The United States' 'massive fiscal cliff'... What's worse – taxes or inflation?... Wal-Mart raises its dividend – again... What Rick Rule thinks about natural gas... China owns fewer Treasurys for first time since 2001... Hooray for selling puts...
"Under current law, on Jan. 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date. All those things are hitting on the same day, basically. It's quite a big event."
In his statement to the House Financial Services Committee, Federal Reserve Chairman Ben Bernanke warned cutting spending and allowing Bush-era tax cuts to expire could plunge the economy into another crisis... "You have to protect the recovery in the near term," he warned.
We have one guess for what Helicopter Ben's answer to this problem will be... print, print, print. How else can the government make up for the spread of less tax revenue and high spending? After all, printing money is the only true skill we've seen Bernanke exhibit during his tenure.
We discussed Obama's proposed tax increases in a previous Digest. Most notably, Obama wants to increase the dividend tax rate for "the rich" to a higher personal income tax rate of 39.6%. Including the phasing out of certain deductions and a 3.8% investment tax surcharge in ObamaCare, the top dividend tax rate would be 44.8% – nearly triple today's 15% rate.
Before worrying too much about taxes eating away at your returns, consider the larger problem, inflation... In his latest 12% Letter update, Dan Ferris addressed readers' concerns about the potential tax hikes, putting the situation in perspective…
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First, taxes aren't the worst problem income investors face. Second, we've seen higher dividend tax rates in the past... And our [World Dominating Dividend Grower] stocks have sailed through those times without missing a beat in their dividend-payment schedule... |
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Even at 39.6%, taxes aren't your worst problem. That title goes to inflation. Last Saturday, billionaire investor Warren Buffett published his annual letter to shareholders of his company, Berkshire Hathaway. In that letter, Buffett pointed out that since 1965, inflation has been three times worse than taxes for income investors. Inflation has decimated the purchasing power of your hard-earned dollars. The dollar has fallen about 86% in the last 47 years. Today, it takes about $7 to buy what $1 bought back then. Over the next decade or two, we'll see inflation at least as bad as what we've seen during the last several decades. Owning great businesses will continue to be the best way for investors to beat inflation... |
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To beat inflation while paying a 39.6% tax, you need to make around 9% a year. And that's just to do slightly better than breakeven with taxes and inflation. |
Where do you find 9% returns in today's market? Bill Gross, manager of the world's largest bond fund at the money-management firm PIMCO, warns of a "new normal" in the markets... years of slow economic growth driven by deleveraging, regulation, and de-globalization. He expects 3% annual market returns. Mr. Buffett, America's foremost stock market cheerleader, says you can expect 4%-5% returns.
You certainly won't find those returns in government bonds (10-year Treasurys still yield around 2%) or savings accounts (the highest-level savings account at Bank of America now pays around half a percent). One of the only hopes you have of maintaining your purchasing power with safety is buying stock in a company that can earn double-digit returns on equity. Eventually, that company will pay those returns to you through capital gains, dividends, or share buybacks. (For a great recap on this, read Buffett's IBM example here.)
Take one of Dan's favorite stocks, Wal-Mart… The gargantuan retailer boasts a return on equity of more than 20%. And it's a relentless dividend-payer. Today, Wal-Mart raised its dividend 8.9% a share to $1.59. We asked Dan, who's busy preparing the March issue of Extreme Value, to weigh in on the issue…
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Wal-Mart has raised its dividend again today... just as it's done every year since it first started paying a dividend in March 1974... through inflation, wars, recessions, financial panics, market crashes, terrorist attacks, rising and falling interest rates and taxes, and several U.S. presidents... you name it. No matter what, the company grows relentlessly and provides its shareholders with a consistently rising stream of income. |
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There's arguably no better example in the world of what I'm showing my Extreme Value readers in detail this month: Business trumps politics. Wal-Mart has trumped the world's never-ending ills as few businesses ever have or will. It started with a single store in Arkansas in 1962 and now does $444 billion in annual sales... and still growing. Its $100 billion-plus international division is still growing at double-digit rates. |
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Wal-Mart returned $11.3 billion to shareholders last year. Since we first recommended the stock in Extreme Value in October 2006, the dividend is up 137%. There's no rational expectation, but more of the same. This business will be here five, 10, 20, even 50 years from now. |
In Dan's Extreme Value advisory, he keeps a list of recommendations like Wal-Mart, ones he calls "World Dominators." They are the No. 1 companies in their industry… making it next to impossible for newer companies to compete. World Dominators earn consistent profit margins and generate huge cash flows. Many of them buy back shares and pay dividends that increase year after year. They are some of the greatest businesses ever created. To learn more about an Extreme Value subscription and how to gain access to Dan's list of World Dominators, click here...
