|
When people ask me about
their investments, I've taken to showing them a chart I
made. I thought I'd share it. Here it is:
My charts shows the average annual return of the S&P 500 index.
During the past decade, the benchmark return has
averaged less than +1%.
That statistic -- disappointing though it is --
actually overstates things. The
accumulated return
figures are even worse. Consider: If you had
$10,000 in an index fund in 1998, then you have
just $7,654 today. (Less, really, because these
calculations exclude inflation and taxes.)
When I show this to people, their reaction is always a
combination of disbelief, frustration and fear. They
beat themselves up for not having done better. They
begin to fear that they've lost a decade of returns
on their retirement accounts.
|
|
Year |
Return |
|
1999 |
+21.0% |
|
2000 |
-9.1% |
|
2001 |
-11.9% |
|
2002 |
-22.1% |
|
2003 |
+28.7% |
|
2004 |
+10.9% |
|
2005 |
+4.9% |
|
2006 |
+15.8% |
|
2007 |
+5.5% |
|
2008 |
-37.0% |
|
Average |
+0.67% |
|
And you know something? Both of those statements are true.
Many people could have done better. Many did
lose 10 years of their hard earned returns. And if they
don't change their investment strategy, it may take them the
better part of the next decade to recoup just what they
lost.
I don't tell them that, of course. Instead, I
concede that all investors see losses sooner or later. I
point out the bigger statistical picture: Stocks are still a
great investment, and over the long-run, the S&P has
achieved a +10.8% annual return.
But to get them thinking on the right track, I also ask
them this question:
Where do most of the stock market's returns come from?
They look confused. What do you mean? They
come from, you know -- gains. I guess I'm not sure. Come to
think of it, where do these returns come from?
The answer: Dividends. Depending on what data you look
at, dividends are responsible for between 40% and 70% of
long-term investment results. If their portfolio doesn't have
a significant allocation to dividends, I tell them they
are missing out on the driving force behind hundreds of
billions of dollars in wealth.
Tell me more, they say.
Sure. How about this: Dividends are tangible.
They're paid in cash. You don't have to wait for the
economy to turn around or the market to rebound to realize a
return from your investment. With dividends, you make money
now, even in this market. You just have to wait for the bank
to open. When it does, you take the check there and deposit
it.
Or how about the miracle of compound interest? If
you were to invest in a stock with a 9% dividend yield and
reinvest the proceeds, your investment would double in eight
years. A good, long-term CD might return 2.3%. A highly
rated bond pays 5%. Over time, though, those
investments pale in comparison. It's not even close!
Impressive, they say. But what about all the companies
that are cutting their dividends?
It can be a problem, I admit. They nod, gravely.
But the fact is this: Not all companies are cutting
their dividends. Coca-Cola (NYSE: KO) and Royal Dutch Shell
(NYSE: RDS-B) just raised
theirs. Oracle (Nasdaq: ORCL) just initiated one. And there are lots
of others, I say.
But before I tell them about the particular company I
have in mind, it's worth noting why my friends bring up
dividend cuts. It's because, after the shellacking
most of them have taken in the market, they are
hypersensitive to any kind of risk. They don't want to
put their money in any investment where it could lose even
more ground.
The concern, then, is safety.
Which is why the stock I love to tell them about is so
perfect. It's the single safest dividend play I know
about. That's because all of its assets are back 100%
by the federal government. This company owns . . .
mortgages.
Now, that word scares a lot of investors these days.
And it should. Even as you read this, Treasury
Secretary Tim Geithner is hammering out the details on how a
private-public partnership can absorb $1 trillion worth of
toxic mortgage assets. After a mess like the sub-prime
fiasco, getting investors interested in mortgages may be
like asking a shark-attack victim if he'd like to go for a
swim. A tough sell.
But mortgages are part of life. Most of us have
them. And most of us pay them. Nevertheless, to keep
things running as smoothly as possible after the collapse of
Fannie Mae and Freddie Mac, the government -- which has
always tacitly stood behind Fannie and Freddie's mortgages
-- stepped in and offered an outright guarantee on certain
mortgage assets. If you own a security backed by these
mortgages, then you are sitting on an asset that has been
guaranteed by the most credit-worthy entity in the world,
the U.S. government.
And mortgages is precisely the business that the
company I have in mind is in. It doesn't make mortgage
loans, it doesn't service mortgage loans. It undertakes an
even more vital role in the process: This company buys
securities backed by adjustable-rate mortgages. These might
yield anywhere from 5% to 7%, maybe a little higher in some
cases, perhaps a little lower in a few others. But these
ultra-safe investments -- despite all this talk of
foreclosure -- pay as regular as clockwork.
Here's where it gets interesting: The company buys
these securities with borrowed money. And it borrows
that money for a very short period of time. The
shorter the term, the lower the rate. And with
interest rates at multi-decade lows, the difference between
what this company has to pay to borrow money and what it
makes by lending it has increased. The spread, as they say,
has widened.
And that's exactly why this company just increased its
dividend. And here's the best part: This dividend
is not yielding the 3.7% that Coke pays. It's not
paying the modest 7.2% that Royal Dutch Shell is paying, or
even the luscious 9.0% example I used above, which is from
one of the nation's leading oil and gas partnerships.
The company I have in mind is yielding 21.1%.
That's not a typo. Twenty-one-point-one percent
is accurate. If you were to invest $25,000, you'd have
an astonishing $1,150,331.13 in 20 years, even if
the company never increased its dividend again. But
that's unlikely: In the past three years alone, the dividend
has grown +134.4%.
This company pays an unbelievable dividend. It earns
you money by using long-term assets that are fully backed by
the U.S. government and thus as close to being risk-free as
is possible. And, what's more, this isn't a high-yield bond,
it's a common stock that's going to increase in value over
time.
Now, given all that, you'd think that this company
would beat all comers. But surprisingly enough, I've found a
stock with an even higher yield.
Click here to learn about
it.
Many happy returns --
Andy Obermueller
Co-Editor
Global Dividend Opportunities
GlobalDividends.com
839-K Quince Orchard Blvd.
Gaithersburg, MD 20878-1614
P.S.
-- Don't miss a single issue! Add our address,
Research@GlobalDividend.com,
to your Address Book or Safe List. For instructions,
go
here.
|
Printer-Friendly
