Of the many things that investors lust after, foremost are the idea of being in a “secret” deal that not everyone else knows about, and receiving high cash dividends from their investments.
Which is understandable — it’s fun to be “in the know,” and historical stock market returns show the importance of dividends. By many measures and for long time periods, half or more of the return of stocks for long-term shareholders comes from dividends (and, critically, the reinvestment and compounding of those dividends).
But if you add in the fact that investors are absolutely starved for income in many traditional “safe” investments like CDs or bonds, or even blue chip or utility-type dividend stocks, you can see why ads promoting 11% yields and “secret” dividends get the attention of readers. And have the capacity to mislead.
That brings us to the teaser of the day: Nathan Slaughter is pitching his High-Yield Investing by telling us that he has stocks with “hidden” dividends that the media doesn’t know about, and that fly under the radar of individual investors — so much so that he says you can get 11% yields from stocks that other people think have a much lower dividend.
And he’s not using options income as a way to boost dividend income, as many teasers do — we see lots and lots of options advisories now, almost all of which are touting income strategies for options (that means either selling puts on stocks you don’t own, or selling covered calls on stocks you do own, or both). From the rest of his letter it sounds like this may be a strategy they employ at High-Yield Investing, too (which probably doesn’t work very well — most options are very illiquid, so basic options strategies tend to have disappointing results once you have more than a few dozen people who try to enter the trade on any given day, unless you’re dealing with just mega-caps or ETFs that have relatively high option volume, and this newsletter is only $39 a year so probably has thousands of subscribers)… but this particular tease is all about stocks that have a “real” cash yield for regular shareholders.
So who are these “secret” stocks? He goes through a littany of “secret” examples, stocks that are listed in Yahoo Finance or Marketwatch with a yield of one or two or three percent, but that have actual trailing cash dividends several times that high… so we’ll figure out which are his favorites and let you know. If you want to subscribe to his newsletter after that, be my guess — but don’t ever subscribe to a newsletter just to learn about a “secret” like this, that starts you out with a confirmation bias (you bought it, so it must be a good idea! Buy whatever the “secret” is right away!) and we get enough bias in our investing world without voluntarily adding another layer.
Let’s get a taste of the tease here to put you in the mood:
“These Companies Dish Out Big Bonus Dividends Every Year
“You see, most companies pay out four dividends per year. But these companies – the Hidden High-Yielders – are different.
“In addition to the usual four, they pay out extra dividends too.Are you getting our free Daily Update
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“They’re paying one, two, three, even four extra dividend payments every year. And many of them have been dishing out an extra payout every year for several years now.
“In other words, for most of them it’s a formalized practice… an established pattern.
“But since these extra dividends technically aren’t ‘regular’ payments, they go completely under the radar. The financial media doesn’t know what to do with them, so they don’t count them as part of their yield.”
These kinds of “hidden” dividends have been promoted by newsletter pundits in the past, of course — selling secrets has always worked well as a marketing ploy. Probably the most promoted of these past pitches has been Ian Wyatt’s pitch about the secret oil company with the dividend that’s 10X higher than most investors think (that one was for Diamond Offshore (DO), the drilling rig owner, not such a popular idea more recently, and in February they canceled the large special dividend they had paid for nine years running… an apt reminder that dividends, whether “special” or “regular”, are not guaranteed).
So… which stocks does Slaughter like for their “hidden dividends” these days?
He starts off with a “freebie” …
“Hidden High-Yielder #1 — This Company Has Paid Out Hidden Dividends Worth $3.64 Per Share
“At first blush, it looks like your average company. It’s rarely mentioned on CNBC, and it appears to only yield about 1.5%.
“However, pull back the curtain and you’ll find one of the most relentless dividend payers on the market….
“It’s delivered profits for 16 straight years, and paid a dividend for 38 years. It also has a good track record of hiking those dividends. In the past five years, it increased its dividend 38%…..
“So if you’re looking for a growing company, a rock-solid dividend, and the chance at a massive extra dividend payment, I think this company – RLI Corp. (NYSE: RLI) – is your best option.
“Judging by how few shares change hands each day–138,000, which is about 2% of Wal-Mart’s daily volume – almost nobody knows about this stock. Even fewer know about its juicy 7.6% yield.”
OK. RLI Corp (RLI), that’s one. It’s a very good small, profitable specialty insurer, and it has indeed paid a large special dividend every year for four years in a row now — that extra payout has come in December, so you’ve missed it for now, and the stock is trading at what I would consider a very stretched valuation for a property and casualty insurer so I don’t know why you’d want to rush into it… but it is at 52-week highs, and has done extremely well over the last four years, doubling in share price even as it paid those large dividends.
RLI is an exceptional underwriter — they’ve booked underwriting profits every year for almost 20 years now, and last year’s combined ratio was very strong at 84 (under 100 means you’re making a profit on your insurance underwriting, payout out less in claims and expenses than you bring in in premiums… over 100 means you’re losing money on underwriting, so you better be good at investing your portfolio and the float you hold for future potential liabilities).
