Fri, May 30, 2014|Brian Hunt

The inflation-proof, crisis-proof savings vehicle used by the world's wealthiest people...

In today's Digest, we address a major concern for investors... and come up with a controversial conclusion...

We have a good idea of what investors believe at any given time.

We often know it before they do. We know what people actually believe... rather than what they tell a poll-taker or write down on a survey. We know what people won't even admit to themselves.

We know their deepest fears. We know when they are optimistic. We know when they are deeply pessimistic.

How do we know all this personal information?

By carefully tracking our sales. By tracking what areas of our websites get the most "clicks."

It's one thing to fill out a survey. It's an entirely different thing to actually spend your money on investment research... and then put thousands or millions of dollars to work based on that information.

What people say and what people do are often different things.

What do our sales results tell us right now?

They tell us investors are terrified... They expect another 2008-style financial crisis to occur soon.

We have frequent discussions on how to sell our products at S&A. Right now, our marketers are almost completely resistant to the idea of trying to sell research about long-term investing. They know not many people want to buy it.

After all, if people believe the global financial system is going to blow up, why make long-term investments?

Trying to convince investors to buy research with a "bullish view" right now is like trying to sell winter coats in southern Florida.

It's far, far easier to sell research about the next currency crisis... or how Russia's military actions could help wreck the global economy. It's easier to sell research about Bitcoin than it is to sell research about making investments in American businesses.

People refuse to believe the American economy could actually do well over the next five years.

Of course, we like to think our paid-up subscribers are more informed than the average investor. But even informed investors are human. They can get caught up in the same manias as anybody.

We don't blame folks for being worried. We've highlighted many of the dangers facing investors right now. But one of our core recommendations strikes many people as controversial... even crazy, given some of the warnings our firm has made.

What's the controversial recommendation?

Own stocks. Own businesses.

Specifically, own the world's best, most capital-efficient businesses. Own businesses with excellent brand names and large competitive advantages. Own businesses that are committed to treating shareholders well.

These companies are better places to park long-term wealth than any currency. They are better for parking long-term wealth than gold. There are several major reasons why they're an incredible vehicle for your money...

For one, holding a great business is extremely easy. It's as easy as holding cash in the bank.

Once you buy shares of a great business, there are no storage costs. There are no transportation costs. You don't have to get a safe-deposit box or a home safe, like you do with gold.

Shares of great businesses are liquid and freely traded.

There's a huge market for these business. It's open most every business day.

It's cheap to buy great businesses. You don't get hit with big fees and commissions when you buy and sell them. You can't say that about real estate or art.

S&A's favorite businesses also pay out extremely reliable, extremely safe income to their shareholders.

Discount retailer Wal-Mart, for example, has increased its dividend payment every year for 41 years. International oil and gas company ExxonMobil has increased its dividend payment every year for 32 years. Soft-drink giant Coca-Cola has increased its dividend payment every year for 52 years.

These businesses have increased dividends through recessions, government shutdowns, wars, and real estate busts. They paid their dividends during the 2008-2009 financial crisis. They sailed through the ultimate dividend "stress test."

Great businesses are great inflation-defense vehicles. They have long histories of rising in value when paper currencies decline in value.

This is probably the most important aspect of these stocks...

You see, governments have a long history of debasing currencies.

When governments want to pay for big social programs or wars, they often print up extra currency units (like dollars). Every currency unit that is printed devalues the existing currency units. This is called "inflating" the money supply.

Inflation is a way for governments to quietly clip small bits of value from your bank account and your wallet.

Inflation is one of the greatest dangers a person saving for retirement faces. It can crush the future buying power of the money you save today.

This is why owning great businesses is so important. Great businesses hold their value through inflationary periods.

The world's most successful investor, Warren Buffett, figured this out a long time ago. Buffett urges people who are worried about paper-currency declines to own world-class businesses.

In a March 2013 DailyWealth essay, Porter walked us through Buffett's thinking...

The greatest investor of the last inflationary cycle – Warren Buffett – has never bought a gold stock.

Instead, he has focused on an entirely different group of stocks...

Buffett figured out, long before anyone else I can name, that the best way to profit from inflation wasn't by buying hard assets or the companies that produce them... Instead, you should buy companies that don't require any additional capital at all (or require very little).

Buffett figured out that companies that don't require much in ongoing capital investments can simply raise their prices to combat inflation. Then, they can pay out the excess returns to shareholders. The result? Higher dividends every year.

Buffett says these companies have "economic goodwill." I call them "capital efficient." But it's the same idea.

Most of the extremely valuable, highly capital-efficient businesses produce simple, branded consumer products that are known for consistent quality and consumer loyalty... such as Heinz ketchup... Coca-Cola's soft drinks... McDonald's hamburgers... and Hershey chocolate.

Porter went on to describe how Hershey is a great example of this idea at work...

