You ever buy a stock, watch it go up quickly, feel like a genius…only to watch it top out and take back some of your gains…and then all of them? It’s a–let’s admit it–stupid feeling.
The winner, now a big fat loser. Why didn’t I take the money and run!
“Be patient,” they say. “You’re here for the dividend. The stock will come back.” Well, first, who the heck are they? And second, why should patience be required? It was a fast winner. Now it’s a big fat loser!
Well, my careful contrarian, I ran the numbers earlier this year. And I can confirm that they are wrong. It’s more profitable to take the money and run. Sell high, in other words.
This doesn’t mean we need to put our entire portfolio on ice skates. We can, however, dedicate a portion of our portfolio to this dividend chasing for our version of “speed dating.”
Rather than buy and hold stocks and funds for many years, why not hit the streets and move through the entire market of payers? When we date, rather than marry, a dividend, we can (ahem) lower our standards just a bit.
Let me show you a “no shame” example of chasing a well-endowed dividend.
Take Annaly Capital Management (NLY), a 13% dividend payer we have a bit of a love-hate relationship with at Contrarian Outlook. Readers love to bring it up, and I hate to buy and hold this drifter.
Annaly’s headline yield is always a fat payout that tempts dividend investors, because hey, who can argue with 13% in a world where we’re talking about an 8% no-withdrawal portfolio? What could be better than 8%? That’s 13%!
Well, the problem is that over the past decade Annaly has only delivered total returns of 6.4% per year. In other words, investors are banking 13% or so in dividends, but they’re only keeping 6%. Where does the rest of the money go?
The dividend shrinks over time. Annaly’s cut it more than once over the past decade, and with each slice the price sinks. Remember, the dividend magnet works both ways. When companies raise their payout, the price chases it higher. When they cut, the price drops! So Annaly is a bit of a slow-motion quicksand trap.
Annaly is a mortgage REIT, which means it buys mortgages. Mortgages don’t pay a lot. They certainly don’t pay 13%! Even using debt to fatten returns, Annaly still earns much less than its promised payout, so to complete its dividend it is mailing our own cash back to us.
This does not mean that we don’t buy Annaly under any circumstances. It just means that we don’t want to get married, won’t stash it in a long-term buy-and-hold portfolio. However, I’ve got nothing against asking Annaly to dinner.
Last November 6, my Dividend Swing Trader subscribers bought Annaly at $21.61. Our fall fling went well and lasted into the new year. We collected 70 cents in dividend payments, which is not bad–that’s over 3%. Then we sold on January 15 at $23.83, so we had a 13.5% total return. (The dividend alone handed us 3.2% cash in just 10 weeks!) If you buy and hold Annaly, on average it takes you two years to make this much money. We were having a great time but we knew the stability wouldn’t last.
So, we sold–and headed back to the dividend dating pool!
First, though, we flipped to cash. Worried about a market pullback? Cash is your best friend. It also happens to be our comfortable, secure home base in Dividend Swing Trader.
We make these double-digit gains from dividend payers. We sell high, and instead of riding out another one year and ten months of likely dead money, we just take the money and move on. This gives us security in our portfolio, because we’re only invested part of the time. We bank double-digit returns by only being partially invested!
The rabbit in our hat is our willingness to sell high. Earlier this year I tweaked the Dividend Swing Trader system to opportunistically take gains. The result: 10 straight profitable sales, 10 for 10, averaging 12.8% per trade.
So, our money’s in cash–when do we put it back to work? As a card-carrying contrarian, my favorite time to buy is when everyone else is scared.
Let’s rewind to March 19. The AAII bear reading had just hit 52%. We bought Cisco (CSCO) and Broadstone Net Lease (BNL) for cheap. Then we added two more tech plays: Hewlett Packard Enterprise (HPE) on April 2 and Texas Instruments (TXN) on April 16. These were fast winners!
We thank the bears for these dividend moves. And they’re teeing up another doozy! AAII bears sprung nearly 10 points in late July, and the fear is sticking around–pessimism has camped above 42% for two straight weeks. Bulls? Fewer than one in three. This fear has captured our contrarian attention.
Oh and here’s another issue with Annaly-it’s a mere quarterly dividend! Why wait 90 days when other stocks will pay us every 30? I’m talking about monthly dividend payers with yields all the way up to 16.2%!
Further NLY Research:
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
