After boosting the market yesterday by hinting at a third round of quantitative easing (QE3), Bernanke backed off today. In his second day of testimony, Bernanke told the Senate Banking Committee, "We're not prepared at this point to take further action."
He also warned Congress about aggressive budget cuts, which Bernanke said could hamper the recovery even further...
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I only ask... as Congress looks at the timing and composition of its changes to the budget, that it does take into account that in the very near term the recovery is still rather fragile, and that sharp and excessive cuts in the very short term would be potentially damaging to that recovery. |
Perhaps Bernanke was spooked by yesterday's big rally – especially the rally in gold and gold stocks. Now, he's reining it in.
And while stocks gave back their midday gains, gold and silver are still up. Gold hit a new all-time high of $1,592.80 an ounce.
While Mr. Market is reacting to the perceived ebbs and flows of liquidity, precious metals are unphased... They're trading as they should in the midst of a currency crisis. The metals market knows whatever Bernanke decides, the value of our currency will get much worse before it gets any better.
On the subject of a currency crisis, credit-ratings agencies are pressuring the government to resolve the debt situation. Yesterday, Moody's placed the United States' triple-A-rating on review for a downgrade. The company is worried the government may not raise the debt ceiling in time to avoid missed interest or principal payments. Moody's said it would downgrade our nation's debt to the "Aa" range – much higher than it deserves even today – and it wouldn't necessarily restore the top rating, even if default is "cured" quickly.
While Moody's is going public, Standard & Poor's, the other major rating agency, is allegedly warning the government in private that it may downgrade U.S. debt before a default. According to Ben White at the political news website POLITICO, S&P Managing Director John Chambers warned top Senate Democrats and the U.S. Chamber of Commerce that even if the Treasury avoids a technical default, S&P may downgrade the debt.
Reading all the news this morning about QE3 brought to mind the words of billionaire hedge-fund manager David Tepper. When QE2 was announced last September, Tepper said he was going long equities. He reasoned, "What, I'm going to say, 'No Fed, I disagree with you, I don't want to be long equities.'"
We're not at the "all in" point for the stock market yet. But when Bernanke officially announces the next round of money-printing, stocks will rally again... And gold and silver will soar.
You may recall, in Tuesday's Digest, we asked if you had any success with Dividend Reinvestment Plans (DRIPs). We know our readers are hungry for super-safe ways to grow their capital and collect steady and growing income. DRIPs are the best way to do that.
The response was overwhelming, which proves our thesis correct. For most of you, buying stalwart stocks that constantly grow dividends and reinvesting those dividends back into the stock, is the best way to build your fortune. In case you're not familiar with DRIPs, we asked Dan Ferris, our dividend and value expert, to briefly explain the process and the benefits...
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Most people know DRIPs are a great way to put your stock portfolio on automatic pilot... so it just grows and grows without you having to do much of anything. |
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DRIPs are simple. Most of the time, you can just call your broker up and tell him you want to reinvest your dividends. After that, you won't have to take any action at all to have your cash dividends reinvested in the stocks that paid them. Over time, you'll make a lot more by reinvesting dividends than you will by simply holding the shares without reinvesting... |
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Suppose you had a stock like Altria Group, the tobacco company, which is one of the all-time great dividend payers. It has raised its dividend every year for the last 45 years. Say you bought Altria today and wanted to reinvest your dividends... |
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Today, Altria's share price is a little less than $27 and its dividend yield is around 5.7%. Over the last 10 years, the dividend grew by about 8.5%. Let's assume it keeps up that modest growth rate. |
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Suppose you just buy Altria today and don't reinvest your dividends. Suppose the share price grows 5% a year. After 10 years, you'd earn a total average annual return of about 10% a year. Not bad! |
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But if you reinvest the dividends, you'll earn about 12.6% a year. That's great. It's the difference between a $2,700 investment that turns into $7,000 in 10 years without reinvestment... and turning that same $2,700 into more than $8,700 with reinvestment. |
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But it actually gets even better for the most patient investors. If you kept on reinvesting at those rates for another 10 years, something really amazing would happen. Your return without reinvestment would fall to about 9% per year for the 20-year period... and your return with reinvestment would rise to about 14% a year for the 20-year period. You could turn an investment of a little less than $2,700 into more than $37,000. |
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When you combine great businesses that grow dividends with dividend reinvestment, time is the investor's best friend. With just about any other strategy, time is a potential killer because you're not compounding at the highest possible rates. And let's face it, with the government borrowing and printing money at the highest rates ever, you MUST earn as big a return as possible on your money. You must beat inflation. |
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For the overwhelming majority of investors, buying World Dominating Dividend Growers like Altria Group and combining them with DRIPs is the easiest, safest way to achieve the highest possible long-term returns. |
Altria has been in The 12% Letter portfolio since December 2008. It's returned a total of 94% in dividends and capital gains. More than 30% was from dividends. With dividend reinvestment, you'd have made about 37% a year during that time. A $1,650 investment (100 shares) would now be worth $3,667, a 122% return.
