Safe Money

Safe Money – How To Get Rich With Stocks

By Dr. Bob Rubin ⋅ ⋅ Post a comment

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Safe Money

Safe money or big money? Most of us are taught the false lesson that investors must choose one or the other. They believe that earning big returns means accepting equally big risk. Not so! The most successful investors owe their success to risk reduction. Here’s how they do it –

First, find businesses with low capital needs. These companies can grow their revenues every year without matching growth in capital expenditures. They have simple products that don’t require expensive research and development to stay competitive.

For example, McDonald’s spends nothing on R&D, while Cisco Systems spends 13.4% of its gross revenue on R&D. McDonald’s can grow by opening new stores and by marketing, and its products will never grow obsolete. Cisco, like all high-tech companies, must struggle to stay ahead of its competitors through continual innovation. I’m not recommending McDonald’s or rejecting Cisco here. I’m pointing out that large and continual capital expenditures are a drag on a business’s ability to return cash to its shareholders. Avoid them.

Businesses with strong brands can also hold down capital spending because customers really want their products. That means they can keep their prices and profit margins high regardless of their costs. Competition forces average businesses to cut prices along with costs. But if customers really love a brand, they’ll stick with it even if it means paying more. That translates into higher, sustainable profits, even with less capital spending.

Should there be high inflation again, as there was in the 1970s, businesses with low capital needs will do better because they don’t need as much cash.

Second, find businesses with a high return on (tangible) assets. Management must make a company’s assets productive, whether those assets are owned or borrowed. If not, they’re wasting money. This makes ROA (Return on Assets) of primary importance. The higher, the better.

Be cautious about intangible assets or goodwill (a company’s estimate of what its reputation among customers is worth). These numbers are too easily inflated. For example, McDonald’s claims 8% of its total assets are intangible or goodwill. Cisco claims 22%. You’re safer not relying on large estimates of intangible value.

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Suppose someone showed you stocks that were likely to earn you big safe returns. Would you be interested? If you want to stop guessing what to do and start making safe money, sign up now to find out how.

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Investors want low capital needs and high ROAs so that their companies can afford high increasing dividends and stock buy-backs. Capital gains are sweet but unsure. Dividends are a direct return of cash from a business to its investors. They accounted for 68.7% of total return to investors in the 20^th century. Often overlooked, dividends can be the source of safe low-risk wealth.

The secret is to let dividends compound over time. Some companies grow their dividend every year, and do occasional stock splits increasing the number of dividend paying shares. If you count each dividend as reducing your original purchase price (a return of capital), the dividend can grow huge over time.

A famous example is Warren Buffet’s purchase of Coca-Cola stock between 1987 and 1989. With dividend increases and stock splits, his dividend is now 50% of his original purchase price. Buffet gets a 50% annual return without having to think about the market price of Coke stock! That’s why Buffet likes to buy “forever” – so his dividends can compound. So long as his businesses are healthy and keep paying those big growing dividends, Buffet has no reason to think much about market prices. That’s safe, big money investing.

The key to dividend investing is to buy for a safe price. Pay too much and your returns will be too low. To find a safe price, think like someone buying the company. To buy a whole company, you’d pay its Enterprise Value (market cap plus total net debt). You can find this number for any company at Yahoo!Finance. Then ask yourself if the company could afford to buy itself, i.e., is its operating income enough to pay 7% interest on a loan of the Enterprise Value. If yes, then you get the upside of a stock with no more risk than a bond, i.e., the company can cover interest payments. It’s safe for long-term holding. If no, wait until the price falls far enough to buy safely.

There are many ways to find great safe dividend stocks. The easy way is by subscribing to the Safe Money Products Investment Letter.

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