They were sexy.

The industry sold them well. It told us someone smarter than you and me would invest our money for us and make us boatloads of profits.

I remember nervously and excitedly making my first investment. Despite working an entry-level job for no money and living in Manhattan, I had saved up a few hundred dollars that I was ready to put to work.

I chose the Fidelity Select Health Care Fund (Nasdaq: FSPHX), figuring there’ll always be demand for health care, no matter what the economy was doing. I was right. The mutual fund turned my few hundred dollars into a few hundred more.

But the more I investigated these funds, the more I got turned off. The lessons I learned 20 years ago are still valid today.

In October I told you that 65% of mutual fund managers underperform the S&P 500. It was proof you should take your investments into your own hands.

And now, the numbers for all of 2012 are out. It looks like fund managers improved their performance.

This time, “only” 61% of fund managers did worse than the market.

In other words, if you invested in a stock mutual fund (not a focused fund like precious metals, health care or technology), you still had a nearly two out of three chance of underperforming the market.

Heck, you could do that yourself by throwing darts at The Wall Street Journal, without having to pay expenses to the mutual fund company.

Here’s a graph courtesy of Abnormal Returns…

With a quick glance at the bars on the right, we can see just 39.3% of all mutual funds beat the S&P 500. The average fund returned 15.1% versus the S&P’s 16% gain.

With growth funds, just over half beat their benchmark indices (which performed worse than the S&P). And although 54% of growth-fund managers beat their index, the average return was 15.2% – still below the S&P 500′s gains.

Finally, value managers had a horrible year, with only 21% beating their benchmark.

The bottom line is, the majority of mutual funds will never make you rich. Which is why I present you…

The Three Reasons Why You Can Manage Your Money Better Than a Mutual Fund Manager

1. Expenses – someone has to pay for that Ivy League manager’s paycheck, as well as the salaries of his analysts, traders and administrative assistants. And the company Christmas party doesn’t pay for itself. Neither do the electric bill, cleaning staff and all of the other costs associated with running a business.

   While many managers do have their investors’ best interests in mind, they are still running a business. Bills have to be paid and profits have to be made. And the only way that happens is if they charge you for the privilege of letting them invest your money.

   In 2011, equity fund investors paid an average of 0.79% worth of their positions in expenses to mutual funds. Note that figure is quite close to the difference between the average return for an equity mutual fund and the return of the S&P 500.

   That 0.79% figure might not sound like much, but if you have a portfolio worth $200,000, you’re paying $1,580 per year in expenses. Over 10 years, that’s $15,800 worth of fees. (If the portfolio grows, you’ll pay even more.)

   And that’s just an average fund. If you’re paying over 1% in expenses, you’re flushing even more money down the toilet.

   Don’t forget some funds charge “loads,” or upfront fees. Often, if you’re using an investment advisor, you’ll pay an upfront fee of as much as 4.75%. That means if you give the advisor or fund $1,000, only $952.50 is invested on your behalf.

   It’s going to be very tough to beat the averages starting nearly five percentage points down.

2. You can buy whatever you want. They can’t.

   If you find a small stock that has big potential, you can buy a few thousand shares and see what happens. When you’re done, you can sell your shares with no problem.

   A mutual fund manager doesn’t have that luxury.

   With millions of dollars that need to be put to work, buying a small stock doesn’t make sense unless he can buy a ton of it.

   But that fund manager can’t load up on a stock that only trades 100,000 shares a day without moving the price. It’s the same thing when he goes to sell it.

   The individual investor has a lot more flexibility to acquire stocks that have the ability to outperform, while the fund manager is often stuck buying familiar names because they have the liquidity he needs.

3. No one cares more about your money than you. The fund manager’s goal is to make as much money as possible for you by December 31, because that’s when his performance is evaluated.

   If he beats his benchmark, he gets a nice bonus. If he misses, there may be no big payout.

   But you’re not concerned with December 31. Your focus is probably on April 5, 2015, September 21, 2027, or any other date you plan on retiring. Or perhaps you are already retired and you need consistent income or growth.

   December 31 is meaningless to you except for deciding which friends to ring in the New Year with.

