Many investors are worried about a recession. Or The Federal Reserve easing too fast. Or not fast enough!
And then we have the upcoming election. Buckle up, my fellow contrarian.
Fair enough. But let’s remember that headline worries are usually priced in. The popular “threatdown” rarely thwarts the market.
On the other hand, we contrarians fret about the scenario that may come out of left field. We worry not about a hard landing. Or a soft landing. The underappreciated risk is the no landing that reignites inflation.
Rates down, assets up—let the good times roll! It will be fun for a while. Until prices skyrocket again.
Fed Chair Jay Powell has officially pivoted from his hawkish stance. He held firm for nearly two years, longer than I expected. But hey, in an election year, and I’m sure there was pressure on Jay to relent. So, he did.
For now, the Fed is telegraphing rate cuts. Fair enough, because inflation is cooling off. But what if the economy heats up again and takes prices with it? The stock market could really start to rock and roll. Until, that is, investors realize that a popping stock market means financial conditions are easy which is fertile ground for a return of inflation.
In this scenario, cash would be a bad place to be. Even today, inflation has cooled, but it is still running at 2.5%. We need to beat this number.
Which is quite doable with my three-step post-election dividend plan.
Step one, find a dividend that is growing fast. UnitedHealth Group (UNH) is a great example. The health insurer has a captive audience. The company raises its dividend significantly every year. Over the past decade, it’s rocketed an amazing 460%!
Its stock price over the same 10-year period? Up 460%. Once again, the ticker follows the payout like a puppy dog:
UNH’s Dividend and Stock Price—Each 460% Higher
Source: Income Calendar
The ever-rising dividend is a result of ever-increasing cash flow. UNH’s perennial growth isn’t simply due to good fortune. Management had the foresight in 2011 to start its own technology driven Optum unit. Optum provides pharmacy benefits, runs clinics and supplies data analytics and other cutting-edge tech to streamline healthcare.
This cash cow stays well fed in all economic environments. Plus, UNH is a pro at raising prices. Inflation is no problem for this management team. If anything, they relish the opportunity to charge more money!
As investors, this brings us to step two, where we time our buy point by buying the “dividend magnet” lag. This assures we buy low—when the stock is undervalued with respect to its payout.
Then, step three, we sell high! We’ve owned UNH twice in my Hidden Yields research service. First time around, we booked profits when the stock’s price ran ahead of its payout:
Why We Sold UNH the First Time
I added magnets to the chart above to highlight where UNH was cheap with respect to its dividend. This is a signal that the all-powerful dividend magnet would pull the stock higher.
Many investors waited throughout 2019 and much of 2020 for UNH’s dividend magnet to take effect. Over days, weeks and even months, stock prices can meander far from their payouts. Higher or lower. Remember, this is a “get rich slowly” strategy. Sooner or later, the magnet works.
Why’d we sell in December 2022 and buy the stock back two short months later? UNH got a bit ahead of itself. So, we sold high… and bought the subsequent dip:
Selling High and Buying the Dip
UNH is basically our in-house ATM at HY! Any time we want double-digit gains, we buy UNH low—and sell it high:
UNH Total Returns for Hidden Yields
UNH yields 1.5% today. On paper, that’s peanuts and why this stock is overlooked by many vanilla dividend investors.
UNH’s yield bounces between 1% and 1.5%, for years on end. Which is interesting, because we would think that a company with 460% dividend growth over the last decade would pay more.
Well, it’s not for a lack of effort on UNH’s part. These dividend advances are “absorbed” by Mr. and Ms. Market. They see the hike and bid up the shares. The current yield never moves because the price, over time, soars!
Which is why buying UNH is simply the safest, surest way to get rich in stocks.
I like but don’t quite love UNH here. It has rallied above my Hidden Yields “buy up to” price of $550. Let’s stay patient and see if we can buy (more) on a dip.
That said, I do have a few setups that I love—five “dividend magnet” stocks that are set to soar! This five-pack makes up my post-election dividend plan—please click here so I can share more.
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