Safe Income Investing in 6 Easy Steps
Issue #2134
- WEALTHY: What’s standing between you and hitting the income jackpot? (Andrew Gordon)
- HEALTHY: Look 10 years younger without surgery (Shane Ellison)
- WISE: Jeff Cooper on safety
ALSO IN THIS ISSUE:
- Is your protege ready for that promotion? (Michael Masterson)
- What you need to know if you plan to leave the country (Jennifer Stevens)
- It’s Fun to Know… about the longest-burning light bulb
- Add "osculation" to your vocabulary
Imagine if There Were Only 6 Numbers to Choose from When Buying a Lottery Ticket!
Wouldn’t that be great?! Of course, the fewer the choices, the more likely your chance of success, right?
How many choices are there when buying and selling shares? Errmm… a LOT! Hundreds… One of the reasons I enjoy such consistent success from trading is because I only have 6 options to choose from! Except this is even better in a way, because the lottery is pure luck…
… I only have 6 choices AND have a VERY good idea about which choice to make because of the insider signal.Click here to learn more…
"Safety is something that happens between your ears, not something you hold in your hands."
Jeff Cooper
Safe Income Investing in 6 Easy Steps
Six easy-to-follow rules are the only thing that stands between you and hitting the income jackpot. Follow these rules and it’s almost impossible not to get at least 12 percent in total annual returns. I know, because that’s the minimum return I get when I recommend companies for my INCOME, portfolio.
What makes 12 percent so satisfying is that these are just about the safest investments around… as long as you buy right. And there isn’t a better time than right now to learn how to buy right. Why? Because dividend yields are at historical lows and they’re ready to go up. And even though dividends are at such low levels, getting income plus stock appreciation is such a sweet deal that investors aren’t shying away from them. They love the checks these companies send in the mail.
But whether they know it or not, these checks used to be a lot bigger when compared to market cap and earnings. Even though dividends are getting bigger, companies are growing at an even faster pace.
As earnings slow (and I think they will for the market as a whole), dividend yields are bound to grow. That means companies will be giving out more of their earnings as dividends. But nowadays, they’re hoarding cash for these reasons:
- To buy back their own stock. It’s a case of supply and demand. When the supply of shares goes down, prices go up. It’s another way for companies to make shares more valuable for their shareholders.
There’s nothing wrong with that, except that your increased returns comes from capital appreciation. And to get the money, you have to sell the stock, as opposed to getting the increased returns through dividends that come every quarter in the form of bigger checks.
Most shareholders prefer getting the cash, and I don’t blame them. What’s more, stock appreciation can be reversed. But once the company sends you a check, nobody will knock on your door and take it back.
- To reinvest in the company. Internal growth requires expanding assets. Growing companies need to get bigger physically - more equipment, bigger facilities, an expanded sales force, etc.
- To buy other companies. Another way to expand that’s faster than internal growth.
- To pay off debt. This helps the balance sheet.
But keeping so much cash in the coffers and not reinvesting it back into the company suggests a fundamental lack of faith in the company’s ability to grow and to get an adequate return on capital expenditures.
Of course, the company would put it differently. They’d pin their reluctance to spend on externals, such as economic uncertainty.
Unfortunately, this ends up becoming a self-fulfilling prophecy. The company’s growth consequently slows down, and when enough companies hoard (as they’re doing now), it stunts the growth of the economy. Then companies can point to a slowing economy as a reason not to spend.
The last thing you want, however, is to get bigger yields through share prices going down. You need to approach these dividends as a bonus. Look for fundamentally strong, attractively priced companies that also happen to pay dividends. This is how you do it:
1. Do not exchange income for value. Even when the market is expensive and most companies are overpriced, there are always stocks to be found at discounted prices. Dividend-paying companies are no exception. These companies have proven to be much hardier than other companies. They grow when the market is going up, and usually do much better than other companies when the market declines. Dividend plus value offers double protection against a falling market.
2. Look at payout ratios. These ratios tell what proportion of earnings is going out as dividends. There’s no hard-and-fast number I could give you, however. The historical average is 55 percent. Last year, the average ratio was 21 percent. (Remember, companies are hoarding, so this is not surprising.)
We want companies that have the ability to give out dividends and grow. So we like companies that give out a generous portion of their earnings to shareholders, but not so much that they strangle growth.
The higher a company’s dividend yield is, the more likely it is for its payout ratio to also be on the high side. A high payout ratio and a low dividend yield tells you you’re looking at a loser. Avoid it at all costs.
