Just because you’re a dividend investor doesn’t mean you’re fated to “grind out” income 3% and 4% at a time. With a slight change to your current (dare I say pedestrian?) strategy, you can keep your dividends and enjoy 81% to 437% price upside or more.
These types of life-changing returns are easily achievable within a few years. You just need to employ the ultimate contrarian dividend strategy – and buy select “born again” payouts.
The strategy is two-fold:
- Find the stocks with rock-bottom sentiment around them, and
- Only buy them when a cheery outlook is guaranteed.
First, Find Firms Burdened With This “Stigma”
Contrarian investing works because it capitalizes on overly-negative sentiment to find value. In the income world, this means buying when yields are abnormally high — and prices abnormally low — thanks to popular yet incorrect beliefs.
Corporate bankruptcies can be particularly profitable events for strong-willed income investors like us because they extinguish any and all hope.
And here’s the best part – we don’t even have to invest during the depths of despair. You and I can wait a few years until a successful turnaround is basically guaranteed. And we can still bank triple-digit returns then, with less risk than a typical stock purchase.
All thanks to the shame that lingers longer than it should.
While firms may emerge from bankruptcy in a matter of months, the associated stigma can last many years. An academic study published in the Journal of Finance studied the stock returns of 131 firms emerging from Chapter 11 bankruptcy – and found they outperformed the broader market over the next 200 days by a large margin.
Another study published by the International Journal of Business and Social Research studied 59 companies filing for Chapter 11 protection. It also found that these stocks beat the market handily over the next 250 days.
There’s nothing special about the 200 or 250 day threshold the academics picked. The stocks they studied crushed the market for the simple reason that they were “too cheap” thanks to the bankruptcy black eye they carried.
But we can do even better. Look, I hate losing money – and I’m not interested in buying firms as they emerge from bankruptcy. I only want to buy stocks in companies that are definitely going to make it, so that I can hold them profitably for many years. I also want them to pay me a dividend.
That’s why I employ this income-twist on bankruptcy buying. It helps me avoid the losers and bank safe double and triple-digit returns – while collecting yield to boot. (And by the way, it works whether or not the firm officially filed for bankruptcy – or simply got in enough trouble that it had to eliminate its payout.)