   While the fund managers are trying to make money for their investors, you’re the one that knows your tolerance for risk, your goals and how to best handle your money. Don’t let someone else make those decisions for you.

Get Smart

With those ideas in mind, I beg you to learn as much as you can about investing so that you can handle your own money. After obtaining more knowledge, you may decide to use a portion of your money to try to beat the market and leave the rest in index funds.

Or maybe you’ll do as I consistently recommend and invest in Perpetual Dividend Raisers – stocks that raise their dividend every year. These stocks have an excellent track record of beating the market over the long term. And if you hold them for several years, the yield on your original investment will likely be substantial.

For example, let’s look at Middlesex Water Co. (Nasdaq: MSEX), a small water company that services New Jersey, Pennsylvania and Delaware. It’s a tiny stock, with a market cap of just $305 million and average daily trading volume of less than 30,000 shares. No fund manager could touch it without sending the price rocketing higher.

But the company has raised its dividend every year since President Nixon was in office.

Today it yields a respectable 3.9%. But if you had bought it 10 years ago, you’d be enjoying a yield of 6.4% due to the annual dividend hikes.

A mutual fund manager is probably not going to hold that stock for 10 years. Remember, he’s trying to post great numbers this year. The average tenure for a mutual fund manager is only four to five years. He knows he likely won’t be managing the same fund in 2023… when you’re looking to retire.

Your best chance at a wealthy retirement is to manage your investments yourself. You’ll save money, you’ll have more flexibility, and your money will be in good hands.

My mother routinely buys $300 sweaters for $40. And when supermarket managers see my dad come through the door, they bow their head in defeat.

Once, when our local grocery store had a massive sale on canned tuna, my father and brother went to the store to stock up. My dad told my then 11-year-old brother to go get the tuna that was on sale.

“How many?” my brother asked.

“As many as you can carry,” my father replied with a deadly serious look in his eye.

By the time my dad was done, we had a couple hundred cans of tuna on the shelves in the garage. (I wish I was kidding.)

My parents aren’t the only ones who love a discount.

It’s why companies like Groupon (Nasdaq: GRPN) and LivingSocial, owned by Amazon.com (Nasdaq: AMZN), are so popular.

It feels great to know that you’re getting a deal, especially when you’re paying less than the guy next to you.

Market Markdowns

When it comes to investments, there are various ways to tell if you’re getting a discount.

You can look at a stock’s price-to-earnings ratio (P/E) and compare it to its historical P/E, or to the company’s peers’. And then there are other tools like the price-to-book ratio, price to sales, enterprise value… The list goes on.

With stocks, we can get a decent sense of whether we’re buying at a discount or a premium. But we can’t ever get a “deal” on a mutual fund.

That’s because a mutual fund always trades at its net asset value (NAV).

If the fund has $100 million in assets and 10 million shares outstanding, it’ll trade at $10 per share. If the next month it has $110 million in assets and the same 10 million shares, it’ll trade at $11 per share.

A closed-end fund, though, is different.

A closed-end fund is a portfolio of stocks (or other assets) just like a typical mutual fund, but it trades like a stock. As a result, it will trade at either a discount or premium to its NAV.

So a fund could have $100 million in assets and 10 million shares outstanding, but could trade for just $9 per share, a 10% discount to its NAV of $10.

Naturally, investors love to buy closed-end funds at steep discounts. That way, they have two ways of making money — the NAV could rise or the discount could be tightened.

Low, Low Prices

There are many closed-end funds that generate a solid yield. In fact, there are 347 equity funds that yield 4% or more.

But are they a good value?

The average closed-end equity fund with a yield of 4% or higher trades at a premium of 0.4%. That means for every $10 in assets, a fresh investor pays $10.04.

Just as anyone who pays a load on a mutual fund is out of their minds, I argue there is almost never a reason to pay a premium, especially when there are so many funds trading at a discount.

So let’s take a quick look at a few funds trading at a discount that offer a decent yield.

BlackRock Global Opportunities Equity Trust (NYSE: BOE) – Trading at a 10% discount with a yield of 8.8%, the fund invests in stocks from around the world and writes options on 45% to 65% of them.

