Regular cash payouts take the sting out of market volatility.
Studies have shown that more than half of an investor’s return over a lifetime come from dividends. By getting regular cash payments and reinvesting them in more shares, traders can compound their wealth at a rapid pace.
Later in life, cash payments can be used to meet other expenses. It’s a great investment tool.
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He bought Apple 22 years ago... Amazon 13 years ago... and Netflix more than a decade ago.
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When markets are rising rapidly, dividends take a backseat to capital gains. But when markets slow, or even drop, the power of dividend investing becomes apparent.
Investors who take advantage of big drops to buy dividend payers at yields above their historical average can do well for themselves. They just need the patience to see it through.
By finding companies with decent yields and buying when out of favor, investors can get high initial yields likely to grow over time along with the benefit of capital gains.
Dividend Play #1: ViacomCBS (VIAC)
The merger of these two media companies was completed last year. As with any merger, there will be expenses, and the company recently reported those came in higher than expected.
Thanks to that, the company’s first earnings report as a combined entity was a bit of a dud. Even worse, it led to a near-20 percent drop in shares.
That drop looks overdone. It’s sent shares to 5 times forward earnings, and down nearly half in the past year. And on a technical basis, shares are looking deeply oversold.
While existing traders are heading to the exit, the drop in shares has raised the dividend yield on the company to over 3.2 percent. That’s a good starting point, and this company has some upside potential as well.
Given the sheer content in the CBS and Viacom library, there’s a lot of potential opportunity in the streaming space. The existing content is poorly handled so far, and a more organized method of streaming the content could be huge for the firm. If it’s handled well, shares should move higher, similar to the move in Disney last year.
With both high income potential now and a catalyst for improved share performance, the stock is looking like a contrarian buy here. And thanks to the drop in shares, investors can get in up to $30 without overpaying.
A steep recovery in shares looks unlikely anytime soon, but traders could still do well with the January 2021 $30 calls. Nearly $5 in-the-money before earnings, these options now trade for around $3.00. Shares will likely gradually recover from their earnings drop this year, and this option should move back in-the-money.
Dividend Play #2: Unilever (UN)
As a global player in the consumer goods space, Unilever has been a steady performer for years. That kind of steady performance is attractive in flat or declining markets, when cyclical growth names move heavily out of favor. It’s a name that’s largely missed the recent rally in stocks.
However, short-term fears about a slowdown in Asia have kept shares from breaking higher. The company’s high exposure to the fast-growing Asian market has led to some fears thanks to the coronavirus outbreak.
We expect those fears to eventually subside, and today’s investors will see long-term appreciation to go along with a sizeable dividend yield.
Already, shares yield over 3.1 percent, a hair better than many U.S.-based consumer goods companies. And shares trade at 25 times earnings, a bit pricey to the overall market, but not as high as other players.
Consumer goods companies tend to be defensive in nature and have some branding power to justify these above-average valuations.
The company has spent the last few years increasing its free cash flow, growth levels, and profit margins. These incremental improvements may not be as attention-grabbing as a high-flying tech stock, but they’re delivering on the bottom line.
We like shares up to $60.00 based on these factors. But we see room for shares to run as coronavirus fears fade. Why? The company’s Asia operations will likely see improved activity when that happens.
While there are a limited number of options trades, the August 2020 $60 calls look attractive. They’re near-the-money and could move in-the-money quickly, particularly on a continued flight to quality in the equity markets.
And priced around $1.80, or $180 per contract, they could deliver mid-to-high digit returns on a surge in optimism over the coronavirus.