Some losses are just so bad it is dead money…
Look, I know several of you got into some sketchy stocks over the past couple of years. I’m not naming names but c’mon, as a dad of two young ones, I can tell when something is amiss.
Our safe dividend stocks have held up better than, well, just about anything else in this market. We’ve been cautious since late ’21, booking profits along the way. As the market topped, we sold early and often to raise cash.
So if you’re writing to me about dead money, let’s face it, you got into something bad. Maybe it was tech or crypto or NFTs. Or whatever.
We’re not going to judge in these pages. In fact, we’re going to help you recoup responsibly.
But promise me, this time, that we will all respect 2022’s giant sucking sound. (Gone but never forgotten, Ross Perot.) As we’ve discussed over and over and over (and over!) again, the Federal Reserve is pulling liquidity out of the financial system to calm inflation.
This is bad for stocks, and as long as the Fed is not our friend, the market-at-large will remain challenged.
So let’s finish lamenting your losses. Whatever you got into outside of our Contrarian Outlook community, I’m sure it went up like crazy until it didn’t. When momentum turned, it turned fast. Maybe you thought you’d sell and book profits, but that moment came and went.
If so, you’re not alone. Many other investors have been shell-shocked by the swiftness of the ‘22 decline. Like you, they are still holding some big losers, wondering what the heck they are supposed to do with these stock skeletons.
It’s off 20%. Now 40%. 50%. It’s gotta bounce!
Well, it didn’t happen. These things got trashed. Every support level was promptly wiped out. (Important lesson: Support is much less helpful during declines.)
Taking a loss is a painful but important practice in bear markets. Better to do so early than late.
Overall, knowing when to buy is easier than knowing when to sell. Real pros know the importance of cutting a loser free.
Investing life comes at you fast. And I get it because I was there myself in 2008.
If you think crypto is high octane, you should have seen my futures account in the mid 2000s. As Brazil diverted its sugar harvest into ethanol fuel, your investment strategist loaded up on sugar contracts.
It was brilliant for a while. From 2004 to 2008 I grew the account from an initial $2,000 stake to $154,000. Then the bear market of all bear markets hit, and I didn’t know how to adjust. My tropical island came and went!
But more importantly, I learned how to navigate a bear market. Everyone has to learn the hard way. And if this was your first lesson, well, good. It had to happen sometime.
Now? Get out of this hole with a secure, safe strategy that works really well in bear markets.
There’s one way to bring this dead money back to life. We need to double it. And thanks to cheap valuations, we can do it rather quickly via dividend stocks.
This is a twist on our core retire on dividends strategy, where we find secure 8% yields. Big payouts are great with a pile of dough.
When we’re sitting on a million bucks, we can generate $80,000 per year with 8% yields. Most years, that’s about as good as it gets.
But bear markets are a gift. They give us a window where we can double our money fast.
Here’s what I mean. In April 2020, we had five dividend growers selling at fire sale prices. So, I sent out this Flash Alert to my Hidden Yields subscribers to buy all five:
These five timely buys delivered average returns of 24%. Nice.
This is the type of opportunity I expect we’ll see soon.
Do we always buy at major lows? No, of course not. And to be honest, it is possible to double our money every few years without worrying about the market’s next move. Let me show you an example.
In January 2020, we added UnitedHealth (UNH) to our Hidden Yields portfolio. This was two months before a severe stock market crash. Big picture, that didn’t matter because:
- UNH was growing its earnings by 10% or more every year.
- Thanks to these profit gains, UNH’s dividend was doubling every few years.
UNH’s price-to-earnings (P/E) ratio of 21 wasn’t bad for a high-quality earnings grower, but not cheap either. However, on a free cash flow (FCF) basis, the stock’s multiple was a more modest 17.
Remember, profits are an accounting creation while cash is cash. Savvy Chief Financial Officers strive to minimize profits (and taxes) while maximizing cash. UNH was cheaper on a cash basis.
Plus, we saw an inflection point. The firm’s Optum unit was gaining momentum and set to overtake UNH’s core business in profits. More importantly, Optum was not regulated like a health insurance business, which allowed it to have higher profit margins.
Business was good and set to get better while Optum continued to grow. UNH’s fast-growing dividend was likely to keep climbing.
We didn’t wait for a dip, we just bought.
Oops! Two months later, a mega-dip hit the entire stock market and took UNH down with it.
It didn’t matter. Our terrible timing worked out great! We sat tight and today, we’re receiving a quarterly dividend that is 53% higher than the one we bought just two-and-a-half years ago.
But wait, there’s more. As the payout climbed, so did UNH’s stock price. We’re sitting on total returns of 79% (including dividends), nearly a dividend double in just a bit more than two years.
If it weren’t for this brutal bear market, we might be up 100% already. But hey, that’s OK. We have a few extra months to add new money to our UNH position while the broader stock market circles the bowl.
When the Fed eventually pivots, UNH will really take off. These types of dividend growers really are the surest and safest way for us to double our money in stocks.
No matter what happens to the market over days, weeks, and months, stock prices ultimately follow their dividends. Show me a dividend that will double over time, and I’ll show you a stock that will double your money.
Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.