Eric Ervin was making his rich client so much money that he suggested: "Hey, why don't you just quit your job?"
The investor saw the opportunity to scale Eric's "secret strategy" - and he wanted to help invest!
Both guys knew the power of dividend growth investing. But Eric's second-level insight is what made them both a boatload of cash. He figured out a way to bet purely on the higher payouts - as close to a "sure thing" as you'll ever see in stocks. Here's what I mean.
Blue chip stocks tend to raise their dividend every year. Even if it's a token increase, it keeps shareholders happy. Betting on S&P 500 dividend growth is steadier and better than wagering on price appreciation itself:
S&P 500 Dividend Growth (BLUE) vs. Price (Gray)
Problem is, traditionally there's been no way to bet on the blue line above. You'd have to buy the index and hope its price appreciates in tandem. Not as compelling a bet.
Well Eric figured out that he could buy "swaps" on S&P 500 dividend growth. He walked me through the specifics on the phone in late 2015 - before his new ETF delivered incredibly steady returns for 2016.
At the time, he managed to buy contracts that were only pricing in 1.5% dividend growth for the S&P 500 in the 2016 calendar year. Payouts rose much more (as they usually do) and Eric banked the upside for his Reality Shares DIVS ETF (NYSEARCA:DIVY):
Stocks Up? Down? DIVY Don't Care
The genius of DIVY is that it capitalizes on the underappreciated annual tradition of dividend raises. For 41 of the last 44 years, S&P 500 companies have increased their dividends at large. And the swaps that Eric buys tend to be perennially underpriced - resulting in incredibly steady gains that track payout growth rather than price action.
Eric's Newest ETF
Since launching DIVY, Eric and his team created a five-tier rating system called DIVCON that provides a snapshot of dividend health for individual companies. It combines and weights seven factors (such as cash flow, earnings growth, and shareholder payouts) to provide a comprehensive snapshot of a company's dividend health.
DIVCON 5 is the best bucket. It means the dividend is in good shape, and there's a 96.6% likelihood that it'll be increased in the next year.
DIVCON 1 is the danger zone. It means the dividend is more likely to be cut than increased in the next 12 months.
Over the past 15 years, investors who would have traded off DIVCON ratings - buying the fives, and selling or shorting the ones, would have done quite well:
DIVCON's Dividend Prescience
By now you probably know that dividend growth drives stock prices. It's why dividend growers have returned 10% per year for the past three decades, outpacing static dividend payers, dividend cutters and non-payers (according to Ned Davis):
Dividend Growers Have Outperformed Since 1987
But we can't look in the rearview mirror to predict future dividend growth and stock returns. We need a leading indicator - like DIVCON.
And Eric is making outperformance easy for us individual investors. Thirteen months ago he launched the Reality Shares DIVCON Leaders Dividend ETF (LEAD) to buy DIVCON's top 50 stocks and hold them for a year. Many of them boast dividend charts like these beautiful staircases:
Stairway to Payout Heaven
Everyone loves dividends, but dividend hikes are often underappreciated. Not only do they increase the yield on your initial capital, but they often are reflected in a price increase for the stock.
For example, if a stock pays a 3% current yield and then hikes its payout by 10%, it's unlikely that its stock price will stagnate for long. Investors will see the new 3.3% yield, and buy more shares. They'll drive the price up, and the yield back down - eventually towards 3%. This is why your favorite dividend aristocrat never pays a high current yield - its stock price rises too fast!
LEAD is a convenient way to get exposure to stocks that are "at-risk" of rapid share price appreciation. With DIVCON looking ahead, you can use this fund to create a diversified portfolio of the 50 blue chip stocks most likely to raise their dividends over the next 12 months.
Disclosure: I am/we are long DIVY.
Business relationship disclosure: I write these editorials for ContrarianOutlook.com, where I have premium paid publications that I make money from.
Additional disclosure: I have paid subscribers who are long DIVY.