We detailed Small Stock Specialist editor Frank Curzio's bullish natural gas thesis in several Digests last month... We gave kudos for his 200% gain in Westport Innovations, the No. 1 natural-gas-powered engine manufacturer. The company has partnerships with virtually every major truck manufacturer in the world, including Cummins (U.S.), Weichai Power (Asia), and Volvo (Europe). And as we pointed out in this Digest, natural gas could soon compete with gasoline as a transportation fuel (considering gasoline today sells for more than $4 a gallon)…
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Natural gas as a transportation fuel is now 50% cheaper than regular gasoline. This huge price differential is causing some of the larger trucking fleets in the U.S. to switch from diesel to natural gas. And with more and more vehicles guzzling natural gas, there's huge demand for fueling stations... |
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According to the Census Bureau, the U.S. has more than 100,000 gasoline fueling stations (to serve 234 million vehicles). But we have only 1,000 natural gas fueling stations. We'll need thousands more to support the trucking industry's switch to natural gas... |
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Several U.S. companies are opening natural gas fueling stations... And most are trading at 52-week highs. But as Frank says, "We are still in the early stages of the natural gas infrastructure trend. In other words, investors can still cash in on this trend by investing in some of the companies building 'America's Natural Gas Highway.'" |
Frank believes once the natural-gas-fueling stations are built, the country's largest car manufacturers will start building cars that run on natural gas. Frank recently published a special report detailing this megatrend… all the factors driving it… which companies are involved… and the best way to invest in it. To learn more about Small Stock Specialist and how to get a copy of Frank's new natural gas report, click here...
Also, Frank recently had Rick Rule – one of our most trusted natural resource experts – on his S&A Investor Radio podcast to discuss the natural gas megatrend. They talked about the future of gas as a transportation fuel. (Rick believes it could fall below $2.) Rick also gave Frank the top five places in the world to find the best junior mining companies… To listen to Frank's interview with Rick, completely free, click here...
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New 52-week highs (as of 2/29/12): Pretium Resources (PVG.TO), Anheuser-Busch InBev (BUD), Procter & Gamble (PG), and Target (TGT).
Still more praise for selling puts. What other services of ours do you enjoy? Let us know here... feedback@stansberryresearch.com.
"My experience with PUT selling has been very similar to the feedback received from other S&A subscribers. I have been selling PUTs for 9 months now (through end of February 2012) and have averaged 2.5% per month. I have also been selling covered CALLs which has added an additional 1.5% per month. I have been following both Doc Eifrig's and Jeff Clark's advice with some of my own twists, including…
"Only selling PUTs on World Dominators and Companies that have been increasing Dividends at least 5 years in a row, that I would like to own anyway, and that have ROA > 9%, EV/EBITA ratios of < 11, & F P/E < 12.
"Two other goals are to 'attempt' to use strike prices equal to or less than the 'buy up to price' set by various S&A investment report writers (e.g. Dan Ferris), and wait for a 'down-turn'..." – Paid-up subscriber Larry
"A couple of years ago Porter pointed out that the risk profile of selling puts is the same as covered calls. Since then I have mastered selling puts and use some of the recommended stock trades from the various Stansberry services for selling puts.
"If managed properly you rarely get stocks put to you. If you get put a stock you can write covered calls against it or sell the stock out right. I average an annual return of 75% on my money. This is the holy grail of trading/investing. Just be open minded, and you will find it has a risk that is very low compared to other investing techniques." – Paid-up subscriber Mike Graham
Regards,
Sean Goldsmith
New York, New York
March 1, 2012