The Spirit of the Continental
At the beginning of the American War of Independence, the Continental Congress decided to print money, the Continental. The value was supposed to be based on the Spanish dollar, the famous "pieces of eight," which equaled eight silver Spanish reales.
The Continental Congress intended on printing 2 million Continentals. It soon realized it didn't have enough to pay its debts (sound familiar?). So by 1779, the congress had printed more than 242 million Continentals. The British waged a counterfeiting campaign, compounding the problem. By the time the Continental Congress stopped printing them in 1781, it took $168 worth of Continentals to buy a $1 silver coin. Hence the old saying, "Not worth a Continental."
The Spirit of the Continental lives on in today's U.S. dollar... The Federal Reserve came about in 1913, largely as a political response to the Panic of 1907. Among the Fed's stated goals today are "conducting monetary policy... in pursuit of maximum employment, stable prices, and moderate long-term interest rates," and "maintaining the stability of the financial system."
I'll let you judge how stable the financial system is and how the Fed's doing at maintaining "maximum employment, stable prices, and moderate long-term interest rates." But the monetary policy? The Fed has done quite a number on your money: What cost $1 in 1913 now costs more than $21. What cost $1 in 2009 would have cost about $0.05 in 1913. Hence, the Federal Reserve has reduced the value of the U.S. dollar by approximately 95% during its 97-year tenure.
And the Fed's not done yet! Not by a long shot. In fact, Tim Geithner told the whole world yesterday the devaluation of the U.S. dollar is an absolute certainty now. He didn't put it in so many words. They never do. But according to Reuters, he said, "It is very important for people to understand that the United States of America, and no country around the world, can devalue its way to prosperity, to [be] competitive. It is not a viable, feasible strategy and we will not engage in it."
Geither sounds a lot like a child denying the inevitable. I learned a lot about this sort of thing growing up: "We will not devalue the currency" lives in my mind next to, "I'm not getting in that bathtub," "I'm not eating those vegetables," and perhaps most memorable of all for me, "I'm not going to bed now, because I'm not tired." Every time I uttered that last one, I was sawing logs within minutes.
Maybe after its rapid rise, the gold price is in for some type of correction. I don't know, and I don't care. The U.S. Treasury Secretary has virtually guaranteed gold will increase in value in the coming years, how can you afford not to own it? The government is manipulating the gold price; and it's determined to shove it straight up.
If you're an Extreme Value shareholder, I want you to SELL H&R Block (NYSE: HRB). The IRS is withdrawing its support for refund anticipation loans. Without that extra "oomph" to earnings, the business' intrinsic value is permanently impaired. A permanent impairment to earnings is a dealbreaker.
I'll give you more details in Monday's weekly update, but clearly, the government wants refund loans to disappear. The need for short-term loans by cash-strapped individuals will never go away. The government can't change that. But it can make it impossible for H&R Block and other tax preparers to benefit from it, and it has made it clear it's determined to do so.
Substantial dividend payments helped reduce the losses and preserve the capital of H&R Block shareholders.
Over the next several years, if you don't find great stocks (with much better businesses than H&R Block) that pay dividends, you're unlikely to do well in the stock market.
You have three ways to make money in stocks: higher valuations, earnings growth, and dividends. You can count on higher valuations during bull markets. But during sideways markets like we've had since January 2000, higher valuations are off the table. From here on out, the stock market will go sideways, ratcheting up and down. Between now, and say, 2016 or so, P/E ratios will fall, on average.
Without higher valuations to help you make money in stocks, you must rely on the other two sources of return. More than ever, you must be able to find businesses that can grow earnings, and you must find businesses that pay dividends – preferably rising dividends. In fact, H&R Block has been a great dividend payer. It's grown its dividend every year for 12 years. In the past 10 years, the dividend grew at a rate of 8.88% per year. That's a great performance. (Without the refund loan business, it's not sustainable.)
The sideways market puts the writing on the wall... Investors who don't make it a priority to seek out the best dividend-paying stocks will do poorly over the next five to 10 years. You need dividends now more than ever. That's why I recently agreed to take over Stansberry & Associate's The 12% Letter.
Our latest find is a group of stocks called the Dividend Diluvia. "Diluvia" is a Latin word referring to the "flood" of dividends these stocks produce. The companies are mostly in recession-resistant industries. They have little or no debt, so they're very safe. And they've recently grown their dividends as much as 89% per year. That sounds like crazy dividend growth, but in at least one case, it's true.
I'm featuring this idea in the next issue of The 12% Letter, which comes out in a couple days. I've found a company with a huge competitive advantage, high returns on capital, and 18%-plus dividend growth over the past 10 years.
