This Simple Stock Market Strategy Would Have Increased Returns 926%

Sage advice worth noting! By Tom Dyson, publisher, Common Sense Investing Friday, June 24, 2011

"Dividends don't matter." I was playing golf with a stock trader last weekend. When I told him I specialize in stocks that pay dividends, he gave me a look of condescension. "I don't understand what the big deal is with dividends," he explained. "The stock falls by the amount of the dividend, so you can't benefit from it. Total return is the only thing that matters." On the surface, my golf partner is right. A dividend is simply a cash payout from the company to the shareholder. Whatever the shareholder gains, the company loses. So it seems shareholders don't actually come out ahead. But as I'll show you today, to say cash payouts like these don't matter is wrong. They improve returns by thousands of percent over the long term. My friend Meb Faber proved this to me the other day… Meb is a professional stock market number cruncher, or as he calls himself, a "quant." He's used his skills to create some incredible investing strategies. (You can read more about them here and here.) He alsolaunched an ETF (the symbol is GTAA) so you can follow his system with just one click. Meb recently crunched the numbers on dividends and other cash payouts and found something amazing. He started with the Russell 3000, an index of 3000 small-cap stocks. Since 1972, the market-cap weighted Russell 3000 index gained 9.98% a year on average. But when Meb took the highest dividend payers in the index, (the top 10% of dividend payers), he found they returned 13.29% per year… an improvement of more than 3% over the common index. Meb didn't end his study there… When most people think of companies returning cash to investors, they think of dividends. But there are two other ways a company returns cash to shareholders. Stock buybacks are the first way. A company might decide to pay shareholders by buying back its own stock in the open market. To an accountant, it's an identical transaction as a dividend. Cash leaves the company. Cash goes to the shareholders. The difference is, instead of sending each shareholder a check for, say, $100, the company causes the investors' stock to rise in value by $100. The shareholder has a capital gain instead of a cash income, but the result to the shareholder is the same. The second way a company returns cash to shareholders without paying dividends is by paying down debt. Cash flows from the company and accrues to shareholders, just like a dividend. In this case, the cash pays off a bondholder who has a senior claim to the stockholder. Once the bondholder is out of the way, the shareholder is that much closer to the future profits. When you include these two additional ways companies return cash to shareholders, you get the true "cash" yield to shareholders. Meb calls this the "shareholder yield." Meb repeated his study on the Russell 3000, taking total shareholder yield into account. This is what he found… Group Average Annual Return Russell 3000 9.98% Dividend Yield (top 10%) 13.29% Shareholder Yield (top 10%) 16.93% Earning 9.98% over 38 years turns $1,000 into $37,147. Earning 16.93% a year over 38 years turns $1,000 into $381,229. In other words, over 38 years, that annual difference of nearly 7% would have increased your total returns by 926%. The conclusion is, my golf buddy is totally wrong. Stocks that pay out cash generate far higher returns than stocks that don't. If you're investing for high returns and are ignoring stocks that pay cash out to shareholders, you're missing the point. You should almost always favor companies that pay out cash to investors over those that don't. Good investing, Tom

Six "Gold Bubble Myths"

From Mineweb:

Yes, growth in global gold demand is rapid. No, another decade of quintupling prices isn't nailed on. But neither of those facts make gold a "bubble" today.
In fact, anyone calling gold a bubble right now is talking through their hat -- at best. Take these jokers, for instance, all holding forth in the last month...
MYTH #1. "GOLD IS A CROWDED TRADE"
The finance pages are packed with gold headlines, but actual investment levels remain low. In the early 1980s, private-bank clients...
Read full article...
More on gold:
Why another big gold correction is guaranteed
Top trader Gartman: Gold will replace the euro
Gold isn't enough: This is what you'll need to survive in a real crisis
View the original article here

One of the best kept secrets of retirement investing

From Dividend Growth Investor:
There are over 60 million baby boomers in the U.S., most of which will retire over the next two decades. Most of them will generate income in retirement through Social Security, while some of the lucky ones will also enjoy a pension provided by their employers. Some boomers might also have some amount of money that they want to learn how to invest, in order to generate income in retirement.