This is a common strategy in closed-end funds in order to boost income. The strategy tends to underperform in bull markets and outperform in flat and bear markets. The fund is trading well below its five-year average discount of 4.5%.

ING Clarion Global Real Estate Income Fund (NYSE: IGR) – Trading at a 3.2% discount with a yield of 5.7% (paid monthly), this fund invests in real estate investment trusts (REITs) and has traded at a premium in the past.

Nuveen Preferred Income Opportunities Fund (NYSE: JPC) – Trading at a 5.3% discount with a 7.6% yield, this fund, which also pays monthly dividends, invests mainly in preferred stocks. Its discount has steadily declined since the 2008 lows when it traded at a staggering 27% discount.

These are just a few ideas to get you started looking for high-yielding bargains among closed-end funds.

Hopefully, you’ll satisfy your yearning for a good deal by picking up some great funds at a discount. It’s a whole lot better than subjecting your family to a garage full of tuna.

Washington, of course, was the general who led the colonists to victory over the British in the Revolutionary War and then became the first president of the United States.

Lincoln kept the Union together by winning the Civil War and ending slavery.

But did these two great men have any regrets?

Washington regretted not including Nova Scotia in the revolution against the British, which likely would have gotten the redcoats out of North America entirely. If Washington had included Nova Scotia… Who knows, maybe hockey would be the great American pastime.

Besides his ill-fated decision to go to Ford’s Theatre, Lincoln’s biggest regret was that his temper occasionally got the better of him – though he usually apologized soon after.

Everyone has regrets. But a very avoidable one involves your money.

Five or 10 years from now you don’t want to look back at today and say “I should/could have…”

Beat Inflation in Retirement

Looking down the road, my two biggest concerns about retirement are how much income I will have and if it will keep up with inflation. Notice I didn’t talk about the size of the nest egg. While size matters (or so I’ve been told), the level of income produced is most important.

Would you rather have a $1 million nest egg generating $100,000 a year in income or a $2 million nest egg spinning off $50,000 a year?

The inflation issue shouldn’t be overlooked. It’s easy to forget about inflation now since it has been so muted for the past few years, but even low inflation eats away at your buying power.

If you have $100,000 in income today, at the current inflation rate of 2.07% (the average for 2012) you’ll need $110,787 in five years to have the same standard of living. Ten years from now you’ll need $122,738.

And that’s if inflation stays muted. Remember, the average inflation rate over the past 100 years is 3.4%.

If inflation creeps up to 3%, still below the mean, you’ll need $115,927 in five years and $134,391 in 10.

And what if, due to our forget-about-tomorrow economic policies, inflation runs higher.

If we’re at an inflation rate of 4%, you’ll have to earn $121,665 five years from now and $148,024 in 10.

That’s a lot of ground to make up.

How to Ensure You Won’t Fall Behind

Fortunately, there is something you can do today, to make sure your income will keep up with inflation tomorrow.

It’s simple. Buy stocks that I call Perpetual Dividend Raisers.

These are companies with a track record of raising their dividend every year. But it’s not just any raise. A boost from $1 per share to $1.01 doesn’t cut it. We want companies that raise their dividend by a meaningful amount, so the increase is not only keeping up with inflation… but beating it.

In today’s low-interest, low-inflation environment, a 5% or more increase does the job, although I prefer more. There are many companies with long track records of raising their payouts by an average of 10% or more each year.

With that in mind, let’s see how a portfolio of stocks that raise the dividend by a hefty amount every year keeps up with inflation.

We’ll assume the average starting yield today is 4%, and the companies in the portfolio raise their dividend by 10% per year every year.

Starting out with a $500,000 portfolio, in the first year you would generate $20,000 worth of income. In year two, thanks to the 10% increase in dividends, you would collect $22,000. In year three… $24,200.

The table below shows how much income the portfolio would generate compared to how much you would need based on the initial $20,000 in income to keep up with inflation at 2%, 3% and 4%.

Look at how much income your portfolio is generating in year 10. It’s a whopping $47,158 – all thanks to the power of compounding.

