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An Income Opportunity Nearly Unheard of in My Investing CareerBy
Wednesday, August 17, 2011
It's hard to imagine more troubling times for income investors and retirees...
Last week, Federal Reserve Chairman Ben Bernanke said he plans to keep interest rates at zero percent for at least the next two years. The goal of this policy is to help revive the economy. But it makes it nearly impossible to get a decent yield on conventional savings.
As for keeping your money in stocks, the past few weeks have brought extraordinary volatility and huge one-day declines. Some companies have fallen more than 35% in less than a week.
Meanwhile, the credit of the United States has been downgraded... Our political process has reached new lows of immaturity and grandstanding... Forecasters are calling for another Great Recession... Rioters are burning London.
Have you panicked yet? I don't blame you if you have.
But now, you need to take a deep breath... and get ready to take advantage of one of the best opportunities I've seen in my investing career...
A few days ago, my colleague Brett Eversole showed you a list of stocks that barely budged while the rest of the market fell off a cliff in late July and early August. He mentioned how many of those stocks were sellers of "the basics," like cereal and cigarettes. He also mentioned that many of them were among the best dividend-paying companies in the world.
Take Coca-Cola (NYSE: KO), for example...
From July 22 to August 8, the beverage behemoth fell only 6.6% while the S&P 500 dropped nearly 17%. Its shareholders were able to sleep much better at night than most investors knowing that no matter what happens, the business keep bringing in cash and paying it out in dividends.
Right now, Coke pays a 2.8% dividend. That might not sound like much, but the company has increased its dividend every year for 49 years. Its 10-year dividend growth rate is 10%.
As DailyWealth readers know, focusing on dividend-growing stocks is one of the great secrets to building wealth. It keeps you in the highest quality, cash-rich companies. You know management is committed to taking care of shareholders. And as I showed you here, investments like these allow you to compound your way to a comfortable retirement.
And now is a better time than ever to buy these "dividend machines."
Even though they fell less than the rest of the market did, the panic and speculation has created incredible chance for income investors to buy these stocks at bargain prices.
Oil major Chevron, for example, is selling for just 10.8 times cash flow. Semiconductor giant Intel goes for just 9.4 times cash flow. And software maker Microsoft is selling for an absurd 4.1 times cash flow. All three are selling for under 10 times earnings. And all are master dividend growers.
The opportunity to buy major leaders of industry for less than 10 times earnings and at such low multiples to cash flow is unheard of in my investing lifetime. Great businesses usually go for about 15 times earnings in the stock market.
These companies pay safe, secure dividends and have years of experience managing their businesses. The steady, growing cash they deliver will help insulate your savings from whatever happens next in the market.
It might look like a terrible time to be an income investor. But if you avoid the panic and look at the facts, you'll see what an incredible opportunity we have.
Good investing,
Doc Eifrig
Further Reading:
If you think the Federal Reserve's "zero-percent interest" policy means "zero investment income," think again... Doc is putting together a series of safe, big-income ideas for DailyWealth readers. Read the first installment here: If You're Looking For Safe Investment Income, Buy This Now.
Market NotesA BIG MOVE IN BIG FINANCE Today's chart shows how the XLF's long, sideway trading range is toast.
Regular DailyWealth readers know we monitor XLF, the big U.S. financial stock fund, to gauge the action in the banking sector. With large weightings in JPMorgan, Bank of America, Goldman Sachs, and Citigroup, XLF represents the backbone of the U.S. financial system. It rises and falls according to America's ability to earn money, save money, service debts, start businesses, and generally just "get along."
After soaring off its 2009 lows, XLF got "stuck" in a multi-year, sideways range between $13.50 and $17 per share. Neither buyers (who believe low interest rates will goose earnings) nor sellers (who believe America in general is headed lower) were able to create a trend in financial stocks. We noted how we needed to see XLF break out of this range – like into the $19-per-share area – before we were "sold" on a broad economic recovery
Well, XLF recently broke out of its range... but it did so on the downside. Names like Bank of America and Citigroup suffered brutal selloffs during the recent panic... and the fund plunged below $13 per share. XLF, like the American economy, continues to struggle.
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