May 2009
The Daily Crux Sunday Interview
How to be assured all the income you need for the rest of your life
Daily Crux: Dan, you say right now is a fantastic time to be an income investor. But a lot of folks don't see it that way. Yields on most real estate investments are low and dangerous, and many commodity-related trusts have cut their yields due to low energy prices.
Dan Ferris: The best investors I know are all contrarians. So when you tell me most folks don't see it my way, it sounds just right.
Truth is, most people don't recognize this is a great time to set up an income portfolio because they're scared of every kind of investment under the sun. Even in the best of times, though, few people really understand what makes a truly great income investment.
A great income investment is one that pays you a steady stream of income that grows year after year without interruption for decades. By that one criterion, last year and this year disqualified many companies as ideal income investments. By February of this year, we had already surpassed the total amount of dividend cuts made in 2008, more than $40 billion altogether.
DC: Most income seekers like to buy things like commercial real estate investment trusts (REITs) to collect rents. Do those qualify?
DF: Even the best REITs have a problem: They're required by law to pay out 90% of their distributable earnings. So if they want to grow, they have no choice but to take on debt or dilute your interest by selling more shares. With real estate doing poorly, many REIT dividends have been cut over the past two years. Some REITs have gone bankrupt.
REITs are highly dependent for financing on banks and capital markets, both of which seem to get worse all the time. More banks have failed so far this year than failed in all of 2008. Weak capital markets and bad banks mean it's hard for REITs, all of which are highly dependent on debt financing.
Take another traditional income investment: risky commodity stocks with high current yields. Investors love royalty trusts because most of them are in the energy business. These stocks paid double-digit dividends when oil was over $100 a barrel. It was great earning those big yields... until oil prices fell apart and the sector fell more than 70%.
DC: So what should the income-seeking investor be buying right now?
Dan Ferris: The best investors I know are all contrarians. So when you tell me most folks don't see it my way, it sounds just right.
Truth is, most people don't recognize this is a great time to set up an income portfolio because they're scared of every kind of investment under the sun. Even in the best of times, though, few people really understand what makes a truly great income investment.
A great income investment is one that pays you a steady stream of income that grows year after year without interruption for decades. By that one criterion, last year and this year disqualified many companies as ideal income investments. By February of this year, we had already surpassed the total amount of dividend cuts made in 2008, more than $40 billion altogether.
DC: Most income seekers like to buy things like commercial real estate investment trusts (REITs) to collect rents. Do those qualify?
DF: Even the best REITs have a problem: They're required by law to pay out 90% of their distributable earnings. So if they want to grow, they have no choice but to take on debt or dilute your interest by selling more shares. With real estate doing poorly, many REIT dividends have been cut over the past two years. Some REITs have gone bankrupt.
REITs are highly dependent for financing on banks and capital markets, both of which seem to get worse all the time. More banks have failed so far this year than failed in all of 2008. Weak capital markets and bad banks mean it's hard for REITs, all of which are highly dependent on debt financing.
Take another traditional income investment: risky commodity stocks with high current yields. Investors love royalty trusts because most of them are in the energy business. These stocks paid double-digit dividends when oil was over $100 a barrel. It was great earning those big yields... until oil prices fell apart and the sector fell more than 70%.
DC: So what should the income-seeking investor be buying right now?
DF: I have no interest in commercial real estate or royalty trusts because right now you can buy "World Dominator" businesses at huge discounts to their value. These are large, mature businesses with large competitive advantages. These are – and always will be – the Holy Grail of income investing.
A World Dominator is the No. 1 company in its industry, like Procter & Gamble, ExxonMobil, or Wal-Mart. World Dominators can raise prices to keep ahead of inflation. They can get financing (or not need it) when other companies are finance-starved (like right now). And they are large and well-managed enough that you can count on fewer (if any) bad surprises happening to them.
