Why I Am Buying These 'Hidden Income' Stocks
In a world of active income suppression by the Fed, this isn't easy. But it's hugely important to your financial well-being.
That's because building a portfolio of the right dividend-paying stocks allows you to create enough "income wealth" to free yourself from depending on the market.
Here's how market legend Richard Russell explained this concept in his famous "Rich Man, Poor Man" essay:
In the investment world, the wealthy investor has one major advantage over the little guy... The advantage that the wealthy investor enjoys is that HE DOESN'T NEED THE MARKETS. I can't begin to tell you what a difference that makes, both in one's mental attitude and in the way one actually handles one's money.
The wealthy investor doesn't need the markets, because he already has all the income he needs. He has money coming in via bonds, T-bills, money market funds, stocks and real estate. In other words, the wealthy investor never feels pressured to "make money" in the market.
But one of the things going against yield-hungry investors is that they don't use the right kind of strategies to unlock income. Most folks simply invest in no-growth blue chips such as Microsoft (MSFT) and Wal-Mart Stores (WMT) just because they have recognizable names.
But most of the time, these companies won't ensure either safe or growing payments for years to come.
That's why one of the strategies I use is to look for companies that are able to unlock "hidden income" buried deep within their businesses by spinning off portions of their operations into new companies.
Let's look quickly at a real life example...
In 2007, asset manager Brookfield Asset Management Inc. (BAM) announced it was going to break up its business. Management decided to spin off its timberland and electricity transmission businesses into a new company called Brookfield Infrastructure Partners (BIP).
Spinning off Brookfield Infrastructure Partners put a focus on an aspect of Brookfield's business that investors tended to overlook: its $7.5 billion infrastructure business.
Brookfield Asset Management owns, operates and manages hundreds of different businesses in many different industries. That makes it tough for investors to know what price tag its stock should have. By spinning off Brookfield Infrastructure Partners, the market could get a better idea of what exactly that part of its business was worth.
But what's really interesting here is the "hidden income" that the move unlocked for shareholders.
You see, the assets that Brookfield Infrastructure Partners owns and operates -- timberland and power transmission -- are cash cows. These aren't exactly high-growth industries. But they are high-margin businesses. And they throw off tons of income.
So as soon as it went public, Brookfield Infrastructure Partners decided to pay a significant portion of this income to its new shareholders through dividends.
Since the spinoff, Brookfield Infrastructure Partners has paid a total of $5.86 per share in dividends. Based on its share price at the time it was spun off in January 2008, that's a 28.6% return through dividends alone.
Also, thanks to the strong recovery of the two industries in which it operates, Brookfield Infrastructure Partners has been raising its payments during each of the last four years. And another massive dividend hike was just announced on Friday.
Brookfield Infrastructure Partners has also enjoyed solid share price appreciation. In total, investors have made a 159.6% profit in just five years.
I keep a constant eye out for new "hidden income" opportunities like this one. Next week, I'll tell you all about one on the horizon and how to play it for a dividend yield upward of 7% -- twice what the pre-spinoff business pays today.