Avoiding risk, having fun, breaking furniture...

Avoiding risk, having fun, breaking furniture... Cisco's blockbuster earnings... A 75% dividend hike... Companies that reward shareholders... Our newest WDDG and two that are screaming 'buy'... Fat-dividend stocks for $0.11 per day...

 I've been on a bit of a risk-avoidance kick for a couple years. Maybe I (Dan Ferris) am just getting old. But I find it harder and harder to recommend any stock I'm not convinced is ultra-safe and dirt-cheap. So I don't recommend as many stocks as I used to many years ago. But the ones I do recommend tend to perform well more often than not.

And I'm actually having more fun in my work now. Because when I find a stock I like, I don't just recommend it and move on to the next idea. I stick with it and pound the table until it breaks in half for as long as the stock is cheap. Like I'm doing these days with computer-networking giant Cisco, for example...

 Yesterday, Cisco announced blockbuster earnings and a dividend raise. Shares are up 7% today. Rising earnings and dividends are music to my ears. They mean the business is becoming more valuable, and that value is making its way into shareholders' pockets. The market is totally wrong about Cisco. It's way too cheap... providing our readers with a fantastic opportunity.

 I first recommended Cisco in the February 2011 issue of Extreme Value. At the time, Cisco's stock was down 73% from its March 2000 highs (prior to the bursting of the tech bubble). Meanwhile, the company was what I called the "World Dominator of Internet plumbing." It makes the routers and switches that allow the Internet to exist.

Cisco was trading at only 10 times free cash flow (a no-growth valuation). And the company had excellent financials. Here's what I wrote about Cisco then…

 Last night, Cisco announced a quarterly sales increase of 4.4% from a year ago to $11.7 billion. The company earned $1.9 billion in the fiscal fourth quarter, up 56% from $1.2 billion a year ago.

Cisco also increased its quarterly dividend 75% from $0.08 a share to $0.14 a share. The company only started paying a dividend in April 2011. It has increased the dividend by 133% since then. I expect the company to keep raising the dividend annually for several years to come. It also bought back 108 million shares in the July quarter, for a combined $1.8 billion.

This is the hallmark of a great business for shareholders. It gushes plenty of extra cash flow, and management makes sure a large amount of that cash goes straight into shareholders' pockets...

 On the post-earnings conference call, Cisco Chief Financial Officer Frank Calderoni noted the company increased profits faster than revenue in the quarter. The company estimated non-GAAP (generally accepted accounting principles) gross margins at 61%-62%. Calderoni pledged to return a minimum of 50% of the company's free cash flow to shareholders going forward. That's a huge increase. In the fiscal year just ended, Cisco returned 37% of free cash flow to shareholders.

Compare that with an investment bank like Goldman Sachs that pays 50% of its total revenue as employee compensation. As the old saying goes, "Where are the customers' yachts?"

There ought to be more companies like Cisco (and probably more Goldman Sachs executives in jail). Most corporations are lousy at investing the profits they make. Shareholders would be better off receiving the cash as a dividend... or getting a boost from a share repurchase program that only buys the stock when it's cheap enough (like Cisco's shares are right now).

 In its just-ended fiscal year, Cisco returned $5.9 billion to shareholders in buybacks and dividends – more than 6% of the company's market capitalization and more than 50% of free cash flow.

Although thanks to a recent selloff, Cisco is currently showing a loss in our Extreme Value portfolio… I still believe it's one of the safest investments in the world today. It currently trades at an enterprise value (market cap + debt – cash) of seven times free cash flow. The stock could appreciate 58% from here to about $30 a share, and it'd still only be trading at an enterprise value of 13 times free cash flow. So there's plenty of upside here. The market is crazy to value this excellent business as low as it is.

 As good as Cisco is… our newest World Dominator is even better. Over the past three years, this technology leader has paid every dime of its free cash flow back to shareholders. The stock price has doubled since 2008, but I think subscribers could easily earn 10%-15% annually over the next decade if they buy it up to our maximum buy price. I just recommended this one, so it wouldn't be fair to Extreme Value subscribers to tell you its name just yet.