It’s worth doing some comparison shopping by looking up the payout ratios of a company’s competitors. Your company’s payout ratio should be lower or in the same range.
3. Do not settle for a dividend yield of less than four percent. There’s no complicated mathematical formula at work here. From experience, I can tell you that there’s not enough choice at five percent and above, and that there are too many companies with dividend yields below four percent to settle for such yields.
4. Look for at least 10 quarters of uninterrupted dividend growth. You want your dividend checks to be getting bigger, not smaller. And you don’t want to take the company’s word for it. You want evidence that the company is capable of sustained dividend growth. Past payout growth is no guarantee that the company will continue along that path, but at least they’re not blowing smoke. A record of dividend growth plus a solid growth plan executed by experienced leadership lays the groundwork for continued dividend growth.
5. Confirm past price performance. Seeing is believing, and you want to see that the company is already climbing up the charts. As I said before, past performance is no guarantee, but it sure beats the alternative - investing in a company that has been falling. That’s one way to attain an impressive dividend yield, but it’s certainly not the right way.
6. Catch the stock on a dip. Though dividend companies tend to be less volatile, it’s still worth buying them on the dips. Doing so could improve your return by 5-7 percent. Multiply that by several stocks, and it can make a big difference.
Is it really this easy? Yes and no. There are always surprises, like when the Canadian government decided to propose withdrawing the tax advantages for Canadian trusts. Those stocks immediately went into a dive, and have since experienced several aborted rebounds. But instead of getting out along with everybody else when the Canadian REIT in our INCOME portfolio dived, we waited and issued "sell" instructions to our subscribers at the top of the first of the company’s several rebounds - with only a slight loss in our portfolio to show for it.
Payout ratios are the trickiest thing to figure out. So let me give you a simpler rule to follow: Anything under 55 percent is fine. If the payout ratio is more than 55 percent, do the following. If it’s gone up over the past six quarters, don’t invest. If it’s gone down, consider it a green light to buy.
There’s one more thing you need to keep in mind: Finding fundamentally strong companies - whether or not they pay dividends - requires serious digging. There are no shortcuts to doing the work. If you don’t have the time, get a trading service to help you out. The good ones should be able to find exceptional dividend-paying companies for you.
For example, one of the biggest gainers in my INCOME, portfolio is a pipeline company I recommended last July. It’s up almost 50 percent… and I consider it the safest stock in my portfolio.
It just goes to show that with dividend-paying companies, you don’t have to choose between great returns and safety. You can get both. Can you ask for anything more than that?
[Ed. Note: Andrew Gordon, ETR’s Investment Director, author of several books on energy markets, global countertrade practices, and the hot growth sectors of China and Russia, is the editor of INCOME, a monthly financial advisory service that uncovers income-generating stocks that promise safety (first and foremost), along with much-higher-than-average profit potential.]
Are YOU Ready to Snatch YOUR Share From This $300 BILLION Cash-Pile Looking for a Home?
"They " thought they’d keep it all for themselves, but "they " were wrong…
Retire NOW by getting revenge… on Wall Street!
Here’s how the "mercenaries" ruthlessly cream off fat lump sums and monthly checks for doing NOTHING but following simple instructions…
Quick Management Tip: Is Your Protege Ready for That Promotion?
Before you give your promising protege a promotion, consider forming a small team of trusted advisers to assess his strengths and weaknesses. Leadership is a tough and tricky skill. It’s not always so easy to tell who has a talent for it.
I’ve made enough mistakes of my own to wish I had done things differently. You still have a chance. Promise yourself that you won’t make another big promotion without discussing it with two or three people you trust and respect.
[Ed. Note: Michael Masterson and his team of business-building and marketing experts will be revealing their strategies for getting a brand-new business off the ground … and making an existing business grow like crazy. Time is running out to get our $200 Early Bird Discount for this fall’s Info Marketing Bootcamp - Making a Fast Fortune on the "Other Side" of the Internet. Reserve your spot before 5:00 p.m. tomorrow and save $200.]
Reader Feedback: "There are people in my life who frequently ask favors of me."
"It’s amazing, but you often write pieces on subjects that I am dealing with at the time. For instance, your article on giving and receiving.
"I am in the process of building an online business, have created my own website around a particular product, and just finished my very first e-book, which shall hit cyberspace soon. There are people in my life who frequently ask favors of me - and yet when I ask them, they are too busy (’though I’d LOVE to help out’), late in responding, or don’t respond at all. Once my business is successful, however, they will be the first to call me with favors. Hmm… I wonder whether I’ll be ‘too busy’?
