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The Daily Crux Sunday Interview It's the best time in 35 years to buy these stocks... The Daily Crux: Doc, folks are finding it harder and harder to earn safe income these days. The common wisdom says bonds are safer than stocks... so scared investors have been pulling billions of dollars out of stocks and into bonds this year. But in your latest issue you recommended readers take some profits from bonds and move the cash into stocks. Can you explain the reasoning here? Dr. David Eifrig: Well, first I should say that I've recommended several bond funds in Retirement Millionaire. Just over a year ago, I practically begged readers to buy six different high-yield bond funds. At the time, the difference in yield between high-yield bonds – also known as junk bonds – and 10-year Treasurys was huge. Over the past year, those bonds have rallied significantly. We're up an average of 35%. That's a fantastic one-year return, considering we're talking about boring bonds here. ---------- Advertisement ---------- Minnesota eye surgeon reveals how to get a "free" retirement A Minnesota eye surgeon is revealing an incredible retirement secret... You can use it to get almost anything you want for free. Phil Franklin of Canton, OH told us "My sister introduced me to this and I was instantly hooked. I jokingly tell her that I'm now addicted because it's such a great way to save money and it's so easy to do. I still can't believe all of the things I get absolutely free." Click here for more information. -------------------------------------- Now, I'm not recommending readers sell them all. I think these funds are still likely to do well, they're just no longer the screaming buys they were last year. Two of the funds I recommended – the iShares High Yield Corp Bond fund, symbol HYG, and the SPDR Barclays High-Yield Bond fund, symbol JNK – still pay close to 10% and 12%, respectively. So if you don't have any exposure to high-yield bonds, you could still add a few of them to your portfolio. But they aren't without some risk. They're called junk bonds for a reason. If the economy turns down again or interest rates really start to rise, these funds are likely to fall in value... possibly by a great deal. So I don't recommend large positions in them today, and if you've got profits, it's probably a good idea to take some money off the table. Sure, you could buy investment-grade corporate bonds, but they're not paying much more than Treasury bonds or blue-chip stocks these days, and they've rallied so much over the past year that the upside is probably limited at this point. Crux: So you're recommending readers buy stocks instead? Eifrig: Yes, but not just any stocks. I'm talking about a select group of high-quality dividend-paying stocks. For any readers who may not be totally familiar, a dividend is just money that a company pays to shareholders. It's basically your cut of the company's profits. A long history of paying dividends is the mark of a top company. It means they've been successful and profitable. Companies can fudge numbers and use accounting tricks to make the quarterly earnings look better than they actually are, but you can't fake a dividend payment. Keeping a portion of your portfolio in dividend-paying stocks is one of the great secrets to building long-term wealth. And today, we've got an opportunity to buy some of the world's best dividend stocks at fantastic prices. You may be thinking I'm old-fashioned. These days most investors don't even think about dividends. Some professionals actually refuse to invest in stocks that pay dividends because they'd rather see the company spend all its money on growing the business and increasing the share price. But those investors are missing one of the most important historical facts about the stock market. Almost half the total long-term gains from investing come from dividends. If you're focusing only on capital gains, you're missing out on half of your long-term total returns. As I told readers in my latest issue, one of the most important rules to investing – besides asset allocation, meaning what you buy, and position sizing, meaning how much you buy – is your exit strategy, or how you intend to get your money back. When you invest in a smaller company that's growing quickly, you don't mind letting your money grow along with the company. But eventually growth slows down, so what do you do? If it's a great business, you don't particularly want to sell the stock, but at the same time your capital gains will begin to slow dramatically. Dividends are the answer. When you own a high-quality dividend stock, you get a steady payout from the company's earnings, and can still benefit from the slower but still steady growth in the business. And right now could be the best opportunity to buy these stocks in 35 years. Crux: What makes this a great time to buy? Eifrig: Well, it's all got to do with how dividends compare to other income-paying investments, like corporate bonds or Treasurys. Much of the time, the yields on bonds will be higher than the yields on most stocks. All things being equal, it usually doesn't make sense to make big purchases of dividend stocks at those times. But right now, we have a rare situation where the yield on high-quality dividend stocks matches the yield on 10-year U.S. Treasurys. Today, you can get the same income as a safe Treasury note or bond, and still have the potential capital gains of a stock. This situation hasn't occurred in over 35 years. Investors have been fleeing from stocks and into the safety of Treasurys, which has brought the yields on 10-years down below 3%. Now I don't blame investors for being fearful and seeking safety. But I can't recommend giving the government your money for 10 years to make just 3%, especially when there's very little upside. I'd much rather earn 3% or more in the world's best dividend stocks that have the potential for significant capital gains. Crux: What criteria do you look for in the best dividend stocks? Eifrig: Well, our goal here is safety and income. Number one is finding stocks that have paid out and increased dividends for a long time... 25 years or more, ideally. This limits our search to strong companies that have paid and grown their dividends through thick and thin. When I hear from Retirement Millionaire readers, their biggest fear is that inflation will wipe out the purchasing power of their money. Companies that have grown their business and dividends for many years are likely to continue to do so. Just limiting your search to these criteria drops your list of potential stocks from thousands to around 100. We're also looking for companies that pay over 3%. Eliminating companies that pay 3% or less cuts the list down to less than 50. Next, I look at a statistic known as the payout ratio. This is simply the percentage of the company's total earnings that it uses to pay its dividend. A high payout ratio obviously means that the company is using a large percentage of its earnings to pay its dividend. If something happens and the company's earnings are reduced – whether it's a problem specific to the company or an economic downturn like we saw recently – the company could have trouble continuing to pay the dividend. So you want to seek out companies with relatively low payout ratios. This will cut the list nearly in half again. There's a final criteria I used to narrow the list down to the six top dividend payers right now... but it wouldn't be fair to give that away right now. But those criteria will give you a good list of dividend stocks to look into more closely. Crux: That's fair... Could you leave us one stock you like? Eifrig: Sure. It's not one of my final six, but it's a top 20 dividend stock we own in the Retirement Millionaire portfolio. It's the pharmaceutical company Eli Lilly, symbol LLY. I recommended it earlier this year, and we locked in a 5.6% annual dividend. The company has paid a dividend for 125 years straight, and increased it 42 years in a row. As I mentioned to readers, it's almost impossible to find a business better managed than that. Crux: Thanks for talking with us, Doc. Eifrig: You're very welcome. Take care. 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