Most of your friends are going to struggle to make any money in U.S. stocks for the next five to seven years. They’re battling not one, not two, but three major headwinds:
- Low yields,
- High valuations, and
- Rising interest rates.
Historically, half of the stock market’s returns (or more, depending on the study you believe) have come from dividends. With the S&P 500 paying just 1.9%, the math isn’t promising.
An expensive market is also problematic because it makes rising multiples unlikely. The S&P index trades for 25-times earnings today – where can it really go from here but down?
Finally, rising interest rates are a concern for many income investors. Will their current strategies work when today’s cheap money gets a bit pricier?
The outlook is so grim that respected investment firm GMO predicts negative 3% annual returns for U.S. stocks for the next seven years. Meanwhile “Bond God” Jeffrey Gundlach says investors should sell or short the S&P 500 altogether.
I don’t disagree with GMO, Gundlach or other bears. Most American investors will struggle in the years ahead.
But you and I have the ability and know-how to do better. Much better. Twelve percent per year or better, to be specific.
With one simple strategy, we can tackle these three headwinds head-on and earn 12%+ annual returns while our friends and peers lament about the tough investing environment. Here’s how.
Our 12%+ Investing Strategy for Rising Rates
When interest rates rise, the best defense is a good offense. Research from Nuveen shows that dividend growth stocks outperform everyone else in the 36 months after a Fed rate increase:
Stocks After the Fed Increases Rates
Everyone loves dividends, but dividend hikes are often underappreciated. Not only do they increase the yield on your initial capital, but they often are reflected in a price increase for the stock.
For example, if a stock pays a 3% current yield and then hikes its payout by 10%, it’s unlikely that its stock price will stagnate for long. Investors will see the new 3.3% yield, and buy more shares. They’ll drive the price up, and the yield back down – eventually towards 3%. This is why your favorite dividend aristocrat never pays a high current yield – its stock price rises too fast!
Let’s take UPS, which always seems to pay between 2.5% and 3%, give or take. This yield already gets you ahead of the game in today’s low rate world. Next, let’s consider the stock’s price appreciation which moves remarkably in tandem with its dividend:
UPS Payout Drives Stock Price Growth
Same goes for General Mills (GIS). Its stock price actually “got ahead” of its dividend last year. But, like a rubber band, it was snapped back towards its payout:
GIS Price and Payout Move Together, Too
Since share prices move higher with their payouts, there’s a simple way to maximize our returns: Buy the dividends that are growing the fastest.
Dividend aristocrat buyers try to emulate this strategy when they purchase stocks that have a consistent track record of raising their dividends. They reason that stocks with decades of dividend growth are the most likely to continue raising their payouts in the future.
Problem is, this rearview mirror doesn’t always project forwards. Wal-Mart (WMT) is a cautionary example – its dividend growth was rolling until it wasn’t:
Wal-Mart’s Payout Plateaus…
This is reflected in Wal-Mart’s share price – it’s gone absolutely nowhere for five years:
… as Does its Share Price
AT&T (T) is another dividend darling that has disappointed investors buying it for its 5% yield. For the last five years, its pathetic “penny per share” annual increase has boosted its payout only 11% over the time period in total.
Meanwhile its stock price sits 1% lower now than then, and investors who bought AT&T for its dividend have received that, and only that. A sleepy 5% annualized return.
A 3-Step Process for 12%+ Returns per Year, Forever
The very best dividend stocks never show high yields (like AT&T) because their prices keep rising in line with the increasing payments.
Most people never realize any of this.
But those of us who DO stand to profit handsomely and almost automatically!
It’s a simple three-step process:
Step 1. You invest a set amount of money into one of these “hidden yield” stocks and immediately start getting regular returns on the order of 3%, 4%, or maybe more.
That alone is better than you can get from just about any other conservative investment right now.
Step 2. Over time, your dividend payments go up so you’re eventually earning 8%, 9%, or 10% a year on your original investment.
That should not only keep pace with inflation or rising interest rates, it should stay ahead of them.
Step 3. As your income is rising, other investors are also bidding up the price of your shares to keep pace with the increasing yields.
This combination of rising dividends and capital appreciation is what gives you the potential to earn 12% or more on average with almost no effort or active investing at all.
I’ve scoured thousands of stocks out there right now, looking for the very best companies that have both rising dividends and strong buyback programs in place … the kind of stocks that could easily spin off annual total returns of 12%, 17%, even 25% or more … doubling your money in very short order.
Right now, at this very moment, there are 7 in particular that I think you should consider buying.
They stand to do well no matter what the broad market does … regardless of what happens in Washington … and irrespective of interest rate trends.
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