Thursday, April 16, 2009
Now Is a Once-in-a-Lifetime Opportunity for Income Investors
By Dan Ferris, editor, Extreme Value
Not one investor in a hundred realizes this, but now is a once-in-a-lifetime opportunity for income investors.
Most people will never recognize this opportunity because they don't know what a truly great income investment is. Most income seekers like to buy things like commercial real estate stocks (REITs) to collect rents.
REITs have a big 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. That's why so many REIT dividends have been cut over the past two years. Banks are in horrible shape and getting worse all the time, so it's only going to get worse for businesses like REITs that depend on a lot of 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 the sector fell more than 70%.
I'm not interested in those traditional income investments because right now we can buy mature, World Dominator businesses that have large competitive advantages at huge discounts. These are – and always will be – the Holy Grail of income investing.
A "World Dominator" is a company with an absolutely dominant position in its industry... like Procter & Gamble, ExxonMobil, or Wal-Mart. World Dominators can raise prices to keep ahead of inflation, get financing (or not need it) when other companies are finance-starved (like right now), and 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. Here's why...
Most World Dominators are past their capital-intensive, high-growth cycle... so they can funnel surplus cash to shareholders in the form of dividends and share buybacks. Instead of funding growth, cash goes to you.
World Dominators are also usually the lowest-cost provider of their product or service. They tend to crush the competition and have exceptional brand names. That means they often generate enormous amounts of cash. And that cash can support dividends through good times and bad.
Here's where most investors don't "get it." World Dominators aren't yielding in the eye-popping double digits. They yield 3%-5%. But that yield grows like an oak in your
portfolio. ExxonMobil, for example, has raised its dividend every year for 26 years. Procter & Gamble has increased its dividend every year for 53 years.
Now is a great time to buy these stocks. Without times of great financial turmoil, it's hard to make a lot of money in stocks. We need bad times to buy stocks cheaply enough to make us rich over the long term. As I'm sure you're aware, we're in "bad times" right now. The Dow Industrials just turned in the third worst year in its history... and the worst ever since the Great Depression. This has set off a fire sale in these companies. Most World Dominators go for less than 10 times annual cash flow.
If you have, say, seven or more years until you're going to need an alternative income source, you should load up on World Dominators now and reinvest the growing dividends until you need to live off them. By the time you actually need the income, the yield over your cost will be much higher, and you won't make the mistake of chasing high current yields on REITs or energy trusts.
Think about it: Which is more certain, Procter & Gamble's 53 consecutive years of dividend growth or the price of oil? It's an easy choice.
Good investing, Kingsley.