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There aren't many truly ironclad rules on Wall
Street, but the relationship between yield and price is
unbreakable. They always move in opposite directions.
When
price falls, yield rises -- always, period, amen.
For instance, if a $100 stock pays a $5 dividend, then
its owner receives a nice 5% yield. But if that same stock
drops to $50, its dividend yield rises to 10%. And right
now, there are literally hundreds of stocks in this exact situation.
The Dow and S&P are each off about
-35% on the year, and dozens of
dividend-paying companies have seen panicky traders push their shares to
fire-sale prices -- lifting yields to historic marks. Smart investors are locking in those
high yields right now.
How to Calculate Your Dividend Earnings
Let's review what it means to lock in a yield, because most investors
assume that yields change. And, indeed, they do.
They rise
every time a firm's share price falls, and vice versa. But the price you paid
for a stock
doesn't move -- it's locked in. Because of this, you can use
depressed share prices to lock in some
mouth-watering yields.
Take our previous example -- a $50 stock that is yielding 10% based on a $5
dividend. Even though shareholders all receive the same
payments each year, the
investor who bought their shares at $100 is earning only 5% on what
they invested -- and
the investor who bought at $75 is seeing a 6.7% return on
their money. But those who bought at $50 can continue
enjoying 10% yields on their original investment -- even as the share
price rises, decreasing the yield.
While this concept is simple to follow, what most often gets overlooked is
how large an impact it can have on your portfolio. Let's
examine the performance of a company with a long history of
rewarding shareholders with a rich dividend stream: Altria
(NYSE: MO),
the company many investors knew for years as Philip
Morris.
Here are its actual dividend payouts from 2000 through
the end of 2006:
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As you can see, investors have been showered with rising
dividends for years. But those smart enough to buy in
when the stock was trading at an abnormally low share price
were able to lock in a higher yield -- a yield they're still enjoying
today.
Let's assume you bought 1,000 shares of MO on Feb. 11,
2000 -- a roughly five-year low. At a price of $19.06 a share,
dividends totaling $2.02 in 2000 worked out to a 10.6% dividend yield.
In 2001, MO paid $2.22 in dividends, and investors who
bought at $19 earned 11.6% in dividends on their investment. The next year, 2002 saw a
12.8%
dividend payout, which rose to 13.9% in 2003. By the end of 2006, the shares
were yielding 17.4% based on your original purchase price.
An investor who bought at $19.06 would have collected a total $17.94
in dividends, a +94.1% return based on dividends alone.
Now that's a great investment ... but not everyone
fared so well. Why? Because as dividends
rose, so did the share price. When prices go up, yield
goes down. So investors who bought at a higher share price
locked themselves in to a lower yield.
Our table below shows how dramatic a difference buying
near a high can make on your yields compared to using a
market sell-off to lock in above-average yields. Investors
who bought MO just over a year later -- well after the
shares had rebounded from their low -- locked themselves into
significantly lower yields.
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Dividend yields as a percentage of original
investment were 11.8 percentage points
higher for
investors buying Altria at its low (Feb. 11, 2000)
vs. its high (May 31, 2002). |
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Yield for investment made 2/11/00 |
Yield for investment made 5/31/02 |
|
Purchase Date |
10.6% |
4.3% |
|
2001 |
11.6% |
N/A |
|
2002 |
12.8% |
N/A |
|
2003 |
13.9% |
4.6% |
|
2004 |
14.8% |
4.9% |
|
2005 |
16.1% |
5.3% |
|
2006 |
17.4% |
5.6% |
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In
other words, even though the investor who bought at the low
in 2000 is
getting the exact same dividend payment per share as the investor
who bought at the high in 2002, they are earning
drastically different yields on their investments
because they locked in at different prices.
Again, the lower the buy price, the higher the yield.
The higher the buy price, the lower the yield. In the end,
that added up to a huge difference: Investors who bought at
$19 in 2000 were earning 17.4% in 2006, while investors who
bought in 2002 earned only 5.6%.
But wait, there's more!
We
haven't factored in any capital gains yet. At the end of 2006, the shares
were worth $85.82, an increase of +350% from their 2000
price. So the 1,000 shares bought for $19,060 sold for $85,820,
a gain of $66,760, plus the $17,940 in
dividends collected along the way.
That's the awesome power of locking in a yield for the
long term at depressed shares prices. And that's where we are in
the current market. Many are fearful of this volatile
market -- and caution is warranted. But If you want to earn a rich yield and
collect a positively gargantuan capital gain, the time to
buy is now.
Where to Find the next Altria
The question, of course, is how to determine which
companies out there will mirror MO's historical payout.
Nick Lanyi, editor of
High-Yield International, has been scouring the
globe for its best dividend payers. His premium newsletter
is full of yields that have been juiced thanks to the global
sell-off:
Here are two of Nick's favorites:
A Brazilian telecom that is paying a 14.3% yield
based on payments over the last 12 months. This company, one
of the most respected corporations in the fast-growing
economy of Brazil, has seen a -14% drop in its share price,
less than a third of the -48% decline posted by Brazil's benchmark Bovespa
in the last year. A year ago these
shares were yielding closer to 8.5%.
A French communications company with an 11.3%
yield. A year ago, this stock was paying out 8.5%.
Now, obviously, the company's
board didn't intend to pay out 11.3% to shareholders, but it's not
going to cut the dividend to reduce the yield -- and it
doesn't need to, as nothing is wrong with its business.
You have, right now, the chance to lock
in a solid double-digit yield that simply wasn't available a
year ago -- and to receive it
for as long as you want to keep cashing the checks.
These Bargains Won't Last
Not to be overly dramatic, but you're running out of
time. The markets won't stay at these depressed levels
for long -- there's just too much value to be had at too
cheap a price.
Investors have tons of cash on the sidelines, and many are
waiting for Wall Street's dark mood to lift (we already
saw this yesterday with the Dow's +10.9% gain). That's
important, because all of these foreign companies actually
trade on the New York Stock Exchange. You can buy them --
and start collecting these dividends -- using the same
brokerage account you have now.
So while everyone else is stymied by fear, readers of
High-Yield International are taking
advantage of this rare buying opportunity. Some checks have already been cut.
Follow
this link to make sure your name is on
one of them.
Thanks for joining me on my search for today's
highest-yielding securities!
-- Andy Obermueller
Co-Editor
Global Dividend Opportunities
GlobalDividends.com
839-K Quince Orchard Blvd.
Gaithersburg, MD 20878-1614
P.S.
-- Don't miss a single issue! Add our address, Editors@GlobalDividends.com,
to your Address Book or Safe List. For instructions, go
here.
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