Editor’s Note: Earlier this week, I published a special report called “Best Stocks for 2014. It’s probably the single most important report I publish all year and includes actionable investment opportunities from ALL of our advisors. I’d like to give it to you for free – as a holiday gift. Click here to find out how to claim your copy of this report today.
There is no shortage of stock indicators to predict future investment performance. However, there is one single stock indicator that is the most important: dividends.
The dividend is the most reliable indicator of future earnings and price action. That’s because a company’s stock prices is highly correlated to the growth of its dividend.
It seems too obvious to work. After all, an indicator’s utility usually negatively correlates with its acceptance among investors: The more investors know about a stock indicator, the less useful it becomes.
Fortunately, the stock market is far less than 100% efficient. In fact, it’s frequently inefficient. In other words, you can employ common insight to generate uncommon returns. Common insight on a dividend can be one of the most clairvoyant indicators of future success, yet so few investors embrace the obvious.
A company that can support and raise a dividend will be rewarded with a higher share price. It might not be immediate, but it will occur. Microsoft (NYSE: MSFT) – one of the recommendations in the High Yield Wealth portfolio – began paying a dividend in late 2004, and has raised the payout every year since.
In recent years, Microsoft has ramped up its dividend commitment. The quarterly dividend has more than doubled since 2008, to $0.28 a share from $0.13. Over the same period, Microsoft’s share price has risen 88%.
I believe that good things reside over the horizon. Microsoft is a prodigious cash generator: It continually pumps out a copious flow of cash. Despite continually raising the dividend, the cash account continues to swell. Five years ago it was $31 billion; today, it’s $80 billion.
Another High Yield Wealth recommendation is Altria (NYSE: MO). This company is the most remarkable example of dividends predicting a rise in the share price. Since the late 1950s, the maker of Marlboro cigarettes has generated a long-term average total return of 20%.
For the past 45 years, Altria has raised its per-share dividend annually. The higher payout was invariably followed by higher earnings and cash flow per share. This despite the fact cigarette consumption has been nearly halved in the past 30 years.
More important, Altria continues to perform its “20% magic” to this day. Since we first recommended Altria in Sept. 2011, it has returned 51.5% to the High Yield Wealth portfolio.
Dividends are simply the best stock indicator to what lies ahead. Therefore, I focus much of my time analyzing the dividend. I want to discern if it’s sustainable and if it can be increased. If the dividend is both sustainable and growing, good fortune likely lies ahead.
Plenty of academic research backs this view.
One of the more influential studies was published in the Journal of Finance over a decade ago. In a 2001 study titled “Dividend Changes and Future Profitability,” Columbia Business School professors Doron Nissim and Amir Ziv examined the relationship between dividend changes and alternative measures of future profitability. They provide ample evidence that dividend changes are positively correlated to future earnings.
I’m sure you can appreciate my fanaticism with dividends in general, and with dividend growth in particular: The strategy is as close to foolproof as there is. Not surprisingly, one of my top picks for 2014 is a dividend-growth stock. I’ve found a company that began paying a dividend in 2009 and has raised its payout at an average annual rate of 58%!
That strong dividend growth could translate into a rising stock price in the years ahead. For income investors, the combination of dividends and capital gains is remarkable. And owning dividend growers is a key wealth building strategy that we advocate at Wyatt Investment Research.
We’ve just released our Best Stocks for 2014 special report. The report includes the top 10 investment ideas from our team of advisors. Inside the report, you’ll discover the name of my top dividend growth stock for next year. Plus, you’ll get my complete analysis of this wealth building opportunity.
To get all the details on this report and to claim your copy today, just click here now.