Even if inflation averages a higher-than-normal 4% over 10 years, by owning a portfolio of stocks with dividends that are raised every year, you’ve actually increased your buying power during a high-inflation environment.

It’s the only strategy I know of that will beat inflation. But it requires patience.

You need to find some great stocks and stick with them. Let those dividend checks in your mailbox grow quarter by quarter. That way you’ll never look back at February 2013 as a time you should have taken action to prepare for your future.

I hadn’t seen him in years, so it was great to sit down to a meal with my friend and catch up. He’s a big shot corporate attorney specializing in mergers and acquisitions for a household name investment group. He filled me in on the details of one of his recent deals in which a client bought a piece of a well-known Fortune 100 company.

He said he was stunned at the ineptitude of the senior management of the big company, with everyone looking out for their own interests and fiefdoms, rather than adding any real value to the business.

I’m not surprised. And anyone who has been a part of a large organization probably isn’t either.

That’s why when it comes to companies with large hoards of cash, I’d rather have them pay me back in the form of a higher dividend than let them decide what to do with the money.

Don’t get me wrong. I want management to put cash to use growing the business and making smart acquisitions that will generate even more cash. I’m talking about the cash that is on the books that management feels pressured to do something with.

That psychological burden usually leads to a boneheaded acquisition or a stock repurchase.

Stock Buyback – The False Messiah

Many investors (and certainly Wall St.) react positively to a stock buyback announcement. After all, if a company has fewer shares, each share represents a larger slice of the profits.

When a company buys back 5% of its shares, the company essentially grows its earnings per share by 5%… even if profits are flat.

If the company buys the stock at a discount – when it’s undervalued – it can be a positive thing for investors. But, as I wrote in Barron’s this week, management has a history of buying stock when shares are expensive.

Professors Azi Ben-Raphael, Jacob Oded and Avi Wohl, concluded in a paper for the Center for Financial Studies that large companies typically do not buy back shares at favorable prices – because management is “more interested in the disbursement of free cash.”

In other words, management knows shareholders want them do to something with all that cash on the books, so they do the easiest thing. They buy back the company’s stock… regardless of whether it is a good deal or not.

These large companies pay too much for their own stock because, quite frankly, management doesn’t care. They just need to show Wall Street that they are deploying capital.

Another use of cash is acquisitions. While some deals make good sense for the business and ultimately reward shareholders… many do not.

For example, Clorox (NYSE: CLX) paid $925 million for Burt’s Bees in 2007 in order to gain market share in the natural products space. In 2011, it took a $250 million impairment charge from the deal. In other words, Clorox flushed $250 million of shareholders’ money down the toilet.

Had they instead given that $250 million to shareholders in the form of a dividend, it would have amounted to about $2 per share.

Sage Advice

Scott Kingsley, the CFO of Community Bank System (NYSE: CBU), a small cap regional bank with a 3.7% yield, once told me, “We believe hoarding capital to potentially reinvest via an acquisition or some other use can lead to less than desirable habits… Having excess capital on the balance sheet when assessing a potential use can lead to bad decisions – because at that point almost everything results in improvement to ROE [return on equity].”

What the executive is saying is that the return on cash is so low that if they put it to any use, it will result in an improvement, but it might not be in the best interests of shareholders. Therefore, Community Bank System returns the capital to shareholders.

When it wants to make an acquisition, it raises the funds to do so, which makes management think long and hard about whether it’s a good deal.

I love that line of thinking. It makes sense. Yet it is counter to what goes on at most large companies.

The idea of a buyback is not a negative thing… but only if management is acting responsibly and purchasing the shares at a discount to their true value. Otherwise, investors are better served having the money in their pocket for them to deploy as they see fit.

I’d rather you have the money instead of giving it to management that will spend it on share repurchases aimed at producing the illusion of value rather than actually creating it for shareholders.

My Investment U Report Card

Investment U is filled with articles that are designed to make you a better investor. Hopefully, throughout the year, you learned some techniques, strategies and new ways of looking at the market.

Throughout the year, along with the columns that are more educational in nature, I have made predictions, both macro and about individual stocks and sectors.

