At PBRG, we use a two-part strategy to help you build, grow, and protect your wealth.
First, we find safe, conservative ideas that generate multiple income streams.
Then we put a portion of that safe income into “asymmetric” ideas like cryptocurrencies and private equity.
That allows us to benefit when markets are uncertain… but also make massive profits when investors throw caution to the wind and valuations take off.
It’s a strategy that’s helped us outperform the market year after year…
Since Daily editor Teeka Tiwari took over his flagship Palm Beach Letter in June 2016, the portfolio has delivered an average annual return of 147.8%.
That trounces the S&P 500’s average annual return of 12.9% over the same timeframe.
A great deal of that outperformance comes from crypto gains… for example, bitcoin and Ethereum are up 5,321% and 18,678%, respectively, since we first recommended them in 2016.
However, our strategy’s “asymmetric” side doesn’t work without steady income from blue-chips like Southern Company, Johnson & Johnson, and Tyson Foods.
These “boring” stocks aren’t as exciting as crypto or private equity… But they pay market-beating yields of 3.7%, 2.5%, and 2.2%, respectively.
And as I wrote yesterday, it’s the perfect time to bargain hunt for more world-class dividend payers.
Four Criteria for Finding World-Class Dividend Payers
Buying any company with a dividend might seem like a way to benefit from today’s market environment.
But not every stock that pays a high yield is a wise investment.
High yields could indicate that the price has dropped significantly due to bankruptcy fears or a dividend cut…
Or a company might be paying out most of its earnings and leaving little opportunity for growth.
That’s why we only look for world-class dividend payers that meet four criteria:
Yield target: We want to see a higher dividend yield than the stock’s 5-year average.
Payout ratio: We’re looking for companies paying out less than half their earnings in dividend income.
Consistent dividend growth: We want to see at least 5 years of annual dividend increases… but 10 years or more is ideal.
Debt levels: We’re looking for companies with low debt relative to their industry. At the very least, they should have a debt-to-equity ratio of 1 or less.
The first step in identifying world-class dividend payers involves what I call yield targeting.
It’s a simple off-the-radar strategy I’ve developed to find dividend stocks trading at steep discounts.
Here’s how it works: You look at a stock’s 5-year historic yield… And you buy when it’s trading with a yield 20–25% higher than that.
When yields are higher than normal, it means the stock is trading lower than normal. That’s exactly what we want.
The yield target strategy acts as an “early warning” system to tell us exactly when we should buy or be patient.
For example, when I invested in McDonald’s during the Great Recession, shares yielded just over 3%… about 36% higher than its 5-year average of 2.2%.
Today, I’m up over 530% on this blue-chip name. So yield targeting showed me the right time to buy McDonald’s… and it’s been a steady source of income ever since.
The next thing we look at in a world-class dividend stock is its payout ratio…
A stock’s payout ratio measures how much earnings are going toward dividends… And generally speaking, we don’t want to see a payout ratio over 50%.
Weak earnings can cause a payout ratio to spike. But companies that consistently pay out almost all (or more than) they earn in dividends could be a dividend trap.
World-class dividend payers will yield income and have enough cash to expand into a new area, buy a competitor, or buy back shares.
We also want to see the payout ratio decline while dividends grow…
When I bought McDonald’s in 2009, the company’s earnings grew as more diners opted for fast food over upscale restaurants.
And even though its payout ratio dropped from 66% in 2007 to 43% in 2008… its dividend payout increased by about 8.3%.
Third, it’s crucial to look for a history of consistent dividend growth…
Five years of dividend increases is our minimum target… but in today’s market, more than 350 companies have raised their dividends for at least 10 years… and 65 have raised their dividends for the past 25 years.
These 25-year “Dividend Aristocrats” are usually well-known, industry-leading names that trade at a premium… So the best time to buy them is during market chaos like today.
The last thing we look at in a world-class dividend stock is its debt level compared to its equity…
Debt-to-equity ratios vary by industry… But a ratio of 1 or less is our target.
So a company with $1 million in debt and $1 million in equity has a debt-to-equity ratio of 1… while a company with $10 million in debt and $1 million in equity has a ratio of 10.
This number is important because a ratio of 1 or less tells us the company has enough cash to cover its debt and pay us a steady stream of income.
You Need to Focus on Income in This New Order of Money
As Teeka wrote, we’re living in a New Order of Money.
It’s a time when factors like record-high inflation are limiting growth… so you need to adjust your strategy to come out ahead.
Dividend investments, particularly in companies with a history of increasing payouts, are uniquely poised to offer greater returns in the coming months and years.
And since the market is still recovering from this year’s downturn, it’s the perfect time to buy them.
That’s how I put cash to work with companies like McDonald’s in the Great Recession… and why I’m now seeing double-digit yields relative to my initial investments.
Companies with a long history of increasing dividends have been through worse economic environments than today… In time, they’ll rebound stronger than before.
The best thing you can do right now is allocate your capital to world-class dividend payers and start collecting payouts.
By making dividend growth stocks the cornerstone of your equity holdings, you’ll set yourself on a path for a lifetime of market income.
Over time, they’ll continue to grow and pay you more… And you’ll have cash for any asymmetric opportunities you see along the way.
Analyst, Palm Beach Daily