Use Insider Buying to Identify Top Dividend Payers
Today, Income Expert Marc Lichtenfeld examines the recent insider trading scandal — that’s insider buying or selling — surrounding Senator Richard Burr. He allegedly sold shares in response to insider knowledge about COVID-19’s likely impact on stocks he owned.
The truth is, people with insider knowledge about the market often use that information to enrich themselves through insider buying or selling. But most of the time, if this trading is done legally, there’s actually a way that you can track their behavior.
Me: Can this Congress be any more unlikable?
Sen. Richard Burr: Hold my beer.
If you’re unfamiliar with the “hold my beer” meme, it’s used to suggest that a person is about to one-up whatever you’re talking about.
In late February, as the coronavirus was exploding and the country was shutting down, the federal government was pretty darn unlikable (nothing new there). And then the story broke that various senators and representatives sold stock after being briefed about how bad the virus was going to be.
Richard Burr, a U.S. senator from North Carolina, sold 33 stocks that were worth between $628,000 and $1.7 million just after he wrote an opinion piece for Fox News saying that the U.S. was better prepared than ever to face the pandemic. As chairman of the Senate Select Committee on Intelligence and author of the Pandemic and All-Hazards Preparedness Act, Burr knew darn well that wasn’t the case. If it were, he most likely wouldn’t have dumped his stock. And he’s just one example of insider buying or selling in the U.S.
If you’re like me, you find it infuriating when people in the know use their privileged access to information to enrich themselves like Burr did. But what if you were almost immediately made aware that Burr sold his stock after a briefing on the virus? Would you have perhaps followed his lead?
While you can’t do that with two-faced politicians, you can follow CEOs, chief financial officers (CFOs) and other corporate insiders quite easily.
Following the Signs of Insider Buying
Executives and directors must file documents with the Securities and Exchange Commission within two days of buying or selling their companies’ securities. It’s important to understand that insiders may sell for a wide variety of reasons. They may know that their company is going to go through difficult times, they may have college tuition to pay for, or they may need to diversify their holdings since stock may be a large part of their compensation.
But there’s primarily one reason for insider buying, it’s primarily for one reason: Insiders expect the stock to go higher.
Some insiders have programs where they buy or sell stock on a regular basis. They may buy or sell a certain dollar amount or number of shares every week, month or quarter.
What’s especially meaningful is when insiders, especially more than one in the same company, buy stock in the open market. That suggests confidence in the company’s prospects.
Insider Buying at These Dividend Payers
Those of you who know my work know that I am all about owning strong dividend payers for the long term.
So I took a look at which dividend-paying companies had large amounts of insider buying since the pandemic began as a potential signal for which companies may rebound when we emerge from the crisis.
Exxon Mobil (NYSE: XOM). Though oil is trading near its lowest level in 18 years, two senior vice presidents snapped up nearly $1 million and $1.1 million worth of Exxon’s stock, which has a generous 8.6% dividend yield.
Kar Auction Services (NYSE: KAR). The CEO and CFO bought $1 million and $900,000 worth of stock, respectively. The stock yields 5.8%.
Prosperity Bancshares (NYSE: PB). This Houston, Texas-based bank yields 3.8%. Despite the virus and low interest rates, the vice chairman bought nearly $1.3 million worth of stock, and the senior chairman and CEO bought $650,000 worth.
These executives and directors have confidence that their companies will thrive and their stocks will eventually move higher. That’s as good a place as any to begin your own research into great stocks to buy during this downturn.
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About Marc Lichtenfeld
A master of the steady, reliable science of income investing, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report. He has also appeared on CNBC, Fox Business and Yahoo Finance. His book Get Rich With Dividends: A Proven System for Double-Digit Returns achieved best-seller status shortly after its release in 2012. He captures the hearts and minds of readers approaching their golden years in his daily e-letter, Wealthy Retirement.