Here’s the truth about the whole “sell in May and go away” strategy—following it will cost you huge gains and income. And if whipsawing markets have you thinking of cutting back on stocks this summer, you need to reverse course now.
Consider this: in the 9 years since the financial crisis, this “advice” only worked 3 times. And by “worked,” I mean you would have sidestepped a decline in the S&P 500 by sitting out from May through October. Those are crapshoot odds!
Selling Low and Buying High
And the wins you would have passed up are enough to make any investor weep.
Take last year: say you were holding Valero Energy (NYSE:VLO), one of the 5 “surprise” dividend growers I’ll say more about below (4 of which are primed to drop big payout hikes on us in the next 6 months).
Now let’s say you dumped VLO on May 1, only to buy it back on October 31. Here’s what you would have missed out on:
22.6% Profits—Left on the Table
In other words, you would have sold VLO at $64 a share and bought it back at $79!
This is the opposite of successful investing. And if you fall into that trap this year, you’ll be making an even bigger mistake.
Why Selling Now Would Be Your Worst Blunder of ’18
I say this because earnings are scorching hot, with Q1 profits coming in 18% higher than last year so far.
Meanwhile, the market has flopped over and gone back to sleep:
The Bargain Hunt Is On!
You and I both know that no matter how scared the herd gets, stock prices always come back to earnings. In the meantime, this silly disconnect is handing us the biggest crop of bargains we’ve seen in years.
And here’s something else no one’s talking about: according to Barron’s, you can pick up so-called value stocks for a song today: about 13.5 times earnings, on average. But FANG growth rockets like Facebook (NASDAQ:FB), Amazon.com (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOG)) are going for a nosebleed 24 times.
That’s a huge gulf—and it means that when fearful first-level investors pile back into the market, they’ll pass by pricey names and go straight for today’s best bargains.
We’re going to get there first, starting with 5 terrific stocks I’ll show you shortly.
Before I do, I have to tell you one more thing: there’s another step to our plan, in addition to just buying profitable companies cheap.
Because we’ll squeeze even more out of the coming market bounce by adding a second element to our bargain hunt: dividend growth … but not the kind of dividend growth you’re probably thinking of.
The Quick-Profit Power of Dividend “Surprises”
Instead of your typical Dividend Aristocrat, like AT&T (NYSE:T) and Colgate-Palmolive (NYSE:CL), which dribbles out tiny one-cent or two-cent payout hikes every year, we’re going to look for bargain companies throwing off “surprise” dividend hikes.
That means picking out stocks poised to hand out bigger payout hikes than the herd expects, dragging new investors in and ballooning the share price as they do.
This is exactly what happened with Packaging Corporation of America (NYSE:PKG), which I recommended to readers of my Hidden Yields service in July 2016.
At the time, first-level investors were shunning PKG because of its “boring” business—it makes containerboard, which it turns into packaging for everything from produce to in-store displays.
But we felt PKG was set to deliver a “dividend surprise,” for 4 main reasons:
- It was cheap, at just 12.9-times FCF;
- It was a cash machine, boosting FCF 171% over the preceding 5 years.
- Its dividend was safe, with FCF of $5.56 a share in the preceding 12 months, way more than enough to cover the $2.20 payout, and;
- It was a “pick-and-shovel” play on e-commerce, supplying packaging for the ever-growing number of packages piling up at our doorsteps.
How did that call turn out?
We pounded the table on PKG on July 15, 2016, weeks before management dropped a “surprise” 15% payout hike on shareholders. That ignited the stock and sent it on a wild profit ride as the herd took notice.
Take a look at this chart, showing PKG’s performance over the last 3 years. You can clearly see that the dividend hike is the “fuse” that set off the stock’s surge:
Big Dividend Hike, Big Return
And keep in mind that PKG’s gain was triggered by a relatively modest 15% payout hike!
Our Next 5 Dividend Stunners
Fast-forward to today and PKG’s payout growth looks tapped, with management holding the dividend where it was after that August 2016 raise. And the stock is now much more expensive at 22.5-times FCF.
That’s why I recommended my Hidden Yields readers sell PKG on October 20, 2017, locking in a nice 65.3% return in just 15 months. The shares have pulled back a little more than 3% since my sell call.
But the 5 stocks I want to show you now—Valero, Ingersoll-Rand (NYSE:IR), Carnival (LON:CCL) Cruise Lines (NYSE:CCL), Delta Air Lines (NYSE:DAL) and Summit Hotel Properties (NYSE:INN)— are all showing telltale signs of being the next PKG.
So let’s stack them up, first by the last 5 years of dividend-growth history:
“Fabulous 5” Deliver Monster Payout Growth
Already we’re looking at average payout growth of 188%!
And yes, these stocks are all cheap in relation to FCF (or funds from operations—FFO—the benchmark of REIT cash flow, in the case of INN). Their payouts are also safe and backed by surging cash flows, too.
Check out the table below. The stellar numbers pop out at you right away:
Two quick takeaways here: while the price-to-cash flow multiples for Ingersoll-Rand and Carnival may look high, they’re down quite a bit, from 18.3 and 35.5 a year ago, so these two really are bargains in disguise.
And while your eyes might glaze over at the 2.1% and 2.3% current dividend yields from IR and Delta (just above the 1.9% S&P 500 average and below the 3% yield on the 10-year Treasury), we’ll happily take the massive dividend growth each stock has delivered—408% for Delta and 114% for Ingersoll-Rand.
To put those hikes in context, if you’d bought IR five years ago, the yield on your original investment would already be up to 3.3%, while your Delta payout would have soared to 6.8%!
Plus, their almost non-existent payout ratios give management lots of fuel for more.
Finally, if this isn’t a signal to buy instead of selling this summer, I don’t know what is: INN regularly raises its payout more than once a year, so I expect another hike to be announced as soon as July.
Moreover, IR and Delta normally announce hikes in August, and Carnival could roll out another big raise in October. These are dead-giveaway signals that, out of the 5 stocks I’ve shown you here, these should be the top 4 on your buy list.
7 More “Free Lunch” Dividends to Triple Your Money in 3 Years
Life is too short to waste our time with middling dividends! Which is why I’ve just released my 7 very best buys for your portfolio now. These 7 dividend-growth powerhouses are set to SAFELY double your money in 3 years!
It’s a simple formula: the 7 stocks I’ll show you when you click here all boast dividends that are doubling often—which means their prices will rise in tandem. At the same time, we’ll collect their dividend payments today and enjoy an even higher income stream tomorrow.
This dividend-growth strategy has produced amazing 23.5% annualized returns for my Hidden Yields subscribers since inception. In two-plus years, we’ve crushed the broader market by 60%.
If you achieve returns of 23.5%, you’ll double your money in just a little over 3 years!
So if you haven’t been following this strategy, why not? The best time to get started is today—before the 7 dividend growers I just mentioned begin to move higher. Click here and I’ll share their names, tickers and buy-under prices with you right now.
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."