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Editor's note: All week, we've shared some of our favorite investment lessons from our friend and colleague Dan Ferris... including why it's important to ignore the news, how to spot the world's greatest businesses, and why the price you pay is the most important key to your success. Today, in an essay that we originally published in April 2012, he explains the magic of "boring" businesses...
Why 'Boring' Businesses Are More Profitable Than 'Exciting' OnesBy
Thursday, August 11, 2016
A reader wrote to me with a complaint...
He was irritated with my coverage of World Dominating Dividend Growers (WDDGs).
These stocks are too "boring," he said. Why pay to hear how these companies continue to do the same darn thing day in and day out?
If you're a regular DailyWealth reader, you know what I mean by WDDGs. These businesses are usually the No. 1 companies in their industries. For example, UPS (UPS) is the No. 1 package-delivery company in the world. Wal-Mart (WMT) is the No. 1 retailer. Intel (INTC) is the No. 1 maker of semiconductors.
These companies have thick profit margins, have fortress balance sheets, and pay out large and growing dividends. Because they are so good at what they do, and because of their dominant position in their industries, they are extremely resistant to outside competition. This allows their shareholders to safely compound their wealth over many years.
They are the ultimate safe havens. But according to the reader's complaint, there wasn't enough "new" stuff happening with these stocks to justify the time I spend telling readers about them.
It's extremely unlikely this person will ever make substantial money in the stock market.
You see, the urge for "action" is one of the hallmarks of the average stock market loser. Put bluntly, it's how poor people view the market. They see it as a place for "action." But investing isn't about action and excitement. That's what Las Vegas casinos are about.
Only after someone grows to favor "boring" over "action" does he start thinking like a rich investor, rather than a poor one. You need to understand that investing is about making money and keeping it safe, and that's what WDDGs do for you...
In fact, back in 2008, when the stock market fell 38% for the year, and more than 53% from its late-2007 highs, Wal-Mart returned 18%, and McDonald's (MCD) returned 6%. Not all World Dominators performed that well in 2008, but they all did better than the overall market.
Yes, they're boring... But think about why they're boring.
They don't change much over the years. Coca-Cola (KO) looks a lot like it did 20 years ago, except it's bigger now. Same with Wal-Mart, McDonald's... and most other WDDGs.
Coke will continue to exploit the world's largest beverage-distribution system. Wal-Mart will keep selling everyday goods at the cheapest possible price. McDonald's will keep selling fast food, based on what its customers demand. Boring. Very boring. But very profitable.
Compare that to exciting businesses, like biotech. Most biotech companies don't have any sales because they're just research companies. They usually wind up going out of business. Small exploration-mining stocks are also exciting. And they, too, generally have no revenues... And many of them wind up worthless.
But the WDDGs just keep doing the same old boring thing year in and year out... And their sales and profits grow almost every year, year after year, decade after decade. Their dividends keep growing every single year, year after year, for 10, 20, 30, more than 50 years in a row in some cases.
For investors, putting money into WDDG stocks is so boring, it's almost like putting your money in a plain old bank account... except this account can make you double-digit average annual returns over a long period of time... instead of the 0.1% you get in bank accounts these days (per Bankrate.com's national average). Over the past year, software giant Microsoft (MSFT), Internet "plumber" Cisco (CSCO), and medical-equipment manufacturer Becton Dickinson (BDX) have grown their dividends at an average rate of more than 16%.
If you want excitement, go to Las Vegas. If you want to make money, invest in boring businesses that dominate their industries and pay higher dividends every single year.
Good investing,
Dan Ferris
Further Reading:
On Monday, Dan shared the "key to the success of some of the world's most successful investors." Get the full story here: One Popular Investor Obsession You Should Give up Right Now.
The world's strongest, safest companies sport the biggest profit margins and pay the safest dividends. They're also some of the market's most "boring" companies. Read more here: A Common-Sense Guide to 'World Dominating' Dividend Stocks.
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