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The Ultimate Way to Protect Your Money from Wall Street ScamsBy
Saturday, August 14, 2010
"Dividends don't lie."
It's one of my favorite Wall Street sayings. Accountants can mess with a company's books in all kinds of ways, but they can't fake a cash payment. And if a company can pay a dividend, it's almost always making money.
In the past 20 years, we've seen Merrill Lynch's Henry Blodgett touting stocks he privately dismissed as crap (actually, his term was worse)... Bernie Madoff mailing phony account statements to hoodwink clients out of $18 billion... Corrupt lenders building a multibillion-dollar firm based on worthless "liar" loans... And that's just a sample. There's nothing new about accounting fraud.
The irony is, protecting yourself from these convoluted shell games is simple... Demand a cash dividend from your investments. It's hard to pay shareholders year after year if you're cooking the books.
A dividend is money a company pays its shareholders. Every quarter, the company counts its earnings and pays out some portion to its owners (the shareholders). Essentially, it's your cut of the profits.
Focusing on dividend-paying stocks is one of the great secrets to building wealth. And fortunately, the market is giving us a rare chance to load up on some of the world's greatest dividend payers at good prices.
Most investors dismiss dividends. In fact, some alleged professional stock-pickers refuse to even consider companies that pay a dividend. After all, they argue, the company should be plowing all the money back into the growing business. If the company reinvests the cash in itself, the company can grow even bigger, right? Wrong.
Here's what investors who only focus on capital gains are missing: Nearly half of your total long-term returns from investing in stocks come from dividends.
Sure, you want the company to use some of its earnings to grow, but you also want to get your money back along the way. In fact, among the most important rules to investing (along with asset allocation and position sizing) is defining your exit strategy – how will you get your money back?
When you invest in a small startup, you're happy to let your money grow as the business grows. But what happens when the growth slows? Do you sell the stock?
Not if it's still a good business. You don't want to lose out on reaping the success of the business as it evolves into a larger, steadier company.
Dividends are a simple way to pay back owners who've invested in the business. By keeping some of the money and paying the rest to shareholders, dividend-paying companies can continue their growth while rewarding shareholders at the same time.
Right now, I love those rewards. We have a rare moment in modern history when the yield on dividend-paying stocks matches the yield on 10-year U.S. Treasury notes. We haven't seen this setup in more than 35 years.
As investors reach for income and safety, they've bid down the yield for 10-year Treasurys to historic lows – now 2.95%. I understand the rush to safety. But giving $1,000 to the government to get $30 a year for 10 years is a poor choice, especially when there's no upside.
If you want to wait to earn $300 over 10 years, so be it. But you can do better by looking at other securities paying at least that same 3% yield... investments where you can get all the capital gain potential of a stock and a growing income stream.
For example, three months ago, I recommended pharmaceutical company Eli Lilly (LLY) to readers of my Retirement Millionaire advisory. We locked in a 5.6% annual payout. Lilly's paid a dividend for 125 consecutive years and increased it 42 years in a row. It's almost impossible to have a business better managed than that.
When companies like LLY establish a decades-long history of paying out money to shareholders, it reflects their commitment to managing the value of the business through down times and up times.
The No. 1 fear of retirees is that inflation will erode the value of their money. If you're on a fixed income like Social Security, it's imperative to own securities that will keep up with future prices and pass some of that growth back to investors. Dividend growers are your best answer here. And as I mentioned, they have a built-in safety mechanism...
In the past 30 years, I've seen Wall Street lie and cheat... from Blodgett to Madoff. The simplest, most effective way to fight back is to demand a dividend. Companies that pay dividends are sending you real money – and dividends don't lie.
Here's to our health, wealth, and a great retirement,
Doc Eifrig
Further Reading:
If you're looking to "supercharge" Doc Eifrig's dividend advice, don't miss Brian Hunt's classic Market Notes about the benefits of compound dividends. It includes the only chart long-term investors will ever have to see again. You'll find it here: The Miraculous Dividend.
Market NotesCHART OF THE WEEK: A CLASSIC PETER LYNCH WINNER Our chart of the week displays that, in addition to tobacco companies, another business has shrugged off the recent market weakness and terrible job numbers.
That business is home movie rentals. Specifically, home movie rentals from Netflix (NFLX).
Netflix strikes us as a classic "Peter Lynch stock." The phenomenally successful money manager Lynch became famous for his love of investing in companies that earned the loyalty of friends and family. These days, most people we know are huge fans of Netflix and its easy-to-use red envelopes. We count ourselves as users. Ordering The Good, the Bad, and the Ugly online beats standing beside a smelly guy at Blockbuster.
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Stat of the week
26%
The approximate percentage of U.S. homes sold in June that went for less than the seller originally paid, according to real estate tracking firm Zillow. In The Daily Crux
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