Saturday, February 4, 2012
"Ooooh, mon... you got daaa bananaaaa, mon... Luuk, he got daaa bananaaa!"
Charley Brown was shouting. He wanted everyone on the beach to know there was a fermenting piece of banana floating in my cup of "Reef Juice." This, in his eyes, was cause for some celebration. Charley – whose five remaining teeth, impossibly slow gait, and extremely drunken demeanor was reminiscent of a homeless vagrant in our hometown (Baltimore) – was nevertheless in charge of serving us lunch and drinks on the beach behind Mr. Busby's restaurant in St. Maarten.
After celebrating the banana in my drink and taking our wives' lunch order, Charley cleared his throat to get our attention and then reminded us solemnly: "Your vacation is my job." Ironically, he then slowly stumbled away without any of the men's lunch order. "Ah, Charley... Hang on, brother... You forgot to take our order... "
Notwithstanding Charley (who was charming in a certain way)... I had a wonderful vacation recently at Oyster Bay on the Dutch side of St. Maarten. My wife and I were guests at a beautiful stone house perched above the bay. The house belongs to a good friend who was celebrating his 40th birthday. There were five couples in our party, and all of us were in finance. I bet the beach in St. Maarten has rarely overheard more talk about stocks and bonds in a five-day period.
Breaking up our debates was Charley Brown – hands down, the worst waiter in the world. His service was so bad, it was comical. But the food was great. And so was the Reef Juice – a mixture of rotting bananas and rum.
One of the main issues we discussed on the trip was the role of the financial industry itself – in particular, whether or not the fees these guys charge are worth it. (Keep in mind, one of the guys in our group is a successful hedge-fund manager and the others were traders for a major investment house.) The answer was an unequivocal no.
Here's a prediction... The Securities and Exchange Commission will do more and more to shut newsletters like mine down because we threaten the established financial firms.
The other question I always like to ask other financial pros is... What do you tell your mother and father to do with their money? Do you trade it for them? Do you tell them to stay away from stocks? The nearly unanimous answer won't surprise you if you've been reading our letters for long: "I tell my parents to invest for dividends in the biggest and most stable companies we can find."
Most people reading today's essay will walk away and think, "That was a waste of time. I can't invest for dividends. I need to make money right now." Very few of these people will ever get rich. It is nearly impossible to become wealthy overnight in the stock market. Many (if not most) of the approaches I urge subscribers to follow involve taking the smallest amount of risk and generating income over time. The fact is, this income usually seems small at first. So many investors make the mistake of ignoring it...
Look carefully at all the things I've written about investing in corporate bonds. Your downside in corporate bonds is far more limited than in stocks, and your income is almost always much, much larger. Or look at selling puts. There's no additional risk whatsoever... but lots of additional income – sometimes as much as 50% more a year on principal (not just margin). Look at all the work we've done on dividend-growing companies – the so-called World Dominating Dividend Growers.
Richard Russell is the greatest living financial writer. He is almost 90 years old now and has been writing about finance longer than most of the people reading this message have been alive. Here's what he says about the importance of "compounding" your income – that is, reinvesting the income you receive from your investments...
In a period of great financial uncertainty, dividends offer investors both shelter from the storm and solid total returns. We are bullish on top dividend-paying stocks because we believe more and more investors are going to buy these stocks in the future – adding significantly to their total returns. This trend is already happening. In 2011, the 50 highest-paying stocks in the S&P 500 returned more than 8%, trouncing the S&P 500's total return (which was essentially flat).
Here's my challenge to you... Always make sure at least half the money you have invested in stocks is tied up in companies that pay large dividends and have a long track record of increasing their annual payouts. (If you really want to do well, you'll keep 90% of your stock allocation in these names...) You'll find these stocks across our recommended portfolios.
And pay attention to the big tech names this year that don't pay dividends (or only pay tiny ones) – stocks like Google, eBay, Dell, Oracle, Apple, and Cisco. I believe all these companies will announce new dividends or major increases this year. When they do, buy them. Over time, around 40% of the total return you will make in stocks will come from dividends. The higher your dividends, the higher your total return. And if you will compound those dividends, your total returns will become vastly larger.
Here's a final point to make... This approach only works if you're rigorous, disciplined, and patient. (That's probably why it works... Few people display these emotional qualities when it comes to money.) You have to be willing to allocate capital to these kinds of companies when they're cheap. That means when other folks don't want to buy them – like over the past five years with Wal-Mart, for example. You have to be able and willing to hold them for relatively long periods of time – like a decade or more.
To make sure you don't stop out of these high-quality companies, adjust your trailing stop losses for the income you've received. Doing so is pretty easy. It just takes a bit of accounting homework. All you have to do is subtract your stop price from the amount of income you've gotten. For example, if your stop loss would take you out of a stock at $10 and you've booked $3 in dividends, your stop loss becomes $7.
I use one other rule of thumb for very stable companies. Once the dividend has increased so that the stock pays more than 10% a year (based on my purchase price), I simply hold the stock without a stop loss. My thinking is simple. If I'm making 10% a year on the stock via dividends, I'm not going to sell it. I don't really care what the market thinks about the shares.
But... be careful with this rule. It only applies to companies that are truly battleships. Make sure you're capable of understanding whether or not a given stock qualifies. Be especially leery of viewing any technology company this way... Even the biggest and best tech companies are frequently wiped out by small innovations.
Now... if I'm right about my audience, lots of people reading this will think, "Yes, that's what I should have done years ago. But now, it's too late." Nope. That's just not true.
It does take about a decade for the big benefits of compounding to kick in. But given the uncertainties in the world's markets, this approach is likely to beat the market right from the get-go. Besides... if you've been making the wrong choices with money for decades, why not simply stop making those choices? You don't have to continue to be wrong. You can start being smart and doing the right thing today. All you have to do is make a few simple decisions... make a plan. And then follow it.
What does Richard Russell say about the folks who ignore this simple advice? Well, he knows most average investors won't follow a plan like this. It takes too much discipline...
If you're not generating income with your portfolio every month... stop being a loser. Move your investments into our best dividing-paying recommendations. Trust me... The world will follow you into these stocks over the next several years. Beat the rush. Buy them now.
The two publications we publish that use this strategy to the fullest are The 12% Letter (written by Dan Ferris) and Retirement Millionaire (written by Dr. David Eifrig). Together, these two publications cost less than $150 annually... and they provide the best research on blue-chip, dividend-compounding stocks you'll find anywhere, for any price. I know many of our more sophisticated investors use these two letters almost exclusively to help manage their stock portfolios. You can learn more about a 12% Letter subscription here, and learn about a Retirement Millionaire subscription here.
Date Range:1/26/2012 to 2/2/2012
Date Range:1/26/2012 to 2/2/2012