Editor’s Note: This week, Marc shares his strategy for identifying the best dividend stocks that will deliver consistent income. This strategy – and Marc’s signature 10-11-12 System – make dividend investing a completely different animal than making traditional stock picks, as Marc will explain.
We receive feedback from many readers asking, “What are the best dividend stocks to invest in?” Using the strategies Marc discusses in this piece, along with his proprietary system SafetyNet Pro, we hope to provide our readers with the tools to recognize true winners (and risks) when they spot them.
For example, in the March 26 Oxford Income Mailbag (a weekly column sent to Oxford Income Letter subscribers) and in Safety Net on May 15, Marc used his signature SafetyNet Pro to warn readers about an impending dividend cut from Two Harbors Investment Corp. (NYSE: TWO). On Saturday, the company slashed its dividend from $0.47 per share to $0.40.
We always like to celebrate victories in Safety Net because we’re passionate about saving our readers from nasty surprises like this one.
– Mable Buchanan, Assistant Managing Editor
I’m often invited to appear on financial news segments and comment in publications about the outlook of various stocks. For example, several years ago, I was asked to appear on CNBC’s Talking Numbers segment to discuss Verizon (NYSE: VZ).
I said I liked the stock – which was true.
But even though I liked its outlook at the time, I didn’t recommend it to my subscribers of TheOxford Income Letter.
I’ll tell you why in a moment, but first let me take you behind the scenes of TV land.
I’m Ready for My Close-Up
When a producer calls and asks you to be on a show to give your thoughts on a stock, they want strong opinions. The producer doesn’t want you hedging your position. A wishy-washy answer doesn’t make good television.
If you don’t give them what they want, they will find someone else. After all, there are lots of people who would love the opportunity to talk to hundreds of thousands of viewers at once.
I won’t go on TV and say something about a stock unless I believe it. I’ve told producers in the past, “I don’t have a strong opinion on this one.” Or sometimes, if they’re looking for a bull and I’m a bear, I’ll admit to them, “Sorry, I don’t like it.”
And I know that people will act on what I say. No one should buy a stock because they hear someone talking about it for 90 seconds on TV, but they do. I learned that years ago, before I ever joined The Oxford Club – back when my then-boss refused to take responsibility for any of his market calls.
I was the one reading the emails that were sent to him telling him how much money investors lost on his advice.
He didn’t want to hear it or believe it. But I knew these were real people investing real money based on what he said. I’ve never forgotten those emails.
And after I appear on TV, I get calls from friends and family asking if they should buy the stock.
So why did I tell CNBC viewers to buy Verizon, but not my subscribers?
Increase Your Buying Power
It has to do with my specific strategy for investing in the best dividend stocks. It’s called the 10-11-12 System, and it is designed to achieve 11% yields and/or 12% average annual total returns within 10 years.
The entire goal of the portfolios in TheOxford Income Letter is to generate solid income today – and even more tomorrow. And typically, stocks of companies that raise their dividends go higher and outperform the market.
The secret sauce is dividend growth.
The companies that I recommend in TheOxford Income Letter‘s portfolios have long histories of raising their dividends every year, usually by a meaningful amount, such as 10% or more.
Think about what that does for an investor.
If inflation rises 2.4% per year, what costs $1,000 today will cost $1,125 in five years and $1,267 in 10. If inflation returns to the historical average rate of 3.4% per year, $1,000 worth of goods will cost $1,216 in five years and $1,480 in 10.
Again, the 10% dividend raiser beats inflation. It actually increases your buying power – improving your quality of life or ability to save.
But an investor who receives $1,000 in dividends today and whose dividend increases 10% per year receives $1,464 in five years and $2,357 in 10.
Verizon, as I once said on CNBC, is a great company – the leading telecommunications company with growing margins and earnings. But it doesn’t have impressive dividend growth.
It’s paid a dividend every year since 1984 and raised it for 13 consecutive years. However, the growth rate of the dividend during the past five years is just 2.7%.
That’s been enough to beat the official inflation numbers recently, but it is not especially exciting. And importantly, it is not likely to help get income investors where they want to go.
However, a stock with a similar starting yield, but that grows the dividend 10% per year, will yield 9.9% in 10 years.
A $10,000 investment in even a 4% dividend grower will generate only $597 in income in 10 years, while the same investment in a stock with 10% dividend growth will spin off $990. That’s a big difference.
Texas Instruments (Nasdaq: TXN) is a great example of the kind of stock I’m talking about. The company has raised the dividend an average of 21.6% per year over the past 10 years.
And while its yield today is lower than Verizon’s, if Texas Instruments maintains just a 21.6% dividend growth rate and Verizon keeps its 2.7% growth, you’ll notice the difference between these two seemingly equal payouts by the time a year is up.
So buy stocks like Verizon if you’re most focused on short-term gains (it went up by more than a point directly after my segment aired).
But if you’re looking for a way to ensure your investments generate a significant amount of income in the future, be sure to stick with dividend growers that raise their dividends by meaningful amounts.