You should be looking for companies like these if you're interested in collecting large amounts of investment income for decades. Most World Dominators are past their capital-intensive, high-growth stage... so they can funnel surplus cash to shareholders in the form of dividends and share buybacks.Instead of funding growth, cash goes to you.
DC: What are some more characteristics investors should look for in these companies?
DF: Look for a well-established track record of dividend growth. Also, learn to identify World Dominator companies that have entered the "sweet spot" for huge dividend growth potential.
Procter & Gamble raised its dividend 10% recently. It's done that every year for 53 years in a row. Wal-Mart has raised its dividend every year for 35 years – ever since it started paying dividends in March 1974. Automatic Data Processing: 34 consecutive years of dividend raises. ExxonMobil: 25 years. TJX Companies: 13 years.
My newest World Dominator recommendation is in the sweet spot for income growth potential. It's a mature business that routinely earns big profits. It's only logged five consecutive years of dividend increases, but the cash will keep coming in, and it'll continue to raise dividends.
Today, its dividend is seven times what it paid out just six years ago. The growth should continue as the company continues to dominate its global market; it's more than four times the size of all its competitors combined. I just recommended it in Extreme Value a couple weeks ago... so for now, the name of this stock is for subscribers only.
It can be a huge mistake to avoid large companies whose growth is slowing. That's when they start paying shareholders larger and larger dividends, raising them year after year as excess cash flow can no longer be invested in future growth.
DC: What are a few of your favorite World Dominators?
DF: Procter & Gamble (NYSE: PG) is the largest consumer-products company in the world. It sells to roughly half the world's population.
UPS (NYSE: UPS) is the largest package-delivery service in the world. It's the only delivery company that serves every address in all 50 states. It's been beating the competition consistently for over 100 years.
Wal-Mart (NYSE: WMT) is the largest retailer on Earth. It is the low-cost retail provider of groceries, jewelry, sporting goods, electronics, clothing... You name it, and Wal-Mart probably sells it for less than any of its competitors.
DC: Why is now such a good time to buy these companies?
DF: They're finally cheap enough. You rarely get the chance to buy the best companies in the world this cheap. You have that chance today, and you should take advantage of it.
Most people are scared of a bad economy, but if you want to make money in stocks, you should feel exactly the opposite. We need bad times to push stock prices down far enough, so we can buy low enough to make big returns over the long term.
The Dow Industrials just turned in the third worst year in its history... and the worst ever since the Great Depression. Right now, there's a fire sale in World Dominator stocks. Most World Dominators sell for 10 times operating cash flow or less. That is absurdly cheap for such high quality stocks. Bad times are here... hallelujah!
DC: Do you think income investors who buy World Dominators should reinvest the dividends?
DF: Yes. The ideal income strategy is to buy World Dominators when they're cheap, then reinvest the dividends for as long as possible until you need the income. By then, the dividends will be much higher than when you started, and you'll be earning a much higher yield over the cost of your original investment.
I've heard some people say they can't wait 10 years for dividends to grow because they need the income now. All I can say to them is be very, very careful. Trying to hurry your investment results is a surefire way to throw money down the drain. Patience is absolutely essential for making big money in stocks.
Buy World Dominators when they're cheap, reinvest the dividends, wait five or 10 years, and you'll have plenty of income without ever taking much risk at all.
That's the best income strategy I've ever come across... and even more than that, it's the No. 1 stock investing strategy I know, bar none.
Crux note: To learn Dan's top World Dominator picks for steady income, be sure to get on board as an Extreme Value subscriber.
On the precious metals side, Dan has found a serious distortion in the gold markets right now. If you understand how this distortion works, and how to capitalize on it immediately, you could make more money over the next 18 months than you've ever made in your life. Click here to learn more about this "distortion" and Extreme Value.
A World Dominator is the No. 1 company in its industry, like Procter & Gamble, ExxonMobil, or Wal-Mart. World Dominators can raise prices to keep ahead of inflation. They can get financing (or not need it) when other companies are finance-starved (like right now). And they are large and well-managed enough that you can count on fewer (if any) bad surprises happening to them.
