John A. was ready to call it a day and head off into the proverbial sunset in early 2009. Like many retirees, he was eager to live the life of his dreams.
Only, the timing couldn't have been worse.
The stock market tanked in 2008 and continued to drop precipitously into early March. John's financial planner had all but conveniently disappeared, and John found all the red in his brokerage statements deeply disturbing. He recalls some of his stocks "dropping by more than 50%."
Yet, John stuck to it.
In fact, he stayed "in to win" - something we talk about frequently.
I asked him why he'd decided to hold his positions at a time when other investors were bailing out as fast as they could. He said it was simply because he'd invested in high-income companies that made products and services the world had to have, which reflected solid management acumen, and mirrored his vision of the future.
All of which ought to sound very familiar considering those are the exact principles around which Total Wealth is built and why we take the approach we do.
A Whole New World
Today's markets are even more intense. There have been a record-setting 70 new highs this year with the Dow, and the S&P 500 and the Nasdaq are both pushing higher.
Stocks have run up an incredible 25.5%, and the markets have created an estimated $5.2 trillion in new wealth since last November. Finding quality companies at reasonable prices is harder than ever, especially if you're an income investor.
PE ratios are trading into the stratosphere - meaning prices are high relative to earnings - even as a number of once-dependable dividend-related players are at serious risk of a blowout, including, most notably, General Electric Co. (NYSE: GE), which we talked about earlier this week.
So how do you get around that?
By doing three things:
- Picking the highest quality companies you can find
- Making certain they're tapped into at least one of the six Unstoppable Trends we follow
- Producing "must-have" products and services the world cannot live without
To me, this means big brands and even bigger cash flow, with low or no debt. I won't look twice at any company that isn't a substantial player or an industry leader because the risks just aren't worth it. Further, I place a premium on companies that are not facing existential problems due to their own incompetence, outdated products, vanishing markets, or disruptive competitors.
The easiest way to identify companies that fit these requirements is to take a good look at where you are now, where you want to be in the future, and which companies are going to make that possible, especially when it comes to technology.
Yes, technology.
Most investors think about technology only in terms of absolute growth, which is a shame considering how much income they can kick off.
It's a combination that simply cannot be beat.
Studies show that income and reinvestment can account for 70%, 80%, or even 90%+ of total returns over long periods of time. So much so that you could eventually earn more in income from certain stocks than it took to buy 'em in the first place.
Here are three to get you started...
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Cisco Systems Inc. (Nasdaq: CSCO)
Yield: 3.38%
I love to invest in companies that the markets don't understand very well or have overlooked, especially when they fit logically into the Unstoppable Trends and "must-have" metric that we know lead to higher profit potential. Having just announced a partnership with Google to fight Amazon in the cloud-based infrastructure space, CSCO is poised to take on some of the $4 billion in quarterly sales Amazon presently enjoys.
The company already dominates the server market, but this move lays important groundwork needed to establish Cisco as a data and connection resource. Perhaps most importantly, the company has a number of "micro-monopolies" in specific markets where it can use its position to generate impressive cash flow.
Digital Realty Trust Inc. (NYSE: DLR)
Yield: 3.09%
There are all kinds of questions about central banks, about our political leadership, about geopolitics, and more. However, there is NO question that Big Data is here to stay, which is why this real estate investment trust (REIT) is so attractive.
Digital Realty invests in carrier-neutral data centers while also providing colocation and peering services - meaning it's integral to the growth of tech companies that rely on data processing centers and cloud computing. Colocation and peering, if you've never heard the term before, allow companies to provide offsite management, storage, and infrastructure for data that's strategically exchanged.
It's what drives the company's "Connected Campuses," which support clients while they mature and grow. The company has just beaten estimates and raised guidance.
The company posted a 21% increase in profits for Q3, has partners with Mitsubishi Corp. to launch a joint venture data center in Japan, and purchased the 250,000-square-foot Ascent Data Center in Chicago. It's all very exciting, but the last point is especially important when you consider that Chicago is the third largest U.S. city and home to 40 Fortune 500 companies - all of whom have immense data center needs in a geographic area with the lowest data center space vacancy in the country for a primary market.
That's particularly important because REITs are required to return 90% of taxable income to shareholders every year... primarily in the form of dividends... to remain REITs.
NetEase Inc. (Nasdaq: NTES)
Yield: 1.34%.
This company pioneered Internet services in China and is ready for prime time. That's critical because many companies don't change their technology setups on a whim knowing how integral they are to growth. What interests me the most when it comes to this company is that it quickly identifies and pivots to services its clients can't get enough of. For example, reports surfaced in April that the company had raised more than 750 million yuan (roughly $112.73 million) from one of China's oldest investment banks for its cloud-based music unit. Launched initially in 2013, the unit now has more than 300 million users, and NetEase is getting ready to acquire entirely new libraries while also making substantial product improvements.
Then there's the online gaming community. Not many Westerners understand the scale of what's going on there. There are roughly 600 million online gamers in China alone who together comprise roughly 25% of the total global online gaming market, which is itself worth around $101 billion. Free-to-play games dominate Chinese markets, but U.S. company Blizzard has partnered with NetEase to pioneer the micro-transaction model. I'm expecting big results as that matures.
NTES is one of my longtime favorite Asian Internet technology plays and last quarter reported Q2 2017 revenue of $1.97 billion. It was an incredible year-over-year increase of nearly 50%, driven in part by an expanding portfolio of online media and gameplay options that contributed to more than 72% of total revenue for the quarter.
Looking forward, the company continues to expand its global footprint, achieving record high online traffic in Japan and Southeast Asia, in particular. Q3 earnings will be broadcast in early November.
Incidentally, subscribers who have followed along as directed with NetEase in my premium service, the Money Map Report, are approaching profits of 100% (technically speaking, 96.72% and counting). I think that's only a fraction of what's to come as China transitions to a digital economy and another billion or more users start using the "pay to play" model.
In closing, income investing can seem like a lost cause in a world that prioritizes instant riches. But only if you let it.
Long-term growth aligned with Unstoppable Trends and "must-have" products are the secrets when it comes to generating the income necessary to make your dreams a reality.
John, incidentally, doesn't have that same pit in his stomach these days that he did back in late 2008 and early 2009. Unlike many investors who are fearful of the next correction, he understands the path to Total Wealth, and he realizes that the choices he makes to align with Unstoppable Trends and "must-have" products have more influence on his success than short-term market volatility.
Now, so do you.
I'll be with you every step of the way.
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About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.