There aren't many truly ironclad rules on Wall Street, but the relationship between yield and price is unbreakable.  They always move in opposite directions.  When price falls, yield rises -- always, period, amen.

     For instance, if a $100 stock pays a $5 dividend, then its owner receives a nice 5% yield.  But if that same stock drops to $50, its dividend yield rises to 10%.  And right now, there are literally hundreds of stocks in this exact situation.  The Dow and S&P are each off about -35% on the year, and dozens of dividend-paying companies have seen panicky traders push their shares to fire-sale prices -- lifting yields to historic marks.  Smart investors are locking in those high yields right now.

     How to Calculate Your Dividend Earnings

     Let's review what it means to lock in a yield, because most investors assume that yields change.  And, indeed, they do.  They rise every time a firm's share price falls, and vice versa.  But the price you paid for a stock doesn't move -- it's locked in.  Because of this, you can use depressed share prices to lock in some mouth-watering yields.

     Take our previous example -- a $50 stock that is yielding 10% based on a $5 dividend.  Even though shareholders all receive the same payments each year, the investor who bought their shares at $100 is earning only 5% on what they invested -- and the investor who bought at $75 is seeing a 6.7% return on their money.  But those who bought at $50 can continue enjoying 10% yields on their original investment -- even as the share price rises, decreasing the yield.

     While this concept is simple to follow, what most often gets overlooked is how large an impact it can have on your portfolio.  Let's examine the performance of a company with a long history of rewarding shareholders with a rich dividend stream: Altria (NYSE: MO), the company many investors knew for years as Philip Morris.

     Here are its actual dividend payouts from 2000 through the end of 2006:

     As you can see, investors have been showered with rising dividends for years.  But those smart enough to buy in when the stock was trading at an abnormally low share price were able to lock in a higher yield -- a yield they're still enjoying today.

     Let's assume you bought 1,000 shares of MO on Feb. 11, 2000 -- a roughly five-year low.  At a price of $19.06 a share, dividends totaling $2.02 in 2000 worked out to a 10.6% dividend yield.

     In 2001, MO paid $2.22 in dividends, and investors who bought at $19 earned 11.6% in dividends on their investment. The next year, 2002 saw a 12.8% dividend payout, which rose to 13.9% in 2003.  By the end of 2006, the shares were yielding 17.4% based on your original purchase price.  An investor who bought at $19.06 would have collected a total $17.94 in dividends, a +94.1% return based on dividends alone.

     Now that's a great investment ... but not everyone fared so well.  Why?  Because as dividends rose, so did the share price.  When prices go up, yield goes down. So investors who bought at a higher share price locked themselves in to a lower yield. 

     Our table below shows how dramatic a difference buying near a high can make on your yields compared to using a market sell-off to lock in above-average yields.  Investors who bought MO just over a year later -- well after the shares had rebounded from their low -- locked themselves into significantly lower yields.

     In other words, even though the investor who bought at the low in 2000 is getting the exact same dividend payment per share as the investor who bought at the high in 2002, they are earning drastically different yields on their investments because they locked in at different prices.

     Again, the lower the buy price, the higher the yield. The higher the buy price, the lower the yield.  In the end, that added up to a huge difference: Investors who bought at $19 in 2000 were earning 17.4% in 2006, while investors who bought in 2002 earned only 5.6%.

     But wait, there's more!

     We haven't factored in any capital gains yet.  At the end of 2006, the shares were worth $85.82, an increase of +350% from their 2000 price.  So the 1,000 shares bought for $19,060 sold for $85,820, a gain of $66,760, plus the $17,940 in dividends collected along the way.

     That's the awesome power of locking in a yield for the long term at depressed shares prices.  And that's where we are in the current market.   Many are fearful of this volatile market -- and caution is warranted.  But If you want to earn a rich yield and collect a positively gargantuan capital gain, the time to buy is now. 

     Where to Find the next Altria
    
     The question, of course, is how to determine which companies out there will mirror MO's historical payout.  

     Nick Lanyi, editor of High-Yield International, has been scouring the globe for its best dividend payers.  His premium newsletter is full of yields that have been juiced thanks to the global sell-off:

     Here are two of Nick's favorites:

     A Brazilian telecom that is paying a 14.3% yield based on payments over the last 12 months. This company, one of the most respected corporations in the fast-growing economy of Brazil, has seen a -14% drop in its share price, less than a third of the -48% decline posted by Brazil's benchmark Bovespa in the last year.  A year ago these shares were yielding closer to 8.5%.

     A French communications company with an 11.3% yield.  A year ago, this stock was paying out 8.5%.  Now, obviously, the company's board didn't intend to pay out 11.3% to shareholders, but it's not going to cut the dividend to reduce the yield -- and it doesn't need to, as nothing is wrong with its business.  You have, right now, the chance to lock in a solid double-digit yield that simply wasn't available a year ago -- and to receive it for as long as you want to keep cashing the checks.

     These Bargains Won't Last

     Not to be overly dramatic, but you're running out of time.  The markets won't stay at these depressed levels for long -- there's just too much value to be had at too cheap a price.  Investors have tons of cash on the sidelines, and many are waiting for Wall Street's dark mood to lift (we already saw this yesterday with the Dow's +10.9% gain).  That's important, because all of these foreign companies actually trade on the New York Stock Exchange.  You can buy them -- and start collecting these dividends -- using the same brokerage account you have now.  

     So while everyone else is stymied by fear, readers of High-Yield International are taking advantage of this rare buying opportunity.  Some checks have already been cut.  Follow this link to make sure your name is on one of them.      

     Thanks for joining me on my search for today's highest-yielding securities!
 

-- Nick Lanyi
Editor, High-Yield International