The Market’s Unintended Opportunity

If you’re sick of the gloom and doom permeating markets right now, you can find solace in one investment… Well, it’s actually a type of investment. I’m not talking about options or shorting or even bonds. We still like to buy low and sell high, but we also like our investments to pay us as we go.

Income investing is a great way to do that. It gives you the chance to take cash out of your investments without selling shares. One way to successfully do this, while staying aggressive, is to reinvest your dividends in penny stocks. That way, you have the best of both worlds: security and potential money multipliers.

There’s never been a better time to start. With the recent thrashing in the markets, many companies are sporting unbelievably high yields.

More Income Than Ever Before

The S&P 500 is now sporting a yield of 2.65%, up from its low of 1% in 2000. The same goes for the Dow, which is now at 3.74%, up from its 2000 low of 1.5%. These yields may not sound high to you, but they both factor in non-dividend paying companies.

We are seeing enormous yields everywhere we look. Others are too…

Warren Buffett, you might have heard, is buying up depressed stocks. But instead of buying just any old ones, he’s investing his hard-earned money in these high yields.

The Oracle of Omaha recently bought up $5 billion worth of Goldman Sachs preferred shares. For his gutsy investment, the company is going to send Buffett a check for $500 million every year. That’s a 10% yield on one of the largest banks in the country.

Yields that high can mean one of two things: either the company’s payments are too high and a drop is coming, or its shares are depressed and should rise. In this market, most companies fall into the second category.

Sure, companies like Bank of America and Citigroup cut their dividends. But, there are many others riding through this stormy market with consistent dividend payments. Just take a look at JP Morgan Chase and Wells Fargo. Those are two banks still paying nice premiums to shareholders.

We aren’t interested in banks though. You don’t want to stand too close to this economic fire. That’s why we are looking for companies with consistent dividend payment and piles of cash in their coffers in other industries. We are finding tons out here.

As Chris Mayer puts it, “According to the WSJ, nearly one in 10 stocks trades below the value of its per share cash holdings, an even greater proportion than Graham found in 1932.” Combine that with a high yield in a safe industry, and you are looking at a monster of a buying opportunity.

We are seeing stocks tied to real resources — like oil, natural gas, and coal — paying enormous dividends. Take BP for instance. It’s one of the largest integrated oil companies in the world and it’s paying 7.6%. That’s absurd. Last year this time, the company only paid 3.5%.

Royal Dutch Shell is another massive oil and gas company that’s offering a relatively astronomical yield. Shares of Shell fell from $88 in October 2007 to just $55 today. That fall from grace set up a yield rally from just 2.2% to 5.9% in that 12-month period.

Double Your Income Even as Jobs Disappear

Think of it this way: while millions are taking pay cuts or even losing their jobs, both BP and Shell are offering more than double last year’s income to shareholders.

If you are wondering how income investments like these will hold up as this bear market continues, take a look here: from 1970 through 2005, dividend stocks returned twice the gains of non-dividend paying stocks in the S&P 500. In that period, there were at least seven bear markets and economic crises. So maybe now, more than ever, you should be looking into income stocks.

But before you start buying the highest yields out there, remember that it’s only based on previous or planned dividends. No one knows when a company will cut its payments. If a company is paying more than 15%, take a serious look at why. If the business is still producing solid gains at a respectable growth rate, you may be ok. But if it’s starting to take a loss, that yield may not be an attractive opportunity.

Keep a lookout now more than ever. You don’t want to miss the chance to grab shares of solid companies like BP and Shell while they are willing to pay you this well.


Jim Nelson
November 11, 2008

The Daily Reckoning