The 2008 credit crisis offers a tremendous lesson for folks interested in generating income from their investments.
You’re not going to hear this from your broker. He doesn’t want you to know.
But if you learn this lesson, you’ll find it indispensible in the years to come…
The lesson is that chasing income through stock in highly leveraged companies – like most finance and real estate vehicles – can be a killer.
Many finance companies and real estate firms take on lots of debt to conduct business. They are such low profit margin businesses, they have to “lever up” in order to achieve good returns on capital. They can only exist with continuous debt financing. If this debt financing seizes up, as it did in 2008, it’s like the oxygen leaving a room for these guys. If they don’t have that constant financing, their share prices collapse. No amount of income will allow your portfolio to recover from a near-total loss.
[ad#Google Adsense]There is an income investment where you never have to worry about that. Ever. These investments sailed through the crisis, paying… and raising… their dividends the whole way. If you’re tired of getting killed by every ludicrous, leveraged sham Wall Street thinks up, this investment is where you want to be.
Before I get to that, though, let me back up and show you how poorly traditional income investments are set up to withstand trouble…
Thornburg Mortgage was a real estate investment trust (REIT). It was great company. It never lost a penny investing in mortgages since the day it started up in 1993. Thornburg returned an average of about 14% a year to investors, most of it in dividends, from 2000 to 2007.
Thornburg’s stock carried a double-digit yield. But in 2008, Thornburg was hit with $600 million in “margin calls.” Its mortgage assets were falling in value due to the ongoing mortgage crisis. Thornburg’s lenders needed $600 million in additional cash – which it didn’t have. It sold its high-quality mortgages for less than it paid so it could stay in business. Thornburg’s problems worsened, and it eventually declared bankruptcy and ceased all operations.
Thornburg knew what it was doing. The business performed well for over a decade. Its only problem was that it carried $13 billion in debt. Shareholders saw the stock drop from $140 a share to less than $1.40.
You’ll find similar stories with many master limited partnerships (MLPs), another popular income vehicle. At the beginning of 2009, for example, Atlas Pipeline yielded more than 30%. Ignorant income investors thought they were in hog heaven. But that year, it cut its dividend from $0.96 a share to $0.15. The share price fell more than 90%.
The problem was, it had over $1.5 billion in debt, more than three times its equity. Atlas’ profit margins shrunk as natural gas prices fell… making it impossible to properly service its debt. The company almost went bankrupt.
I hope you see what I’m getting at here. Investors eager for high current yields often buy leveraged junk – junk dreamed up by Wall Street. When trouble hits, junk gets outed and the investors suffer.
But there was one group of stocks that raised its dividends in 2008 and 2009: World Dominating Dividend Growers.
As DailyWealth readers know, 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 don’t yield double digits right this second – are generally underappreciated by the average income investor.
But in a crisis, your income investment couldn’t be safer. Remember, these are the biggest, strongest companies in the world… and their fortress-like balance sheets allow them to march through tough times.
Take dominant software company Microsoft, for example. It carries very little debt, less than $10 billion versus a $219 billion market cap. And in the depths of the crisis, with companies like Thornburg struggling to borrow money, Microsoft had no trouble getting another $2 billion in short-term debt.
More important for income investors, on September 22, 2008 – with global financial markets in a panic – Microsoft raised its quarterly dividend 18%.
The same thing is true of other World Dominating Dividend Growers…
Wal-Mart – the world’s biggest retailer – issued $1 billion of new debt in January 2009, at rates as low as 3%. And in March 2009, when the world looked like it was coming to an end, the company raised its dividend almost 15%.
Now… you might argue, World Dominating Dividend Growers’ share prices fell along with others in 2008 and 2009. But unlike most other stocks, the World Dominators were never in any financial danger.
They just became better investments during the crisis. Investors were able to buy them more cheaply. (The amazing thing is they’re STILL cheap relative to their earnings today.)
By far the best, safest stocks to buy today are World Dominating Dividend Growers. Yes, their share prices can drop, just like any other stock. You don’t have control over that. But even if their share prices suffer, they’ll still be safe, financially strong companies that raise their dividends year after year. They’ll still be great businesses that will prosper for years to come.
Wall Street would rather you not invest in those companies. It wants you to buy the leveraged stuff so they can collect banking fees…
That leveraged stuff usually sounds new and exciting. But great investors avoid “new” and “exciting.” They prefer “been around a long time, through everything” and “safe and steady cash flow.” They prefer “sleep at night” income investing.
They prefer World Dominating Dividend Growers.
Good investing,
— Dan Ferris
P.S. In the 12% Letter, we have four World Dominating Dividend Growers in our portfolio right now that are still in buy range. These stocks have less financial risk than any others. They generate more free cash flow than any other businesses. They pay consistently rising dividends. These should be the core of an income investor’s portfolio, not the Wall Street shams. You can learn more on how to access this list immediately by clicking here.
Source: Daily Wealth