I may not always be correct (as you’ll see below), but I do hold myself accountable for what I write.

Below is my self-graded report card on my specific predictions during 2012.

Dividend Predictions

I wrote a lot about dividends during the year. On December 28, 2011, I authored my 2012 forecast about dividend stocks. In the article I said that in 2012, “The Crowded Trade” chatter would heat up, dividend stocks would outperform, master limited partnerships (MLPs) would become trendy and Apple (Nasdaq: AAPL) would declare a dividend.

The only one that wasn’t correct was on dividend stocks, since they did not outperform the overall market. Surprising, I know, considering how much people were talking about dividend stocks in 2012.

However, the SPDR S&P Dividend ETF (NYSE: SDY) returned 10% while the S&P 500 had a total return of 14%.

Apple, though, did in fact declare a dividend, MLPs became hot and dividends were all anyone could talk about during 2012. (Perhaps that’s because of my book, Get Rich with Dividends.)

Grade: B

Healthcare Stocks

On February 1, a few weeks after returning from the J.P. Morgan Healthcare Conference (I’m heading there again on Sunday), I predicted that the biotech and medical equipment sectors would outperform in 2012 and beyond.

Biotech stocks doubled the S&P 500′s performance, climbing 12%, while the S&P came in at 6%. However, medical equipment only logged a 4% rise. If you average the two sectors’ gains, they’re still above the returns from the broad market.

Grade: B

The Bubble That Never Was

Also, in February I said 2012 would see a bubble in MLPs. While they certainly became trendy, there was hardly a bubble. The Alerian MLP Index only gained 5.5% this year. Not exactly bubble-like figures. If tax rates on dividends go significantly higher this year, I wouldn’t be surprised to see a rush into MLPs because of their tax-deferred status. But as far as my prediction in 2012, it was a swing and a miss.

Grade: F

Rolling the Dice

Later in February I wrote about gaming stocks. I mentioned that S.T.A.R.S., which I use in the Oxford Systems Trader, had identified Las Vegas Sands (NYSE: LVS) as an attractive stock. (Subscribers to the service entered the position a month earlier at about $45.) I also suggested avoiding Wynn Resorts (Nasdaq: WYNN) due to infighting with a member of the board and Steve Wynn.

Las Vegas Sands was trading at about $53 when I wrote the article. It eventually hit a high of $62 before coming back down. (Oxford Systems Trader subscribers exited at $54 with a 20% gain in May.) The stock has been a laggard since.

Wynn was trading at around $110 at the time. And despite going up and down about 20 points in each direction, it is right back where it was. So it was smart to avoid it.

Grade: C

Let the Good Times Roll

I’m a big believer in listening to what the markets are telling us. In March, I said the markets were indicating an economic recovery. But with a raging bull market, record corporate profits and investor sentiment that was anything but bullish, I suggested stocks would keep on rising and the economy would continue to recover.

There is little doubt now that the economy did in fact recover. Unemployment fell from 8.3% at the time to 7.7%, and every early economic indicator is pointing in the right direction.

Later that month, I also declared that the bull market was not over. The market went on to rise over 6% from that point.

Grade: A

Two Stocks to Avoid

In May, I singled out two dividend stocks to avoid, Meridian Bioscience (Nasdaq: VIVO) and Portugal Telecom (NYSE: PT). Since the article appeared, the S&P 500 has been flat. Both stocks are as well. I was concerned that, should the companies hit any snags in their businesses, their dividends would not be safe.

Meridian increased its cash flow the last two quarters, lowering the threat level, although net income in each of the last two quarters was below the first quarter of the year. Portugal Telecom, on the other hand, still has a dangerously high payout ratio. That makes it susceptible to a dividend cut if cash flow slips.

Grade: C

Ready for a Rebound

A month later, I picked two stocks that were ready to rebound. Goldman Sachs (NYSE: GS) did just that, rocketing 32%. I argued that the stock was too cheap and the best in the business. On the other hand, Facebook (Nasdaq: FB) didn’t go anywhere.

To be fair, I suggested Facebook was a longer-term pick, but the stock is flat from when the article ran.

