One of the most stable sectors for income...

One of the most stable sectors for income... A government-appointed monopoly... The new utilities... You pay them when you use your computer... This 'Digital Utility' pays one of the safest big dividends in the market today...
 

 One of the greatest ways in history for retirees to collect income was born from the Great Depression...

 

In the early days, utility companies providing electrical power weren't regulated. Multiple companies would compete for the same clients, sometimes even building duplicate distribution channels.

 

 In the late 1880s in Chicago, for example, there were as many as seven companies competing with each other, according to the National Bureau of Economic Research.

 

The competing firms drove the cost of gas down from $2.25 per thousand cubic feet (mcf) to $1 per mcf.

 

But this kind of competition wasn't available outside major cities, where populations weren't as dense or as wealthy.

 

Price wars erupted amongst utilities in big cities and margins evaporated. In Chicago, all the companies merged into a single firm to survive. Gas prices rose 25% after the merger. Other large cities followed suit.

 

So began the price gouging.

 

 As Dr. David "Doc" Eifrig wrote in the December 2010 issue of Retirement Millionaire...

 

A city needs just one source of electrical power. One provider of anything is a monopoly. And since a monopoly is the only game in town, it tends to gouge customers and provide shoddy service. That's why the government created the utility industry.   For generations, utilities – the entrenched monopoly providers of local water or electricity service – have enjoyed guaranteed profits. If you want indoor plumbing or a refrigerator, you've got to do business with the local utilities. In exchange for that monopoly position, traditional utilities have accepted heavy regulations that limit their ability to raise prices... Essentially, municipalities assured themselves reliable power in exchange for guaranteeing the companies' profits.

 

 That's why utility companies are a safe component to a retiree's portfolio... They're able to pay large, stable dividends due to their monopoly status and steady earnings.

 

Doc still recommends holding some of your portfolio in traditional utilities for the reasons discussed above... even though, like everywhere else, yields in the utility sector aren't what they used to be (around 3.5% today).

 

But with the advent of technology, a new type of utility has emerged... They're just as dominant as electricity providers... and they play just as integral a role in our everyday lives. Doc has dubbed these companies "Digital Utilities." Every time you turn on your computer, you're paying these firms. As he wrote...

 

These companies enjoy the same kind of monopoly position on a vital service as old school power and water companies. But these new utilities are even better than conventional utilities. Old-fashioned utilities were limited by geography – for instance, the power company in Baltimore wasn't going to open a branch office in Toronto.   But nothing constrains these new Digital Utilities. They are international in scope. They can sell their vital services anywhere in the world. Even better, they're lightly regulated. Their pricing power is unlimited. So their growth potential (and their stocks' prospects for capital gains) is wide open... at the same time that they pay safe reliable income, just like a utility.

 

 Remember, in the early days of traditional utilities, a handful of firms were competing for customers. But the industry consolidated, leaving dominant players in every city.

 

A similar process has happened in the digital age. A decade ago, you could choose from a dozen search engines... Remember WebCrawler, Excite, AltaVista, and Lycos?

 

Today, there are two primary search engines. It's the same with operating systems... In the early days of computing, you could choose from multiple word-processing packages. Today, only a couple exist... with one dominant software in the space (Microsoft). Here's how Doc put it...

 

Consolidations and mergers have led to a handful of "Digital Utilities." Each company is a dominant player in its sector. Traditional utilities have been a cornerstone of retirement investing. They are considered safe-to-buy businesses that supply electricity and natural gas to every household. And utilities throw off cash dividends that can supplement a retiree's income. I've owned a few utilities in my investment career, each of which supplemented my cash flows well.   But today we're looking at a new type of utility business – Digital Utilities. Each company is the dominant player in its industry. Most have near-monopoly positions. They can't be uprooted. Moreover, they sell their goods and services around the world, so local government regulators can't control them. Regulators can't limit their profits, prices, and returns on capital the way they control traditional utilities.   The information flow over the Internet and airwaves is the new electricity and gas of this century – it's the new world of Digital Utilities. Every time you use the computer on the desk at home, the cell phone in your hand, or your favorite search engine... these businesses collect a little more money.

 

 In December 2010, Doc recommended four Digital Utilities:

 

•	Intel – The semiconductor giant has 80% of the world's microprocessor market.
•	Microsoft – The dominant software company.
•	Cisco – The company that makes the routers and switches that power the Internet.
•	Google – The dominant search engine.

 

The companies all share traits that make for a perfect utility: Impeccable financials, brand loyalty and recognition, captive users, friendliness to shareholders, and regular and frequent use of their services.

 

 If you had followed Doc's advice and purchased Intel in November 2010, you would be up around 83% including dividends. The company has increased its dividend payout twice since then... And you'd be earning 4.2% a year on your original purchase price.

 

Microsoft is up 91% since then. The software giant has increased its payout four times. In November 2010, Microsoft was yielding 2.4%. Today, you'd be earning 4.6% on your original purchase price.

 

Cisco is up 9% and has increased its dividend four times since November 2010. The stock was yielding 1% back then. Today, you'd be earning 3.1% on your original investment. Google is up 83% over the same period. Though it doesn't pay a dividend, it does reward shareholders through share buybacks.

