Q&A: Expert Advice from a Wall Street “Rainmaker”
Our investment experts are spread around the country and hail from diverse backgrounds and experiences. They’re smart, opinionated and hopelessly overeducated.
Which brings me to the incisive mind of my colleague Nathan Slaughter, chief investment strategist of Takeover Trader and High-Yield Investing. I spoke with Nathan for today’s question-and-answer session.
Nathan’s previous experience includes a long tenure at AXA/Equitable Advisors, one of the world’s largest financial planning firms. He also honed his research skills at Morgan Keegan, where he managed millions in portfolio assets and performed consultative retirement planning services.
Nathan [pictured here] holds NASD Series 6, 7, 63, & 65 certifications, as well as a degree in Finance/Investment Management from the Sam M. Walton School of Business.
Nathan is what Wall Street calls a “rainmaker,” a term for a person who generates income for a business or individual by making shrewd investments or deals. Let’s see what Nathan has to say about the markets and how he can serve as a rainmaker for you.
You’ve often discussed the need to “think outside the box.”
It’s not hard to stumble onto widely-held stocks like Wal-Mart (NYSE: WMT) or ExxonMobil (NYSE: XOM). They’re solid companies, no doubt, with decent dividend yields. But if you want to capture much bigger payouts, you have to break away from the crowd.
ExxonMobil is a cornerstone of many income portfolios. But if you look a little deeper, you’ll find relatively unknown companies like Magellan Midstream Partners (NYSE: MMP).
MMP is about 1/20 the size of ExxonMobil. Yet, the firm packs quite a punch in the yield department. It owns a network of energy pipelines and storage facilities that is absolutely essential to the nation’s energy infrastructure. The master-limited partnership’s fee-based income supports a 9.5% payout, nearly five times the market average.
And while the stock has fallen with the rest of the energy sector, it has absolutely trounced the sector (and the overall market) over the long haul. (We’re currently sitting on a 390% total return since adding it to our portfolio in 2005.)
The point is, if you limit your universe exclusively to popular blue-chip dividend payers, you’re missing out.
But don’t a lot of investors get blinded by yield?
If a yield seems too good to be true, it probably is. More often than not, the high payout didn’t result from rising dividends, but because of a falling share price. And plunging stock prices usually indicate trouble. The company could be losing customers; it could be facing an industry slowdown; or it could be loaded down with crippling debt.
On the bright side, the market could simply be overreacting to temporary issues that will resolve in time (coronavirus anyone?). Contrarian investors love these situations. But you can’t tell the difference without popping the hood and doing a more thorough inspection.
Successful investors don’t get lured by the headline yield without first evaluating cash flows, payout ratios, debt levels and other factors to determine sustainability of the distributions. Remember, dividends are never guaranteed. They can be cut or discontinued without a moment’s notice.
Bottom line: Better to invest in a stable business with a sustainable 6% yield than a cash-strapped one offering a dubious 12% that might be eliminated.
However, a safe dividend doesn’t mean the share price can’t tumble. A double-digit yield is of little consolation if the stock declines 30% or 40%. Total returns (dividends plus share price performance) are what matter most.
How important is dividend growth potential?
Successful investors don’t just look at the dividends paid out last quarter, but rather at what they might receive over the next 10 or 20 quarters.
When choosing among portfolio candidates, you might run across two $20 stocks, one with a $0.50 per share annual dividend and the other paying $0.70, providing yields of 2.5% and 3.5%, respectively.
The first impulse is to automatically pick the higher upfront yield. But don’t be too hasty. The lower dividend might be growing far more rapidly. At a 10% annual growth rate, a dividend will double in just seven years. So that $0.50 payout might easily grow to become $1.00 or more in the future. Even better, that type of growth is usually accompanied by a rising share price as well.
Should investors stay in the markets during downturns?
A wise man once observed that you make most of your money in bear markets — you just don’t realize it until later. When panic sets in, investors sell indiscriminately, even dumping the shares of unaffected companies that are still posting record profits.
We saw that happen recently with the COVID-19 selloff. And when other investors panicked, we went on a shopping spree over at High-Yield Investing. And it’s already paying off handsomely.
When this happens, it can be a great opportunity to pick up undamaged merchandise at discounts of 20%, 30% or more. Quite often, these undervalued stocks are among the first to bounce when sentiment improves.
Until then, you can thank the market for these erratic mood swings. A widespread 20% decline means that stocks that used to yield 4% now pay 5%. On a $200,000 investment, that’s an extra $2,000 in your pocket over the next 12 months — and $10,000 over the next five years.
Explain why it’s crucial to reinvest dividends.
Unless you’re living off your dividend payments, you need to reinvest them.
By reinvesting, you purchase more shares, which throw off more dividends, which then buy more shares, which in turn generate more income… and so on. This is a great way to harness the miraculous power of compound interest to dramatic effect.
Let me give you a quick example using one of the world’s most iconic companies, Coca-Cola (NYSE: KO).
An investor who bought $10,000 worth of KO in 1962 would have received a total of $136,000 in dividend payments over the next 50 years. By that point, through stock splits and appreciation, the original stake of 131 shares would have grown to 6,288 shares worth $503,000 — for a total of $639,000.
You could certainly do worse than turning $10,000 into more than half a million.
But if all those quarterly dividends were reinvested, the original 131 shares would have grown to 21,858 shares worth a cool $1.75 million. That’s an extra $1 million in your pocket — not by investing in better stocks, but simply from putting your dividends back to work and harvesting the power of compound interest.
It seems to me that investors should always have an exit plan, especially during tumultuous times such as the coronavirus pandemic.
While there are countless articles and other resources that help teach you which stocks, bonds and funds to buy, information regarding when to sell is sparse.
Yet, these decisions can be just as important. Many investors sitting on big gains have watched helplessly as those unrealized profits evaporate, until finally the position is underwater. There are few things more frustrating than taking a loss on a stock that had been a big winner just a few weeks or months earlier. But it’s a common tale.
That’s why it often pays to protect gains with stop-loss orders, particularly on overheated stocks that might be due for a pullback.
And don’t be too quick to cut losses on stocks that drop right after you buy them. If the company is operating the same as before and the shares are simply sliding in a weak market, there is no need to panic.
But if the stock is falling because of deteriorating earnings caused by company or industry-specific reasons, it’s time to reevaluate. Up or down, successful income investors don’t succumb to emotion and base their sell decisions on valuation.
Editor’s Note: As chief investment strategist of Takeover Trader, Nathan is an expert on mergers and acquisitions and corporate takeover initiatives.
Nathan is adept at digging up the inside data on pending takeovers. Along those lines, he’s about to go on camera to reveal a startling development. If you watch his presentation and follow his advice, you could reap huge market-beating gains.
Nathan intends to answer the most urgent questions for investors in the second half of 2020:
- Why are CEOs at America’s most flush-with-cash companies raising even more cash right now?
- What hidden asset class are they gearing up to invest in, at historic levels?
- How can you beat them to the punch?
Nathan will lift the curtain on the one hidden asset that’s about to attract $4 trillion of cash from America’s richest CEOs. These powerful insiders have pinpointed a future bonanza and they’ve decided to go “all in.” This is your chance to join them. To lock in your free spot for Nathan’s “Project Rainmaker” expose, click here now.
John Persinos is the editorial director of Investing Daily. You can reach him at: email@example.com