If you want to get access to the list of companies that grow dividends faster than most others and to all upcoming issues of The 12% Letter, in which we'll discuss the best dividend-paying stocks in the world today, just click here.
| Great Minds Wanted, Wicked Pens Adored
Stansberry & Associates Investment Research is hiring analysts this fall. We're looking for people with a genuine passion for finance. Formal experience may not matter, depending on the candidate. The ideal candidate has a keen mind, lives and breathes the world's markets, and writes great stories. If you've ever wanted to make a living reading, writing, and thinking, please send us:
No other information is necessary. Send via e-mail, with subject line "Analyst" to: compellinginsight@gmail.com. |
Rob, the gentleman who asked where to buy gold in yesterday's Digest, sent us a note of appreciation for our speedy reply. We have one thing to add to yesterday's response... Just knowing reputable dealers is a good place to start. But if you want to take it a step further, we recommend you read our Gold Investor's Bible...
Since we started covering gold in 2003, we've become friends with the best gold analysts, gold dealers, and gold traders in the country. And they've all shared their best secrets with us. We want to pass those secrets along to you...
Our gold book shows you how to collect dividends of 20% a year on your gold and how to save hundreds, even thousands, of dollars when buying gold bullion. We also explain how to avoid paying tax on your ETF sales and how to legally take as much gold as you want out of the country. In short, we tell you every trick and gold investing strategy we've discovered over the past decade.
We are currently offering our Gold Investor's Bible for free (you just pay $5 shipping and handling). To receive the book, click here.
New Highs: First Trust Dow Jones Select Microcap (FDM), Powershares Dynamic Biotech & Genome (PBE), Silver Wheaton Corp (SLW), Silver Standard Resource (SSRI), Silvercorp Metal (WVM), Coca-Cola Co (KO), Enzon Pharmaceuticals (ENZN), Forest Laboratories (FRX), WD-40 (WDFC), Penn Virginia Resource Partners (PVR), Chimera Investment (CIM), WR Berkley (WRB), Enterprises Products Partners (EPD), Kinder Morgan Energy Partners (KMP), ConocoPhillips (COP), Amerigas Partners (APU), Altria Group (MO).
In the mailbag, one subscriber asks about calculating dividend reinvestments... and another accuses us of being silent on St. Joe. Us? Silent? That's a new one. As always, direct your vitriol to feedback@stansberryresearch.com.
"Understanding that your customers pay for your service so they don't really have to do any 'homework' or research themselves (I am in the same boat, so not pointing fingers), it nevertheless would behoove your readers to be able to read the Einhorn takedown of JOE, which has been available online for several days now, one such link is http://www.businessinsider.com/david-einhorn-presentation-joe-2010-10#-139. I feel in such unusual circumstances, you should offer your customers as much information as possible, so they may better make their investment decisions, rather than just semi-defensive statements like 'It's a long term hold. Nothing has changed.' Cheers," – Paid-up subscriber Bruce Mitchell
Ferris comment: To be fair, Bruce, Porter wrote more than 2,700 words on St. Joe Company in Friday's Digest – including this link to Einhorn's entire presentation. And I wrote my Extreme Value readers a full update on the company Monday. By the way, I can't find that quote you call "semi-defensive." Are you sure you're not quoting Fairholme Capital's Bruce Berkowitz, a St. Joe investor? When asked his opinion of Einhorn's short call, Berkowitz responded: "If someone wants to lower the price of a product I'm buying, I'm OK with that. We're long-term investors here." You might have seen that in Monday's Digest.
"For Dan Ferris... you answered a question from a subscriber (scientist like me) about DRIPS compounding effects. The computations appear to be impressive but there are two major problems that, in my mind, severely limit this utopia. The first is that during the last 30 years, the true inflation rate is between 5% and 6 % (not the governments CPI data). This comes form my own experiences and other sources trying to correct for all the misinformation. The other problem is taxes or fees or anything else that eats away at the apparent earnings. Therefore, the real earnings for this period come far more from buying low and holding than the compounding. What happens when you correct for these interferences?" – Paid-up subscriber C. Glen Wensley
Ferris comment: Without reinvesting dividends over a long period of time, most investors won't benefit from owning stocks. Those who reinvest dividends in great stocks that grow dividends every year for decades will outperform the armies of self-proclaimed daytraders, stock pickers, and others who think they can actively manage their money effectively, but are ill-suited to the task.
I haven't studied tax treatments enough, and you obviously have, so maybe you can forward your work to us. Please make clear how having a lot more income is worse than having a lot less. Also, I'm unfamiliar with DRIP accounts that destroy compounding by taking large fees. Can you please provide us with a list of those companies?
Regards,
Dan Ferris
Medford, Oregon
October 19, 2010The Spirit of the Continental... Geithner's gold price guarantee... An Extreme Value SELL... Sideways markets... Big dividend payers...