What To Do If You've Made A Fortune In World Dominating Stocks

It sure feels good to make money in the stock market.

And if you’ve been invested for at least a year in the stocks I’ve labeled World Dominating Dividend Growers (WDDGs), you’ve made a bundle.

Since last July, our WDDGs have outperformed the general stock market by more than 12 percentage points — a huge difference in returns.

WDDG Company

Ticker

1-year total return

Altria Group Inc.

MO

43.9 percent

Wal-Mart Stores Inc.

WMT

42.5 percent

Abbott Laboratories

ABT

34.0 percent

Intel Corporation

INTC

17.6 percent

The Coca-Cola Company

KO

17.5 percent

Microsoft Corporation

MSFT

11.2 percent

Johnson & Johnson

JNJ

10.5 percent

McDonald’s Corp.

MCD

9.4 percent

Procter & Gamble Co.

PG

8.9 percent

Average 1-year return

17.8 percent

Standard & Poor’s 500 return

5.5 percent

 

Many investors don’t like investing in these large, blue-chip stocks because their share prices don’t move much from one year to the next. And they’re usually right. WDDGs are the biggest, most stable companies in the world. It takes a lot to move their share prices.

But over the past year, investors have been catching on to my WDDG mantra. In a world of extremely low interest rates and plenty of “big picture” risks, collecting cash dividends with the world’s biggest, best, safest companies is a powerful idea.

As my colleague Brian Hunt predicted in January, owning WDDG stocks is becoming the “fashionable” thing to do on Wall Street. You can see that idea at work by looking at the extraordinary returns in Altria Group Inc. (maker of Marlboro cigarettes), Wal-Mart Stores Inc. and Abbott Laboratories (a dominating drug company).

So the next time someone rolls his eyes at the mention of giant, dominating businesses, show him the table above — and feel free to gloat a little. After all, it sure feels good to make money in the stock market.

But be careful, too. Many investors make the simple, but fatal, mistake of letting their emotions make their investing decisions. They see a stock that is racing higher (like Wal-Mart) and chase after it without caring about getting value for their money.

If you’re a short-term trader, buying stocks based on share-price momentum can work. But for long-term investors, buying at high valuations and hoping stocks will go higher is a mistake. Long-term investors have to focus on buying great values.

After all, the price you pay for a stock is an incredibly important factor in determining how much you’ll make on an investment. The more you pay, the lower your investment return. The less you pay, the higher your return.

Consider a small business that makes $100,000 a year in net profit.

Suppose you buy the business for $1 million, or 10 times the earnings. Every year, you take $100,000 in net profit out of the business. So you’re earning a 10 percent yield on your original investment. It would only take you 10 years to recoup your initial investment.

Now suppose you paid $2 million for the same business. You’d earn only a 5 percent yield, and it would take you 20 years to get your initial money back.

Price You Pay

Net Profit

Yield

$1 million

$100,000

10%

$2 million

$100,000

5%

 

The trouble is: That’s logic, and humans aren’t always logical. They’re highly emotional. So when stock prices go up, they tend to get happy and want to buy. That is the wrong tactic.

If the success of WDDGs over the past year leaves you desperate to increase your stake in the stocks, I urge you to keep one thing in mind: Make sure any new stock you buy represents a great value. Don’t allow the “good feelings” from making money in stocks make you forget how you made it in the first place: by buying great businesses at great prices.

In summary, if you’ve made a pile of money in the stocks I’ve been urging you for years to buy, congratulate yourself. But don’t rush into buying more stocks without giving careful thought to the value you are getting for your money.

And don’t be afraid to do nothing for a while. That’s a huge part of your job as an investor. Be smart. Be patient. While you are patiently looking for another good stock to buy, let your winners compound and pay you higher dividends every year.

Good investing,

–Dan Ferris

P.S. In my latest issue of The 12% Letter (published just a few weeks ago), I detailed exactly what price I think investors should pay for these WDDGs right now. With a $39 subscription to The 12% Letter, you can access this issue — and all my materials on WDDG stocks. If you decide this information is not for you, we’ll refund 100 percent of your subscription. You can take us up on our offer here without watching a long promotional video.

Editor’s note: The returns listed in the table above were originally published in DailyWealth on July 23.

A Commonsense Guide To 'World Dominating' Dividend Stocks

As I’ve been expecting for years, the world is now flocking toward World Dominating stocks.

