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| Dear Daily Crux reader, If you're interested in safely compounding your wealth in high-quality, dividend-paying stocks, this week's interview is a "must read." It's with our friend and colleague, Frank Curzio, editor ofSmall Stock Specialist and host of S&A Investor Radio. Frank recently told his readers something that might shock you. He said investors buying elite, large-cap dividend-payers like McDonald's and Coca-Cola could be making a big mistake. Read on to discover exactly what this mistake is… and the simple way you can be sure you don't make it, too. Good investing, Justin Brill Managing Editor, The Daily Crux www.thedailycrux.com |
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The Daily Crux: Frank… In a recent issue of Small Stock Specialist, you made a surprising claim: Investors in elite, large-cap dividend stocks could be making a big mistake. Can you explain? Frank Curzio: Well, first, let me assure your readers that I am a big fan of long-term dividend investing. "Compounding" your money by reinvesting your dividends in quality companies is one of the most powerful investment strategies in the world. Over longer periods of time – 20, 30, 40 years or more – compounding can turn even small investments into substantial wealth, and can make almost any investor a millionaire. But holding an investment for that long requires the right kind of company. You need safe, stable companies that pay steady, rising dividends. This is where the elite, large-cap dividend stocks come in. Most dividend investors flock to the big, well-known companies like Coke or McDonald's… and for good reason. These companies can be great stocks to own. They are super-profitable businesses with world-famous brands and huge competitive advantages. They pay solid dividends that have consistently grown year after year for decades. When the world's best investors discuss great businesses, these are the companies that always come up. But there's a problem with them… Everyone knows they're great businesses. And when everyone wants to buy something, it almost always commands a premium price. Investors can wait for years and years without getting the chance to buy these premium stocks for bargain prices. This is especially true today. Since the financial crisis, many folks have been too scared to put money into anything but "safe-haven" dividend stocks. At the same time, you've got the Federal Reserve keeping short-term interest rates near record-lows, pushing income investors into these same stocks in search of yield. With so much money going into these stocks, many have become quite expensive. For example, Coke trades at 18 times forward earnings and almost six times book value. And McDonald's trades at 16 times forward earnings and almost seven times book value. That's expensive, considering the average S&P 500 company is trading at 14 times forward earnings. So I think many dividend investors are making a big mistake by focusing only on these popular, large-cap companies – the companies everyone wants to own right now – when there are some great alternatives almost no one is paying attention to. Crux: What are these alternatives… and why are they being ignored? Curzio: They're the elite, small-cap dividend-payers that also have great brand names, competitive advantages, solid management, stable cash flow, and long histories of steady dividend growth… They just happen to be much, much smaller. In fact, some are less than 1/100th the size of a company like Coke. Most have been around just as long – or even longer than the big guys. Two of my favorites have been in business for a combined 218 years – but because they serve smaller "niche" markets, they don't rise to large-cap status, even though they're steadily growing. Because they're so small, most investors simply haven't heard of them… And most pension funds, mutual funds, and hedge funds are just too big to buy them. So you're likely to face much less competition from other investors looking for safety and yield, and can often find these companies trading at much better prices than their larger relatives. Crux: Besides cheaper valuations, do elite, small-cap dividend-payers have other advantages? Curzio: Absolutely. While most of these stocks trade at a big discount to the S&P 500, they also tend to grow earnings much faster. This can make a huge difference in your returns. The faster the growth, the more powerful compounding becomes. Just a few extra percentage points of growth each year can be worth hundreds of thousands or even millions of dollars over 30 or 40 years. As a simple example, in Small Stock Specialist, I compared the returns of a single $10,000 dollar investment in a tax-deferred account with 5% growth versus 10% growth over 40 years. At 5%, your investment would grow to $77,399 by year 40, giving you 600%-plus returns. But at 10% growth, your single investment would turn into $452,592, or 4,400%-plus returns. So the faster growth of these smaller dividend-payers can be a huge advantage. They're also potential takeover targets due to their smaller size. This tends to put a floor on their stock prices… If a high-quality business gets too cheap, a larger one is likely to step in and buy it. Given these benefits, I think anyone looking for safe, long-term compounding today needs to put these elite, small-cap companies on their radar right alongside the large-caps. ----------Advertisement--------- How the Bergers made nearly $100,000 for retirement Not long ago, a Georgia couple had almost nothing saved up for retirement… until a friend told them about a new way to pay for retirement. Click here for the full story. --------------------------------- Crux: Can you give our readers a couple elite small-caps to consider now? Curzio: Sure. A great example is Leggett & Platt (LEG). You've probably never heard of the company, but you've likely seen or used their products without even realizing. LEG is one of the largest manufacturers of mattress bedsprings and bed frames in the world. It also produces tons of steel for specialty wire used in chairs and the racks you can find in almost every retail store. The company is relatively small, but it employs over 18,000 people in 18 countries, so it has a global presence. It currently pays out a little more than a 3% dividend, and it's been raising its dividend every year for 40 years. That's longer than companies like McDonald's, Pepsi, and AT&T… yet it's still expected to grow earnings by 12% annually over the next couple years. That's more than 50% faster than the average large-cap S&P 500 stock. It has run up a bit in the past few months, so it's a little too expensive to buy today, but it's one I'd consider buying on a pullback. Another one I'm really bullish on – and that's currently a "buy" recommendation in my Small Stock Specialist portfolio – is RPM International (RPM). RPM is another one most folks have never heard of despite using many of its products. It's a chemical company that makes specialty coatings, sealants, and building materials. Its brands include names like Rust-Oleum paints, DAP caulks and sealants, and Varathane wood finishes. And business is booming right now. Many of the company's products are related to the housing industry, and they've benefited greatly from the rebound in the sector. Even better, the company's largest input cost is natural gas. Thanks to the shale boom, natural gas prices are now expected to average under $5 per million British thermal units over the long term… so the company's costs have plummeted. Like LEG, RPM pays a 3% dividend, and has raised it for every year for over 30 years. And RPM is growing like crazy. Earnings are growing almost three times faster than the average S&P 500 company… yet it's trading at a cheaper valuation than most of those companies. It's a great buy today at current prices. I expect investors who buy today will see annual returns of 10% to 15% or more for years. These are just a couple examples of the elite small-cap dividend-payers out there you can safely buy and hold for the long term. Crux: Any parting thoughts? Curzio: I think this is such an incredible opportunity that I've already devoted two full issues ofSmall Stock Specialist to these stocks, and I expect to cover several more. They are one of the last places in the market today where you can still find safety and income at bargain prices. If you're interested in safely compounding your wealth over the long term, I urge you to consider these companies immediately. Crux: Thanks so much for talking with us again, Frank. Curzio: My pleasure. Editor's Note: Earlier this week, Frank recommended a brand new elite, small-cap dividend-payer to his subscribers. If you're looking to put new money in safe, high-yielding dividend stocks today, there's never been a better time to try a risk-free subscription to his Small Stock Specialist. Click here to join, without having to watch a long promotional video. |
Sunday, 21 April 2013
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