They are one of the better underwriters I’ve seen, just about on par with the best underwriter in my personal portfolio (Lancashire), but they’re also priced at more of a premium valuation than any other insurer I’ve ever looked at, at 2.7X book value, so I’ll leave it at that and let you research the name to see if you think it’s worth that premium (insurance has been a tough business in recent years, with pricing generally soft, and established insurers don’t typically have excellent combined ratios below 90 for long, and also don’t typically trade at much more than 1.5X book value for even the best underwriters).
How about the secret stocks from Slaughter? Here are our clues:
“Hidden High-Yielder #2: This company is not your typical investment. It has zero inventory. Nor does it have any manufacturing expenses, fuel costs or shipping costs.
“It’s also one of the most stable businesses on earth, with customers around the globe and over 100 years of continued success.
“That’s because this company is a stock exchange. It’s not the New York Stock Exchange, the Nasdaq, or an international exchange. It’s a slightly lesser-known outfit whose home is right here in America, and it traces its roots all the way back to 1898.”
OK, I suspect that’s enough for many of you to have a ready answer — but let’s check a few other clues just to be sure:
“In March, 2012 the company was sitting on $199 million in excess cash from the prior year. So management decided to pass it along to investors through a bonus dividend of $0.60 per share….
“The company was left with twice as much excess cash at the end of 2012, about $434 million. So the next bonus payout doubled to $1.30 per share.
“Surplus profits doubled yet again in 2013 to $872 million. So the company gave stockholders a bonus dividend check of $2.60 per share.
“Then in 2014, it paid another bonus dividend worth $2.00 per share.”
So who is it? Thinkolator sez: CME Group (CME), which owns the futures and options exchanges CME, CBOT, NYMEX and COMEX. The stock is still well off of its 2007 highs, but has been pretty steady for the last several years and has, indeed, paid special dividends for the past three years. They’ve also been steadily increasing the regular dividend, so the stock has a fairly reliable 2% dividend in addition to the annual payouts shareholders have recently enjoyed. The relative upstart Intercontinental Exchange (ICE) has been taking some business from CME in the last five years, it appears, but I haven’t looked at the details of either company for quite some time.
The basic revenue stream at any exchange is driven by trading volume — with the corollary that competition among electronic trading platforms and the gradual move away from floor trading and to electronic trading has put pressure on pricing, which also has pressured all the exchanges to come up with new trading products and contracts to make themselves stand out. Exchanges seem to me to be critical to trading (they get rid of the direct counterparty risk that crushed many traders and banks in 2008), and I suspect they always will be, but I don’t know what CME’s share of the futures and options trading business will be in the years to come, or if they’ll be able to maintain these strong profit margins forever.
I’m not quite sure how to best value CME — is it a bank that you assess based on book value? A service provider that you assess based on earnings and sales growth? A financial utility? Since things settled coming out of the financial crisis, they have been decent but unspectacular — the book value per share has essentially been flat, revenues have gone up by 15% over five years, and earnings per share have gone up by about 25% (for the full period, not per year). That’s not spectacular, but investors have gradually been giving CME a better price/book valuation in recent years — the shares traded right around book value until the Spring of 2014, and since then have appreciated to more than 1.5X book. Perhaps that’s because of the strong dividend history, and the special dividends, giving investors more reason to buy shares of a company that’s having some trouble putting together real growth in their business — and they wouldn’t be alone in that regard, lots of mature, established companies who are unable to put up dramatic sales growth numbers “buy” investors by placating them with dividends.
So… there’s one “secret” from the windy city — what else?
“Hidden High-Yielder #3: This company is a niche retailer with over 450 stores across the country.
“Over the past 10 years, its share price has beat the market 9-to-1. Over the same time period, it’s also increased earnings per share from $0.86 all the way to $3.39 – a whopping 294% increase.
“The S&P 500 only increased earnings per share by 40%. So you get an idea of how profitable this company is.
“Meanwhile, its cash holdings have ballooned. It now has over $200 million in cash and zero long-term debt.
“The best part: Most investors believe its dividend is a mere 1.5%. In reality, it’s over 7%.”
The Mighty, Mighty Thinkolator didn’t need much time to chew on this one: This is The Buckle (BKE), the quiet growth darling of the retail space over much of the past five years — we’ve noted this as a teaser pick from a variety of newsletters during that time, sometimes as a high-grower and sometimes as a “hidden dividend” idea, most recently it was a Tom Dyson pick for his Palm Beach Letter as a “fifth dividend” play last year.