Financial Advisers typically offer the 4% rule as a solution for managing ones money in retirement. This method assumes that investors will rely on total returns in order to monetize their portfolio for living expenses. 

... The danger of this method is that it requires total returns each year in order to grow your portfolio, and avoid eating/spending your principal. Otherwise investors could end up depleting their asset base and might not be able to enjoy retirement for long...

Read full article...

This Is How the Dollar Dies

This is the last of Porters 3 part series. By Porter Stansberry Thursday, June 9, 2011

The research I've laid out in the past few days (here, here, and here) suggests interest rates are inevitably headed higher. But how much higher? Over the long term, the average real rate of interest on U.S. sovereign debt has been around 2% a year. The latest Producer Price Index (which we believe is more reliable than the Consumer Price Index) shows price inflation is currently 6.8% annually. Add the 2% real return we believe investors expect, and you get 10-year Treasury bonds yielding 8.8%. Currently, those bonds yield only about 3%. This implies a huge collapse of bond prices – a collapse of more than 50%. A collapse of that magnitude would completely wipe out the stock market. It would be a massacre. No one is expecting any of this. Everyone believes something like this could never happen. Yet this rise in interest rates would only carry us to the average return bond investors have earned over the last several decades. It doesn't even consider the kind of panic selling that would ensue. In truth, rates might go considerably higher than this for one fundamental reason. If the bond market crashes, investors would begin doubting America's ability to finance its debts, never mind trying to repay them. As rates rise, the cost of maintaining our debts would grow substantially – perhaps doubling. Keep in mind, the U.S. Treasury currently pays only 1.4% annually to borrow $14 trillion. Yes, 10-year Treasurys currently yield around 3%. But because the Treasury has issued so much more short-term debt than long-term debt, U.S. borrowing costs are lower. No, all our debts wouldn't "reset" to higher rates overnight. But the losses in the bond market, the losses in the stock market, and the resulting decline in business activity would cause a lot of our creditors to worry about our ability to afford higher interest payments. Think about it this way: By the end of 2012, our national debt will likely exceed $17 trillion. Let's assume our average interest increases to 4.4% – half the rate we believe investors will eventually demand. That works out to an annual interest expense of almost $750 billion. That's more than we spend on defense or Social Security. Interest expenses would leave the government spending almost $0.25 of every dollar on interest payments. Does that sound wise or reasonable to you? Given these expenses, some of our creditors would become reluctant to "roll" our debt into the future by offering new loans. This could cause a serious problem for the U.S. Treasury. Portugal's government recently had too much short-term debt coming due and not enough lenders were willing to extend these loans at affordable rates. It suffered a debt default. The country required a bailout by the European Central Bank (ECB). Lots of economists criticized Portugal's borrowing strategy because much of its debts were short-term. Apparently, these folks haven't bothered looking at the U.S. Treasury's debt-maturity curve. We have. The numbers are so shocking, we expect most of our subscribers simply won't believe us.  You can read all of the numbers for yourself, if you'd like. The Bureau of the Public Debt includes them in its Financial Audit, which you can readhere. Feel free to read all 35 pages… Or focus on just one piece of data. It's all you really need to know: 61% of all the marketable Treasury debt held by the public will mature within four years. Thus, over the next four years, the U.S. Treasury must either repay or refinance more than $1 trillion in existing debt each year – not to mention additional deficit spending of at least $1.5 trillion. For us to avoid a default, the U.S. Treasury may have to borrow or refinance as much as $10 trillion in the next four years. That would double the amount of U.S. Treasury bonds currently trading in the world's markets. Think about that for a minute. Then consider the decades-low yields in the Treasury market today, which would surely rise to accommodate this enormous increase in supply. Now, try to arrive at any sort of scenario that ends well for today's U.S. Treasury bond market investors. We can't… We don't know exactly what the end game will look like or exactly when the bond market will crash. But we know it is coming. We know it can't be avoided. And we know many investors will suffer catastrophic losses. Given these risks, the Federal Reserve cannot allow the Treasury's borrowing costs to increase. It cannot allow the dollar to strengthen. It cannot allow the stock market to fall or business activity to slow… That's why we are 100% certain the Fed's promise to stop printing money and buying Treasury bonds on June 30 is a lie. Even though we know Bernanke will have to turn back on the printing presses sooner or later, we have no doubt the market will react strongly to the presses' temporary stop. Expect big moves: falling commodities, a rising dollar, and even falling stock prices. We have been warning our readers since the spring of 2010 that the stock market was no longer broadly attractive. Since then, valuations have only gotten more extreme. A big correction is overdue. We will likely get that correction this summer. That means for the risk-averse investor, the best advice I can possibly give right now is to seek safety. Seek it in a diversified portfolio of cash, gold, silver, and a "core" position of income-producing blue-chip stocks bought at cheap prices. There's a storm coming… but there's no reason you should suffer, as the vast majority of Americans will. Good investing, Porter

