With the battered economy, somewhat risky investments into possibly undervalued high dividend stocks could be the way to score big over time. One such stock - Allied Capital (ALD) is trading below 8 when it's 52 week high was near 30. If they kept up their current annual dividend, this would give it a yield of over 34%! Obviously there are a ton of risks here inherent to not only the market, but this stock specifically and a likelihood in my opinion that the dividend will be cut and then rebound.
There are many ways to calculate this, and if you do so, you notice that the slower the stock's price appreciates, the more money in the end you'll have as your dividend reinvestments are able to buy more shares up front.
The Math
I assumed purchasing 250 shares at price of 8 dollars per share (2k). I used the dividend yield of 32.5% - the assumed yield if the dividend remained the same next year. I assumed a 5 percent annual stock price increase and a 2 percent annual dividend yield increase. At the end of 33 cycles, this gives a little over $5.25 mil. Assuming you do this inside of a Roth vehicle such as an IRA, the dividends wouldn't be taxed.
This speculative play may be just what my portfolio and psyche needs! Even if it doesn't return my millions, it will deliver some hope (until the stock goes under).
You really need to do some basic research before putting out stocks like ALD. Have you read David Einhorn's book which documents the very scammy ALD? A very good read and all proceeds go to charity.
http://foolingsomepeople.com/main/
ALD will very likely go to 0 in the end. A far better short than anything.
Valid sentiment - but I said this was speculative. I am not a financial adviser. This being said
ACAS is another one trading presently at around 30 percent yield (though if you're an Einhorn fan, you'd recongnize that ACAS differs in oppinion from Einhorn at the valuation game ALD plays). I'll admit they may do some lofty evaluations, but in the VC or BDC world, I have seen a lot of people pay for higher than should be evaluations on the high side, like in the 2001 bubble. Yes, that was a bubble, but Allied Capital's successes will, I believe, keep attracting new customer base, mitigating the issue to some respects.
Not all proceeds go to the charity - the effect of the marketing on the stock price of Einhorn's baby helps only Einhorn, not charity.
I very well may be eating my words somewhere (and, for the record, I limited my stake in ALD to 880 bucks because it was just a speculative play).
Thanks for posting!
If you do your research you will find that ALD has assets far in excess of its debt. The likelyhood of it going to 0 is almost 0. The dividend will be cut but will still be large and will likely go back to historic levels in 18-24 months.