They have indeed paid a strong special dividend to accompany their relatively small regular dividend, and they’ve paid those special dividends each year since 2008 so they are certainly “expected” by investors now. The last one was $3 a share, back in January, so there won’t be one coming anytime soon — but that is a trailing yield of better than 7% and they have continued to grow their “regular” dividend as well (the forward yield, if they just pay the regular dividend and don’t have a special dividend next year, is just under 2%). It also means they’re paying out more in dividends than they’re earning in profits, and the profits have only grown by a couple percent per year in recent years (and are projected to grow at substantially less than 5% a year going forward), so it’s no great surprise that there’s a large short interest in the shares (that means a substantial number of investors have borrowed the shares to sell them, hoping to buy them back at lower prices in the future to return the shares).
High short-interest in a dividend stock always concerns me, because those shorts have to pay the dividend, which theoretically means they must have even more conviction about their short bet — though in this case the number of shares sold short has always been pretty large as a percent of the floating shares, because there’s such a high insider and institutional ownership that the float is small, and the number of shares sold short has actually decreased over the past five years.
So… Buckle is a teens-to-20s retailer of mostly denim and similar styles, it’s a mall retailer, they have admirably steady operations and margins for a fashion retailer, but it’s also a former growth darling that’s not really growing right now… and yes, they sure do pay out a strong dividend. I don’t know where that cash comes from, and haven’t scoured their books to see if it’s just depreciation or if there’s something else generating cash for them aside from gross profit, but they’ve generally been a very disciplined and well-run company over the past five years, from what I can tell.
They are very much a small-market and midwestern story — you’ll now find that some of their 500+ stores are in malls near big cities on the coasts, but their growth over the years has come from being fashion leaders in small cities and towns, from flexibly leveraging brands that they don’t own (unlike “sell their own brand” leaders like American Eagle or Abercrombie), and from running a very lean operation from their Nebraska headquarters. I know absolutely nothing about fashion but I like their financial performance in terms of margins and operating efficiency, and I think they’re probably too expensive at 15X earnings given the weak growth prospects — I’d really rather be looking at this stock after a really lousy quarter, should they ever report one (they don’t talk to Wall Street much, and they haven’t historically given earnings guidance, so there’s a lot of guessing). Still, they can probably keep paying a 5% plus dividend as long as you can wait for those annual special payouts.
And one more…
“Hidden High-Yielder #4: This company is perhaps the least-known of all the Hidden High-Yielders. Only about 20,000 shares trade hands every day. Apple trades that much every 11 seconds.
“It has zero debt, $45 million in cash, and issues some of the biggest bonus dividends of any company.
“It’s paid a dividend for 70 straight years, but over the last ten years it’s paid an extra dividend every year too – good for a 7% yield by itself.
“Combine all the dividends and you have a yield over 8% – nearly five times larger than the 1.7% reported by the financial media.”
The numbers are a little bit off, the yield is slightly lower at this point (perhaps because the stock has recovered a bit from recent lows), and the cash balance is actually $54 million, so perhaps they transposed the numbers… but it does trade about 20,000 shares a day, they have paid a dividend now for 71 years in a row, and it is not a well-known stock: This is the kitchen appliance, adult diaper, and ammunition conglomerate National Presto Industries (NPK).
NPK has been in a downtrend for a long time, since peaking at $135 or so about four years ago, largely because their revenue and profits also peaked in 2010 and have been gradually declining most quarters since then. But they have paid a dividend for a very long time (the base dividend is $1 a share) and a special dividend each year for ten years or more (the last special dividend was $3.05, so a total of $4.05 for the dividend for this calendar year). That special dividend has gradually declined as profits have declined, but it’s still substantial and they can still easily afford it — they do have no debt, and they have generated plenty of cash to cover the dividend without any crazy balance sheet tinkering. According to their recent press release, it’s been the defense business (specialty ordinance and ammunition, a business they got into when the war effort required that they produce ordinance instead of pressure cookers in the 1940s) that has kept cash flow going recently, with weaker performance from the home appliance business (lots of electric gadget-y stuff, in addition to their pressure cookers — they brought the world the Salad Shooter, among other kitchen fads) and very weak performance from the adult diaper business keeping them from growing overall revenues. I have no idea whether they’ll be able to stem this long slide and grow earnings again.
So … there you have it, I can’t say that I have strong opinions about any of these “hidden high yielders” but they all do have long histories of paying special annual dividends to reward investors for their patience — and in most cases, they’re also not growing their top or bottom lines in a meaningful way, which probably makes those management teams feel a little bit better about the fact that a large portion of their dividend is “special,” variable, and dependent on the year’s earnings performance.
Any of these sound interesting to you? To me they all seem fairly reasonable, they’re generally well run companies as far as I can tell in my quick glance today, but not so compellingly valued that I’m eager to buy shares immediately… and, frankly, there are very few people who own the shares of any of these stocks who are not acutely aware of (and holding the shares because of) the special dividends… these aren’t secrets, even though they don’t show up in the “current yield” numbers on most websites. But it’s your money, let us know if those super-dividends appeal to you — share your thoughts on any of these companies, or Nathan Slaughter’s service, or special dividends in general with a comment below.