Right now, investors are fleeing bank stocks and mining stocks — the kind that tend to be very speculative. But almost every “World Dominating Dividend Grower” (WDDG) stock is holding up just fine these days. While the market is sinking, stocks like Coca-Cola and Wal-Mart are near yearly highs. I’m not surprised.

As I’ve been saying for years, these stocks are different from typical stocks. They are different from “the market.” WDDGs are vastly better.

If I could teach investors just one thing, it would be how to identify and value a World Dominating Dividend Grower business. It’s the single best way to get rich in stocks.

Let’s use Microsoft as a “case study.”

Microsoft is the World Dominator of personal computer software. Its Microsoft Windows and Microsoft Office products enjoy enormous market shares of approximately 90 percent worldwide. So all over the world, whenever someone buys a PC and needs an operating system and office productivity software, he buys Microsoft nine times out of 10.

Nothing dominates its market the way Microsoft dominates PC software. Even Intel’s share of the global microprocessor market is “only” 80 percent.

In other words, it has an extraordinary brand, and it is No. 1 in its industry. Those are “on the surface” clues to finding these stocks. But we also need to look inside the company to find the financial clues of a WDDG business.

To say Microsoft has all the financial clues of a World Dominating Dividend Grower is the understatement of the year.

One of the hallmarks of a WDDG stock is consistently thick profit margins. This is the amount of money a company earns from each dollar of sales. A great business should have thick profit margins so it can pay you plenty of dividends, but that company should also have a sustainable long-term competitive advantage so it can consistently earn those thick margins.

Well, Microsoft doesn’t merely have consistently thick profit margins. It has the thickest margins of any business I know of, with gross margins (the margin earned before deducting the basic costs of doing business) consistently around 80 percent and net margins (the margin earned after deducting all expenses) consistently around 25 percent — after taxes.

That’s huge. Most businesses are ecstatic to earn net margins of 5 percent or 10 percent.

Another hallmark of a World Dominating Dividend Grower is huge free cash flow. Free cash flow is the final “cash in hand” number that a business owner has after deducting expenses. It’s a vital number for investors.

Microsoft gushes free cash flow like no other business. On sales of just over $73 billion, Microsoft generated just under $27.5 billion in free cash flow the past four quarters.

A third sign of a World Dominating Dividend Grower stock is a strong balance sheet. As shareholders of a business, we want to see lots of valuable assets and low debt. We want a strong balance sheet so we don’t have to worry about tough times causing a bankruptcy.

Microsoft’s balance sheet isn’t merely strong. It’s a financial fortress. The company has $59.5 billion in cash and short-term investments and less than $12 billion in debt. It could afford to pay off its debts nearly five times over. Microsoft has zero interest net expense because it earns more interest on its cash and investments than it pays on its debt. Sales could go to zero, and this company wouldn’t go bankrupt. It doesn’t get much safer than that.

Finally, for a company to qualify as a WDDG, we need to see a history of dividend growth. Microsoft is a relatively young dividend-payer. But what it lacks in history, it makes up for in growth.

The dividend has grown 150 percent since Microsoft initiated it in 2003. So the dividend has grown at about 10.9 percent per year for nine years. That number jumps to an even more impressive 12.4 percent if you look at the last five years alone. And it’s accelerating recently, with a 25 percent increase last fall.

Microsoft Dividend Growth

Microsoft pays out less than 30 percent of its earnings per share. So there’s plenty of room for big dividend growth in the coming years. Right now, Microsoft yields 2.6 percent. Even if it merely maintains its growth of 12.4 percent per year, you’d be making 27 percent over your original cost in 20 years.

To sum up, there are obvious things to look for when you’re after the world’s safest, best dividend-paying stocks — the kind you can hold for decades and get rich. This includes a dominant brand and the top position in an industry.

But today’s essay shows you some vital “financial clues” for finding these stocks and why Microsoft is a great example.

Good investing,

–Dan Ferris

P.S. In my latest issue of The 12% Letter (published a few days ago), I told readers about my two favorite WDDG buys right now. With a subscription to The 12% Letter, you can access this issue and my materials on how to find WDDG stocks. You’ll also find my proprietary list of these elite companies and the right price to pay. If you decide this information is not for you, we’ll refund 100 percent of your subscription. You can take us up on our offer, here, without watching a long promotional video.

The Ultimate Portfolio to Protect Yourself from the “End of America” Scenario

Now that my colleague Porter Stansberry has made national news with his dire "End of America" video, I’m hearing a major question over and over…

To paraphrase a hundred emails, the question goes:

If you guys are right about the "End of America" prediction and a currency crisis, why on Earth would you recommend investing in U.S.-based stocks?