 

Not all of the Digital Utilities Doc originally recommended are still in the Retirement Millionaire portfolio... He stopped out of some and sold and rebought others at later dates. The numbers we provide above are just to show the value of holding these Digital Utilities over a long period of time – not necessarily the actual gains his subscribers achieved.

 

 In his latest Retirement Millionaire – out yesterday – Doc recommended another Digital Utility... This company and its closest competitor control about 70% of their sector. This company provides a service we use every day... And it's incredibly difficult for a new company to enter this space.

 

The company generated $11 billion in free cash flow over the past 12 months... It trades for around 11 times earnings. And it pays a huge dividend. It's one of the cheapest, highest-quality stocks in the market today.

 

 You can get immediate access to Doc's latest pick with a 100% risk-free trial subscription to Retirement Millionaire. After reading through Doc's work, if you decide it's not for you, we'll give you a full refund.

 

And Retirement Millionaire is more than just profitable investment advice... Every month, he also shares his best tips for leading a healthier and wealthier life. You can start your trial subscription to Retirement Millionaire by clicking here.

 

 

 New 52-week highs (as of 10/8/14): Deutsche X-trackers Harvest China A-Shares Fund (ASHR), Becton Dickinson (BDX), CVS Health (CVS), Invesco Value Municipal Income Trust Fund (IIM), Coca-Cola (KO), Altria (MO), Nuveen AMT-Free Municipal Income Fund (NEA), Nuveen Municipal Opportunity Fund (NIO), and Pepsico (PEP).

 

 Dozens of subscribers wrote in to tell us what they thought of S&A Global Contrarian editor Kim Iskyan's upcoming trip to Venezuela. We're publishing some of our favorites below. Tell us what's on your mind at feedback@stansberryresearch.com.

 

 "In addition to being a domestic oil and gas producer, I have a sailboat in the lower Caribbean, currently in the Island of Grenada. We monitor sailing safety between the islands of Grenada and Trinidad, to the ABC Islands off of the coast of Venezuela. Sailors transiting these waters during the past two years have been boarded and some have been killed. Reports are that some of the killers were 'police.' Only a complete fool sails off of the Venezuela coast. There was a young couple from Venezuela on a sailboat in Grenada that we made friends with last year. Their parents had given them the boat and told them to flee the country before they were kidnapped and killed. The government is a disaster. They have nationalized all of the oil wells and do not have the money to keep up the production. The country is imploding and unsafe. All I want to know is, if you are kidnapped and held for ransom, will my subscription rates go up?" – Paid-up subscriber George Todd

 

 "I am originally from Caracas Venezuela. I left the country 12 years ago when I realized the government intentions, which were confirmed by now. The country right now if being held hostage by a group of people under the umbrella of a social revolution but in reality they are a group delinquents sucking all the wealth of the country for their benefit.

 

"I am sure this system is unsustainable but I do not believe change will come soon. If you still what to see for yourself, keep in mind that the black market exchange rate is aprox. 100 bs/US$ while the official rate is 6.3 bs/US$ (you can imagine the distortion this huge difference makes in the market). So try to sell US$ to locals you can trust and try to pay as much as you can in Bs.

 

"I highly recommend you do not go at this moment but if you still want to go I can put you in contact with a few friends. One of them is the owner of a newspaper called 'El Impulso.' He has a very good pulse about the county. He has become a magician trying to buy paper to print his daily editions. He tells me he has inventory just for days and never knows if he is going to be able to print it next week. This is the kind of environment right know for private enterprise. I wish you luck and please do not go out at night. Stay in the hotel. The best hotels are in: 'Las Mercedes' and 'El Rosal' and there are very good restaurants around these areas." – Paid-up subscriber Ricardo Lopez

 

 "I'm real curious to see if you can even find one company or sector to invest in while in Venezuela. The only thing they export now is hate towards the U.S. The only thing they have imported is a bunch of Cubans for health care and Iranians to taunt the U.S with some type of building they are constructing. They've ruined or ran out any reasonable profitable business with their communistic ideas. Sorry, I just wanted to vent as I married a lovely lady from Puerto Ayacucho, Venezuela and hear about the mess they have down there from her family. It was once a great place to visit and invest in. Make sure you take your own toilet paper." – Paid-up subscriber Joe Sullivan

 

 "My son in law is a Venezuelan and owns a bond trading firm in New York specializing mostly in emerging market bonds. He knows of many profitable opportunities in Venezuela. He travels there several times a month. It is not as bad as the media make it out to be." – Paid-up subscriber Dennis J. Lewis

 

