Our Contrarian Income Strategy for 40% Yearly Returns

Our Contrarian Income Strategy for 40% Yearly Returns

As the stock market returns to Planet Earth, we contrarians will have an opportunity to cherry pick some bargains. This is a good thing for us income seekers. We’ve been thin on dividend deals since the Federal Reserve cranked the printing presses in the spring of 2020.

Last year was slim pickings for income plays. When the Fed’s easy money drives prices of everything higher and higher, our dividend yields go down.

This makes it challenging for us to identify meaningful yields with a bit of upside. After all, we’re in the business of buying low and selling high (not buying high and hoping to ride a price even higher).

Fortunately, we found two sectors with dividend value last year—banking and energy. Banks benefited from rising long rates. As interest rate spreads widened, their bottom lines boomed. Bank dividends were a key theme for us in 2021, one that paid off nicely.

Energy payouts were another profitable sandbox to play in. Granted, it wasn’t obvious when we made the case for Exxon Mobil (XOM) in these pages last April. Mainstream investors thought XOM’s dividend was in danger of a spill. But we careful contrarians knew better.

Buying out-of-favor stocks like XOM last year rarely feels good in the moment. There’s pressure to run with the investing herd—it feels safer. But we know the real profits are made by running away from popular opinion.

“Basic” dividend investors didn’t believe XOM could continue to pay its dividend. Activist investors were grabbing Board seats, and XOM’s debt ballooned since early 2019. At a glance, the company appeared to borrow cash to float its dividends. Never a good look!

For a few quarters, it was. But our “second-level” research revealed that a multi-year bottom was likely in for XOM shares and that its dividend was safe. We had two reasons to be confident:

  1. Oil prices were starting to rally. We reasoned they would continue to climb as the goo traced out its usual “Crash ‘n Rally” pattern. And that is exactly what happened. Higher energy prices since then have been a boon to XOM’s profits.
  2. Thanks to improved cash flow, XOM was able to begin paying down long-term debt. This was a strong sign that the dividend was safe.

How We Knew XOM’s Dividend Was Secure

Firms like XOM will do anything they can to avoid cutting their dividend—including taking on debt to make their payments. And yes, management went to the debt well for a few quarters when oil prices collapsed. But a quick rebound in Texas tea prices would save the day and quickly reverse the need for XOM to borrow.

Declining debt gave us a strong sign that the worst was behind. 

This would soon be reflected in XOM’s share price. The stock market rewards investors like us who place our wagers before an outcome is obvious to the rest of the world. This is why contrarian investing can be so profitable—because we buy before the fog completely clears. (If we run with the herd, we split the smaller profits with it!)

We made the case that XOM was a 6.1% dividend with 60% upside and inflation protected—quite handy as consumer prices soared.

Profitless tech shares, meme stocks and cryptocurrencies don’t look so great when inflation is hot. High inflation means an end to the Federal Reserve’s easy money. That restricts dumb money and its dumb bets.

As investors flee speculative junk, they find their way to inflation-hedges like XOM. Our detested energy stock became a dividend darling, zigging while the market-at-large zagged (mostly sagged!) We’re already two-thirds of the way to our total return projection—up 40%, including dividends, in just nine months since our XOM call!

XOM: Indeed, a Safe Dividend with Upside

The easy oil money has already been made, and the biggest dividends have been collected. XOM yielded 6.1% last April but pays only 4.6% now, thanks to its price gains.

A perfect income portfolio today has different dividend stocks, but the same upside as XOM did. In fact, this portfolio has similar potential to a recent one where I turned $2,000 into $154,000 in just 48 months. Click here and I’ll share the details, including my perfect dividend picks for the months ahead.


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