Just in case you’re not familiar with the "End of America" scenario, know that it isn’t off in the future. It’s right here, right now.

What you read and see every day is what the End of America looks like. It’s not a Mel Gibson post-apocalypse movie…

It looks more like this: The Fed keeps interest rates at 0 percent, prints $1.5 trillion in one year, and then decides to become the biggest holder of Treasuries. A scam-oriented financial system penalizes savers and rewards the biggest risk-taking speculators. Home prices plummet. The government takes over the car manufacturing, home mortgage, financial services and health care industries. The dollar is worth 35 percent less than nine years before.

Unemployment is 17 percent, but the government reports it as 9 percent. Inflation is causing food prices to spike, but the Fed reports inflation is under control. Moving money around in any amount is risky. Leaving the country and reentering it is risky. Huge protests take place (like in Wisconsin) when politicians propose spending cuts. The protesters can’t stand the thought of not riding on the taxpayers’ gravy train.

The End of America isn’t "out there." It’s right here, right now. The question isn’t what will you do if it gets here, it’s what are you doing now that it’s here?

For most folks, the thought of owning U.S. stocks in this sort of environment doesn’t make sense. For me, it does… But you have to own the right stocks. And the right stocks are a group of companies I call "World Dominators."

World Dominators are big companies that are No. 1 in their industries. They dominate their markets, obliterate competition, gush cash, pay rising dividends year after year, and—since they probably aren’t going to rise 300 percent in a week—are generally underappreciated by the average investor.

World Dominators ought to be the core of your stock portfolio, the anchor that performs for you over the long term, providing safe, steady returns (mostly via relentless dividend growth) and providing you with an income that will beat inflation better over a lifetime of investing than all the gold stocks in the world. They are the ultimate "armor plated" wealth-preserving vehicle for the "End of America."

World Dominators are so hard to compete with they sometimes get sued for it, like when the Justice Department sued Microsoft and the European Union sued Intel.

Of course, it didn’t matter to either company. Microsoft still has 90 percent of the personal computer operating system market. It’s got $40 billion in cash and securities and less than $12 billion in debt. It still has 80 percent gross profit margins. Intel lost its $1.25 billion lawsuit. The result: It is one of the financially strongest companies on the planet, stronger than most U.S. banks. It has $21 billion in cash and less than $3 billion in debt, and it makes 44 times its interest expense in pretax profits. It has 50 percent-plus gross profit margins.

World Dominators are so good at what they do, regulatory bodies often try to prevent them from putting other, higher-cost providers out of business, like when Walmart was denied a license to start a bank. All the big Wall Street bankers knew it would put them out of business by not charging super-high fees.

When World Dominators get cheap enough to buy, they are the only "sure thing" in the stock market. We bought Intel in April 2009. Less than two years later, we’re up 50 percent. Likewise, my 12% Letter readers are up 76 percent in just over two years with cigarette giant Altria, which they bought in November 2008 (26 percent of that gain is from dividends alone). Payroll dominator Automatic Data Processing is up 51 percent since we bought in October 2008.

World Dominators are not frauds. They’re not financially weak. They’re not losing money. Their businesses aren’t shrinking. They might have laid a few people off and had lower sales in 2008 or 2009… But for the most part, the crisis left them untouched compared with almost every other business in the world.

You want to know what the greatest investor in history owns? His name is Warren Buffett and he owns World Dominators. His company, Berkshire Hathaway, is Coke’s biggest shareholder. He also owns Procter & Gamble, Johnson & Johnson, Walmart, UPS and ExxonMobil. Warren Buffett buys World Dominators because he knows they’ll continue to beat the competition for many years to come.

If you’re concerned about defending your wealth from the End of America, absolutely own some gold, silver, energy and agricultural assets. But keep a good chunk of your portfolio in World Dominators.

Bought at the right price they are the greatest stock investment idea ever. They offer safety. They offer large and growing income streams. They offer huge profit potential. And right now, many of them are as cheap as you’ll ever see. It is truly a once in a lifetime opportunity to get started.

Good investing,

Dan Ferris
Editor, The 12% Letter

PS: For more insight and actionable investment advice on protecting your wealth in a difficult market, please click here.

Signs The “End Of America” Is Nearing

I keep getting subscriber emails asking me what good it is to buy stocks when the United States dollar will soon be destroyed, taking the value of most equities with it. This question is a better one now than it’s ever been in my lifetime.

