A ‘Secret’ to Making Money in Bull and Bear Markets Alike

Mar 11, 2022

Over the past couple weeks, I’ve shared some of the most important ideas that have shaped how I invest my own money.

The first has to do with the benefits of using a more “tactical” approach to investing. Whether that’s using simple trailing stops or our more comprehensive TradeSmith entry and exit signals, our research suggests most folks do much better with this strategy than with a traditional “buy-and-hold” approach.

The second involves what I like to call “forever stocks.” In short, owning the world’s best, highest-quality businesses is the simplest, safest, and surest way to make a fortune in stocks over the long run.

As I explained last week, forever stocks are the only individual stocks I would consider with a buy-and-hold approach, but I believe they should be a cornerstone in just about every investor’s portfolio.

Today, I’d like to share a third and final idea, and make an exciting announcement I’ve been waiting months to share with you.

So, let’s get right to it, shall we?

The Hidden Power of Dividend Growers

The third idea that has helped shape how I personally invest is also the simplest.

It has to do with the proven advantage of owning “dividend growers,” or stocks that pay a consistent, growing dividend.

Now, most investors intuitively understand the benefits of dividends.

Dividends provide a guaranteed return that can supplement your income, act as a buffer against market volatility, and provide protection against inflation.

However, it’s easy to lose sight of their importance during roaring bull markets like we’ve experienced in recent years.

Research shows dividends have accounted for roughly 40% of the broad stock market returns over the long run. That’s not insignificant.

But this number has jumped to as high as 70% or more for entire decades during the prolonged bear markets.

In other words, dividends can provide a great boost to your returns when things are going well.

But they become absolutely critical for making money in stocks when trouble sets in. And that’s especially true during times of high inflation, like we’re experiencing now.

Fortunately, finding dividend growers isn’t difficult.

But there is one common mistake many folks make when investing in dividend-paying companies. It’s sometimes known as “yield chasing.”

Many investors are tempted to buy stocks with the highest dividend yields. After all, bigger dividends mean higher payouts and better long-term returns, right?

Not necessarily.

The problem is that high-dividend yields are often a red flag. They can indicate that the dividend isn’t sustainable and is at risk of being reduced or eliminated completely.

The key is to choose companies that pay sustainable growing dividends.

How to Find Sustainable Dividend Growers

Now, you can evaluate the sustainability of a company’s dividend using financial metrics. (For example, I explained how to calculate the “dividend to free cash flow ratio” in our TradeSmith Daily e-letter last month.)

But I have an even simpler suggestion for Money Talks readers today.

The easiest way to find companies that are likely to keep paying a growing dividend is to find those that have already been paying a growing dividend for years and years.

A great (and free) place to start your research is the Dividend Aristocrats Index. This is an index of 65 S&P 500 stocks that have increased their dividends for at least 25 years. Several stocks on this list have done so for 50 years or more.

If you happen to be an Ideas by TradeSmith subscriber, our Dividend Growers strategy is a fantastic resource for identifying these stocks as well.

Finally, if you focus on owning “forever stocks” as I suggested last week, you’ll likely find yourself owning some fantastic dividend growers by default. That’s because many (but not all) of the world’s highest-quality businesses also pay consistent and growing dividends.

If all you did was focus on owning the very best businesses paying consistent, growing dividends for the long term, you could likely outperform 99% of investors out there.

And again, if you also use TradeSmith’s “smart” trailing stops and other risk-management tools with these stocks, I’m confident you could do even better with much less stress.

However, I also understand that for some folks, even these kinds of returns may not be enough.

Maybe you got a late start in investing and are worried you may not have enough time to reach your retirement goals…

Maybe you’re closing in on retirement and know your nest egg isn’t where you need it to be to live the life you have planned.

Or maybe you’re already retired and are just now realizing that your savings may not sustain you as long as you expected.

In any case, if you’re looking to produce more income or bigger returns without taking more risk, I have some great news for you.

An Exciting New Addition to the TradeSmith Family

As you may have heard, we recently added a brand-new senior analyst to the TradeSmith family.

His name is Mike Burnick, and his resume speaks for itself. He’s a 30-year market veteran and income-generation specialist. He’s authored multiple books on investing and finance. And he’s been featured all over the financial media through the years.

Given his experience, I know he’s going to be a tremendous asset to our team and a valuable resource for our readers.

But I bring him up because he has developed one of the most powerful income strategies I’ve ever come across.

What makes me particularly excited is that it relies on those same three ideas I’ve shared with you over the past few weeks.

That’s right… Mike has found a way to generate big, consistent, short-term payouts using high-quality, dividend-paying stocks and TradeSmith risk-management tools.

And he’s going to share the details on this strategy in a free webinar for all TradeSmith readers next Tuesday, March 15, at 8 p.m. Eastern.

If you’ve been reading Money Talks for long, you know this free weekly letter is a little different from the others we publish.

My goal in Money Talks is strictly to educate and inform, not to promote TradeSmith products. You won’t see a bunch of ads here, and I’ll never give you a “hard sell” on anything. So, I want to be completely up front with you.

This webinar will include a discounted charter offer for Mike’s new service, featuring this strategy. But I think you’ll learn a lot — whether you’re interested in subscribing to his service or not.

Of course, if you like what you hear and do decide to try it, that would be great. But you are under no obligation to purchase anything.

As always, if you have any questions or comments on what we covered today, I would love to hear from you. You can reach me at [email protected]. I can’t respond to every email, but I read them all.