In Which We Sniff Out Six “Dividend Vault” Companies

Checking out the teased "$1.7 Trillion 'Dividend Vault' That Could Save Your Retirement" from StreetAuthority

By Travis Johnson, Stock Gumshoe, February 6, 2013

Paul Tracy and the folks at StreetAuthority tend to be very dividend focused — we’ve covered several of their ads that tease long lists of their top picks, many of which are either high-yielding stocks or “blue chip” dividend growth stocks.

And there’s always a soft spot in your friendly neighborhood Gumshoe’s heart for a company that sends you cash just for owning the shares, so I do always like to see if there’s a new dividend idea I should consider. Which leads us to today’s tease about the “Dividend Vault” — just the name sounds so strong and reliable, doesn’t it?

So … what are they talking about?

Well, according to Tracy…

“It’s the easiest way I know to collect thousands of dollars every month for the rest of your life. Invest before Feb. 19, 2013 to get your full share….

“Picture an enormous vault filled with billions of dollars.

“Every day, more and more money is shoveled onto the pile.

“Right now marks an amazing moment in stock market history. You finally have the chance to take advantage of a true once-in-a-lifetime investing opportunity. And all it takes is a few hundred dollars to get started.

“A few savvy investors are already cashing in on the “dividend vault.'”

So phew, we’ve still got a couple weeks to “get our full share.” Just what does that mean?

Well, you probably won’t be shocked to hear this but the pitch is basically just a dressed-up way of saying, “Corporations are loaded with cash like never before.”

And that’s true — companies used the downturn and recession to get leaner and stronger and clean up their balance sheets … at least, the strong companies did that. And they’ve been more reluctant than usual to put that cash to work investing aggressively in expansion, or acquisitions, or, as you’ve probably noticed from your local want ads, hiring new employees. So they’re loaded with cash.

And it’s not just the crazy tech companies that have ridiculous amounts of cash — Apple (AAPL) always leads the list of these cash-strong companies, with more than $100 in net cash per share that they have been very reluctant to do anything useful with (other than the recently launched dividend, of course, which amounts now to a very average ~2.5% yield and won’t slow their cash accumulation very much).

That’s a theme that a lot of reporters and pundits have used over the past year to make predictions — whatever will those corporations do with all that cash? Raise dividends? Increase buybacks? Launch a massive merger & acquisitions wave? There’s no telling how it will play out exactly, but the fact remains that corporate balance sheets are a lot stronger than the average person’s balance sheet, and, though companies have been relatively conservative after being burned by the 2008 crash, many of them are likely to at least try to do something with their cash that benefits shareholders. So those are the stocks that Paul Tracy is looking for … what did he find?

Well, he implies that we’re on the verge of giant payouts:

“The good news is, several companies are beginning to open their ‘dividend vaults’ right now. I’ll give you the names and ticker symbols of several of them in a moment. I’ll also show you how they’re quietly using 3 easy payment methods to unload billions to everyday investors.

“One of these companies just unloaded $2.4 billion on November 14. Another dished out $743 million to shareholders on December 18th. In the month of January alone one company has committed to pay out nearly $906 million.

“These aren’t ‘pie in the sky’ projections. These payments are already on schedule, and checks will be mailed out in the coming weeks.”

Those numbers sound big, delightfully big, but without some context they obviously don’t mean very much — Apple’s quarterly dividend, for example, is right around $2.4 billion and that November 14 payout was probably theirs, but that’s a drop in the bucket (and, though I hate to mention this since I’ve owned and suggested Apple both before and since that date, that $2.65 per share payout didn’t do much to assuage the anguish that shareholders felt as the stock fell by $200 per share over a few months).

Still, we’d like to know which picks Tracy is actually teasing — and no, he won’t “give us” the names and ticker symbols, since he’s trying to sell them, so we’ll have to figure it out from the clues. He pitches the idea of 13 of these stocks, but actually hints at or identifies about half of them … so let’s see what we can share with you.

He gives us three kinds of “Vault Combinations” to start with … the first is a thinly veiled allusion to dividend growth stocks:

“Vault Combination Part One – An 85% Yield from a Stock Yielding 3% ….

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“When most investors want a big dividend check, they focus solely on the stock’s current yield. They think bigger equals better.

“To some extent they’re right. Clearly, a higher dividend puts more cash in your pocket.

“But you also need to consider a company’s dividend growth. This can quickly turn a lower-yielding stock into a big income producer.

“Savvy investors know this and use it to their advantage. When Buffett bought shares of Coca-Cola in 1988, it yielded a modest 4%. But since then the company has grown its dividend every year, to the point where it’s giving Buffett a 50% yield on his original investment today.”

And this “Vault Combination” strategy has indeed been one of the most fantastic wealth-building strategies for investors for decades, particularly for those “buy and hold” investors who picked up shares 30, 40 or more years ago and let the dividends compound … you hear stories of retirees who receive a quarterly dividend payout on, for example, Johnson & Johnson that’s now higher than the price they originally paid for their shares, thanks to the long-term growth in the dividend and the reinvestment of those growing dividends into more shares.

I’ve got a few stories that remind me of the power of this growth — for example, I bought shares of Rayonier (RYN) about nine years ago and still hold them, I stuck with it as an allocation to timber even when I thought it might be getting overvalued or undervalued, I never bought or sold. The initial dividend was about 5%, and that was just lovely, I kept reinvesting it each quarter and now the stock has done very well (along with most of the other timber stocks) over a long period of time and, with lower interest rates, it yields just 3.2%. But that dividend is a 13% yield on my original investment. And still growing and compounding. With stocks like this, I need a really, really good reason to ever consider selling — I know that I’m human, and therefore my chances of selling at just the right time and buying back in at just the right time are poor.

So that’s what you look for with dividend growth — a meaningful dividend and a focus on growing the dividend over time, hopefully with a long and steady record of growth. And, of course, a company whose business you expect to be meaningful for years and years and years, giving you a chance to be patient and let it grow and compound for you as Coca Cola has done for Berkshire Hathaway shareholders. And it helps if you’ve got a strong stomach and won’t be tempted to try to trade in and out of those shares — even Buffett has said from time to time that he should have sold KO when it got to bubble valuations right before the crash, but people (even Buffett) are generally terrible at picking tops and bottoms consistently … would he have solid it near the peak and known that it was ripe to buy back in when it had dropped close to 50% a couple years later, and hold it through now, when it’s again getting close to those peak prices? Just holding on and letting the dividends pile up means Buffett paid no taxes on the massive gains in KO shares over time, and Berkshire still gets to keep pulling in that KO dividend that amounts now to about $400 million a year on Berkshires 400 million shares. That’s 3% of Berkshire’s annual profits, which is nothing to sneeze at, and in the meantime the value of those KO shares, even without reinvesting dividends (Buffett is one of those investors who doesn’t have to automatically reinvest dividends to compound his returns, of course, his core competency is allocating capital), has grown by about 1,000%.

Which pick is Tracy teasing for this “Vault Combination” strategy?

“‘Dividend Vault’ Stock #1…. It has one of the biggest ‘vaults’ in corporate history — $45 billion (by comparison, Coca-Cola’s “vault” is $9 billion). Rather than let that money just sit there, this company started paying a dividend in March of 2011.

“But here’s the kicker…

“Since then this company has already raised its dividend 133%. That means a $1,000 annual dividend check has turned into $2,330 in less than two years.

“And given that the company still has $45 billion left in its ‘dividend vault,’ it could easily continue to hike its dividend going forward.”

So … according to the Mighty, Mighty Thinkolator this one is … Cisco (CSCO), which you’ve undoubtedly heard of. The