Masters Series: The Ultimate Way to Protect Your Money from Wall Street Scams

Editor's note: Wall Street is full of liars and cheaters – from Bernie Madoff tricking clients out of $18 billion to corrupt lenders building a multibillion-dollar firm based on worthless loans.

But there is a way to fight back and protect yourself from the scams.

Retirement Millionaire editor Dr. David "Doc" Eifrig is a Wall Street veteran and has seen the corruption firsthand. In today's edition of our weekend Masters Series – published in the August 14, 2010 edition of our free e-letter DailyWealth – Doc shares one simple solution he recommends to protect your wealth from accounting fraud, inflation, and volatile markets.

He calls it one of the greatest secrets to building wealth he's ever found…

"Dividends don't lie."

It's one of my favorite Wall Street sayings. Accountants can mess with a company's books in all kinds of ways, but they can't fake a cash payment. And if a company can pay a dividend, it's almost always making money.

In the past 20 years, we've seen Merrill Lynch's Henry Blodgett touting stocks he privately dismissed as crap (actually, his term was worse)... Bernie Madoff mailing phony account statements to hoodwink clients out of $18 billion... corrupt lenders building a multibillion-dollar firm based on worthless "liar" loans... And that's just a sample. There's nothing new about accounting fraud.

The irony is, protecting yourself from these convoluted shell games is simple: Demand a cash dividend from your investments. It's hard for a company to pay shareholders year after year if it's cooking the books.

A dividend is money a company pays its shareholders. Every quarter, the company counts its earnings and pays out some portion to its owners (the shareholders). Essentially, it's your cut of the profits.

Focusing on dividend-paying stocks is one of the great secrets to building wealth…

Most investors dismiss dividends. In fact, some alleged professional stock-pickers refuse to even consider companies that pay a dividend. After all, they argue, the company should be plowing all the money back into the growing business. If the company reinvests the cash in itself, it can grow even bigger, right? Wrong.

Here's what investors who only focus on capital gains are missing: Nearly half of your total long-term stock market returns come from dividends.

Sure, you want the company to use some of its earnings to grow, but you also want to get your money back along the way. In fact, one of the most important rules to investing (along with asset allocation and position sizing) is defining your exit strategy – how will you get your money back?

When you invest in a small startup, you're happy to let your money grow as the business grows. But what happens when the growth slows? Do you sell the stock?

Not if it's still a good business. You don't want to lose out on reaping the success of the business as it evolves into a larger, steadier company.

Dividends are a simple way to pay back owners who've invested in the business. By keeping some of the money and paying the rest to shareholders, dividend-paying companies can continue their growth while rewarding shareholders at the same time.

Right now, I love those rewards. We have a rare moment in modern history when the yield on dividend-paying stocks matches the yield on 10-year U.S. Treasury notes. We haven't seen this setup in more than 35 years.

As investors reach for income and safety, they've bid down the yield for 10-year Treasurys to historic lows – now 2.95%. I understand the rush to safety. But giving $1,000 to the government to get $30 a year for 10 years is a poor choice, especially when there's no upside.

If you want to wait to earn $300 over 10 years, so be it. But you can do better by looking at other securities paying at least that same 3% yield... investments where you can get all the capital gain potential of a stock and a growing income stream.

For example, three months ago, I recommended pharmaceutical company Eli Lilly (LLY) to readers of my Retirement Millionaire advisory. We locked in a 5.6% annual payout. LLY paid a dividend for 125 consecutive years and increased it 42 years in a row. It's almost impossible to have a business better managed than that.

When companies like LLY establish a decades-long history of paying out money to shareholders, it reflects their commitment to managing the value of the business through down times and up times.

The No. 1 fear of retirees is that inflation will erode the value of their money. If you're on a fixed income like Social Security, it's imperative to own securities that will keep up with future prices and pass some of that growth back to investors. Dividend-growers are your best answer here. And as I mentioned, they have a built-in safety mechanism...

In the past 30 years, I've seen Wall Street lie and cheat... from Blodgett to Madoff. The simplest, most effective way to fight back is to demand a dividend. Companies that pay dividends are sending you real money – and dividends don't lie.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig

Editor's note: Dr. Eifrig recently released a report on an unusual opportunity to earn extra income. This simple strategy is great for retirees and doesn't have anything to do with the stock market. It doesn't require any trading experience. And if you follow Doc's techniques, it's virtually risk-free. Learn more about how to boost your income – and how to access Doc's latest research – here.

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Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any S&A publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.

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