 In my other publication, The 12% Letter, we focus on income. So we look for World Dominators with excellent dividend payouts. We call them World Dominating Dividend Growers (WDDGs). One such stock, retail colossus Wal-Mart, also announced earnings...

The world's largest retailer saw second-quarter earnings rise 5.7% to $4.02 billion on strong international sales and its fourth-straight quarter of same-store sales growth in the U.S. Revenue rose 4.5% to $114.3 billion.

The company also raised its full-year earnings guidance from its February estimate of $4.72-$4.92 a share to $4.83-$4.93 a share.

However, CEO Mike Duke said the paycheck cycle "remains pronounced" here and abroad. In other words, the retailer's sales rise and fall depending on how close the next payday is for its many customers who live paycheck to paycheck. Duke also noted "continuing economic pressures."

Apparently, Duke's comments were enough to scare the market... Wal-Mart shares are down more than 2% on the earnings announcement.

 I don't worry about Wal-Mart falling 2%-3% in a day. The stock is up 50% over the past year. A 3% breather isn't a big move compared with that. It's also typical of traders to "buy the rumor and sell the news." They buy in anticipation of a good earnings announcement and sell when the announcement is made, whether they think it's good or bad.

Wal-Mart's announcement was very good. Sales and profits grew at a really excellent rate (both more than 4%). Free cash flow – the thing that really gives equity its value – grew more than 50% in the first half of 2012 versus the first half of 2011. And Wal-Mart spent more than $3 billion on dividends and share repurchases last quarter. At that rate, it'll put nearly all its free cash flow into shareholders' pockets this year.

 The only slight disappointment was Wal-Mart's international division. International sales growth slowed to 6.4% in the second quarter, down from more than 10% in the same period last year. But the two main problems there don't strike me as big problems at all…

First, the slower sales had a lot to do with the strength of the U.S. dollar. When the dollar is strong, foreign sales seem lower. If the dollar hadn't changed in value, international sales would have been up more than 7% last quarter, instead of 6.4%. I don't need to tell you… We don't stay awake at night worrying that the U.S. dollar will stay strong. Over the longer term, the U.S. dollar is going to weaken.

The other "non-problem" with Wal-Mart's international division is a management decision to slow down its international expansion to focus on improving sales at existing stores. That's something the market should like and reward, not penalize with a 2% drop. I feel like I've spent half my career telling the world the market is totally wrong about Wal-Mart. I looked like an idiot with the stock at $48. At $74, folks are starting to believe me.

But like I said, I prefer it when share prices drop. As a lifelong buyer of World Dominating Dividend Growers, I like it when they get cheap. I encourage you to adopt the same stance. You'll make a lot more money in stocks that way.

If Wal-Mart wasn't up so much the past year, I could recommend it all over again! That's a bit of a joke… because I started recommending it in October 2006 and renewed my recommendation probably dozens of times since then – up to $56 a share. It hit $75 recently, up about 50% during the past year. And 12% Letter subscribers are up 71% on the stock.

 So Wal-Mart is no longer a buy. But we have two WDDG stocks that are in "buy" territory in The 12% Letter's model portfolio.

They're both cash-gushing businesses that have raised their dividends every year for nearly four decades. Both of these companies do a fantastic job of creating shareholder value. Both pay out all their free cash flow in dividends and share repurchases. They both possess all the financial clues that say, "Your money is safe here!" They're both consistently profitable with consistently thick profit margins, quarter after quarter, year after year, decade after decade. They both gush free cash flow. They both have only the tiniest financial risk. One earns about 14 times its interest payments, the other about 12 times.

There's no global financial crisis or European debt crisis or any other kind of financial crisis for WDDG stocks. I think that's why so many of them are doing well these days. Investors are finally discovering what I've been saying over and over again for the last five or six years now. The highest-quality businesses in the world are the best stocks you can buy, as long as they're cheap enough.

Both of my "buy"-rated WDDGs are plenty cheap enough. When companies like this get acquired, buyers usually pay 28-32 times earnings. One of them is around 16 times earnings today. The other trades just below 14 times earnings. For many stocks, those prices might be expensive… but not WDDGs. There's plenty of upside left at these prices.

