During volatile times like these, the best thing to do is this: stay calm and keep collecting your dividends.
Fighting the urge to sell is critical, because doing so could slash your dividend income by 82% or more.
Here’s where I’m getting that number: let’s say you hold the stocks in our Contrarian Income Report portfolio, which yields an average of 7.2% as I write this. (If you bought a while back, you’re likely yielding more on your investment, thanks to our picks’ dividend growth, but let’s use 7.2% as our benchmark here.)
And let’s say you’ve got a reasonable nest egg—about $350K—invested. Your 7.2% yield translates into an income stream of $25,200 a year. I think you’ll agree that dividend payouts of that size are a big part of the retirement puzzle—and they’d stop cold the moment you sell.
What would you buy instead? Treasuries? At today’s 1.3% yield, the 10-year would pay you $4,550 a year on your $350K—or 82% less than our CIR picks! That’s no way to fund a retirement.
Here’s an even better reason to hang on to your high yielders: these stocks tend to hold up quite well in a downturn like the one we’re living through now.
Our 3-Point “Pullback-Proof” Checklist
What are the hallmarks of a resilient high-yield dividend play? Here are three telltale signs I always look for:
- A history of holding firm in past downturns. It’s obvious: if a stock held its own in the last pullback, odds are it will outperform in the current one.
- A high—and rising—dividend. Big payouts tend to get investors’ attention in times like these, when the first-level crowd is going all in on pathetic payers like Treasuries. A growing 7%+ payout looks great compared to the 1.3% the 10-year is currently dribbling out.
- A low “beta”: Beta ratings sound like a shadowy technical indicator with no value to us conservative dividend investors, but that’s false.
Beta—measured over five years on most stock screeners—is an important volatility measure. Its simple: a beta of 1 means a stock tends to move in tandem with the S&P 500. Below 1: less volatile. Above 1: more volatile. For pullback-resistant buys, I look for a beta of 0.5 or less.
To see this 3-point strategy in action, let’s look at Omega Healthcare Investors (OHI), which I’ve recommended in Contrarian Income Report. OHI is a real estate investment trust (REIT) with investments in 950 senior-care facilities, almost all of which are in the US.
OHI Is a Rock in a Downturn
Let’s start with point No. 1, strong performance in the last downturn.
Check! In the late 2018 wipeout, which ran from September 20 of that year to Christmas Eve, OHI investors made money—and no small amount, either: we bagged a 4.9% total return in that three-month period, while the broader market returned negative 19%.
So it probably comes as no surprise that OHI is holding up nicely again in 2020. Even though the market had tanked 10% from February 19 to last Thursday morning, OHI was paddling along nicely, its share price off only about 1.7%, while its shareholders continued to benefit from its 6.2% dividend.
And on the year, it was still well into positive territory, particularly when you look at its total return (including dividends) while the S&P 500 was deep in the red.
Go back a year and the difference is even more stark!
Big—and Growing—Dividend Draws a Crowd
Bear in mind that these steady performances come from a stock paying “just” a 6.2% dividend today, well below our CIR portfolio average of 7.2%. But the key takeaway here is that OHI’s dividend has grown, and as I’ve written before, a rising payout acts like a magnet, pulling a company’s stock up with it.
The Final Ingredient? A Low—and Falling—Beta
Finally, OHI ticks the last of our three boxes: a low beta, at just 0.39, meaning the stock is less than half as volatile as the S&P 500.
This is one of the best testaments to the ability of a high (and rising) payout to stabilize your portfolio that I’ve ever seen!
Put it all together, and you can see that OHI has been the definition of a pullback-resistant dividend—in the long haul and the short.
Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, click here for his latest report How To Live Off $500,000 Forever: 9 Diversified Plays For 7%+ Income.