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Weekend Edition

One of the best income investments in today's zero-percent-interest world
Saturday, October 18, 2014

The Weekend Edition is pulled from the daily S&A Digest. The Digest comes free with a subscription to any of our premium products.
 One of the greatest ways in history for retirees to collect income was born from the Great Depression...
In the early days, utility companies providing electrical power weren't regulated. Multiple companies would compete for the same clients, sometimes even building duplicate distribution channels.
 In the late 1880s in Chicago, for example, there were as many as seven companies competing with each other, according to the National Bureau of Economic Research.
The competing firms drove the cost of gas down from $2.25 per thousand cubic feet (mcf) to $1 per mcf.
But this kind of competition wasn't available outside major cities, where populations weren't as dense or as wealthy.
Price wars erupted amongst utilities in big cities and margins evaporated. In Chicago, all the companies merged into a single firm to survive. Gas prices rose 25% after the merger. Other large cities followed suit.
So began the price gouging.
 As Dr. David "Doc" Eifrig wrote in the December 2010 issue of Retirement Millionaire...
A city needs just one source of electrical power. One provider of anything is a monopoly. And since a monopoly is the only game in town, it tends to gouge customers and provide shoddy service. That's why the government created the utility industry.
For generations, utilities – the entrenched monopoly providers of local water or electricity service – have enjoyed guaranteed profits. If you want indoor plumbing or a refrigerator, you've got to do business with the local utilities. In exchange for that monopoly position, traditional utilities have accepted heavy regulations that limit their ability to raise prices... Essentially, municipalities assured themselves reliable power in exchange for guaranteeing the companies' profits.

 That's why utility companies are a safe component to a retiree's portfolio... They're able to pay large, stable dividends due to their monopoly status and steady earnings.
Doc still recommends holding some of your portfolio in traditional utilities for the reasons discussed above... even though, like everywhere else, yields in the utility sector aren't what they used to be (around 3.5% today).
But with the advent of technology, a new type of utility has emerged... They're just as dominant as electricity providers... and they play just as integral a role in our everyday lives. Doc has dubbed these companies "Digital Utilities." Every time you turn on your computer, you're paying these firms. As he wrote...
These companies enjoy the same kind of monopoly position on a vital service as old school power and water companies. But these new utilities are even better than conventional utilities. Old-fashioned utilities were limited by geography – for instance, the power company in Baltimore wasn't going to open a branch office in Toronto.
But nothing constrains these new Digital Utilities. They are international in scope. They can sell their vital services anywhere in the world. Even better, they're lightly regulated. Their pricing power is unlimited. So their growth potential (and their stocks' prospects for capital gains) is wide open... at the same time that they pay safe, reliable income, just like a utility.

 Remember, in the early days of traditional utilities, a handful of firms were competing for customers. But the industry consolidated, leaving dominant players in every city.
A similar process has happened in the digital age. A decade ago, you could choose from a dozen search engines... Remember WebCrawler, Excite, AltaVista, and Lycos?
Today, there are two primary search engines. It's the same with operating systems... In the early days of computing, you could choose from multiple word-processing packages. Today, only a couple exist... with one dominant software company in the space (Microsoft). Here's how Doc put it...
Consolidations and mergers have led to a handful of "Digital Utilities." Each company is a dominant player in its sector. Traditional utilities have been a cornerstone of retirement investing. They are considered safe-to-buy businesses that supply electricity and natural gas to every household. And utilities throw off cash dividends that can supplement a retiree's income. I've owned a few utilities in my investment career, each of which supplemented my cash flows well.
But today we're looking at a new type of utility business – Digital Utilities. Each company is the dominant player in its industry. Most have near-monopoly positions. They can't be uprooted. Moreover, they sell their goods and services around the world, so local government regulators can't control them. Regulators can't limit their profits, prices, and returns on capital the way they control traditional utilities.
The information flow over the Internet and airwaves is the new electricity and gas of this century – it's the new world of Digital Utilities. Every time you use the computer on the desk at home, the cell phone in your hand, or your favorite search engine... these businesses collect a little more money.

 In December 2010, Doc recommended four Digital Utilities:
•   Intel – The semiconductor giant has 80% of the world's microprocessor market.
•   Microsoft – The dominant software company.
•   Cisco – The company that makes the routers and switches that power the Internet.
•   Google – The dominant search engine.

These companies all share traits that make for perfect utilities: Impeccable financials, brand loyalty and recognition, captive users, friendliness to shareholders, and regular and frequent use of their services.
 If you had followed Doc's advice and purchased Intel in November 2010, you would be up around 71% including dividends. The company has increased its dividend payout twice since then... And you'd be earning 4.2% a year on your original purchase price.
Microsoft is up 81% since then. The software giant has increased its payout four times. In November 2010, Microsoft was yielding 2.4%. Today, you'd be earning 4.7% on your original purchase price.
Cisco is up 4% and has increased its dividend four times since November 2010. The stock was yielding 1% back then. Today, you'd be earning 3.7% on your original investment. Google is up 70% over the same period. Though it doesn't pay a dividend, it does reward shareholders through share buybacks.
Not all of the Digital Utilities Doc originally recommended are still in the Retirement Millionaire portfolio... He stopped out of some and sold and rebought others at later dates. The numbers we provide above are just to show the value of holding these Digital Utilities over a long period of time – not necessarily the actual gains his subscribers achieved.
 In his latest Retirement Millionaire, Doc recommended another Digital Utility... This company and its closest competitor control about 70% of their sector. This company provides a service we use every day... And it's incredibly difficult for a new company to enter this space.
The company generated $11 billion in free cash flow over the past 12 months... It trades for around 11 times earnings. And it pays a huge dividend. It's one of the cheapest, highest-quality stocks in the market today.
 You can get immediate access to Doc's latest pick with a 100% risk-free trial subscription to Retirement Millionaire. After reading through Doc's work, if you decide it's not for you, we'll give you a full refund.
And Retirement Millionaire is more than just profitable investment advice... Every month, he also shares his best tips for leading a healthier and wealthier life. You can start your trial subscription to Retirement Millionaire by clicking here.
Sean Goldsmith

This Week's Winners
S&P 500 Symbol Change
Cliffs Natural Resources CLF +28.6%
Peabody Energy BTU +10.3%
Diamond Offshore DO +9.3%

Countries Symbol Change
Australia EWA +0.4%
United Kingdom EWU +0.0%
Hong Kong EWH -0.5%

Sectors Symbol Change
Real Estate IYR +0.8%
Gold Mining GDX +0.7%
Utilities XLU +0.1%

Commodities Change
Wheat +4.8%
Soybeans +2.6%
Corn +2.2%
Date Range:10/9/2014 to 10/16/2014
This Week's Losers
S&P 500 Symbol Change
Netflix NFLX -21.7%
Microchip Technology MCHP -13.9%
Newfield Exploration NFX -13.5%

Countries Symbol Change
Brazil EWZ -7.5%
Latin America ILF -5.9%
Israel ISL -5.1%

Sectors Symbol Change
Semiconductors PSI -6.0%
Internet FDN -5.5%
Technology QQQ -5.2%

Commodities Change
Lean Hogs -17.5%
Nickel -7.2%
Palladium -6.8%
Date Range:10/9/2014 to 10/16/2014
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