 "I am an American Citizen born and raised in Cuba. I came to the United States from that miserable regime in 1962 and never looked back, meaning I never even revisited my homeland. After all, I have everything I need in this country. Venezuela is just another Cuba. It is not a cyclical situation or one where there will necessarily be a turnaround due the inevitability of sentiment that points to a tunnel searching for some ray of light. In countries like Venezuela and Cuba there is no light at the end of the tunnel. Sentiment about Venezuela is not sufficiently pessimistic. That miserable regime has a long way to go, and there is nothing stopping it. The regime has complete control of a miserable situation and of an incredibly ignorant populace. I lived exactly the same thing in Cuba. Its regime and general social and economic conditions went sour from the get go. And it has been downhill for more than 50 years. Do not chase a pipe dream. Stay away, unless, of course, you became aware that a regime change were in the offing. Just a friendly advice from a hardened veteran of communist misery! Good luck." – Paid-up subscriber Carlot Urrutia

 

 "When I read that Kim is headed to Venezuela I let out a little giggle. Yep, Kim is so crazy it makes a grown man giggle. Maybe Doc can refer him to a good neuro to get his head examined. A reasonable sane person would not do what he does. For his insight and travel stories my Alliance membership has gotten its value many times over. Keep up the great work guys." – Paid-up subscriber Cameron Robertson

 

Regards,

 

Sean Goldsmith

Baltimore, Maryland

October 9, 2014

 

How to make a fortune in resource stocks...

 

Yesterday, we featured the first half of our excellent interview with resource billionaire Rick Rule.

 

In today's Digest Premium, Rick explains how to determine where we are in a commodity cycle... and his best advice for profiting off the cyclicality in commodities...

 

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

How to make a fortune in resource stocks...
 

Editor's note: Yesterday, we featured the first half of our excellent interview with resource billionaire Rick Rule. In today's Digest Premium, Rick explains how to determine where we are in a commodity cycle... and his best advice for profiting off the cyclicality in commodities...

 

 

S&A: Are there any tricks for distinguishing where we are in a particular commodity's cycle?

 

Rule: Yes... In any resource, when the industry's median production cost exceeds the commodity's selling price – in other words, when it costs companies more to produce that commodity than the commodity is worth on the market – that industry is in liquidation.

 

There are two potential outcomes at that point... either the price has to rise, or that commodity will no longer be for sale on the market. That is a strong sign that you're approaching or have arrived at the bottom of a cycle.

 

Conversely, when commodity producers as a whole enjoy 50% or better pre-tax margins, and returns on capital employed exceed the S&P 500's returns by 50% or more, you should be looking for the exits. The stage is set for a serious decline in the price on that commodity.

 

In other words, markets work. The cure for low prices is low prices, and the cure for high prices is high prices.

 

S&A: You've made a career of profiting from resource cyclicality. What advice do you have for readers to do the same?

 

Rule: Well, technically it's as simple as following the old Wall Street adage of "buy low and sell high." You want to buy when supply exceeds demand and prices are low, and sell when demand exceeds supply and prices are high. It sounds easy. But in practice, it's very difficult to follow.

 

Most people don't have the courage to buy something that is dirt-cheap and has gone nowhere for years... But that's what it takes to "buy low" in the resource sector. Similarly, most people don't have the discipline to sell something that has soared hundreds or thousands of percent... But that's what it takes to "sell high."

 

So the first thing that one must do is learn to master him or herself before attempting to master cyclicality.

 

Warren Buffett famously said you shouldn't buy a share of stock unless you know it well enough that you would be delighted to see it fall 25% in price, so you could buy more at a 25% discount.

 

That is also how you must approach the resource sector. Even when you buy low, it is certain many of your investments will go lower before they go higher. You absolutely will buy shares of XYZ exploration for $1 a share and see it fall to $0.70 a share. If you did your research, the stock will be a substantially better buy at $0.70 a share than it was at $1 a share, and you need to buy it.

 

When you buy resources stocks, you need to recognize that they're not merely trading vehicles. They represent fractional ownership of a business.

 

And to profit from them, I think you have to go through the type of analysis your colleague Dan Ferris goes through.

 

What's the company worth? If the company is worth $1 billion and there are 10 million shares outstanding, what is the value per share of the business?

 

That's a simple example, but many people don't go even that far.

 

If you have a good sense of what something is worth, and it declines in price... you may have the courage and the sense to buy more. If it escalates fairly rapidly in price to the point where its price exceeds your estimate of its value, you might make a rational sell decision.

 

But without that sort of grounding in value and understanding, most people have no business in resource stocks.

 

S&A: Thanks for the insight, Rick.

 

Rule: You're welcome. Thanks for having me.

 

 

Editor's note: Many of Stansberry Research's best-performing recommendations of all time have come from natural resource stocks, including Seabridge Gold (995%), ATAC Resources (597%), Silver Wheaton (345%), Jinshan Gold Mines (339%), and Northern Dynasty (322%).

 

That's why several commodity experts teamed up to create the most comprehensive guide to resource investing that Stansberry Research has ever published. Whether you're just starting out in resources or looking for ways to reduce your risk while increasing your profits, this guide is a must-read. Click here for the details.

How to make a fortune in resource stocks...

 

Yesterday, we featured the first half of our excellent interview with resource billionaire Rick Rule.

 

In today's Digest Premium, Rick explains how to determine where we are in a commodity cycle... and his best advice for profiting off the cyclicality in commodities...

 

To continue reading, scroll down or click here.