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Tuesday, March 16, 2010
"Always be compounding."
The three words above are written on a piece of paper and taped to my computer screen. Compounded returns are the single most important force in finance for generating investment profits. They're safe. They're sure. And anyone can do it. These three words remind me I should never stray from compounding, no matter what...
Today, I'm going to tell you about a special list of 212 stocks I call my compounding "cheat sheet." These companies are the best stocks in America for generating compound returns. If you're interested in compounding, you need to know about this list. It'll save you hours of research...
To compound, all you have to do is invest your money in something that pays a return... and then reinvest your returns. Now your interest is earning interest and your dividends are paying dividends. Pretty soon, your money is growing like a bacteria colony.
Richard Russell wrote the best essay I've read about compounding. It'll be the first thing I show my children the day I decide to teach them about finance. If you haven't read it before, make sure you read it now. He called it "Rich man, Poor man." You can read it here.
Compounding only works if you can generate a safe, consistent return on your money. The trouble is, the government doesn't want you saving money right now. The government thinks saving money is bad for the economy. It wants you to borrow, spend, and consume. To encourage you, the government has set interest rates at zero percent.
The result of this crazy policy is, it's really hard to find investments that offer worthwhile interest rates or dividend yields you can use for your compounding strategies.
This is where my compounding cheat sheet comes in...
The best way to compound your money in the stock market is to buy stocks that raise their dividends every year. Not only do you get the dividend, which you can reinvest, but the dividend grows each year, generating what I call a "double compounding" effect.
In yesterday's column, we saw how investors used this "double compounding" effect to make a 100% return on their money in Altria between 1992 and 2003, even though the stock went nowhere. That was possible because Altria was paying a 5% dividend yield, and it raised its dividend 10 times in 12 years.
My cheat sheet is a list of stocks that relentlessly raise their dividends every year. The official name for this list is the Mergent's Dividend Achiever Index.
Mergent's is a famous financial research firm, with a 100-year history. It's known for the work it does on companies that relentlessly raise their dividends, like Altria.
Each quarter, Mergent's scans the entire stock market for companies that have raised their dividends every year for at least 10 years in a row and show average daily trading volume of more than $500,000. Then they publish the list in a book titled Mergent's Dividend Achievers. It's like the bible for compound dividend investors. You can find the list online, here.
Right now, Mergent's Dividend Achiever Index lists 212 companies. The companies on the list pay dividend yields anywhere between 3% and 10%.
For an investor trying to harness the power of compound investing, this list is the Holy Grail. Not only can you be sure these companies will help you compound your money... but the fact that these companies pay out dividends so consistently gives you an implied level of safety. Risky stocks generally cannot raise their dividends every year for 10 years in a row.
Whenever I'm looking for a new company to use in my compounding strategies, I immediately download this list and begin my research there. If you're interested in compound investing, I suggest you do the same.
P.S. I already have 10 of the best dividend achievers in my 12% Letter Portfolio. And we use a particular system to boost our compound returns from these stocks. The results have been spectacular. This report explains the system in detail.
If you missed Tom's essay yesterday, it's worth it to go back and take a look. It tells the story of one of the greatest money-compounding vehicles of all time... and how the government has practically guaranteed this company will continue to generate loads of cash for decades to come. You can find the essay here: Get 7% Dividends from the Most Profitable Stock in American History.
AN INCREDIBLE BELLWETHER RECOVERY
As we've been highlighting in our "New Highs of Note" column each Monday, America is finally getting back down to the "consuming business." Fast food, department store, shoe, and gadget stocks are soaring right now.
Leading the pack is Disney. Like the share price and profits of Home Depot, Disney is an excellent measure of how flush the American consumer is feeling. Disney owns television networks ESPN and ABC... a hugely successful movie business... amusement parks... and the merchandising rights to it all. This pile of assets is good for more than $30 billion in annual revenue.
It's also good for a remarkable recovery. As you can see from today's chart, Disney's share price has completely recovered to pre-credit-crisis highs in the mid $30s. Not many stocks can make this claim.
In The Daily Crux