The Dark Truth of Dividends: A “Safe” Way to Lose Money

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I’ve been in the market for over 25 years, and I still see investors make this one common mistake:

Paying for their dividend yield.

And no, I don’t mean paying a commission. I mean losing a huge chunk of their portfolio after those dividend stocks absolutely plummeted to the ground.

These are the yield investments I’m talking about…

The iShares 20-year Treasury Bond ETF (TLT) is a very popular income generator for investors. It pays about 1.6% dividend yield to its holders.

Another popular income fund, the Pimco Total Return Fund (PTTRX), pays an attractive 2.46% dividend yield to investors. It’s one of the “gold standards” for income funds.

But there’s a problem with both.

Since the beginning of 2021, TLT shares have lost more than 13%. PTTRX has lost 3.8% since the beginning of the year, and 2.6% in the last 12 months.

Believe it or not, this is the nature of the income beast. Values go lower as yields go higher.

This relationship sends a lot of investors out into the market to “forage” for yields. Why not? It’s the reasonable response.

But beware, because high yielding stocks are often no better.

If you’re looking for a safe dividend play that will earn you money – not lose you money – then I have 3 stocks that you’ll want to take a look at right away.

Here’s everything Wall Street doesn’t tell you about dividend stocks…

Let me tell you a story about an old client.

Between 2003 and 2006 interest rates went from 3% to 5% as bond prices tumbled. Over the same period, the S&P 500 was trading in a bull market – and this is the exact same situation we’re seeing develop right now in the current market.

So it’s 2003, my phone rings, it’s my client calling.

He says, “Hey Chris, I need to get out of these tanking bonds and start generating some yield, buy Frontier Communications Corporation (FTRCQ) for my account.”

I knew the ticker immediately. The stock paid a 15%+ dividend yield and was hailed as a “dividend diamond” because of that yield.

But that dividend diamond was a lump of coal.

While the stock boasted an impressive dividend, it was at the cost of the plummeting stock price.

The client moved from out of the frying pan and into the fire by selling bonds to simply buy a dividend that over the long run cost him about half of his principal investment.

Lesson learned: Don’t lose money safely by chasing high dividends.

Instead, follow my three simple rules to make sure your dividend income isn’t costing you more than it’s worth. I’ll keep it really simple.

First, check the stock’s movement, is it bullish or bearish?

Is the stock above or below its 20-month moving average? A lot of investors think that they’re going to hold their dividend yielders for the long run, which means that they don’t have to worry about whether the stock is in a bull or bear market.

I liken this to buying a lemon of a used car when you’re getting ready for a long-haul drive. It’s going to cost you. Spend the money, buy quality.

Second, make sure that the stock is not crowded.

Don’t buy the dividend yielders that the entire market is buying.

Why?

If things go wrong, you’ll watch the stock spin into the abyss as the entire market sells something that they thought was safe.

Third, buy revenue.

This is a simple way of saying “buy quality.”

It’s rare that you hear me talk a heavy fundamental game.

As I always say, bull markets are driven by speculation, not fundamentals. That said, dividends are paid by fundamentals, not speculation.

Finally, don’t be afraid to “trade” your dividend yielder.

My old client from 2003, Mr. FTRCQ, rode that stock all the way into despair.

The company filed for bankruptcy in 2020. It turns out that the dividend wasn’t worth its weight in coal.

Make sure that you keep that in mind.

Sure, selling a dividend yielder from your portfolio may cost a little in capital gains – or you may be able to grab a little tax harvest loss – but nothing stings worse than trying to add up the pennies that a dividend makes for your account against the dollars that the same stock has lost.

As the saying goes, don’t step over dollars to chase pennies.

To help you pick the best dividend stocks, I’m giving you 15 companies near the top of my dividend watchlist that should add both income and growth to your account.

We’ll also take a look at three stocks in more detail.

Here they are…

Now let’s take a look at three of my favorite stocks from this list.

1. Exxon Mobil Corporation (XOM)

XOM was one of the first of the “old school energy” stocks to hit my radar six months ago, and the trend is getting stronger.

The equation is simple. Oil prices keep rising as global demand is expected to rise during the re-opening of the global economy. In addition, inflation – or reflation – pressures are also providing a tailwind for commodities like oil and other energy sources.

The market was quick to throw these companies out years ago as crude prices pressed lower. The results, a very uncrowded trade as analysts and investors abandoned the sector. Things only got worse when the clean energy movement got some traction in 2020, but we’ve learned that the more things change, the more they remain the same. At least for now.

XOM broke into a long-term bullish trend months ago as oil prices started to rise. Now, this giant is starting to wake-up again as revenue bottomed in 2020 and earnings are leading analyst expectations.

2. Intel Corporation (INTC)

INTC went from a favorite in the industry to neglected as much hotter companies like NVIDIA and hit the scene, but things are turning around for the chip giant now.

I’ve long been in the bearish camp on INTC, but as I always say, the number don’t mislead you, and they’re telling me that INTC is the place to be for growth and income.

Shares have broken back into a long-term bullish trend as the stock crossed back above $55 in January. The move attracted attention from the technicians like me as shares were now taking a leadership role in the semiconductor sector. Then came a fundamental game-changer.

Instead of shifting production away, INTC recently announced the construction of new manufacturing facilities in the U.S., a move that is strong for both political and security reasons.

Analysts are now warming to the company’s outlook and trends.

The 2.2% dividend beats the yield on many S&P 500 companies and INTC‘s growth target – according to my forecasts – could add another 25% to your portfolio.

3. Welltower Inc. (WELL)

Healthcare is returning to the scene in a big way, and WELL is positioned in a key demographic.

The company is a REIT that focuses on health care facilities for seniors and continued care patients. Now, there were a lot of REITs on my dividend yielding list – including Innovative Industrial Properties, Inc. (IIPR) shares – but WELL is in an inelastic market as our population continues to increase demand for their type of facilities.

The vast majority (65%) of analysts are camped out with “hold” recommendations on this REIT while the stock continues to strengthen and is targeting its pre-pandemic price target of $90.

Shares of WELL just broke above their 20-month moving average, putting them back into a bull market. At the same time, the stock is seeing support from shorter-term trendlines like its 20- and 50-day moving averages. That “action” is telling me that the stock is in the hands of traders that are bidding it into a stronger bull trend.

My technical models are forecasting a return to $90, which tacks another 20% of return on to the 3.4% dividend yield.

Until next time,


Chris Johnson

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