A simple plan for 100% dividend growth
In a levitating market like today, we are paying dividends to investors absolutely must have a portfolio that does three things:
- Automatically “syncs” the market for us.
- Free up money to allow us to grab some bargain dividend-paying stocks in the event of a downturn and, of course …
- pays us a growth income stream!
We’ll get to point 1 in a second. Let’s start with point # 2.
Most people panic when the market goes down, but we dividend investors know that volatility is our friend. It’s easy to see this just by looking at what the S&P 500 benchmark SPDR S&P 500 ETF Trust (SPY)
has been doing in the past five years. You would have significantly improved your performance if you had added to your holdings the market troughs and the peaks of the VIX, the market’s “fear indicator”, which measures investors’ expectations for volatility.
Even in a constantly growing market like the one we saw in 2021, timing matters. If you had bought SPY at its highest level during the month of January (which happened on the 25th) you would have gone up 9.7% as of this writing.
It’s not bad, but if you had just bought four days later you would be up a lot After.
This is not a stupid change: your 13.9% gain by buying the January drop is 43% larger than the increase that a buyer had seen four days earlier.
I know what you’re thinking, “Brett, trying to take a dip like that takes Jedi reflexes.” How am I supposed to know when to intervene? “
This is where our “automatic” market-timing strategy comes in.
It’s a method you’ve probably heard of – a proven method called Average Cost Dollars (DCA). You probably DCA your portfolio at its current level, dropping a fixed amount of money into your stock holdings at fixed intervals.
This is my favorite way of “timing” the market: your regular investment automatically buys more stocks when they’re cheap and less when they’re expensive.
An “active” DCA strategy is your best game for economic recovery
We are going to take this robotic process a little further by withholding money so that we can bargain hunting actively when traditional investors are afraid.
The beauty of this “active” DCA strategy is that it allows you to hold onto your winners – and let them run – while also improving your wins by injecting that extra money into the down and rebound.
This is what I recommend to readers of my Hidden returns Dividend Growth Service Done Now: Let Our Winners Run, Including Canadian Pacific Railway (CP), which we bought on April 14, 2020, just as the rebound was finding its rhythm. CP gave us 78% crushing gains and dividends in the market in just 14 months.
Or, in the longer term, Texas instruments
You can effectively use a lump sum buy, DCA, or better yet our split DCA / down buy game on either of these winners.
But if you want me to name the least liked (and therefore cheapest!) Sector, I would say oil and gas. Here’s why the industry is now giving us opportunities, along with a specific name to consider, however you choose to buy.
A top-notch DCA target: energy stocks with rising dividends
Everyone says energy prices are unpredictable, and in the short term, that’s true. But following a seizure, they have a very predictable ‘crash’ n ‘rally’ model that we can exploit. The last one ran from 2008 to 2012 and is back on track.
Here’s how it usually goes:
- First, the demand for oil evaporates due to a recession. Oil prices are collapsing.
- Second, energy producers reduce costs and production.
- The economy is recovering. Demand for energy is accelerating.
- But there is not enough supply! Oil prices are therefore rising.
- Power producers are restoring supply, but it takes time. Supply lags demand for years, and the price of oil goes up and up.
We’re still at the start of this latest crash ‘n’ rally model. We have to assume that oil prices will continue to rise for at least the next two or three years.
My bet? Oil will wipe out $ 100 again before this rally is over. And if inflation continues to rise, which, let’s be honest, is a near-certainty at least for the remainder of 2021, as we compare the current months to their benchmarks from the previous year crushed by the pandemic, the stocks of resources are poised to increase. This is because oil, gas, base metals, etc. all increase with consumer prices.
Then there is the demand / supply dynamic. According to the International Energy Agency, global oil demand will reach 92.7 million barrels in the third quarter and 94.7 million barrels in the fourth. These figures exceed production forecasts by 91.1 million and 92.4 million.
Canadian Natural Resources (CNQ) is the beneficiary of this arrangement: it is the largest producer of heavy crude in Canada and a major producer of natural gas, with properties in British Columbia and Alberta.
CNQ shares have rebounded this year, as has oil. But they still have room to run, in part thanks to their windfall valuation: CNQ is trading at just 10.6x futures earnings as of this writing.
You also get a solid dividend. Stocks are earning 4.1% today and that payout is sustainable, with management actually being growth dividend over the past 12 months, with increases reported in March 2020 and March 2021. Few other energy companies can make such a claim.
Another sign that CNQ is about to rise is that its stock price has lagged its dividend growth (when measured in Canadian dollars and on the Toronto Stock Exchange).
I’ve written before about how a company’s stock price will always follow its dividend up (which is why the returns of your favorite dividend producers always stay roughly the same, even when they increase their payments). So when the price starts to lag behind the payout, we have a good chance on the upside.
The fact that the company pays dividends in Canadian dollars also works in our favor, with the greenback likely to fall further against its Canadian resource-fed cousin in the coming months. That would further inflate our payment.
Brett Owens is Chief Investment Strategist for Contrary perspectives. For more great income ideas, get your free copy of his latest special report: Your early retirement portfolio: 7% dividends every month forever.