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From: "Money and Markets" <eletter@e.moneyandmarkets.com>
Date: 21 February, 2011 4:34:01 AM PST
Subject: Safer Stocks
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MONEY AND MARKETS » Monday, February 21, 2011 YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON'T GET FROM WALL STREET
[«] Money and Markets Archive View This Issue On Our Website [»] Safer Stocks by Martin D. Weiss, Ph.D.
Dear Subscriber,
While the country is still struggling to lift itself out of this Great Recession, many investors don't want to take big chances with stocks that are unproven or high risk.
Nor do you have to. You should be able to have your cake and eat it too — with safer stocks that give you a cushion of yield, stability and profits.
Fortunately for our readers, Weiss Research's income specialist, Nilus Mattive, has repeatedly found precisely that combination; and his brand new video just posted to our website shows you how.
I'll tell you more about the video in a moment. But first, let me illustrate the power of safer stocks with a passage from my father's writings of years ago ...
Safer Stocks in the 1930s
"Throughout the 1930s," Dad wrote, "I was continually looking for safer stock opportunities. But the best single opportunity actually came as the Depression was ending, in a very conservative sector of the market.
"It was a sector that failed to recover with the rest of the market and then hit a new low at the end of the decade: utility stocks.
"A key reason: Wall Street was afraid President Roosevelt was going to nationalize the entire industry.
"I worked as an analyst and business manager for a stock research company at the time. So I went to my boss, and I said: 'FDR is already contemplating a war overseas. He's not going to fight another war at home. Let's get a study up on utilities. They're way down and they look like fantastic values.'
"I was deeply interested in utilities for the same reason many investors became enamored with them years later: a stable, cash-cow business with the likelihood of rising dividends on their stocks.
"After much painstaking effort, we came to the conclusion that it was time to buy. We bought bonds that were going at 25 cents on the dollar, like Standard Gas and Electric. We bought stocks in Commonwealth and Southern, which were trading on the Big Board at 10, 15, 16 cents a share.
"Between the dividend income and the price appreciation, we multiplied our money many times over."
Indeed, Nilus tells us that dividend-paying stocks offer a host of advantages that make them a viable choice in uncertain times.
First, companies that pay dividends have weathered bad markets far better than their peers that don't pay dividends.
For example, in 2002, a very bad year for stocks, non-dividend-paying stocks in the S&P 500 fell 30 percent. Dividend-paying stocks lost only 11 percent. Similarly, in 2008, while non-dividend-paying stocks fell dramatically, those paying dividends declined only moderately and then recovered far more quickly.
Moreover, there are ways to shield yourself even from those lesser declines, as I'll explain shortly.
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Second, dividend stocks can be one of the few investments that provide rising yields.
Let's say you buy a stock for $10 a share and it's paying an annual dividend of $0.50. Your immediate yield is 5 percent, which is not bad. But watch what happens as the company boosts its dividend by $0.05 per share every year: Ten years later, the stock will pay an annual dividend of $1 a share. And since your cost for the stock is locked in at $10 per share, your effective yield (based on the original cost) is now 10 percent. If this pattern continues over time, your effective yield could grow to 15 percent or even 20 percent.
Thus, with a prudent selection and patience, stocks that steadily raise their dividends can produce levels of income that are virtually impossible to get with equivalent bonds.
Consider Procter & Gamble. Its shareholders have received larger and larger dividend checks every year for 52 consecutive years.
Moreover, you don't have to go back 52 years to see the benefits: If you had bought P&G just 15 years earlier, you would be earning an effective dividend yield of 11.3 percent.
Johnson & Johnson delivered even better results: Investors who bought its shares 15 years ago get an effective dividend yield of nearly 17 percent.
And investors who bought Altria (the tobacco company formerly known as Phillip Morris) get an 18.6 percent annual yield.
While other investors were busy chasing fast profits during the dot-com boom — only to see them go up in smoke — investors in companies with steadily rising dividends like P&G, J&J, and Altria made out like silent bandits. As long as they bought companies that continued to boost their dividends, their effective yields kept going up — and there was no limit to how high their dividend payments could rise.
Third, dividend stocks provide the potential for higher total returns.
In addition to the dividend yield, let's not forget the real potential for the stock to rise in value.
The formula: Your total return = Yield + Gains
In other words, the total amount you make each year is the combination of both your dividend checks and the rise in the price of your shares.