"Thanks for all the good advice."
- Heidi Walter
Chicago, IL
[Ed. Note: How has reading ETR helped you - maybe even changed your life? Send your comments to ReaderFeedback@gmail.com. Include your name and hometown… and we may print your e-mail in a future issue.]
A Natural Facelift
As a beauty-salon owner, my wife sees dozens of over-50 clients who are eager to undergo cosmetic surgery. She is quick to teach them about using alpha-lipoic acid (ALA) as a natural and safe alternative to pricey and potentially dangerous procedures like facelifts.
Because I’m an ex drug-design chemist for Big Pharma, I know all about the wrinkle-reducing properties of ALA. When consumed, it activates an anti-wrinkle agent within your skin cells known as AP-1. Working in unison, AP-1 and ALA promote the digestion of damaged, wrinkle-inducing collagen. This helps get rid of unsightly wrinkles. And if you don’t have ALA in your diet, wrinkles come on like gangbusters.
Without ALA, AP-1 can begin to make you look old beyond your years. By itself, AP-1 increases free-radical production within the skin cell and the oxidative stress that can cause the cell to produce collagen-damaging and micro-scarring enzymes. Premature aging of the skin is the end result.
If you want your skin to look years younger, don’t turn to expensive and risky surgeries. ALA is a much easier, safer, and even more effective way to peel the years from your face. Consuming 200 to 400 mg of ALA daily can stop the degradation. You can get ALA in supplement form and from food sources, including spinach and broccoli.
[Ed. Note: Shane "The People’s Chemist" Ellison is an internationally recognized authority on therapeutic nutrition. Get his "Foundational Health Education" program to beat obesity, heart disease, and even Type II diabetes by clicking here. You can also read Shane’s insights into what you can do to lead a healthier life by signing up for ETR’s FREE natural health e-letter here.]
A Practically Fail-Safe Guide to Getting a Passport
Yesterday, I told you how my family and I almost had to cancel our trip to France because we couldn’t get a passport for our one-year-old in time. As I explained, there are ways to get a passport in a hurry. But if you have a few weeks or months before you’re planning to leave the country, you can avoid that last-minute dash altogether.
Here’s how:
- Put in your passport application well before your trip. Assume at least four months - maybe more - for processing.
- No matter when you apply, pay the extra $60 (plus overnight mail fees) to expedite your passport.
- You may want to pay even more ($109-$199) and have a passport expeditor take charge of your application from the start. American Passport Express says that if you’re traveling within 14 days, they can get you a passport in two business days. If you don’t have firm travel plans but still want to expedite your passport, they can have it to you in four business days.
[Ed. Note: Jennifer Stevens gets paid to travel. If you’ve ever dreamed of a "job" that would pay you to shop in a market in France… or dive on the Great Barrier Reef… or sample the best restaurants in Prague, then you don’t want to miss "The Right Way to Travel" e-letter. Sign up now - it’s free!]
It’s Fun to Know: The Longest-Burning Light Bulb
They don’t make ‘em like they used to. The Centennial Light, located in a firehouse in Livermore, CA, has been running for 106 years with only short interruptions, making it the longest-burning light bulb in the world. The four-watt bulb, which is currently used as a night light above the fire trucks, was turned off only once, when it was moved from one fire station to another.
(Source: Guinness Book of World Records)
An Exciting Opportunity To Take Advantage Of A Trillion-Dollar Industry
Of the many paths to wealth, there is only one that Michael Masterson most consistently recommends to his closest friends and relatives.
It has all the advantages you want if you’re starting from scratch: simplicity, an extremely low entry cost and a huge and growing potential for wealth-building.
Here’s what I am talking about…
- Patrick Coffey
P.S. The Early Bird Discount for this fall’s Info Marketing Bootcamp - Making a Fast Fortune on the "Other Side" of the Internet is almost gone. Reserve your spot before 5:00 p.m. tomorrow and save $200.
Word to the Wise: Osculation
"Osculation" (os-khuh-LAY-shun) - from the Latin for "a little mouth" - is kissing.
Example (as used by Thomas Sutcliffe in the Independent): "He had engaged in nervous osculation with all three of Lord Flamborough’s daughters."
[Ed. Note: Become a more persuasive writer and speaker … build your self-confidence and intellect … increase your attractiveness to others … just by spending 10 VERY enjoyable minutes a day with ETR’s new Words to the Wise CD Library.]
Michael Masterson
Copyright ETR, LLC, 2007