JOHN DELVECCHIO: Two Dividend Stock Tips You Don’t Want to Miss

It may be called a “sideways” market more often than not, but really, it is just all over the place.

Up.

Down… All around.

It’s emotionally trying, in times like this, to say the least. That’s why it’s important to have a strategy that works with your emotions. The only challenge then… is sticking with it.

And I mostly short stocks. Which is a tough game when the market blows off nearly all bad news only to rally to new highs.

• Since shorting stocks is a rarity, I’m often asked two questions when I meet new people:Are companies still as aggressive with their accounting as they were in prior decades before regulations like Sarbanes Oxley went into effect? The answer is yes. Just because someone signs off on a piece of paper doesn’t mean they weren’t aggressive in their accounting or worse yet committed fraud. Liars lie all the time.

• So, the next question I often get is “well I own stocks and want to own stocks, so what can I do about it to protect myself.”

Most investors do not want to short stocks. It’s a totally different process and less familiar to most people. And though they can make a killing with me going short, I tell these folks that they should consider companies that pay you first.

By putting the shareholder (you) first, you can avoid a lot of the risk brought on by management shenanigans used to keep the stock price up and line executives own pockets.

Prudent management teams can generate market-thumping returns. My own research into companies with “good shareholder yield” returned over 15x the S&P 500 since 2000.

Good shareholder yield is the focus of our coming newsletter Hidden Profits.

One of the most obvious ways to get paid first is to receive a dividend. Dividends rule. According to the data presented by Ned Davis Research, dividend initiators and growers have compounded at 9.8% since 1972.

That would turn $100 into $6,467.

On the opposite end of the spectrum, non-dividend paying stocks have returned just 2.3% annually.

In the 1980’s it became easier for companies to buy back stock. Since then though, dividend payers have significantly out-performed companies that only buyback stock.

But, of course, we have good buybacks and bad buybacks. That’s something I will discuss in my next go round at Economy & Markets.

The deathblow to a stock is when the company cuts or eliminates dividends. Those stocks have seen a $100 investment shrink to $78 since 1972.

Yuck.

Quality matters. You could be receiving a dividend and then it’s cut and the stock implodes.

Or, the dividend could be paid while the business around it melts down like an ice cube. At Hidden Profits we go beyond surface level analysis and search for companies that will pay you first for the foreseeable future. And, more importantly, can pay you even more over time.

Let’s look at a couple of quick examples.

Off-the radar local banks often dish out sturdy dividends. Capitol Federal Financial (CFFN) does, but no one’s watching.

Throughout its over 120-year history, CFFN has been headquartered in Topeka, KS.

It is too small for institutions, has negligible analyst coverage, sports an unimpressive 2.4% dividend yield, and carries a dangerous payout ratio of over 100%.

But I know better by digging into the fine print.

CFFN has way too much money – far beyond required capital ratios.

Overcapitalization has a great margin of safety to cover loan losses and can return cash to investors. So why the measly 2.4%?

The online services don’t report that CCFN (with only two exceptions) paid two special dividends since 2002.

CFFN’s first pay out the first comes mid-year, and the company actually names it – True Blue® Capitol Dividend. Then at the end of the year, the company pays a “true up” dividend to complete the payout of all unneeded cash.

The actual dividend total may vary slightly year to year, but the stock doesn’t sway with it. And every time CFFN stock slips below book value, management buys back stock too. Capitol management puts us first.

Boeing (BA) is thought of as a cyclical stock, with business that rises and falls with the economy and airline industry. So what looks good in the last 12 months or few years often turns bad tomorrow.

But that’s changed with more profitable and growing air traffic, especially in the Middle East, Latin America, Africa, and Asia-Pacific regions.

Over 70% of exploding demand and orders are for single aisle planes, and Boeing’s 737 is the top choice. And the 737’s newest model is 20% more fuel efficient to boot.

Boeing 737 fuselage

Boeing is winning the war against Airbus for big aircraft; too, with a 45% share of the commercial aircraft market, it has bulging competitive muscle.

Boeing’s yield today is 3% – 50% higher than the S&P 500’s 2% – and it has room to grow, with only a 51% payout ratio. Plus, it’s cheap at 11 times free cash flow, which is one big reason savvy management has a current buyback authorization of 8% of its shares.

Low valuation, buybacks (which retire dividend obligations on those shares), and good payout ratio mean sustainable and likely rising dividends ahead. The stock hasn’t moved much from late 2013 levels, while business and valuation have improved. Good for buyers.

That’s just two stocks.

There’s more where that came from with great potential to line your own pockets first.

The next time you look to buy a stock, consider if management has your interests in mind by paying you first just like we do at Hidden Profits.