Let’s chat about making some real money in stocks. I’m talking about 14.6% returns per year, every single year.
I know, my 14.6% annual number sounds pedestrian in a world where peddlers are hawking virtual (pretend?) coins with pups on the cover. But my returns are real—and spectacular for investors who are patient.
With this method we can double our money every four years and ten months (the wonderful Rule of 72 says so!). And we can achieve these gains safely—without gambling or buying and hoping—because these profits are fueled by dividends.
The only twist from the traditional income investing that we both know and love is that we’re playing the dividend growth plus the current yield. In a way, we can think of it as “second-level” dividend investing.
Here’s an example. I recently pointed out that hospital landlord Medical Properties Trust (NYSE:MPW) is poised to deliver 9.4% to 10.4% returns per year, every year, for the foreseeable future.
But the stock only pays 5.4% today. So where did I come up with the extra coin?
Well, MPW raises its dividend every year. In fact, the company has hiked its payout six times in the last five years. It is skillfully playing a game of “Hospital Monopoly” where it adds assets regularly. These new hospitals boost the firm’s cash flow and then management, in turn, hikes the dividend:
MPW Raised Dividends Six Times In Five Years
Going forward, I have MPW penciled in for another “penny per share” raise next year. And the year after that. And so on.
These pennies add up. They represent 4% to 5% annual gains on the stock’s payout. Which means that by 2025, shares will pay $1.28 per share, a sweet jump from today’s $1.12.
When 2025 comes around, and we wonder where the first half of the decade went, MPW’s yield will have grown to 6%+ thanks to these annual gains. But it’s unlikely we’ll be able to bank 6%+ on new money. This “yield on cost” will be a deal that can only be snagged by forward-looking investors who bought shares today.
Over time, MPW’s share price tends to rise along with its payout. Let’s rewind even longer to 2013—a full eight years—which is when MPW began boosting its payout. And its dividend staircase has been a guiding light for its stock. The price can spike higher or lower, but over time it simply follows the dividend:
Dividend Growth Means Price Appreciation
(Please note that the price line above means price only, not total return, which includes the dividends you are paid and is, of course, higher.)
The reason I don’t think we’ll see a 6%+ dividend yield deal on MPW in 2025 is that, over the long haul, this stock’s price tracks its payout. By then, new investors will probably see a yield of 5% or less, because income investors will continue to realize they should ditch their lame 2%-paying blue chips and hop aboard this hospital landlord.
Which means anyone who owns shares right now is poised to enjoy 4% to 5% annual price gains per year. Shares should cruise north of $25 by 2025, thanks to these dividend increases that will attract new income investors.
Want to make more than 9.4% to 10.4% per year? (I did promise 14.6% above, after all.) We have two choices:
- Find a double-digit yield that is not only secure, but also growing. (Difficult.)
- Find a dividend that is growing by double digits (Doable.)
Texas Instruments (NASDAQ:TXN) is a textbook example of a breakneck payout driving a stock price higher. We added this Hidden Yields hall-of-famer to our HY portfolio nearly four years ago. The technology firm was raising its dividend so fast that our mission was simple:
Buy this dividend and hang on.
In the three years and 11 months since, TXN’s dividend has already doubled:
A Quick Dividend Double
So, did we make 104% from TXN? No. We did even better, thanks to the power of its dividend magnet.
We bought TXN when its price was lagging its payout curve. A dividend like this leaves dust in its tracks. Our gains are 156% (and counting) thanks to this runaway magnet:
How We Calculate 156% Returns (And Counting)
(Note: We added TXN to our HY portfolio on June 16, 2017.)
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."