I recommended Hershey to my Investment Advisory subscribers back in 2007. At the time, I told readers it would likely be the most profitable stock recommendation I'll make in my life.

From 2005 to 2012, Hershey repurchased more than $1 billion worth of its own stock – more than 10% of the company, in addition to paying large ($200 million-plus) cash dividends.

Hershey can afford to return so much capital to its shareholders because it requires little capital to grow. In 1997, the firm invested $172 million in property and equipment. By the end of 2012, its annual capital budget had only increased to $259 million – essentially unchanged. Meanwhile, cash profits had reached $836 million – growth of more than 150%.

This is the beauty of a capital-efficient business: While sales and profits grow, capital investments don't.

Hershey doesn't have to invent chocolate year after year. It doesn't have to build new plants. Because it has the love of its customers, it doesn't even have to spend that much on advertising. Over time, it can spend less and less on advertising because its installed user base grows and grows.

That's what makes Hershey a very capital-efficient business.

Porter also described how capital-efficient businesses are better for long-term wealth preservation than gold stocks...

A business like Hershey tends to do very well during inflationary periods... even better than gold stocks.

I've studied the long-term returns in Hershey stock. I've studied the returns of gold and gold stocks. And since 1980, the price of an ounce of Hershey chocolate has risen roughly as much as the price of an ounce of gold.

But here's the best thing... Hershey doesn't have to mine chocolate. It doesn't have to spend money buying up equipment and new holes in the ground, which is enormously expensive. And it doesn't have to deplete its balance sheet to make money.

Every time a gold company sells a bar of gold, it loses something from its balance sheet. Every time Hershey sells a chocolate bar, it loses nothing from its balance sheet.

Think about this for a minute. A gold mine is a depleting asset. To make money, it must slowly sell off parts of itself. A chocolate factory is not. To make money, it must simply produce the product its customers are accustomed to. Some routine maintenance is necessary, but that's about it.

In sum, if you want to protect yourself from inflation... and if you want to become truly wealthy through investing... your best, safest choice is to buy these kinds of companies – the Hersheys, the Coca-Colas, and the McDonald's.

These businesses will be able to raise their prices along with inflation... while having to spend comparatively little on growing and maintaining their business. That is exactly why Buffett focuses on these companies... and it's exactly why I've been telling my readers to buy them.

As we mentioned, this advice is controversial... especially in the investment-newsletter business. When a newsletter writer sees reasons for caution, he's expected to say, "Get out of stocks and buy gold, gold stocks, and guns."

Regular readers know we recommend gold and silver as "crisis hedges." We recommended buying gold in 2003... long before most people jumped on the bandwagon. We're long-term owners of gold.

But we've done the research. We've looked at the numbers. We know great businesses do a better job of preserving and growing wealth over the long term.

Consider that from the start of 1990 until last month – a time period that includes booms and busts for both stocks and gold – gold has returned 222%. ExxonMobil has returned 1,573%. Wal-Mart has returned 1,775%. Coke has returned investors 1,270% Health care giant Johnson & Johnson has returned 2,213%. Fast-food dominator McDonald's has returned 1,660%. (Note: These numbers factor in dividend reinvestment.)

Keep in mind… these companies were well-established enterprises in 1990. It wasn't like you were buying them as bets on speculative startups.

The numbers are clear. Owning well-run businesses that generate consistent cash flow and dividends is a better long-term strategy than owning gold. (Again, we're gold fans and gold owners in general. Save your hate mail for someone else.)

If you're concerned about another financial crisis – and as I mentioned, we know you probably are – we encourage you to think about today's idea... and how the world's greatest investor approaches it.

Own some gold. Own some real estate. But don't abandon the proven wealth-building power of owning the world's best businesses. Don't pass up a chance to buy a great business for a great price.

New 52-week highs (as of 5/29/14): Apple (AAPL), Anadarko Petroleum (APC), Blackstone Mortgage Trust (BXMT), Callon Petroleum (CPE), Comstock Resources (CRK), Carrizo Oil & Gas (CRZO), CVS Caremark (CVS), ProShares Ultra Oil & Gas Fund (DIG), Devon Energy (DVN), SPDR Euro Stoxx 50 Fund (FEZ), Freehold Royalties (FRU.TO), WisdomTree Europe Hedged Equity Fund (HEDJ), Integrated Device Technology (IDTI), Altria Group (MO), Nuveen AMT-Free Municipal Income Fund (NEA), AllianzGI Equity & Convertible Fund (NIE), ProShares S&P 500 BuyWrite Fund (PBP), Pepsico (PEP), PowerShares QQQ Fund (QQQ), ProShares Ultra Technology Fund (ROM), Sabine Royalty Trust (SBR), Sanchez Energy (SN), Superior Energy Services (SPN), ProShares Ultra S&P 500 Fund (SSO), Skyworks Solutions (SWKS), The Travelers Companies (TRV), Union Pacific (UNP), and Walgreens (WAG).

