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Three Easy Steps to an Income-Rich Retirement

By Dan Ferris, editor, The 12% Letter
Friday, February 25, 2011

If you're a financial newsletter reader – and if you're reading this, you are – you hear dozens of promises of easy money from the stock market every week... maybe every day.
 
But I've found the only one that works. I've found the easy money. And it can guarantee you a rich retirement.
 
Don't close this e-mail. This is NOT the advice you're reading anywhere else. Give me three minutes, and I'll show you why...
 
The first step to a rich retirement is to buy dividend-paying stocks.

If you aren't earning dividends, the odds are against making money in stocks. Dividends beat all other sources of return from stocks (inflation, earnings growth, and changes in valuation) put together.
 
A few years ago, well-known researcher/investor Rob Arnott wrote about this in the Financial Analysts Journal. Arnott researched the sources of stock market returns during the 200 years from 1802-2002. Here's what he found (emphasis added):
 
The importance of dividends for providing wealth to investors is self-evident. Dividends... dwarf the combined importance of inflation, growth, and changing valuation levels.
 
This result is wildly at odds with conventional wisdom, which suggests that ... stocks provide growth first and income second.

In other words, if you're not buying dividend-paying stocks, you're missing your best chance at making money in stocks. The only way to guarantee you'll always make money in stocks is to focus your investments on stocks that pay dividends.
 
But you shouldn't just buy any old income stock. The second step is to focus on the very best income payers.

This idea hit me like a ton of bricks when I read a study by Ned Davis Research, a well-known and widely respected investment and research firm.
 
Ned Davis compared the returns of all the stocks in the S&P 500 from 1972 to 2004. They studied the S&P 500 stocks by separating them into groups, based on the dividend paying policy of the company. And look what sort of returns they produced...

Non dividend-paying stocks: 4.3% per year
Dividend cutters or eliminators: 5.2% per year
Dividend payers with no change in dividends: 7.3% per year
Dividend growers and initiators: 10.6% per year

Moving "up the ladder" from a plain dividend payer to a dividend grower increases your annual returns from 7.3% to 10.6%... that's almost twice as good. Imagine that difference over a decade or two of investing...
 
And that brings me to the final – and most important – step...
 
The Miller/Howard investment firm invests primarily in dividend-paying stocks. One of the principals, Lowell Miller, wrote a good book about dividend investing, The Single Best Investment.
 
Milller/Howard recently did a study of the S&P 500 from 1935-2010. They found that, if you invested $1 in the S&P 500 and relied upon price appreciation alone, it grew to $93.65 through the end of 2010. That's almost 94 times your money. Not bad. But if you reinvested the dividends along the way, you turned $1 into $1,740.30.
 
Buying dividend growers and reinvesting your dividends is the only easy money in the stock market. If you're an income-focused investor, following this strategy will make the difference between a good investment... and decades of comfortable retirement living.
 
Good investing,
 
Dan Ferris




Further Reading:

Find another high-income retirement idea from Dan here: This 6.5% Dividend Is One Sure Path to a Wealthy Retirement.
 
In this recent essay, Doc Eifrig explains the key to great investing and reveals one pick that has earned his Retirement Millionaire readers safe, double-digit returns in less than a year. Learn more here: The Only Stocks I'm Telling My Retired Friends to Buy Right Now.

Market Notes


WHY CANADIAN STOCKS ARE SOARING RIGHT NOW

The message from today's chart: Soaring natural resource prices are heaven for some… and hell for others.
 
Today's chart shows the performance of the big Canadian investment fund (EWC, the black line) over the last six months, versus the performance of the big Indian investment fund (IFN, the blue line). As you can see, these two funds are heading in opposite directions…
 
Canada is the ultimate resource investment destination. It's home to the largest safe store of crude oil in the world… It's also blessed with incredible timber, gold, uranium, agriculture, and natural gas deposits. It's a safe country. It's right next door to the resource-hungry U.S. When problems with other resource producers, like Libya, occur, it's bullish for Canada.
 
India, on the other hand, is like many other emerging markets... It must import much of its needed raw materials. So soaring oil and food prices suffocate its economy.
 
You can see the differing fortunes of these two nations below. The Canadian fund is up more than 25% in the past six months… and has surged in response to the violence in Libya. The Indian fund has lost several percent in the same time. When resource prices are robust and rising, Canada is the place to be.

Canadian stocks soar, Indian stocks sink

In The Daily Crux



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