Dividend-Paying Stocks that Beat the Market and How to Find Them
Not only is our Dividend Portfolio beating the market but five of the stocks have nearly tripled the return on the S&P 500. That's saying something considering the stock market is having one of its best years ever!
In this video, I’ll reveal the power behind these dividend-paying companies, why shares are surging and how you can use it to pick dividend stocks for your portfolio.
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Updating Our 2019 Stock Market Challenge
Our 2019 Dividend Stock challenge just passed the six month mark and I’m still amazed at how well this portfolio is doing. Look at some of these stocks in the portfolio, Hanesbrands 80% return in six months, General Mills 44%, Bank OZK 41% return.
Five of the seven dividend stocks in the portfolio are beating the stock market which is even more amazing when you consider the S&P 500 just had it’s best six months since 1938.
I’m going to update you on the entire portfolio of dividend stocks, then we’ll dig deeper into those five stocks averaging a 46% return. I’m going to dissect why these dividend-paying companies are doing so well and how you can use it to pick better stocks for your portfolio.
I’m putting this video into our 2019 Stock Market Challenge playlist so if you haven’t seen the other updates, check those out. Along with some of the biggest investing channels here on YouTube, I created a $1,000 portfolio in January and will be tracking it all year.
To track my portfolio of dividend stocks, I’m investing $1000 on M1 Finance, a no-fee platform that lets you pick your stocks and automatically invests any new deposits across your group.
Stop losing money to fees! Open an account on M1 Finance and never pay to invest your money again.
So here’s our dividend portfolio through June with a 26% return so far for the year. We had that rough patch in May though the portfolio lost much less than the market because of that repositioning we did late April into REITs, utilities and bonds. What’s been really amazing though is that even though we have some of those safety plays that protected our money, the portfolio has rebounded even more than the market since those May lows.
And a lot of it has to do with those five dividend paying stocks beating the market that we’ll talk about after the update.
Scrolling down past the five we’ll talk about, we see the Vanguard Real Estate Fund, ticker VNQ, and this was one of the real saviors during that May selloff. Here we have a diversified real estate fund that pays a 4% dividend yield and has jumped more than 20% in six months. A lot of the outperformance here is in the fact that interest rates have come down hard over the year so we see a lot of the rate-sensitive investments like real estate, utilities and bonds doing really well.
A Stock Market Warning Sign
This actually should be a huge warning sign for investors but nobody is paying attention. Since May, it’s been those rate-sensitive, safety sectors that have been leading the market higher…not the economic growth names like tech and financials. This is a warning sign because if you look at the reason those sectors are outperforming, falling interest rates, it’s because the economy isn’t looking so hot.
We’ve got lower growth, corporate profits that will likely meet the definition of earnings recession in the third quarter and yet the stock market is notching record highs.
There is a disconnect between investor sentiment and reality and that’s where things usually turn bad REAL quick.
But let’s get back to our portfolio because I want to get to highlighting those first five stocks to help you make better investments. We’ve got the iShares China fund, ticker FXI, that just started rebounding but I think still has a lot of long-term value for investors. This Alerian MLP fund of energy assets, ticker AMLP, took a hit on those lower oil prices but remember, this is a fund that pays an 8.2% dividend so you’re collecting that dividend and oil prices have some solid support with OPEC just announcing they’re going to extend production cuts for another nine months.
This iShares MSCI European Financials fund, ticker EUFN, has lagged for a lot of the year but adds some great international diversification especially when rates are controlling so much of the direction in the market. So this fund will move with those European rates and financials rather than a lot of our other investments tied to US rates.
Finally the BLV bond fund and the XLU Utilities fund that we put on just before May, didn’t do much for us this last month but a 6% return in two months on a bond fund is huge and I expect both of these to do well the rest of the year as both protection from weakness in stocks and upside potential as the Fed cuts rates.
How to Pick Dividend Stocks
I know it was a quick update this month because I want to get to those five stocks but click through to watch the other videos in our dividend stock challenge to see how we put the portfolio together.
So we see the overall portfolio beating the S&P 500 here with its 18% return so far in 2019 and the Vanguard Dividend Appreciation fund, ticker VIG, which I’m using as a benchmark. The portfolio is just running away, beating the market by 7.5% in the first six months of the year.
Best Dividend Stocks for Returns
But I wanted to look a little deeper this month to see why some of our standouts are really zooming past the rest of the market. Just these top five are sporting an average 46% return in six months.
