2 Alternative Strategies for Larger Dividend Stock Profits

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1 2 Alternative Strategies for Larger Dividend Stock Profits A Special Research Report from 30 Day Dividends

2 Introduction By Tim Plaehn There are numerous benefits and advantages to buying and owning a portfolio of wellchosen high-yield stocks including: Earning yields that are well above the rates paid on bank accounts or investment grade bonds. A significant portion of the return you earn are cash dividends that are not affect by downturns in the stock market and can be used as either income or reinvested to grow your portfolio. Owning stocks that regularly increase the dividends paid provide a growing stream of cash payments that help your income keep up and stay ahead of inflation. Down periods in the stock market are buying opportunities that allow you to lock in even higher yields on the best dividend paying stocks. However, price action of some dividend stocks the stock market offers opportunities to generate returns greater than the 6% to 8% yields provided by a buy-and-hold strategy of quality high yield stocks. In the short to intermediate term, share prices are primarily a function of investor mass psychology. Certain actions by dividend stocks produce reactions from the investing public that set up counter-psychological predictions of share price changes that can be profitably traded a large percentage of the time. We'll go over two such strategies in detail in the next few pages, plus actual trade recommendations you can take action on right now.

3 Strategy 1: Generate Capital Gains from Rapid Dividend Growth How much would you pay for a stock if you knew that the dividend would grow by 20% per year for the next three to four years? The answer to that question is the dividend-based investment strategy that will generate 20% plus annual profits from a stock that yields 2.5%. This strategy is based on a type of stock market investment called a master limited partnership (MLP). The core group of MLPs own assets that support energy exploration and refining, such as pipelines, storage tanks and natural gas processing facilities. The better midstream MLPs are managed to pay an attractive yield and distributions that increase every year, or even every quarter. Investors in an MLP are, by definition, "limited" partners and have no say in how the business is run. Every MLP is managed by a general partner, which can be a private company, a large corporation with other business operations, or a publicly company focused on acting as the general partner of an MLP. The last type of company provides the type of stock that will produce 20% returns. The general partner typically owns a large percentage of the limited partner units plus earns extra incentives as the distribution rate grows above preset levels. As a result, the income of the general partner will increase at a two to three times multiple of the distribution growth rate produced by the MLP. Targa Resources Partners (NYSE: NGLS) NGLS is an MLP in the business of gathering, compressing, treating, processing and selling natural gas and storing, fractionating, treating, transporting and selling natural gas liquids and NGL products. Since going public four years ago, the NGLS distribution has been increased every quarter, and growing at about 10% per year. Wall Street analysts forecast that the NGLS distribution will continue to grow by at least 7.5% per year for the next three years. The MLP units currently yield 4.4%. Targa Resources Corp (NYSE: TRGP) TRGP is the general partner company for Targa Resources Partners. The increases in the NGLS quarterly payouts plus the general partner incentives paid by NGLS have allowed the TRGP dividend to grow by 6% to 7% every quarter. The wording and function of the Targa Resources Partnership agreement act to insure that TRGP will be able to grow its dividend payments approximately 2.5 times the rate of distribution increases at NGLS. As a result those smart Wall Street types are predicting that the TRGP will grow at a 21.5% compounded rate for the next three years. TRGP currently yields 2.25%. Regular old percentages math dictates that if the TRGP dividend grows by 21%, to stay at the current yield the share price must also increase by the same 21%. Add in the 3% you earn in dividends (remember the dividend is getting larger every quarter) and an investment in TRGP produces a 24% total return with the yield staying level for the year. Compound 24% per year for three years and your investment has doubled.

4 The trade: Buy TRGP at the current market price and hold until it doubles. As long as the dividend increases by 5% to 6% each quarter, the share price will follow. Small share price dips are a good time to accumulate shares. Historically, the share price has risen steadily and pullbacks have been small and for a limited amount of time. Planning note: As an MLP, NGLS provides partnership Schedules K-1 for tax reporting purposes. K-1's can add complexity to your tax return. TRGP is a corporation and reports results on the familiar Form 1099, which makes doing tax returns a whole lot easier. Strategy 2: Catching the Rebound after Corporate Actions that Produce a Temporary Share Price Drop High-yield stocks are that way because the companies pay out the bulk of profits or free cash flow as distributions to investors. To grow this type of company must either borrow money sell bonds or issue equity sell new shares to raise capital to buy new assets that can be put to work. That money can be paid out has a higher dividend rate. When a company files to sell shares into the market, the move can be viewed as a dilution of the investment of existing shareholders. There is often a knee-jerk reaction to sell off the shares, even if the money raised will soon be put to work to generate a higher level of cash flow out of which dividends are paid. The trade is to buy when the share price falls on the announcement of a capital raising share issuance and either hold for the long term dividend payments or sell when the price has recovered. Below is an example of this trade, with a bonus alternate profit scenario. Nordic American Tanker (NYSE: NAT) NAT is a high-yield, variable dividend stock. The NAT share price exhibits several large swings over the course of a year as the trading public tries to determine the level of

5 future dividend payments. The chart below clearly demonstrates this phenomenon. Over the most recent 12 months, the NAT share price has made three 30% swings from low to high between dividend payment and the next distribution announcement. On April 7, 2014 Nordic American Tanker announced a public offering of 10 million shares. The news caused the share price to tank from $10 to about $8.50 setting up a swing trade to profit from now until the next dividend is declared. The trade: Buy NAT up to $8.80. Take profits at $11.20 for a 27% gain. If the target price is not hit, sell before NAT next goes ex-dividend on or around July 25. Alternate sell criteria: There is a definite possibility that the second quarter dividend will be much higher than recent distribution levels. If NAT hits the target $11.20 well before July, set a $10.80 stop-loss, wait for the dividend announcement and then take additional profits if the share price jumps on the news of a higher dividend Investors Alley Corp. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Investors Alley Corp., 41 Madison Avenue, 31 st Floor, New York, NY or All data, including equity prices and yields current as of when this report was published. For complete terms and conditions governing the use of this publication please visit