Currently, Dan has two World Dominating Dividend Grower stocks in his 12% Letter portfolio that are perfect for DRIPs. One of the stocks has grown its dividend around 12.25% a year for the last several years. Dan thinks you can more than double your money in 10 years – in this super-safe, blue-chip stock – by simply buying and holding.
Dan believes his other favorite DRIP candidate, another safe blue-chip, could nearly triple in 10 years with dividends reinvested. For most investors, buying, holding, and reinvesting the dividends is the best way to invest. You do nothing... simply let time and compounding do the work.
To access Dan's favorite dividend-growing stocks, click here... And don't miss some testimonials about our readers' success with DRIPs in today's mailbag.
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New 52-week highs (as of 7/14/11): Prestige Brands (PBH).
Make sure to read today's mailbag so you understand the big and easy money you can make using DRIPs... Send your feedback to feedback@stansberrryesearch.com.
"Over 20 years ago I bought into a Utilities Fund. I got small dividend checks for several years and then I 'discovered' their Reinvestment Program. Since I didn't need the dividend checks (I was still working at the time) I enrolled. Shares ran $8-$10 and the dividend was 6.5¢ a share per month. Over the years my 100-share investment has grown to over 600 shares and growing faster. Every 100 shares I request a Stock Certificate for that amount. The adage being, 'You don't own it until you can hold it.'" – Paid-up subscriber Howard C.
"I subscribe to Dan Ferris 12%... which I like A LOT!
"I have made $$ in DRIPs with MDU and MGEE up about 292% and 300% since 2000. I made $$ with Regions Financial but sold for a Profit. I made quite a bit from a long term Drip with US West but also sold most of it for profit in Jan 2000. The residual shares of Qwest recently went to CTL... which I am now 'Dripping as well.' I have made quite a bit in ATT's Drip for years. I also had DQE and made about 205% I have had Frontier since it was Citizens and even with the price reduction and DIV cuts (first eliminating the stock DIV... then from $1.00 to $0.75), I recently added up all the cash plus shares and am up 227%.
"As I mentioned to Mr. Ferris, I made well over 400% in Texaco/Chevron Drip for my kids since the market highs in 2000. Also 411% in WEC (which I also own). But an additional point. My WEC is up 392% since I opened it in about 1995. BUT my kids accounts are 411% since 2000!! SO... This is a perfect example of what Dan Ferris mentions about NOT BUYING even a good stock at too high a price. Now 392% is GOOD! But I obviously didn't need to hold it the extra 5 years. So Ferris comment about the right price is SPOT ON." – Anonymous
Regards,
Sean Goldsmith
Baltimore, Maryland
July 14, 2011
Bernanke reneges... Gold and silver jump... Moody's and S&P warn of downgrade... Tepper's words come back... Why DRIPs are great... States prepare for default...