You should be looking for companies like these if you're interested in collecting large amounts of investment income for decades. Most World Dominators are past their capital-intensive, high-growth stage... so they can funnel surplus cash to shareholders in the form of dividends and share buybacks.Instead of funding growth, cash goes to you.
DC: What are some more characteristics investors should look for in these companies?
DF: Look for a well-established track record of dividend growth. Also, learn to identify World Dominator companies that have entered the "sweet spot" for huge dividend growth potential.
Procter & Gamble raised its dividend 10% recently. It's done that every year for 53 years in a row. Wal-Mart has raised its dividend every year for 35 years – ever since it started paying dividends in March 1974. Automatic Data Processing: 34 consecutive years of dividend raises. ExxonMobil: 25 years. TJX Companies: 13 years.
My newest World Dominator recommendation is in the sweet spot for income growth potential. It's a mature business that routinely earns big profits. It's only logged five consecutive years of dividend increases, but the cash will keep coming in, and it'll continue to raise dividends.
Today, its dividend is seven times what it paid out just six years ago. The growth should continue as the company continues to dominate its global market; it's more than four times the size of all its competitors combined. I just recommended it in Extreme Value a couple weeks ago... so for now, the name of this stock is for subscribers only.
It can be a huge mistake to avoid large companies whose growth is slowing. That's when they start paying shareholders larger and larger dividends, raising them year after year as excess cash flow can no longer be invested in future growth.
DC: What are a few of your favorite World Dominators?
DF: Procter & Gamble (NYSE: PG) is the largest consumer-products company in the world. It sells to roughly half the world's population.
UPS (NYSE: UPS) is the largest package-delivery service in the world. It's the only delivery company that serves every address in all 50 states. It's been beating the competition consistently for over 100 years.
Wal-Mart (NYSE: WMT) is the largest retailer on Earth. It is the low-cost retail provider of groceries, jewelry, sporting goods, electronics, clothing... You name it, and Wal-Mart probably sells it for less than any of its competitors.
DC: Why is now such a good time to buy these companies?
DF: They're finally cheap enough. You rarely get the chance to buy the best companies in the world this cheap. You have that chance today, and you should take advantage of it.
Most people are scared of a bad economy, but if you want to make money in stocks, you should feel exactly the opposite. We need bad times to push stock prices down far enough, so we can buy low enough to make big returns over the long term.
The Dow Industrials just turned in the third worst year in its history... and the worst ever since the Great Depression. Right now, there's a fire sale in World Dominator stocks. Most World Dominators sell for 10 times operating cash flow or less. That is absurdly cheap for such high quality stocks. Bad times are here... hallelujah!
DC: Do you think income investors who buy World Dominators should reinvest the dividends?
DF: Yes. The ideal income strategy is to buy World Dominators when they're cheap, then reinvest the dividends for as long as possible until you need the income. By then, the dividends will be much higher than when you started, and you'll be earning a much higher yield over the cost of your original investment.
I've heard some people say they can't wait 10 years for dividends to grow because they need the income now. All I can say to them is be very, very careful. Trying to hurry your investment results is a surefire way to throw money down the drain. Patience is absolutely essential for making big money in stocks.
Buy World Dominators when they're cheap, reinvest the dividends, wait five or 10 years, and you'll have plenty of income without ever taking much risk at all.
That's the best income strategy I've ever come across... and even more than that, it's the No. 1 stock investing strategy I know, bar none.
Crux note: To learn Dan's top World Dominator picks for steady income, be sure to get on board as an Extreme Value subscriber.
On the precious metals side, Dan has found a serious distortion in the gold markets right now. If you understand how this distortion works, and how to capitalize on it immediately, you could make more money over the next 18 months than you've ever made in your life. Click here to learn more about this "distortion" and Extreme Value.