The Hottest New Place to Find Income in Q2/2015

Keith Fitz-Gerald Apr 15, 2015
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Many investors believe that growth and income are mutually exclusive – that you can’t have one if you want the other. So they don’t give a second thought to high-growth sectors that haven’t traditionally paid out.

It’s one of the costliest mistakes they can make, for the simple reason that the markets change constantly. Think about it for a moment. Just because a sector hasn’t paid dividends in the past and it hasn’t been attractive to income investors, doesn’t mean that it won’t be in the future.

Take, for example, Altria Group Inc. (NYSE:MO) and CNH Industrial N.V. (NYSE:CNHI). At the time I recommended them to Money Map Report subscribers, they were considered by the broader investing community to be staid investments with very little upside – about as exciting as watching paint dry.

My take was quite different.

Despite tremendous increases in regulatory pressure, global growth concerns, and doubts related to the markets themselves, I saw two companies tapped into our Unstoppable Global Trends and, by implication, the higher revenues, higher earnings, and higher stock prices that go with them.

I knew they were getting ready to grow.

The fact that most investors took them for granted was pure gravy, because it meant that the shares were cheap compared to the potential they represented. And now anybody who followed along is glad they did. Altria and CNH Industrial have returned 245% and 142%, respectively. Now I’m seeing history getting ready to repeat itself.

As usual, I’ve identified a few companies that people don’t traditionally think of as income generators to get you started.

Here’s what you need to know.

Your Opportunity in a Sector Known for Dividend Stinginess

Tech companies have historically mustered up only meager dividend payouts – if they paid out dividends at all. Google, Tesla, Facebook, and GoPro are just a few of the famous names that pay nothing, for example. Even Apple only started to pay dividends in 2012, after a 17-year hiatus.

“First Mover” Advantages Apply to Dividends, Too

Some companies, the “Dividend Royalty,” increase their dividend payouts regularly. That means that even if the yield isn’t spectacular when you buy the stock, it will become a very handsome payout for you in a few years’ time.Take Altria Group Inc. (NYSE:MO), for example.

When I recommended the company to Money Map Report subscribers on February 23, 2010, Altria was one day away from declaring a new quarterly dividend payout of $0.35/share. For a company that had most recently closed at $19.97/share, this would amount to a yield of 7% – more than enough to make the stock a formidable Growth & Income pick.

But if you thought that yield was good, let me show you what the yield would be for investors who were savvy enough to buy Altria back in February 2010.

The company increased its dividend payout four times in the next five years, most recently paying out a quarterly dividend of $0.52/share last March. That’s enough to give it a 4.1% yield for any investors who bought it this week, since the stock is now trading at around $52.

But if you bought it in 2010, you’d see $2.08 returned to you in a year for a stock that cost only $19.97/share. That’s a 10.4% yield – more than double what investors who are late to the table enjoy.

What Altria should teach every investor is that entry points aren’t just important for a stock’s absolute price. You also want to think about entry points when you’re considering an income stock. Will a stock keep maintaining its dividend payouts? Will it increase them?

But the tech sector is on fire and will be for years to come – and not because they’re making gee-whiz products, either, which is how most people think about the sector.

It’s the data that matters.

According to Newstex, there were only five exabytes of data created from the dawn of time until 2003. By 2013, we were generating five exabytes of data a day.

IBM suggests that fully 75% of that is unstructured, meaning it comes from cell phones, text, voice, and video.

Perhaps 90% of all the data that has ever existed has been created in the past two years.

I realize that these are big numbers that are hard to wrap your mind around, so let me put this in perspective.

We are talking about so much data that the storage capacity involved here could capture every word ever spoken by every human who’s ever lived and still have space left over.

Here’s why this matters.

Dividends get paid by companies with three things in common: double-digit demand growth for the stuff they make, healthy profit margins, and gobs of cash.

Money always goes where it’s treated best, so it stands to reason that if you want to capture tomorrow’s massive payouts, you need only to look for the biggest cash stockpiles today.

And right now there isn’t an industry on the planet stashing more cash than tech.

As of Q4/2014, the technology sector had an average free cash flow margin of more than 26%, compared to the S&P 500 average of 11.56%. In plain English, what this means is that tech companies in general are awash in cash.

Obviously, a good deal of that is going to get plowed back into reinvestment and ongoing development – as it should.

But – and this is the “aha” moment – it’s inevitable that some of the players that have had a particularly strong earnings season will choose to boost their dividend payouts to reward shareholders immediately.

Here are three of the most likely candidates to raise their dividends in the coming weeks and months.

Dividend Contender No. 1: Apple Inc. (NasdaqGS:AAPL)

Last February, Apple CEO Tim Cook gave an interview that made every long-term Appleista jump for joy.

“By and large,” he told a crowd of investors at the Goldman Sachs Technology and Information Conference in San Francisco, “my view is that for cash we don’t need – with some level of buffer – we want to give back. We’re not hoarders.”

For a company with more than $178 billion in cash on hand according to The Guardian, Apple has plenty of latitude in determining just how far it should go in raising its dividend.

Recent history provides some indication as to how far the company’s management may decide to go. No doubt Tim Cook understands the need to keep activist investors at bay, yet still reward current shareholders.

In July 23, 2012, Apple announced a dividend payout of $3.05, which amounted to a 2% dividend yield at its pre-split stock price. But the stock has gone up in value by more than 53% since – and today its yield is 1.5%.

A return to the 2% dividend yield would boost Apple’s payouts by 33%.

The precise increase is speculation on my part – but just like investors in July 2012, you’ll want to be invested in Apple before it’s announced rather than after.