I remember many years ago, in the 1980s and early 1990s, when I started investing on my own. Back then, I often read arguments by various gold bugs and libertarian-leaning economists about how the U.S. dollar was on a path to total destruction. Even then, I was often reminded that all fiat currencies meet the same fate and that the dollar would be no different.

Fast-forward a few years to 1997 when I started communicating that same message for a living. Though I remained more concerned with other things, I kept revisiting this message. I kept thinking the Fed’s actions would have dire financial consequences for all of us… but for about 10 years, nothing apocalyptic happened. Every time it looked like the end was finally nigh and the day of economic, political and financial reckoning was upon us, the Fed would ease, the market would rebound and away we went on another bullish tear.

But at long last, it seems as though we’ve finally arrived at the point of no return. Anyone who lends the U.S. government a penny at this point is simply suicidal.

And you don’t have to guess about this, either. Listen to the market. It’s trying hard to tell you something very important

More than once I’ve said late 2008 was the blow-off top of a multi-decade bull market in Treasury bonds. That’s still correct, as interest rates continue to make higher highs and higher lows. Treasury bond prices move opposite to interest rates. So they’re making lower highs and soon, I expect, even lower lows.

Thirty-year U.S. Treasury bonds were yielding as little as 3 percent in late 2008. Today, they’re yielding over 4.5 percent—an enormous move. If interest rates double in the next year or two, it won’t surprise me a bit.

http://images.dailywealth.com/images/Chart%20A%20TLT%281%29.GIF

Big moves down in U.S. Treasury bond prices aren’t supposed to happen. You’re not supposed to think of Treasury bonds as risky. They’re where you go when you’re afraid of risk.

It’s not just the Federal government in trouble. The iShares S&P National Municipal bond fund has collapsed. Every time it looks like it’s rebounding, it bounces to a lower step. Its recent 52-week low is 10 percent below its 52-week high. That’s an enormous move for municipal bonds.

That kind of drop isn’t supposed to happen to municipal bonds. All my life, muni bonds were the second safest investment in the world, next to U.S. Treasury debt. Now, they’re loaded with risk and everybody either knows it, or is starting to get wind of it.

http://images.dailywealth.com/images/20110114-chart-c.gif

Finally, after years of believing the collapse of the U.S. dollar, though inevitable, was apparently far in the future… it’s here.

The crisis so many people have thought and written about for so many years has finally arrived on our doorstep. It’s no longer appropriate to say we’re worried about the world our children or grandchildren will inherit. We need to be worried about ourselves.

Like any good demon, the destruction of the U.S. dollar has arrived with a smile on his face, in the form of an ebullient stock market. The S&P 500 has rallied 75 percent since early 2009.

Focused, as usual, on the rearview mirror, investors are way too bullish according to every stock market sentiment indicator I’ve seen. The American Association of Individual Investors Sentiment Survey, the Investors Intelligence survey of newsletters, Ned Davis Research’s Crowd Sentiment Poll… they all point in the same direction: The great horde of individual stock market dabblers is in a hypnotic trance, deliriously happy in its belief that stocks can and will rise to the moon. The Fed is selling pure B.S., and the herd is buying it.

At the risk of seeming callous or unconcerned for my fellow man (the poor sod), this is the stuff of which Opportunity (with a capital "O") is made. The first bet is one we’ve encouraged you to make dozens of times…

Gold, the anti-dollar, has been telling us for 10 straight years that the crisis is coming. Gold was around $252 an ounce in the summer of 1999. It’s now around $1,400. Gold is up fivefold against the U.S. dollar. That’s not a great statement of confidence in the world’s reserve currency. And it’s important that we continue to pay attention to it. It’s something you should notice—and something the government, the Fed, CNBC and Wall Street hope you don’t notice.

http://images.dailywealth.com/images/Chart%20C%20GOLD%281%29.GIF

Buy gold. Hold it. Caress it. Love it. Hide it. But don’t sell it.

With the (allegedly) safest bonds in the world crashing, stocks clearly overvalued, and gold near new all-time highs, it’s not hard to figure out what to do. Own gold and silver bullion. Own natural resource stocks. Hold plenty of cash and sell fairly valued and overvalued stocks.

The market is telling you tough times are here. Stick with my advice and you’ll protect yourself and even profit while others lose… and wonder what the heck is going on.

Good investing,

Dan Ferris
Editor, Extreme Value

PS: For more insight and actionable investment advice on protecting your wealth in a difficult market, please click here.