First you’ve got Hanesbrands, ticker HBI, with an 80% return with most of that in the first quarter.
Now one of the themes you’ll see if you look back at those first few videos in the dividend series is deep value and it has a lot to do with these five stocks outperforming. All five of these stocks, and especially Hanesbrands, were trading at deep discounts on a price-to-sales and cash flow basis.
The problem when you’re looking at deep value stocks is timing. You see Hanesbrands had been falling since 2015 before it started rebounding this year and is still down 50% over that four-year period. What made this year different is that it had a catalyst, something that could turn investor sentiment and get the shares rising again.
I found those catalysts in the activewear growth rates and direct sales numbers while looking over the company’s financials in December. Activewear is growing at twice the rate of the broader apparel category and the company is seeing stronger profitability as it shifts more sales online. I knew it wouldn’t be long before the rest of the market saw this and picked the shares back out of bargain basement prices.
Moral here is if you’re going to be looking for value, it can’t just be about a low price-to-earnings ratio. There has to be a catalyst to turn investor sentiment around.
The gains on General Mills, ticker GIS, have been smoother with that slow and steady all the way to May and almost 44% return this year.
In February, I pointed out the company’s acquisition of pet food brand Blue Buffalo as a big boost to the top-line sales. US pet food sales have grown by 5% annually over the past decade, way above other food sales, so this acquisition was a game-changer for General Mills.
Not only was General Mills able to tack on big sales growth, something that is unheard of these days in the packaged foods space, but management has been able to drive higher profitability with a cost-cutting program.
The combination there is lethal so I want to repeat it, a game-changing acquisition that increases sales and an operating efficiency program that cut costs.
You see, usually when a company makes a big acquisition, buying another big company to increase sales, costs balloon and profitability falls. So sales might increase but earnings don’t increase by as much because of lower margins.
But what we had here was higher sales PLUS higher profit margins, so a big win for General Mills and something you always want to watch for, responsible acquisitions that increase sales but not at the expense of profits.
Bank OZK is another stock that gave us almost all our gains in the first quarter and I actually cut it back from 10% of the portfolio to 5% in February.
Now deposit-gathering banks have had a tough go on lower long-term rates but what most investors don’t know about OZK is that it also has a huge real estate loan business. It has that traditional community bank feel but the booming market for real estate loans has been the push for this one.
When we added this one it was trading at a price-to-book value of 0.76 but has come up to 0.99 times book value. I still think there’s some long-term growth, especially as the bank expands into the Nashville market but that deep value has come out of the shares.
ConAgra Brands is one we added in February just before the huge pop in the shares and a 34% return for the year.
This is another example of an acquisition driving sales and management forcing profitability. In ConAgra’s case, it wasn’t getting much credit for the 2018 Pinnacle acquisition. The deal had just closed in October and investors were selling the shares in November and December over disappointing results.
A lot of the problem was centered around Pinnacle’s distribution business so I saw that it wasn’t necessarily a problem management couldn’t fix. They went extremely conservative on the profit outlook and ended up surprising on the upside in March.
You HAVE GOT to play the contrarian sometimes and find the clues the rest of the market is missing. Investor sentiment is herd mentality and a lot of times it will push a stock lower when the reasons for upside are staring you in the face.
China Life Insurance is another one that took a huge hit on the trade war but is still up 32% for the year.
Now I’ll admit, my pick on China Life wasn’t for a short-term gain which doesn’t make much sense for a one-year stock market challenge but I wanted to put this one on your radar.
Like we pointed out in January, China’s economy is growing at 6-plus percent a year, three-times the growth here in the US. The trade war has hurt but China’s government has a lot of ammunition to juice its economy. Honestly folks, you need exposure to Chinese stocks if you’re going to be investing over the decades to come.
Within that theme, China Life controls a fifth of the life insurance market…that’s 1.4 billion people and a country where life insurance penetration is still relatively low.
Now the dividend has always been volatile on this one and last month’s payment was lower to protect cash flow but I’m expecting the shares to strengthen and they may even make a special dividend if economic growth rebounds after the trade war.
I’m linking here to a new dividend portfolio I just created, if you want your dividend stocks to pay your bills, click to watch this video. Seven dividend stocks that will put cash in your pocket every single month. Don’t forget to join the Let’s Talk Money community by tapping that subscribe button and clicking the bell.