Tuesday, October 21, 2008
(Cont'd from above)...

Yup, we're circling the wagons, going back to one of the most tried and true ways of trying to make money in stock, finding high yielders, where the dividends are safe, and even growing. And then reinvesting that dividend money so that it compounds over time.

We've already been over the wonders of compounding reinvested dividends... how you can double your money in a stock like Duke Energy (DUK)... that yields 5.86%... in 12 years, by reinvesting your dividends in the stock, even if the share price itself doesn't move up a single cent.

Now, it's time to teach you how to approach these stocks in this market...

First of all, you need to know what to look for. It is not enough for a stock just to have a high yield. There is a lot of companies with high yields that can't pay that dividend. You want something where you know the company can do what's known as, "cover" the dividend with its cash. In other words, it has enough to pay the dividend without borrowing... where the company has a record of increasing its dividend. That's a good history. Even better, where there's a history of "special dividends."

Think of these as special gifts that management gives to shareholders when they have the money to do so. They are a rarity. Most companies don't pay them out. Instead, they spend a lot of money buying back stock. And, when we find these "special dividend" stocks, we don't look a gift horse in the mouth...

Tonight, we are going to talk about a rare breed... a cyclical company, meaning it has to do with... you know, it's not toothpaste here... a cyclical company that not only pays a big dividend, but has consistently done so in good and bad times. This is the kind of stock that I would actually put near par with DUK. DUK has no cyclicality, so I don't want to make you feel like they're the same... I don't want to have that much comfort...

But it is very rare that I would recommend the stock of a company that is cyclical, for its dividend... Why? Because I would fear that it might be cut, when the going gets tough.

In fact, there are only about a handful of stocks... I bet there are not more than a dozen, honestly... not more than about a dozen cyclical stocks... that I feel strongly enough to use for a dividend situation... a dividend playbook.

One of them is a company so deeply committed to its dividend that it paid out fortunes, even during 2000 and 2003, when its industry was decimated.

Tonight's sexy stock is none other than a steel company...

And that stock is Nucor Corporation (NUE) ...

This incredibly well-run company yields 5.7% at these levels, based on its expected 2009 dividend payouts, totaling $2.08 a share.

NUE is a steel maker... a steel maker is supposed to be losing money. Not this one. And a steel maker should have no business having a yield that big but, because of the brutal declines in the stock market, NUE has become a high yielder. We would not be recommending the stock in the $70s off of its yield. In the $30s, yes... In the $20s, wow...

The great thing about a stock like NUE in this environment isn't just that you can make boatloads of money over time by reinvesting the dividend. It's that, partially because of its high yield, the stock has some bounce to it. Last week, the stock went as low as $26.50. Boy, that was ugly... that October 10th thing... where it had a 7.8% yield. You knew you could buy it there, because the dividend that they gave made this one safe.

And, as of today's close, with NUE at $36, the stock bounced back 36% from that low.

I'm looking for a safety net here... a trampoline even... and NUE's dividend can serve as one.

NUE has got a great history of paying special dividends and increasing its regular dividend, despite the cyclicality of the steel business... In fact, this is the most shareholder-friendly industrial company that I follow... by a mile.

So far, in 2008, NUE's paid out an 80 cents per share special dividend, on top of the $1.28 per share regular dividend.

In 2007, the company paid out $1.81 special dividend. In 2006, $1.75 in special dividends. In 2005, it paid out a 62.5 cent special dividend, on top of the 30 cent regular dividend. It's got two different kinds of dividends.

This company has been raising its dividend, and giving you special dividends to boot. And, while the global slowdown should mean, it won't have as much money to pay out special dividends this year... and it definitely won't, it definitely won't okay... because the price of steel is coming down. The stock's been taken down so hard, so fast, it's been cut in half and then some... that I think you're getting a good deal.

Remember, this is a company with great fundamentals in a very hard time, so what we're doing is we're looking at the dividend as a way to be able to find a floor.

If you'd invested with NUE at the beginning of 2004, you'd be up 157%. But, if you'd reinvested your dividends, you would have had a 199% gain. What did the S&P do during that period? Down 13.8%. Or down 5.9% if you'd reinvested your S&P 500 dividends.

Look, this is a special situation. So we know NUE is a member in good standing of the mile-high yield club...

How to Buy NUE in this environment...
But how should you go about buying this kind of stock in an environment where cyclical stocks like NUE regularly get ground to bits?...

I like to use a scale... a scale based on its yield. We talked about this before. I'm going to keep hitting this to you, because you need to know how to... This is a treacherous environment. This is the only thing I know that works. I bring it up again, because it is an essential component of our strategy for dealing with this bear market.

You can't use the price-to-earnings multiple to value a stock like NUE anymore. Because, in a big recession like the one I think we're about to suffer, the estimates are all too high... so we've got to fall back on something else... so we fall back on the dividend. We use the yield to value it.

So how does this work?...

You want to buy 200 shares of NUE, right?... I think it's a good idea. I would buy 50 at the current price (i.e., $36.06), no more than that. Right here, it yields 5.7%. That's a really juicy dividend. Then you buy your next traunch... Wall Street jibberish for your next level... at $32, where the yield would be 6.5%. Now you've got 100 shares. And so on... I would leave room for your last 50 shares, at $26, where it traded 11 days ago. It could do that again.

Trading around your core position in NUE...
Now, if you want to trade around a core position... in the book, Real Money, I describe this... this is something we like to do in a volatile market, and this is an incredibly volatile market... you own your 200 shares. You would sell 50 shares if the stock price goes above $41.60, on strength. That's where the yield drops below 5%. And then, I would sell another 50, if the stock hits $46. That's where the yield falls below 4.5%. Then I would buy back the 50 shares, if the stock falls, and it becomes a 5.7% yielder again, at $37 and change. And then put another 50 shares back on (i.e., buy it again) when it falls below $34, and the yield hits 6%.

Okay, these are totally arbitrary levels. I'm trying to say, as it goes down, you build a position. As it goes up, you take the position off, and you trade around a core. You never sell your last 100 shares.

Now, you've got to find your own comfort scale. You can just put these orders in... I don't like... typically good to cancel orders... but you can put these orders in at prices, not at the market, but at a particular (limit order) price, and get it executed.

This strategy should only be done if you're looking for short-term gains... alright. If you don't want short-term gains, and you don't have time to follow stocks, and you don't want to put orders in all the time... If you just want to own a high-quality stock, and make money by reinvesting that dividend, don't bother to try to trade around the core. Just use scales based on the yield to buy NUE if it goes lower.

The bottom line...

Bottom Line!:   You could make a lot of money by simply buying a high-yielder like Nucor (NUE) and reinvesting its dividend.  But first you have to buy the stock... and that means buying incrementally, as the share price goes down, and the yield goes higher.  NUE is a rare breed.  I will not recommend a lot of industrial companies with big dividends.  I don't trust them.  I do trust Nucor.

[verbatim recap]

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