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Monday, August 4, 2008 - Vol. 10, No. 184
Today's comment is by Eric Roseman, Investment Director and editor of Commodity Trend Alert.
Anyone who tells you "there's no such thing as a free lunch" obviously never heard of this investment strategy...
Let me explain. Several weeks ago, my good friend, David Newman, called me to tell me about this incredible new investment strategy that involves leverage on company dividends. In other words, you receive income every month and you have the potential for higher gains.
I'm going to be honest. At first, this whole idea seemed "too good to be true." Frankly, the idea of putting leverage on dividends is just out of this world - even in a bad market. But the results were clearly quite impressive. In fact, the numbers looked so good that David is now researching these income-producing investments full-time.
The Dividend Index Has Been Shaky at Best
Worst Year Since 1974
David already sold me. I checked it out and this income-based strategy is a great tool to diversify your investment portfolio. That's especially true today during one of the worst market environments since 2002 when just about everything is deep in the loss column.
This year, even conservative investments like corporate bonds, convertible bonds and other fixed-income investments are losing. Real estate investment trusts or REITs, were already hammered in 2007, and they're still losing ground this year. Almost everything connected to income investing is down in 2008.
What about Treasury bills you say? Guess what: They won't protect your portfolio either. Treasury bills barely yield 2%. After inflation and taxes you're actually sitting on a loss of almost 6%.
Stocks, of course, have been drilled hard. Even international markets, including the once high-flying BRICs (Brazil, Russia, India and China) have tanked. European bourses are down 23%, Asian stocks are off by more than 13% and the Dow is down 14%.
Even time-tested dividend-paying strategies like the Dow Jones Select Dividend Index have plunged more than 22% over the past year - including the dividends.
After seven months of trading, U.S. and foreign stocks are logging their worst year-to-date returns since Nixon was President in 1974. These are rough times...
Beware the Dividend Trap!
The "Dividend Trap" is also a common investment mistake in a bear market.
When stocks take a virtual nosedive, value investors often swoop in and buy a blue-chip stock that already crashed. As the stock gets sliced and diced, the annual payout rises and makes the company even more profitable - right?
Not always. In fact, I call this the "Dividend Trap."
In a bear market, be extra careful not to fall into this trap. Bear markets are usually accompanied by a profits' recession, so companies typically reduce or cut dividends during a recession. That fact alone turns that tempting yield into a dangerous proposition.
For example, over the last six months a blizzard of American companies, mostly financial services stocks, have sliced or cancelled dividends altogether under the sub-prime contagion. Other companies outside of the financial sector have also chopped dividends because earnings have contracted for four straight quarters.
Just because a blue-chip stock pays a big dividend doesn't necessarily mean you'll get that payout in 12 months. If the market environment deteriorates from your point of purchase, watch out!
Income on Steroids
Although dividends have historically contributed to about 35% of a stocks' total return since 1926, that total return feature has shriveled since the 1990s.
Dividends as a percent of total return have plummeted to barely 10% over the last decade. In short, dividends are much harder to secure these days. The S&P 500 Index, despite trading 20% below its October 2007 high, now only yields 2.8% in dividends. That's hardly enough to save your bacon in a bear market. And global stocks, measured by the FTSE 500 World Index, yields just 2.7%.
But this new income strategy can boost your dividends exponentially - big time!
A NYSE-listed financial services stock that pays a paltry 1.84% in annual dividends can yield more than 12% in annual income.
Another company, a major oil producer, paying 2.1% in annual dividends can pay 10.5% in income annually.
How about a major oil driller yielding just 0.85% paying a 14% guaranteed cash dividend?
I know what you're thinking. Very few things are really "guaranteed" in the investment world. But this new type of investment opens the door to a very special market that assures you'll obtain these and other double-digit returns - even if the stock market continues to tank. In my book, that's win, place, and show.
What's truly amazing about this strategy is that even if a stock declines 10%, 20%, or even 50% in value, you're assured of that big fat dividend! The stock can literally tank but you're still getting that double-digit yield as the contract must be honored.
I can't think of a better investment strategy in one of the toughest years for the markets. At the very least, every investor should allocate a portion of their portfolio to this strategy.
Death and taxes are guaranteed in this life. But now, so are dividends on steroids!
ERIC ROSEMAN, Investment Director
P.S. David's new service, Accelerated Income, explains how you can invest in some of America's hottest blue-chips and collect guaranteed dividends of 10.5% to 20%, even when the market sinks. Right now, you can get David's Accelerated Income service FREE. Find out how here.
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