When most investors hear about a momentum stock, they expect to see a chart with multiple zig-zagging trend lines. However, I believe the trend can also be your friend with fundamental data and help individuals find potential winning investments.
Price momentum is important for traders looking to make a quick hit in days or weeks, but fundamental momentum can help investors generate a steady and growing amount of dividend income over a period of years.
The key for any stock that pays a dividend is the underlying profit that supports the payout each period. Investors have historically rewarded companies that consistently exceed (or surprise) expectations and higher earnings can lead to higher future dividends.
That said, momentum works both ways, as the cautionary tale of Dynagas LNG Partners (DLNG) reminds us. The liquefied natural gas limited partnership missed consensus profit expectations six straight quarters before management cut the dividend by 41% back in April.
Momentum Works Both Ways
The company’s earnings of $0.16 a unit in the first quarter will likely be the high-water mark of the year, which pales in comparison to the quarterly distribution of $0.25 a share. As a result, the 12%-plus yield should continue to be avoided.
Fortunately, not all energy limited partnerships are created equal. Enable Midstream (ENBL) is a master limited partnership (MLP) that focuses on the gathering, processing, transportation and storage of both oil and natural gas. First, the company has earnings momentum on its side; management has surprised consensus profit expectations each of the past five quarters.
This Growth Could Flow to the Dividend
Distributable cash flow (DCF) increased 15% year-over-year in the first quarter, driven by record gathering and processing volume by natural gas customers. It’s no secret that commodity prices have been volatile in recent years, but 95% of the company’s business is from fee-based or hedged contracts, offering limited downside.
With that in mind, not only did Enable Midstream beat earnings expectations back in May, management had enough confidence to boost its guidance for all of 2018.
The company has not increased its dividend (7.5% yield) since 2015, but covered its distributions 1.2x with DCF in 2017 and 1.42x in the first quarter of 2018. Enable Midstream does not plan to issue new equity to cover capital expenditures this year and the recent earnings momentum and increased guidance could lead to a higher payout in the coming quarters.
Hercules Capital (HTGC) is a business development company (BDC) that offers secured loans to venture-stage technology, life science and renewable energy companies, rather than going through a traditional bank. The name Hercules conjures up images of strength and its partners over the past 15 years have included social media giants like Facebook and Pinterest.
The company posted net operating income of $0.31 a share in the first quarter, which is equal to the quarterly distribution (10.1% yield). Management has exceeded consensus profit expectations four straight quarters and seven of the past eight attempts.
Rising Rates Support this Trend
Hercules is earning an effective yield of 14.3% on its portfolio, which allows the stock to offer a double-digit yield. Net interest income has grown at a 16% compound annual rate since 2011 and 96% of the company’s loans are floating rate.
As a result, management believes that profits can continue to grow along with the prime rate, which is based on the fed funds rate. For every 25 basis-point increase in the prime rate, Hercules should see $0.04 a share of higher annual earnings. Combining these factors, the company should have the room to grow its quarterly distribution in the future.
Western Gas Equity Partners (WGP) is a limited partnership that owns the general partner interest, incentive distribution rights and over 50 million common units of Western Gas Partners (WES). The underlying MLP gathers, processes and transports natural gas and oil and counts Anadarko Petroleum as its largest customer.
What Western Gas Equity’s 6.1% dividend yield lacks in absolute size, investors are compensated for in growth. The upside is coming from higher processing volume at the MLP, which is boosting margins Management has raised the distribution each quarter since it was initiated in 2013, including throughout the energy collapse of 2014/2015.
Double-Digit Growth Expected to Continue
The company posted DCF of $0.57 a share in the first quarter, which equaled the quarterly distribution and surprised expectations a fourth straight quarter. This also represented 16% growth from the previous year and management is targeting further 9% to 12% annual payout growth through 2019, funded by cash flowing down from the MLP.
How to Bank 25.3% Yearly: Buy These 7 Dividend Growers
Finding stocks that have recently generated earnings surprises is one way that investors can use fundamental momentum to seek out steady income. A stable dividend yield of 8% or 10% is nice, but growth is the name of the game, especially if interest rates continue to rise.
If you can “forego” that 6.1%-plus of annual income today, we would encourage you to consider investing that capital into dividend growers.
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 20% or more on average with almost no effort or price momentum investing at all.
Which “hidden yield” stocks should you buy today? Well you know us – we’ve got seven best buys that should safely double your money every three to five years.
It’s a simple formula – their dividends are doubling every three to five years, which means their prices will rise in tandem. At the same time, we’ll collect their dividend payments today and enjoy an even higher income stream tomorrow.
This dividend growth strategy has produced amazing 25.3% annualized returns for our Hidden Yields subscribers since inception. In two-plus years, we’ve crushed the broader market (the S&P 500 returned 15.9% over the same time period.)
If you achieve returns of 25.3%, you’ll double your money in less than three years. So if you haven’t been following this strategy, why not? The best time to get started is right now – before the seven dividend growers we mentioned begin to move. Click here and we’ll share their names, tickers and buy prices with you right now.