The S&P is up 9% since picking both stocks.

Grade: B

Forget Nate Silver

Those who closely followed the election and all the prognostications will remember Nate Silver, and his analysis of the electoral college. He predicted an Obama victory even while all of the polls called it dead even.

In August, I projected that the President would be re-elected because the smart money was signaling it.

As I mentioned earlier, I often use the market to figure out where the world is headed, not the other way around.

Turns out the smart money and I were right.

Grade: A

Short Squeezes

In early September, just a few weeks before the market topped out for the year, I identified two stocks I thought were candidates for short squeezes. A short squeeze is when a large percentage of a company’s float is sold short, and then those shorts are forced to buy back stock as the share price goes higher, forcing the price to go up even more.

The two stocks I mentioned were iStar Financial (NYSE: SFI) and Regal Entertainment Group (NYSE: RGC). iStar jumped 25% from that date and Regal climbed 18%, compared with the S&P 500 which was only up 3% at the top.

Grade: A

Invest in Israel

At the end of November, I mentioned that now would be a good time to consider buying Israeli stocks. You may recall that hostilities between the Israelis and Hamas had begun two weeks earlier. Historically, Israeli stocks outperformed the S&P 500 once military operations were underway.

The TA-100 Index, the 100 largest stocks on the Tel Aviv Stock Exchange, is down 4% since then, while the S&P is flat.

I still believe that the Israeli market will outperform the S&P over the next year. This is a long-term thesis, so I was tempted to give myself an incomplete, but the underperformance in the past month has been significant.

Grade: D

I hope 2013 brings you health, happiness and prosperity. I’ll do my best to help with the latter.

Good Investing,

Marc

Yikes!

Hopefully, he’s got a large 401(k), a pension, or an inheritance. Four years isn’t enough time to get your finances ready for retirement if you’re starting from scratch.

While I like a good speculation as much as anyone, the reader’s approach flies in the face of how to actually make serious money in the markets…

The Dividends Statistics Speak for Themselves

If you’re investing in stocks for the long term, the best thing you can do is buy stable companies with a track record of increasing their dividends and then reinvest those dividends.

Sure, they may only be 3% or 4% dividends, but you’ll be shocked at the way they can create significant wealth. I’ll show you exactly what I mean in just a moment, but first, check out these eye-popping statistics on reinvested dividends:

• From 2000 to 2010, reinvested dividends were responsible for 87% of the S&P 500′s total return.
• From 1990 to 2010, reinvested dividends were responsible for 43% of the S&P 500′s total return.
• From 1871 to 2003, reinvested dividends were responsible for 97% of the stock market’s total return.

Let’s dig deeper…

What Dividend-Paying Companies Are Telling You

The first question to ask yourself when investing in dividends is whether you want stocks that are Dividend Aristocrats or Dividend Achievers.

• A Dividend Aristocrat is an S&P 500 company that has raised its dividend every year for the past 25 years.

• A Dividend Achiever has raised its dividend for the past 10 years.

By raising the dividend, company executives are telling you two things…

• They’re Committed to Shareholders: By returning capital to shareholders, companies are rewarding your faith in their business. Look at it this way: If you invested in your brother-in-law’s restaurant and the business was doing well, at some point, you’d expect him to start writing you checks. The same thing should hold true for the stocks you invest in.

• They’re Confident: Raising the dividend payment shows investors that the company’s management is confident in their business now and in the future. It also shows that they take their dividend policy seriously. Executives are keenly aware that Wall Street doesn’t like dividend cuts – and investors tend to punish dividend-choppers accordingly.

And of course, if you receive more dividends every year, your yield on cost (i.e. the yield on the price you originally paid) rises. For example, if you buy a $50 stock with a $2 annual dividend, your yield is 4%. But five years later, if the dividend has risen to $3, your yield on cost is 6%, even if the share price has doubled to $100.

So what’s the best way to go about investing in dividend-paying stocks?

Are You Looking At These Two Crucial Numbers? You Should Be…

After you’ve identified a Dividend Aristocrat or Achiever, you want to be sure the company can continue to pay its dividend.

