Ever read a company’s annual or quarterly report from top to bottom? 100+ pages long of tiny, unreadable font filled with strange terms. What’s not to like?
Don’t worry. Almost nobody has. That even includes most financial advisors I’ve counseled over the years as a due diligence officer.
And my experience has taught me that if you want to truly “stress test” your portfolio, there’s one main thing you need to look at when evaluating the safety of your investments. But you don’t need to pore over lengthy SEC filings to do it.
Today, I’m going to reveal a secret that’ll save you a ton of time. It’ll give you great knowledge about a company’s health without the headache of reading those reports.
At Intelligent Income Daily, we’re all about putting potential investments to the test to find which will crumble in tough times and which will thrive and deliver you safe, reliable income for years to come.
So I’ll share the details with you. And give you the name of one such company that’s trading at a discount today to help you get started.
The Dividends Don’t Lie
Quarterly and annual reports might as well be written in a foreign language. It takes years to learn how to read them. I know from personal experience.
I spent thousands of hours analyzing financial filings. I had billions of client capital on my shoulders. And I was paid to spend weeks looking at every detail.
But you don’t need to spend all weekend reading company filings with the SEC to decide if a company is worth your investment. You can learn a ton about a company’s financial health with a much simpler strategy. And it doesn’t require a CFA or PhD in finance to understand.
It can tell you invaluable information about a company. It’s so simple, many retail and professional investors overlook it. But for many companies, it can be just as effective as reading a quarterly report from cover to cover.
I call it Truth in Dividends.
What makes dividends unique is that they’re easy to spot and difficult to sugarcoat.
They are paid in cold, hard cash. No amount of accounting trickery changes that.
Earnings, cash flow, and debt levels can all be manipulated. Companies do it all the time. Just take a look at your favorite company’s investor presentation. They likely include “Adjusted” this and “Non-GAAP” that. These are numbers management has created.
It doesn’t mean they are wrong. But they want you to look at these figures instead of traditional EBITDA (Earnings, Before, Interested, Taxes, Depreciation, and Amortization) or GAAP (Generally Accepted Accounting Principles) net income.
They want to change the story before you read the original copy. And since the original copy is an unreadable SEC filing, they usually succeed.
With dividends, things are different. They must be paid in real money.
If a company has paid steady dividends for many years, it can’t fake that track record. And that gives you important insight. That shows you the company’s cash flow, and therefore its business model, are stable. There simply isn’t any other way to fund all those dividends.
Sure, the company could borrow money or sell assets to fund the dividend. But it can’t do that forever. And those are both easy to detect if you know where to look.
Focusing on investments with reliable dividends isn’t just about the income. It is the one part of a company’s finances that management can’t manipulate.
If the company is increasing its dividends, our confidence grows even greater. And our confidence decreases if the company cuts its dividend.
A Winner That’s Easy to Spot
This simple technique of focusing on the truth in dividends allows you to cut through a lot of nonsense. It can be a great tool to focus your effort on the right companies – and avoid the bad ones. Instead of trusting management’s excuses or optimistic projections, trust in dividends.
By investing in proven dividend payers, you can build wealth with lower risk. Confirming a long history of dividend payments proves the company is doing well. You’ll avoid most accounting gimmicks. The same ones I spend hours looking for in those financial filings.
One of my favorite dividend payers right now is Federal Realty Trust (FRT).
This real estate investment trust (REIT) owns a giant portfolio of all-weather retail properties that have proved resilient through eight recessions and a pandemic.
In its latest 10-K SEC filing, the company writes:
“We have paid quarterly dividends to our shareholders continuously since our founding in 1962 and have increased our dividends per common share for 55 consecutive years.”
But we don’t need to take the company’s word for it. Its dividend track record shows us just how durable it’s been with no ambiguity.
Source: Federal Realty Trust Q4 2022 Earnings Presentation
And here’s the best part… Federal Realty is presenting an excellent buying opportunity today.
The best way to value REITs is based on cash flow multiples. If a REIT earns $1 per year in cash flow and trades for $25 per share, that’s a 25x multiple.
In the past, Federal Realty Trust has traded at an average cash flow multiple of 20x. Today, shares are trading at just 15x. That’s a 33% capital gain if the stock trades back to its normal value.
If history is any guide, you’ll also be receiving more income from FRT in the coming quarters… And unlike the analysts I worked with, you won’t have to make yourself dizzy trying to read SEC filings to get to the bottom of the company’s decades-long dividend strength.
Stephen Hester, CFA
Analyst, Intelligent Income Daily
P.S. Federal Realty is just one of our favorite dividend growth companies right now. You can amplify your returns with more proven, safe and reliable dividend growers from our Intelligent Income Investor portfolio. It’s packed with our favorite dividend growth picks.
Now more than ever, it’s important to find safe and secure dividends to create a growing income stream that will passively support your lifestyle with stress-free investments.
To find out more, click here.