How To Get All Of Your Profits From Safe Dividend Cash

We’re all about the dividends here at Contrarian Outlook. Often we take it for granted that we’re not looking to lose 17% in just

just
a few weeks while we collect income!

The share-price chart for Bank of America

BAC
(BAC) may appeal to dividend dumpster divers. And heck, it may work, as BAC stands to gain as more people pull their savings from regional banks and plunk them into “too big to fail.”

Why deal with this nonsense? This is exactly why we’re fading “cardiac” price charts like BAC’s and shifting toward the smooth and steady growth of dividends

That’s more like it! What you’re looking at is the strong upward growth (nearly 500% in a decade!) of dividends from health insurer UnitedHealth Group

UNH
(UNH), a stock I’ve recommended in my Hidden Yields dividend-growth service (more on UNH below).

Record-Setting Year for Dividends = A Rich Hunting Ground for Us

The good news is that it’s never been easier to shift your return to dividends: according to S&P Global Indices, S&P 500 payouts jumped 10.8% last year—despite the manic market. Payouts are poised to set another record this year, which would mark the 12th in a row.

Find me a stock that rises every year for 12 straight years. Impossible, right?

That’s another reason why we put dividend growth at the top of our list when picking stocks. And as we’ll see below, when you buy dividends that grow at UNH-like speeds, they tend to send share-prices into the stratosphere, too.

You’ll go one better if you add share buybacks to the mix. Repurchases get a bad rap from the press, but the truth is, when a company’s shares are cheap, there are few better ways for management to create value for us!

There’s also a nice knock-on effect for us here, as buybacks leave fewer shares on which to pay out, setting the stage for bigger dividend hikes in the future.

Our play here, then, is pretty simple: buy companies with fast dividend growth and smartly executed buybacks. When we do, we can set ourselves up for some truly outsized returns indeed.

How Surging Payouts—and Buybacks—Sent Our TXN Buy Soaring

We’ve benefited from this trend many times at Hidden Yields. One of my favorites came in June 2017, when we bought semiconductor giant Texas Instruments

TXN
(TXN).

The stock popped onto our radar thanks to CEO Rich Templeton, whose brilliant 13-year reign at the company had driven free cash flow
flow
(FCF) per share up an astounding 586%.

That translated straight into a dividend that had nearly tripled in just the preceding five years. Meantime, Rich and friends took advantage of the company’s reasonable price-to-FCF ratio, which averaged around 16 over this period, to buy back 12% of TXN’s shares.

Check out what happened next. The dividend/share price link
link
couldn’t be clearer:

Dividend/Buyback “Twofer” Drove TXN’s Gains Before Our Buy …

So we climbed aboard Rich’s dividend (and buyback) train and happily enjoyed 130% dividend growth over the next four-and-a-half years, plus 120% share-price growth, for a 148% total return!

TXN is just one case of a company’s “Dividend Magnet” delivering the goods. Our buy of aforementioned UNH for Hidden Yields back in January 2020 is another.

During our nearly three-year holding period, UNH’s share price rode its rising payout higher (with a buyback assist!)—straight through COVID lockdowns, soaring inflation, rising rates and, of course, last year’s stock-market mess.

The end result? A 73% price gain and 53% dividend growth, which combined for a quick (and low-drama) 83% total return.

The nice thing about this strategy is that it can tell you when to sell, too. With UNH’s share price getting a bit too far ahead of its payout, we sold the stock on December 16, 2022, sidestepping a 4.7% decline before taking another swing at UNH in February of this year—essentially buying back in for 95 cents on the dollar.

These are just a couple examples of the Dividend Magnet’s power. Sad thing is, most investors only pay attention to share prices when they invest. That’s too bad, because share prices tell (at best) half the story. But we’ll leave these folks to it and happily pick up the cheap—and accelerating—payouts they’re leaving on the table.

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.

Disclosure: none