You can do that by examining its payout ratio – the percentage of net income that’s paid out in dividends. (And when it comes to determining income, I prefer to use levered free cash flow, as it’s much harder for a company to manipulate the numbers.) Generally speaking, you want the payout ratio to be 75% or less. That gives the company plenty of room to still pay the dividend if net income or cash flow decrease in any given year.

So once you’re pocketing healthy dividends, why should you then reinvest them?

Simple…

A 12.4% Return While Underperforming the S&P 500

Here’s a great example of the power of compounding reinvested dividends. It comes from one of my favorite stocks – Genuine Parts Co. (NYSE: GPC).

Genuine Parts has increased its dividend every year for the past 56 years! That’s an extraordinary record. To put that in perspective, the last time it didn’t raise its dividend, President Eisenhower was in office, Elvis made his television debut on the Louisiana Hayride and The Lawrence Welk Show premiered.

Needless to say, Genuine Parts is a strong performer. Over the past 10 years alone, its share price has doubled. And I expect it to keep rising, as earnings are projected to grow by more than 12% per year for the next five years.

But for the sake of our example, let’s assume a 9% annual increase in share price – less than the 9.6% average return of the S&P 500 over the past 50 years.

Let’s say you bought 200 shares today (with GPC’s current share price around $57, that would cost you around $11,400), reinvested the dividend and the dividend increased by 6.8% per year (the average of the past 27 years)… what would happen? After 10 years, your original $11,400 investment would be worth $36,659.98, growing by an average of 12.4% per year – even while the stock underperformed the S&P 500 by over half a percentage point.

I used the underperformance figure simply to illustrate a point. I actually expect Genuine Parts to outperform the S&P 500 over the next decade.

Now imagine if you have a portfolio of dividend-paying Aristocrat stocks doing the same thing. If you had a portfolio worth $100,000 and it had the same parameters of the Genuine Parts example above, but your portfolio simply matched the performance of the S&P, your $100,000 would nearly triple in 10 years.

And the power of compounding really gets going in the following decade, as your investment would soar to $891,000. That compares with $208,000 after 10 years and $520,000 after 20 years if you didn’t reinvest the dividend.

Unfortunately, for the reader I mentioned at the top, this is a long-term strategy and wouldn’t get him to his goals in four years. But if you have a longer timeframe, reinvesting in quality dividend-paying stocks is an excellent strategy for creating and preserving wealth.

Good Investing,

Marc Lichtenfeld

According to a poll conducted by Prudential, 58% of respondents “have lost faith” in the stock market. Even more stunning, 44% say they will NEVER invest in the stock market again. Never ever!

What that tells me is there’s still a lot of buying power on the sidelines. Call me a cynic, but people often say one thing and do another.

I’m sure there are some investors who got so burned by the collapse in 2008 and 2009, that they really never will put another penny into the market. They’ll cower in fear, with all of their money in gold or bury their cash under the floorboards. And while that might keep their money secure, it’ll never produce wealth.

If you’re a long-time reader of the site or subscribe to Investment U Daily, you know that we don’t try to time the markets. That’s a fool’s game. Sure, a market timer might make a great call now and then, but I don’t know any who are consistently accurate.

So rather than the futile exercise of trying to figure out the exact moment to buy or sell stocks, stick to our “Four Pillars of Wealth” to achieve your financial goals. The results will be better and you’ll be able to sleep at night.

1. Stick to an Asset Allocation Model – Investment U follows a formula that won Dr. Harold Markowitz the Nobel Prize in finance in 1990.
2. Adhere to Safety Switch – Buying a stock is easy. Knowing when to sell is the hard part. This way we let our winners ride and cut our losses before they get too big.
3. Understand Position Sizing – Invest no more than four percent of your portfolio in any one stock. That way if things go wrong, no one particular holding will sink your entire portfolio.
4. Cut your Expenses (Including Taxes) – Invest in no load funds with low expense ratios like Vanguard index funds. Also, choose closed-end funds that trade at a discount instead of open-end mutual funds with up-front fees or loads.

