“Zach, I’m making some changes to my retirement fund that I’m really excited about!”
I was sitting in the backyard having a drink with my neighbor Jack and talking about life. And for some reason, the conversation turned to the markets.
Jack told me about the popular stocks that he’s interested in buying.
He understands the importance of diversifying into different areas of the market.
And he’s great at risk management and being careful to protect the savings he’s worked hard to set aside.
But there’s one thing Jack said the other night that concerned me…
“You know Zach, I’ve been looking at this one stock and it has hardly gone anywhere over the last year. That’s definitely a position I’m kicking out to make room for some better plays.”
The logic sounds good on the surface.
But I knew the stock that Jack was talking about. And quite frankly I think selling that stock would be a terrible idea.
I’m not currently licensed to give my neighbor investment advice. So I had to bite my tongue.
But today, I want to show you why Jack is thinking about this position the wrong way.
And I hope that our conversation will help you load up on some positions that will deliver exciting gains over the next year.
So if you’re like my neighbor Jack and you’re about to kick out a position in your account, please read my thoughts below before you pull the trigger!
Sleeper Profits You Can’t See on a Chart
The stock that my neighbor Jack was thinking about selling is actually one of my favorite investments.
It’s a stock that’s been featured in my Lifetime Income Report dividend newsletter. And it’s a company that has some big potential profits ahead!
Unfortunately, Jack is right about one thing. The stock hasn’t done much over the last year.
To be fair, its price is higher than it was last year. And it’s been relatively stable throughout the coronavirus crisis.
That’s worth something because it didn’t give investors heartburn when the market sold off sharply. And it hasn’t caused investors’ net worth to bob up and down like a yo-yo.
But still, I’ll admit that the small advance from this position doesn’t hold a candle to some of the triple-digit gains we’ve seen from popular work-from-home and speculative technology stocks.
What my neighbor Jack completely overlooked is that this stock pays a very lucrative dividend.
In fact, the company’s dividend yield is three times the yield on the overall market.
And these dividends really add up over time — especially if you’re reinvesting the dividends to buy new shares.
So although my friend Jack only saw this stock increase by a few percentage points over the past year, this position actually gave him much more in overall profits.
He just completely forgot about the dividend payments flowing into his account.
In the case of this particular stock, the story gets even better…
Because this play has the potential to give Jack some much larger profits as the Wall Street environment shifts.
A Major Change in Market Leadership
Wall Street traders can be like fickle teenagers sometimes (no offense intended to the many level-headed teens out there).
One minute traders are in love with the semiconductor industry. And the next minute they’re only buying social media stocks.
The changes in popularity for certain stocks or industries can cause big price swings in the market.
As investors, it’s important to understand when these shifts are occurring and how to profit from them.
It just so happens that my friend Jack is considering stepping away from an opportunity to make some huge profits from one of those swings!
Take a look at the chart below. It shows the performance of growth stocks compared to value stocks.
As you can see, the chart sold off sharply this spring.
And that tells us that growth stocks are falling out of favor with Wall Street, while value stocks are performing much better.
One thing you can’t see in this chart is that growth stocks have been favored by Wall Street for the majority of the last 10 years. And this has led to a huge imbalance in the market.
Too many traders have accounts that are full of expensive stocks representing companies that might hit a home run.
But thanks to the popularity of these stocks, prices are now at peak levels that carry a lot of risks.
Meanwhile, value stocks have been left behind. These are stocks of companies that have reliable businesses, and the stock prices are low compared to the profits the companies generate.
For what it’s worth, the stock my friend Jack is thinking about selling is a perfect example of a value stock.
It trades for about 11 times next year’s earnings and is expected to grow steadily for years to come.
The chart above shows you that Wall Street is finally shifting back towards value stocks.
Given the fact that growth stocks have held the attention of Wall Street for years, this shift is likely to continue for a long time.
And that means value stocks like the one my friend is about to sell could trade sharply higher for many months — and possibly several years!
I wanted to show you this dynamic today because it’s tempting to dump some of your best stocks when you see shares of one technology stock or another soaring to new highs.
And there’s nothing wrong with putting some of your investments into speculative opportunities.
But if you keep a foundation of value stocks with strong dividends in your account, you’ll see the overall value of your savings steadily increase.
And in today’s market, you’ll actually benefit more by owning the most overlooked value stocks.
Speaking of market shifts and tracking the best stocks to invest in, I wanted to make sure to invite you to follow my Twitter account.
This is a great way to follow the opportunities that I’m tracking and see what’s going on each day in the market.
Just click on the link above and then hit “follow”. I’d also love it if you sent me a tweet to say hello!
In the meantime, we’ll keep tracking the best ways for you to grow and protect your retirement wealth so you can focus on the things that matter to you.