The Beginning of the Panic

By Porter Stansberry Tuesday, June 7, 2011

In the next few weeks, our country will enter a period without precedence in our experience. On June 30, the Federal Reserve has pledged to cease buying U.S. Treasury bonds. This is the second time since the financial crisis it has intervened in the Treasury market in a major way. The program of buying new Treasury issues has been dubbed "quantitative easing II" (QE2). We'd wager not one in 1,000 Americans has any idea (or at least any real understanding) of what has been going on in the market for U.S. Treasury bonds since the financial crisis. For the last nine months, the Fed has been printing up new dollars and buying huge amounts of newly issued debt from the U.S. Treasury – $600 billion of bonds. And these purchases followed a $1.75 trillion program of quantitative easing that ran from March 2009 to March 2010. It is no exaggeration to say that a printing press has kept our economy going for the last two years. But what will happen when the printing stops? While we honestly don't know, we're going to speculate that, in the short term, the U.S. dollar will rally and commodities will suffer a serious correction. We will see a dramatic slowdown in the rate of monetary inflation. People will think prices will stop going up. Economic activity will begin to decline. Fear will lead a lot of investors to "go to cash." That means buying short-term U.S. Treasury bonds because they're the most liquid, most frequently traded form of cash. As this process unfolds, we expect to see another global panic. Especially if Bernanke's decision to stop the presses coincides with a Republican political gambit – refusing to raise the debt ceiling, which could cause a default on U.S. Treasury bonds. Whether the debt ceiling is raised or not, it's only a matter of time before the Fed will have to turn on the presses again. And when "QE3" begins, it will send our creditors an unmistakable message: You will never be repaid in anything other than massively devalued paper.  That will be a horrible day for the value of our currency. It may even mean the end of the U.S. dollar as the world's reserve currency. But rather than face these unpleasant facts and consider where they are leading us, most people continue to think, "It can't happen here. This is America." Meanwhile, our country has been depending on a printing press to make our economic system work. When is the last time that happened in America? The Civil War. How many other things most people didn't think would ever happen in America have happened recently? What about the collapse of our investment banks, the bankruptcy of General Motors, the liquidation of Fannie Mae and Freddie Mac, the failure of AIG, hundreds of banks being seized, millions of homes in foreclosure, or real unemployment rates close to 20%? We could go on… As we frequently point out to our critics, the question isn't when this crisis will begin – it started in 2008. The question is, when will it end… and how bad will it get before it does?  We believe every American ought to be ashamed, outraged, and furious that the most powerful political union in history proceeded down the path of these bankrupting policies. But most of all, you ought to be afraid of where these policies have led us. Don't forget: At the end of this month, the Federal Reserve will stop buying Treasury bonds. That's the first time since March 2009 our economy will stand on its own two feet. And we expect that just like a child riding a bike without training wheels for the first time… it will crash. We are not alone. Bill Gross, manager of the world's largest bond fund, has put 4% of his fund short U.S. government bonds. Just consider that for a minute: The most powerful fixed-income manager in the world (not just in America) is selling the U.S. Treasury short.  The University of Texas endowment fund recently took physical delivery of $1 billion gold bars. That's an enormous bet from some of the wealthiest and best-informed investors in the world that the U.S. monetary system falls apart. Finally, in what we believe is the ultimate death knell for the U.S. dollar,our trading partners are moving out of the dollar and into gold. Mexico, for example, one of our most important trading partners, just purchased almost 100 tons of gold. All around the world, more and more central banks are selling dollars and buying gold. They're doing so because they can plainly see America's credit has become unreliable and the value of the dollar is likely to decline. If you think you might be trading in something other than U.S. dollars in the future, you might not want to be holding U.S. dollars. You might want to be holding that currency. And if you can't hold that currency, consider holding gold. Good investing, Porter P.S. In tomorrow's essay, I'll show you a secret about U.S. finances you won't read about anywhere else. We don't think many Americans – even sophisticated investors – have considered these numbers…