In today's mailbag… another sign of the top, and some kind words from a subscriber who actually appreciates us telling him what NOT to do. We'll take it. Send your notes to feedback@stansberryresearch.com.

"Sign of the top... Steve Ballmer buying the Clippers for $2 billion when the previous high for an NBA franchise was $550m. Isn't this the definition of asset inflation, especially as a luxury good? Keep up the good work!" – Paid-up subscriber Dan Stringer

"I am in the industry and have followed your work for about eight years now. I have read many newsletters over the years and the work put out by Stansberry Research is outstanding (not to mention cheap). Not only do I find plenty of good ideas about where to invest, but probably more valuable are the times when you and your staff highlight the areas to stay away from, or at least what to watch out for.

Most people have a much easier time buying a stock than they do selling it. Unfortunately, I don't think many people would pay for a newsletter that told them what NOT to buy. Because it would probably make them a lot more money." – Paid-up subscriber Jeff J Wright

Regards,

Brian Hunt

Delray Beach, Florida

May 30, 2014

Why these two companies both pay higher dividends than you realize…

In today's Digest Premium, Stansberry's Investment Advisory lead analyst Bryan Beach discusses two special-dividend payers that are also two of the top-ranked capital-efficient businesses in the market today.

To subscribe to Digest Premium and access today's analysis, click here.

Why these two companies both pay higher dividends than you realize…

Editor's note: We've spent most of the week talking about companies that routinely pay large special dividends and how you can use them to boost your investment income. It's a strategy Tom Dyson, publisher of our corporate affiliate The Palm Beach Letter, has conducted extensive research on.

Our own Bryan Beach, lead analyst for Stansberry's Investment Advisory, also recently completed work screening the market for companies that pay huge, special dividends every year. Here's what he found…

As Tom Dyson discussed earlier this week in Digest Premium, the world is starved for income today.

The Federal Reserve has manipulated interest down so low, conservative investors can't generate a satisfactory return. Treasurys aren't beating inflation, and savings accounts are yielding nothing... So people are going into riskier assets like stocks and junk bonds – anything with an enticing yield.

But this rush for yield has driven these assets to record-high prices. Many big, blue-chip stocks with healthy yields are trading at all-time highs. They're not a value anymore. And junk bonds (paper issued by the riskiest companies) are yielding a near-record-low of 5% – meaning the price is near record highs.

In short, it's difficult to find yield today without overpaying for an asset... and assuming too much risk.

Most of the traditional areas for finding yield have been bid up too high. But there's still one income-producing corner of the equity market that presents a value. I'm talking about companies that pay special dividends.

Special dividends are simply nonscheduled, one-time payouts from a company. It can be in addition to (or in lieu of) a regular dividend.

Returning a large percentage of profits to shareholders is one aspect of what we call a "capital efficient" business. These kinds of companies are familiar to Investment Advisory and Stansberry Data subscribers.

When monitoring the companies that appear on our list of capital-efficient businesses, we noticed something interesting about insurer RLI and manufacturer National Presto.

RLI has been one of the top-ranked companies on our Property & Casualty (P&C) insurance list since the initial ranking back in 2012. It's by far the most expensive stock in our P&C population.

Most companies trade for around a 50% discount to float + book value. (Float represents premiums collected by the insurer that the insurer can invest for its own benefit. Book value is essentially the company's "net worth.") RLI, however, trades at a 10% PREMIUM to float + book value.

As we've explained before, the market's rich valuation is likely attributed to RLI's generous dividend policy. In addition to RLI's standard dividend – which itself yields around 2% – the company also announces a "special dividend" every November 15 to be paid right before year-end. Since 2010, RLI's special dividends have averaged a robust $5 per share.

National Presto has also been on our Capital Efficiency Monitor since the beginning. And we've covered the diversified manufacturer several times over the years.

On the surface, National Presto doesn't seem to have much in common with our top-ranked insurer. Its diversified product line includes small appliances for your kitchen, ammunition for your automatic weapons, and adult diapers for your incontinent uncle. But like RLI, National Presto also has a predictable and generous special-dividend schedule.

Many hedge funds and professional traders understand that big dividends can lead to big price moves. They develop trading strategies to buy shares (and usually put options, as well), capture the dividend, and quickly unload shares.

These special-dividend-paying stocks aren't the easiest to track down. But with some extra effort, and lots of patience, you can find them.

So we decided to compile our own list of special-dividend payers. Every company on the list has paid at least four special dividends since May 2008 and has a market capitalization of at least $100 million.

In Monday's Digest Premium, we'll share our findings with you… and explain the strategy we discovered to profit from these opportunities...

– Bryan Beach

Why these two companies both pay higher dividends than you realize…

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