Let’s start 2021 with a proven strategy to capture of them increasing income streams in one purchase. In addition, we will prepare well for the bank double-digit price gains to start.
The strategy? Simple: we buy dividend paying stocks about to sell one of their companies a brand new dividend paying stock. When that happens, we end up with two or more quarterly dividends, when there was only one.
Two other things you should know: Our “new” dividends will probably grow faster than our initial payment! And we won’t have to do anything to get that extra money.
I’ll give you a telltale sign to look for as we move to the forefront of the next “dividend split” in a moment. But first, let’s take a look at how the payoff is, hands down, which comes closest to a win-win investment.
How payoffs can drive triple-digit earnings and speed up payouts
Manufacturer of medical equipment Abbott Labs (ABT) and its spin-off, the pharmaceutical company AbbVie (ABBV), are classic examples of the gains (and fast-growing dividends) a spin-off can bring us.
Prior to their dissolution eight years ago, the dividend of the former parent company, Abbott, was already growing at a steady pace, more than doubling in the previous 10 years and reaching $ 0.51 per share just before the spin-off. take effect.
On the day of the spin-off, Abbott investors received one AbbVie share for each Abbott share they owned, and the new company set its payment at $ 0.40 per share quarterly.
Abbott, for its part, had reduced its payout to $ 0.14 per share to account for AbbVie’s dividend, so investors now had two streams of dividends it paid them $ 0.54 per share altogether – more than the $ 0.51 they got from “old” Abbott.
The situation improved too, as the fallout ignited a fire under the payout, with dividends from both companies nearly tripling in eight years, increasing 176% on average, a lot faster than the payment of the old Abbott increased in the previous one decade.
And if Abbott investors held onto their AbbVie shares, their holdings exploded as other income seekers noticed these rapid payment hikes and bought, pushing the prices of both companies up along with their soaring payments. !
Spinoff + Growing Dividend = Double win
I think you can see where I’m going here: buy stocks that are about to split and having fast rising payments is the key to unlocking serious profits.
The best news is that to take advantage of the biggest payouts, you born You have to be clairvoyant: even if you had bought Abbott and / or AbbVie in the first few months after their split, you would still have pocketed most of the gains that both stocks made.
This is because new spinoffs tend to stagnate for the first time, as the investors who have received them get a feel for the new company and ultimately decide if they want to keep it. There is also a lack of coverage of the fallout from Wall Street, who would much prefer a brilliant new IPO than a “boring” spin-off.
But the fallout has advantages that IPOs lack: On the one hand, many have already proven to be profitable businesses. And their parents will also want to make sure they get off on the right foot, as they won’t want to be known for a failed spinoff.
IPOs, on the other hand, are rarely profitable, do not have access to the management expertise of a parent company and, let’s be honest, never pay dividends! I am looking at you, Airbnb (ABNB) and DoorDash (DASH).
And make no mistake, dividend growth is essential to our strategy – as AbbVie and Abbott have shown, you can prepare for outperformance if you take shares in upcoming or recent spin-offs with a history of success. ‘increase in their payments.
The telltale sign of an upcoming spin-off
Almost all spin-offs have one thing in common: they originate from companies that have one or more divisions whose products do not overlap. You can see this with AbbVie, whose pharmaceuticals are separate and distinct from Abbott’s medical devices.
You can see it again with one of the biggest fallout in stock market history, the online payment service split. PayPal (PAYPL) from the auction site eBay (EBAY).
Companies that realize spinoffs also tend to grow by buying other companies, as was the case with the CIO. Synnex (SNX), that we added to my portfolio Hidden returns dividend growth service in October 2019.
We did so because this growth stock was trading “too low” thanks to its recent acquisition of customer service consultant Convergys. Higher debt levels had scared Mr. and Mrs. Market, as the couple wondered if SNX could foot its bill.
But we predicted that SNX, which made 24 acquisitions in its 40-year history, would have no problem repaying the loan for its latest shopping spree. Since then, the firm has steadily reduced its debt and its inventory has increased steadily. We, Hidden Yielders, have achieved a total return of 52% since we added SNX to our portfolio.
That’s not all: a little over a month ago, Synnex produced the spin-off of Concentrix Corporation (CNXC), which provides customer service solutions and works with many leading technology companies in the United States. And guess what? We are already up 27% on our new CNXC position.
It’s a good start, and I will have more to say about the two actions in Hidden returns once we get a better idea of the scale and rapid growth of Concentrix’s dividend, as well as the growth in Synnex payouts after the pandemic.
In the meantime, a spin-off to watch is the one underway at International office machines (IBM), which will be completed before the end of 2021. The new firm will contain IBM’s IT infrastructure business, leaving the “old” IBM to focus on artificial intelligence and cloud computing. This move will allow IBM to better position cloud leaders Microsoft (MSFT) and Amazon.com (AMZN).
No word on the new company’s dividend, but management says the combined payments from two companies will not be less than the $ 1.63 quarterly (for a 5% annualized return) IBM is paying today.
Brett Owens is Chief Investment Strategist for Contradictory perspectives. For other great income ideas, get your free copy of his latest special report: Your early retirement portfolio: 7% dividends every month forever.