And The Fourth Best Income Idea Is?

From Porter Stansberry
Stansberry & Associates

My fourth best income idea is learning how to invest in businesses that constantly raise their dividends.

Even though this idea will seem simple and obvious… it's amazing how few investors use this strategy, which in my mind is guaranteed to build wealth. Dan Ferris, editor of Extreme Value and The 12% Letter, has done more to promote this idea than any other analyst I know. He has identified a small group of elite, dominant businesses that have long histories of paying out large and growing dividends… companies like Intel (current yield 3.5%) and Johnson & Johnson (current yield 3.4%). He calls this group "World Dominating Dividend Growers."

 Regular Digest readers should be familiar with this idea. World Dominating Dividend Growers are the biggest and best companies on the planet. They hold dominant positions in their industries. They have the best brand names. They have fat profit margins. They have pricing power. They have stable cash flows. These attributes allow World Dominating Dividend Growers to finance themselves.

These companies have little or no debt, so a credit crisis isn't a serious concern for them. This makes them the safest of long-term investment vehicles. Remember the REIT crash from the chart from above? See how shares of World Dominating Dividend Grower Wal-Mart performed during the credit crisis… 

 Most income investors ignore these stocks because their current yields aren't high enough to warrant any attention. If you want to use these stocks to get rich on income, you have to be willing to buy and wait three to five years. That's when you'll see how they really work…

As Dan Ferris noted in [the February 2011] issue of The 12% Letter…

Intel's current yield isn't big. But it has raised its dividend every year for the last seven years in a row. Since 1993, Intel's dividend has grown at a rate of 25.93% per year. At that rate of dividend growth, you can hold the stock five years, and you'll find yourself collecting dividends totaling 11% per year over today's cost. Then hold it another five years, and with that kind of dividend growth – this is not a typo – you'll get 40% per year over today's share price.

 Or consider the incredible income payments Warren Buffett is earning by owning shares of dividend-grower Coca-Cola, one of the truly exceptional businesses in America. From his… shareholder letter…

Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn't be surprised to see our share of Coke's annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.

Reread that excerpt… Buffett finished building his Coca-Cola position in 1995. By 2021 (26 years later), he expects to make more than his initial investment every year. That's the power of compounding with a great business.

 The hidden benefit with these kinds of stocks is that you stop worrying about the stock market. You stop caring what the Dow Industrials did this day or that. You even stop caring what it did this year or that. When you're earning a dividend of 10%-100% on your purchase price, you don't care if the stock market is up or down 10% in a given year. You just keep cashing dividend checks. You keep compounding your wealth.

 In the Digest, we try to teach our readers to be better investors. Focusing on value and income are the two greatest traits of all good investors. That's why I'm so proud to publish The 12% Letter. It's become one of our most popular advisories because it covers investments that pay high current rates of income (between 6% and 12%)… And it features Dan's proprietary list of "World Dominating Dividend Growers."

I personally know several sophisticated, wealthy investors who use Dan's list (and buy signals) exclusively to manage their stock investments. Like Buffett, these investors know the value of buying an elite business at a great price… and they know the incredible power of compounding. Rather than focus on the day-to-day movements of the market, they simply collect constantly rising dividends from the world's greatest companies.

As I mentioned, when you're earning a huge, 10%-plus yield on the original purchase price of your shares, you stop caring about what's going on with S&P 500 index…

Regards,

Porter Stansberry