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Show These Charts to Every Retiree You Know

By Dan Ferris, editor, The 12% Letter
Saturday, June 11, 2011

Last week, I showed you why World Dominating Dividend Growers are unbeatable investments. These companies dominate their industries. And while they might not have high current yields, they grow them constantly... increasing your income year after year.
 
But I hear from a lot of readers that the World Dominating Dividend Growers' current yields are too low. Many of my readers are retired, and they say they need a high income now, not 10 years from now.
 
What they don't realize is that by focusing on high current yields, they're taking on more risk... increasing the chance their income will fall.
 
Let me show you what I'm talking about... 
 
We'll start with a popular high-current-income vehicle: Mortgage REITs. Companies in this space – like Annaly (NLY) and Hatteras (HTS) – are paying relatively fat yields right now.
 
Due to the current low-interest-rate environment, they can borrow at extremely low cost. So they don't need to make much on their mortgages to still pay out huge dividends.
 
But that won't last. It never does. Just take a look Annaly's quarterly dividend payments since 2001... 
 
 
They're all over the place. You can't count on these companies to grow your income relentlessly, year after year, the way you can count on World Dominating Dividend Growers.
 
The same is true of another popular high-yield group: business development companies (or BDCs). Low interest rates are great for BDCs, too. They borrow low and lend high. And many of them are paying out high yields.
 
But you run into the same problem. Here's the chart of Gladstone Investment Corporation (GAIN), a typical BDC... 
 
 
The dividend record is not exactly stellar. Anyone who bought this stock in 2006 has seen his income fall nearly in half.
 
For comparison, here's a chart similar to the ones I ran last week. It show's the quarterly dividend payments of Word Dominating semiconductor company Intel...
 
 
As you can see, it's just up, up, up. Your income increased every year without pause. I'd much rather have my income follow that pattern than the pattern you see in most high-current-yield stocks.
 
Now, to be clear, I'm not saying all BDCs and REITs and other high-current-income investments are bad. Far from it. We have one of the best mortgage REITs and two of the best BDCs in existence in my 12% Letter portfolio. But some day, borrowing costs will rise, our income will fall, and we'll have to sell them.
 
In sum, there's more risk in stocks with high current yields than many investors acknowledge. You think you're signing on for high income. But you're going to end up with lower income. So these investments are suitable only if you already have a core position in World Dominating Dividend Growers.
 
You see, dividends are like anything else in life. The more you insist on getting right now, the more you'll have to pay for it later.
 
If you're lucky, that bill won't wipe you out when it comes due... But if you want to remove luck from the equation entirely, you should build a core position in World Dominating Dividend Growers.
 
When the market hits its next round of dividend cuts, these stocks will keep your income safe and rising.
 
Good investing,
 
Dan Ferris




Further Reading:

"The market can't promise you growing income," Dan said last week. "It can't even promise you steady income. Only the World Dominating Dividend Growers can.
 
"They're the best investments around. And if you're investing for income, they'll beat the stock market, year after year."
 

Market Notes


CHART OF THE WEEK: STOCKS REACH A NEW LOW VS. REAL MONEY

With the benchmark S&P 500 stock index falling six consecutive days, most folks know stocks are struggling right now. Our chart of the week shows you this "struggling" is worse than you think...
 
This week's chart displays the S&P 500 in terms of gold. Remember, there are always two sides to a price: On one side, you have the product, service, or asset being measured. On the other side, you have your "measuring unit," like dollars, Swiss francs, euros, or "real money" (gold). Keeping this "two sides to a price" idea in mind lets you see things others do not.
 
The problem with measuring things in dollars lately is that the dollar has become more of a constantly declining laughingstock than a solid measuring unit. It's has plunged in value versus stronger currencies like the Swiss franc and gold.
 
For example, while stocks have fallen for the past few weeks, they are still near their yearly high in dollar terms. But when we price them in a strong currency, like gold, we see the S&P 500 index is at its lowest low in more than a year. The recent horrid performance in stocks is even worse than the mainstream press thinks.

A bear market: Stocks reach a new yearly low in

Stat of the week

$664 million


Total cost of the U.S.'s involvement in Libya as of mid-May, according to the Department of Defense. (And we all know it's probably at least twice that "official" number.)

In The Daily Crux



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