In a rising market with rising dividends, that can be a powerful combination. My father also illustrates this key point with a real example about gold shares:
"Back in the Depression," he wrote, "gold and gold shares had a bad reputation. Earlier in the century, a bunch of shady characters used to roam the countryside peddling shares in mining ventures that soon went belly-up. So by the 1930s, most investors gave mining companies a wide berth. But we figured we couldn't go wrong if we concentrated on the biggest companies like Homestake and a couple of big Canadian companies.
"Homestake went from a bottom of $65 per share after the Crash to $130 and change in 1931. From there, it doubled again to more than $350 a share by 1933. By the time it peaked in 1936, it had climbed to $540 a share — an astronomical gain of more than $470 per share. That was a sevenfold increase.
"In the meantime, the dividends also doubled, redoubled, and doubled again — reaching $56 per share in 1935. Think about it. The dividends earned in one year alone almost paid back the entire purchase price of the stock.
"Dome, another great gold producer, did even better. You could have bought Dome for as little as $6 a share after the Crash. But in the next seven years, it paid $16.60 per share in dividends. The dividends alone were equal to more than 2.5 times the cost of the stock. Meanwhile, the price of Dome rose to $61 a share. A person who put $10,000 into Dome could have walked away with more than $100,000."
I believe similar opportunities are likely in the years ahead.
Fourth, dividends are themselves strong evidence of performance.
When a company sends you a dividend check, it's putting its money where its mouth is. Unlike earnings or sales, a dividend is not an accounting construct. It represents decisive and definitive evidence of the company's earnings performance and cash.
So it should come as no surprise that companies paying consistent dividends also happen to be those that typically boast the most consistent pattern of rising share prices.
Dividends are not guaranteed. Companies can — and sometimes do — choose to suspend or lower their dividends.
However, dividends still represent far more than a company's promise or forecast of future earnings; they are hard cash payments and nonrefundable.
Never forget: Your paper profits can disappear if a stock falls. But the moment a dividend is deposited into your account, it's yours to keep regardless of any future decline in the share price.
Fifth, you can take advantage of compounding.
As you probably know, compounding is one of the most powerful tools for building wealth. For example, if you put $10,000 into a savings account with a 6 percent annual interest rate, you'll have $10,600 after one year. Next year, you'll be earning 6 percent on the $10,600 rather than just the original $10,000. It might not seem like a big deal at first, but the effects over time can really add up. Ten years later, you'd have almost $18,000.
With dividends, the idea is the same. If you don't need the income from your dividend checks on a regular basis, you can use your regular payments to buy more shares. By doing so, you'll be steadily increasing your holdings of that company over time. More importantly, you'll also be setting yourself up for additional dividends on the new shares. When combined, these two simple forces become a very powerful form of compounding.
To document its power, Standard & Poor's looked at monthly data for its benchmark S&P 500 Index over a 50-year period, comparing simple price appreciation to the gains made by reinvesting any dividends paid. The results were astounding: The S&P 500's capital appreciation was 381.9 percent; its "dividends reinvested" gains were 905.1 percent!
Two Disadvantages of Dividend Stocks
When buying dividend-paying stocks, please don't ignore the two disadvantages:
1. Dividends can be cut. In an earnings crunch, some companies may cut or cancel their dividends. However, as long as they continue to be viable companies with relatively strong balance sheets, their past history of consistent dividend payments should be a good indication of what to expect in a future recovery.
2. Stock price declines. Dividend stocks can fall in price like any other stock, and the resulting loss could be larger than the dividends you receive during that period. But you can protect yourself against that scenario with easy-to-buy investments such as ETFs designed explicitly for that purpose.
That's what Nilus did in the 2007-2009 bear market. As a result, investors following his recommendations would not have lost any money in the decline. Instead, they would have beat the S&P 500 by 20 full percentage points — and with far less risk!
Today, Nilus is helping investors with income investments that pay average annual total returns of up to 54.4 percent per year without excess risk. He explains how in his brand new presentation, "Emergency Rx for Income Investors," which we've just posted to our website.
Click here and it will begin playing on your screen right away.
Good luck and God bless!
Martin
Dr. Weiss began his career in 1971 when he founded Weiss Research, dedicated to evaluating the safety of financial institutions and investments for consulting clients. He is the publisher and contributing editor of the financial newsletter, Safe Money, known for its track record in picking major turns in interest rates, and serves as co-editor for a number of Premium Services. He is also the author of The Ultimate Safe Money Guide and The Ultimate Depression Survival Guide.
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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