About one year ago, I started issuing controversial advice to readers of The 12% Letter.
The 12% Letter covers income investing. And when most folks think of income investing, they think of things like real estate investment trusts (REITs), oil trusts, and high-yield (aka “junk”) bonds. This is the conventional thinking in the sector. This is what’s popular.
I ignored the conventional thinking. Instead, I started issuing advice that has helped some of my readers make a heck of a lot more money, with a lot less risk
It wasn’t popular. I was called every name in the book. Readers wrote in to tell me that I’d lost my mind… They asked for their money back.
But it worked…
[ad#Google Adsense 336×280-IA]I told my readers to avoid conventional income investments and put the bulk of their income portfolios into “World Dominating Dividend Growers.”
Regular DailyWealth readers are familiar with my “World Dominating Dividend Grower” idea. The basic idea here is to own the world’s largest, safest businesses… with long histories of growing their dividends. These businesses sell basic products like sodas, Band-Aids, and prescription drugs. Some of my favorite names here are Coke, Johnson & Johnson, and drugmaker Abbott Labs.
If you buy a “WDDG” at the right price and hold it for years, you’ll end up making the safest, largest dividends in the world… dividends in the 10%-20% range.
But here’s the thing: These dividend dominators pay “current” yields in the 3%-6% range. You have to hold these stocks for years to put the incredible power of compound interest to work for you. Most people want to make 10%-20% yields RIGHT NOW… That’s a lot more exciting than selling soda, even if it involves big risks.
And as I’ve pointed out before in DailyWealth, buying conventional income investments like REITs and resource trusts is one of the riskiest things you can do with your money. You might collect 8%-12% in annual income for a while… then lose 50% of your capital when the market sells off.
You see, REITs often use lots of debt to finance themselves. Using lots of debt can produce great returns during boom times. But it kills you during a bust. Resource trusts are vulnerable to commodity price busts. Many lost over two-thirds of their value in the 2008 crisis.
The chart below shows these ideas at work. It shows how sticking with World Dominating Dividend Growers and avoiding conventional income investments was the right move.
The black line is Altria, one of my favorite dominant dividend-payers. The gray line is a big junk bond fund, the green line is a big REIT fund, and the purple line is Enerplus Resources, one of the largest oil trusts.
As you can see, Altria has gained around 13% so far this year. It has also held up amazingly well during the recent stock market collapse. Junk bonds, REITs, and resource trusts are all negative for 2011. They’ve been killed in the past few months.
There are times when buying REITs, junk bonds, and resource trusts can be a good idea. This is when nobody wants them… after they’ve suffered big busts. Buying them just after the credit crisis in 2009 was a great move. But as you can see, buying them in late 2010 – after they’d enjoyed a huge rally – was a bad, risky idea.
And even after their recent drop, they’re still much riskier than World Dominating Dividend Growers. That’s because WDDGs employ little to no debt. They generate stable, reliable cash flows by selling recession-resistant products. They sport decades of steady dividend growth. And as I’ve shown you, they can hold up during periods when most income investments crash.
If you share my belief that the world is going to go through some tough, volatile times in the coming years, I encourage you to become familiar with these stocks.
They are the ultimate income investment for the rough years ahead.
— Dan Ferris
Source: Daily Wealth