A Serious Warning: The Facts Behind America's Coming Collapse

By Porter Stansberry Monday, June 6, 2011

On May 11, the U.S. Treasury updated the public on our federal government's finances. So far this fiscal year (which began October 1, 2010), the feds have borrowed nearly $1 trillion. April marked the 31st consecutive month of deficit spending at the federal level. It did not matter that tax receipts have rebounded substantially – growth in spending on social programs has far outpaced the increase in revenues. In total, President Obama's economic mandarins now forecast the fiscal year 2011 deficit will come in at $1.6 trillion. To put this figure in perspective for you, when Ronald Reagan took office, the entire national debt totaled less than $1 trillion. Even as late as 2002, the national debt was only $6 trillion. Obama's administration will almost surely borrow more than $6 trillion in only his first term. In four years, Obama will double our entire national debt from its pre-financial crisis levels. This has never happened in peacetime.  Keep in mind, this is the same president who, after taking office in 2009, held a widely publicized Fiscal Responsibility Summit and pledged to "halve the deficit we inherited" by 2013. The budget deficit in Bush's last year in office (the 2008-09 calendar year) was $1.2 trillion – due largely to the Wall Street bailout and Iraq war. Today, both of these major sources of spending have largely disappeared. The government is selling assets acquired during the financial crisis. That generates revenue. Yet rather than decrease the deficit, Obama has allowed it to grow by 33% annually. This same man, while a U.S. senator, called 2006 efforts to raise the debt ceiling "a sign of leadership failure." He voted against raising the debt ceiling to $9 trillion, proclaiming, "Americans deserve better." Obama noted, accurately in our view, these mounting federal debts were "shifting the burden of bad choices onto the backs of our children and grandchildren." We hope history will hold Obama accountable for his actions. But we're not holding our breath. Federal, state, and local government spending now makes up about 45% of the U.S. economy. Hardly any major business in America doesn't count on the government for a significant amount of its earnings. While we used to call this kind of system "socialism," today the popular term is "crony capitalism." Whatever you call it, it leads to collapse. Another worrisome sign? A record number of people (almost 70 million) now depend on the U.S. government for their daily housing, food, and – most of all – health care… Today, 45% of American households receive some form of direct government payments. And 132.5 million people pay no federal taxes whatsoever – a record number of people who neither paid federal income taxes in 2010 nor were claimed as a dependent by another taxpayer. Tallying up all these numbers, you discover something amazing. A tiny number of Americans pay for the well-being of nearly a majority. While half of the population may pay something in taxes, only the top 10% – people earning more than $113,000 – pay a substantive amount. These few citizens pay 70% of all the income taxes collected. Benefits funded this way are unsustainable. According to a recent study published in the Wall Street Journal, the average couple that retires at age 66 on Social Security and Medicare will receive $1 million in benefits. On average, they and their employers paid $500,000 into the system. The federal government is taking an excessive amount of money from its few high earners – a wealthy minority – and redistributing inefficiently to pay for services the country can't realistically afford… Individuals, of course, are not the only beneficiaries. Entire industries gush cash thanks to the generosity of the federal Treasury – mortgage REITs, defense companies, and most of the health care complex. The system is so broken, not even the already lopsided payment scheme is enough. Not even close. Every week we hear more demands for the "rich" to pay their "fair share." The political reasons for spending are so powerful, until the government can take more from the rich, they will continue to borrow it from somewhere else. Any American with the ability to balance a checkbook can discern the serious nature of this financial situation and the politics that explain its origins. Yet in the battle between political expediency and financial probity, the lust for power will always win. So what can we do to protect ourselves as the borrowing and spending continues to accelerate? Tomorrow, I'll show you the first step to take. Good investing, Porter Stansberry