Dividend Hike Contender No. 2: SanDisk Corp. (NasdaqGS:SNDK)

In May 2014, SanDisk Corp. (NasdaqGS:SNDK), a major leader in flash storage solutions, announced plans to raise its dividend payout to $0.30/share each quarter, amounting to an increase of 30%.

“This dividend increase underscores the confidence we have in SanDisk’s business and reflects our commitment to sharing our success with our stockholders,” said Judy Bruner, the company’s executive vice president at the time.

The company is coming off a disappointing 2014, when net income decreased slightly year over year from $1.04 billion in 2013 to $1.01 billion in 2014. However, the company also has a history of rolling out pleasant surprises – beating, for example, the Zacks Consensus Estimate in three out of four trailing quarters, outperforming expectations by an average of 5.7%.

Last January, the company issued a statement declaring it was maintaining its quarterly dividend payout of $0.30/share. If SanDisk continues to surprise, that suggests it could be a very good candidate for a timely dividend hike above its current yield of 1.8%.

Dividend Hike Contender No. 3: QUALCOMM Incorporated (NasdaqGS:QCOM)

The digital communications company QUALCOMM Incorporated (NasdaqGS:QCOM) is already approaching the latest earnings season with the wind at its back. In its last four earnings reports, it’s proven analysts to be too conservative on its performance by an average of 9.5% each quarter.

Last month, it boosted its dividend payout by five cents, to $0.48/share. But I still see plenty of upside for QCOM as a dividend machine.

Not only has the company been generous with dividends in the past, but it’s raised its dividend payout no fewer than six times since early 2010. That’s enough to make it an exceptional dividend player in the tech field. The behavior is entirely consistent with “Dividend Royalty” stocks like Altria, which raised its dividend payout a “mere” four times over the same time frame!

With a 38% year-over-year increase in operating income reported last quarter, QCOM is in a position to afford even more dividend generosity. And in the meantime, the 2.9% yield it offers today is nothing to sneeze at.

Not today… and certainly not tomorrow.

Until next time,

Keith Fitz-Gerald

7 Responses to The Hottest New Place to Find Income in Q2/2015

  1. Papa Demba Ba says:

    The Hottest New Place to Find Income in Q2/2015
    There’s a seismic shift going on in a sector that now finds itself awash with cash – and that could mean hefty dividend increases in the near future. I’ve found three candidates in a historically stingy field for income that could be poised to hike their dividends for shareholders within weeks… in a big way.

    l am so agree for your suggession, l can’t tell you other thing, because this informations you came to provide me is complet and clear, really looking forward Mr KEITH

  2. Laurier Chabot says:

    I am starting to trade for the first time I have always wanted to try this but I’m am 58 years old and not very smart on markets, I’m currently using a practise account to even understand how to buy and what the markets are about , I love your info it seems to make sense to me is this ok to start with to get my feet wet as they say thank you?

    Laurier

  3. Mary says:

    Thank you for this valuable information. Best business newsletter ever! I am a retired senior and appreciate your help more than you know.

  4. Robert Hartness says:

    A conflict arises in my mind after reading this article. On the one hand, I’ want to invest in all three
    (I already hold 15 Apple shares bought as a price tester at $127) On the other hand , I want to to buy low.
    So do I wait, watch and pounce when the price of these stocks drops, as Apple just did slightly, or do I buy now?
    Also, are these argument so powerful that I should ignore concerns about being overweight in the tech sector, not to mention the 50-40-10 notion? I have recently cashed in profits and conscious of the uncertainty over Greece and Russia
    I want to choose the best moment in re-invest. I agree with you about China and maybe Japan too.
    How does the prices of these recommended stocks compare to their historic price trend and what are the chartists saying? I know that if one sits on one’s hands trying to find the perfect time to buy opportunities may be lost
    Do you have any further thoughts in the light of these comments Keith?

    • Bob says:

      The easy solution to entering the market and buy low is to use options to put your toe in the water and wait for the tide to come to you. You want to buy low but the market is too high. This waiting game may never come your way thus your money is set aside and you miss the game. You could place a limit order at your price but again, that does not solve the problem You do not make any money sitting on the side. Sooooo, the solution is to sell a put option. You obtain a small amount of money roughly equivalent to dividends or risk free interest rate of return plus a risk premium for the obligation to buy 100 shares of stock if the market price is at or below your entry strike price before or at option expiration date. If your price is not realized in the market, the contract expires, you keep your money received. DO IT AGAIN AND AGAIN TO CONTINUE THE PROFITS. THIS REPEATABLE PROCESS EVENTUALLY REDUCES YOUR BASIS AND YOU MAY FEEL MORE COMFORTABLE IN STEPPING UP TO THE CURRENT MARKET PRICE.

      Selling covered calls is not very profitable today because everybody is doing it. Selling puts however to acquire new positions is , more profitable because most buyers are fearful of a downturn and you are playing the other side. Statistics show that about 80% options expire worthless or are traded out before expiration which means that sellers are the dominant winners. This is a great way to acquire stocks at a low price, get a great deal, and be in the discount market and provide income. This is a twist that is not really used much. Also you only need to have a fraction of the total purchase price in you account to hold the option but will have to pay full price if exercised. If memory serves me correct it is about 1/5th the stock market price to hold an option. A margin account will help you in this instance and you can always move funds into the account to fully cover the stock.

      Check out Interactivebrokers.com A great platform and the cheapest fees for commissions and lowest margin rates in the market.
      Bob

  5. keith sullivan says:

    what kind of stock to invest in? What and how much should I invest in and when do I sell? can you give me some advice!

  6. Frank L Bresee says:

    Dear Keith,

    Thank you so much for this valuable info;i even if one doesn’t not act on these specific recommendations one can learn and become a smarter investor…

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