One of them is yielding nearly 4%, too. It's insane that bond investors today are settling for yields of less than 2% – a price at which inflation destroys your entire yield – when they can get a World Dominating Dividend Grower yielding almost double that amount... and whose yield grows enough to beat inflation, too.

Both of these stocks are near their maximum buy prices, so they might not qualify as "dirt-cheap" for much longer. But I'm really conservative when I set maximum buy prices, so as long as the stocks are at or below that level… they're dirt-cheap. I think both stocks will easily provide safe, steady double-digit total returns over the next several years.

The bull run on World Dominating Dividend Growers isn't over yet. It seems like it's just getting warmed up. And these two stocks are definitely the best way to play it right now.

To get the names of these stocks, you have to be a 12% Letter subscriber… But The 12% Letter is a steal, too. At $39 a year, it makes a great present for a young person you'd like to teach about safe investments that pay big, growing dividends. (One reader says he actually reads The 12% Letter to his son at night.) At $39, you're paying less than $0.11 a day!

And if you find The 12% Letter isn't for you, don't worry. You can get a full refund at any time within your first four months. We want you to be happy. That's the only way we'll do business.

If you want to discover the safest, best – and lately the most lucrative – stocks in the world, you need to discover the World Dominating Dividend Growers. And there's no place better to do that than The 12% Letter. We even set it up so you don't have to sit through a long promotional video to sign up. Just click here, and you'll go straight to a quick order form. Do it now, and you'll keep your money safer than most investors', while making better returns than most investors for the next several years.

 New 52-week highs (as of 8/15/12): BlackRock Corporate High Yield Fund (HYV), SPDR S&P International Health Care Sector Fund (IRY), Constellation Brands (STZ), Automatic Data Processing (ADP), 3M (MMM), Texas Pacific Land Trust (TPL), Sysco (SYY), Target (TGT), and GenMark Diagnostics (GNMK).

 More great feedback on options... How many success stories will you have to hear before you try your first trade? Send us your feedback to feedback@stansberryresearch.com.

 "I couldn't disagree more on the options feedback from your subscriber. When I started trading I lost a good amount of money buying bad stocks, not sticking to stop losses and not slowly entering into positions. I have learned so much and I have been very fortunate to benefit from some of your great recommendations and teachings…

"I am collecting dividends from great world dominators... and I'm starting to make good returns overall with a more balanced approach... thanks to studying and having access all of your publications. I feel more confident in making decisions for all of my stock purchases. I have enjoyed your work so much that I went from buying 1 subscription to 2 to 3 to becoming an alliance member. Every one of your publications has some great teaching and very good research into what holdings are in the portfolios.

"Because of your publications I did my first covered call trade. I only placed 1 order as suggested just to get comfortable. I watched every one of Doc's video's... and started riding my bike, as he puts it. I find myself studying covered calls and puts to get great returns or get into a stock that I want to own at a great price... though I'm no expert... I'm 31 and can see a lot of future earning potential and smart investments to be made using options trading. I'm starting with one trade and I see myself doing a lot more as I learn and understand options.

"I say teach us more, keep making it simple to learn and easy to win!" – Paid-up subscriber C.B.

 "In defense of your reader who is tired of hearing about options, I understand since I never tried them in over 25 years of investing. I'm newly retired and saw the offer from the Palm Beach Income newsletter. I decided to try it with their promise to teach us step by step. I have to admit that I was very skeptical that it would be successful. However, after three and a half months, I've earned almost $20,000. Their concept is to make low ball offers (selling puts) on quality stocks that you would be happy to own. Since most of the options written end up expiring worthless, it's beauty is keeping the premium for the option you sold. This is a very conservative approach since you sell puts only on high quality stocks.

"I've recently signed up for Jeff Clark's, Short Report. Hopefully, that will be just as successful since it also involved buying puts & calls but have to admit that I have become partial to getting paid immediately by selling puts. Thanks for what you do." – Paid-up subscriber Bill B.

Good investing,

Dan Ferris and Sean Goldsmith

Medford, Oregon and New York, New York

August 16, 2012