You can potentially lower your taxes by not selling your gains for one year, so that they qualify for the long-term capital gains tax rate (rather than the higher short term), avoid actively managed funds in your taxable accounts and keep your high-yield investments in your IRAs or other tax-deferred accounts.

The markets are a little tough right now. The big financials, such as Morgan Stanley (NYSE: MS), were just got downgraded by Moody’s. Typically, it’s difficult for the markets to rally without the help of the financials.

Several other sectors such as networking, transportation and utilities are also weak. One that still looks strong is the drug and biotech sector.

The point is there’s still stocks out there performing well. You just have to look harder for them.

Consider following the Four Pillars of Wealth to achieve your financial goals and leave the panicking to those who have ridiculously sworn off the markets forever.

Good Investing,

Marc Lichtenfeld

Editor’s Note: These “Four Pillars of Wealth” were originally developed by Alexander Green for The Oxford Club. Marc and Alex wanted me to share a more detailed outline of these wealth preservation tips for those interested in learning more.

For a free copy of The Oxford Club’s full report on “The Four Pillars of Wealth,” click here.

It’s not breaking news that dividends are hot. With bonds paying next to nothing, income-starved investors are increasingly pouring money into dividend-paying stocks.

Last year, while $178.2 billion was removed from equity products, $26.8 billion were invested into dividend-focused funds.

And mutual funds that specialized in dividends saw net inflows (more money invested in than taken out) every week for 44 weeks, according to EPFR Global.

I’m not a huge fan of mutual funds in general, and especially not those that are dedicated to dividends. You can do much better yourself.

For example, Columbia Dividend Opportunity I (RSOIX) is rated five stars by Morningstar. It has a current yield of 3.79% and an expense ratio of 0.75%. Since March of 2004, $10,000 invested turned into $16,915 versus $13,426 for the S&P 500.

Those are some pretty solid stats. If I were looking for a mutual fund that invested in dividend payers, this one would be near or at the top of my list. It’s beaten the S&P 500 and its peers since its inception, the yield is solid and the expense ratio is reasonable.

Its largest holdings are Lorillard (NYSE: LO), J.P. Morgan Chase (NYSE: JPM) and Pfizer (NYSE: PFE) – not exactly a low-risk group. Most of the rest of the portfolio are large cap names like Microsoft (NYSE: MSFT), AT&T (NYSE: T) and General Electric (NYSE: GE).

That’s because a $3.9-billion fund has to buy a lot of stock in order for any one position to be meaningful. A large fund is able to go into the market and purchase two million shares of AT&T or Microsoft.

But if there are better opportunities in smaller names, a mutual fund is going to have a tough time buying enough shares to make a difference.

For example, if you invested in some of the smaller-cap names that are in The Ultimate Income Letter’s Perpetual Income Portfolio, you could do significantly better at an even lower cost.

For instance, let’s say you invested $2,500 each into Community Bank System (NYSE: CBU), Omega Health Investors (NYSE: OHI), Main Street Capital (NYSE: MAIN) and Genuine Parts (NYSE: GPC). During the same eight-year period as the mutual fund’s 69% increase, your $10,000 would have become $19,862 – a significant difference over the $16,915 this very good mutual fund returned.

Community Bank System is not a stock that a mutual fund manager would likely buy. It’s a great little bank with a 3.9% yield, but it only trades 200,000 shares a day. It would be hard for a fund to accumulate enough shares to make a difference in the fund’s returns. Perhaps more importantly, it would also be tough to sell a lot of shares if the fund manager no longer wanted to hold the stock. Omega Health and Main Street have yields approaching 8% and Genuine Parts’ yield is 3.2%, but the company has raised its dividend every year for 56 years.

All of the stocks mentioned above trade less than one million shares per day, although Genuine Parts has a market cap of over $9 billion.

And don’t forget that 0.75% expense ratio. While that is on the low side for mutual fund fees, your return is still being impacted by that 0.75% every year.

If you bought the four stocks listed above with a discount broker, it would cost you about $10 per trade or $40. That comes out to 0.4% of your initial investment. However, that’s a one-time cost, not an annual expense. The only time you’ll incur another fee is when you go to sell. So if you sold it today, you’d have incurred a total expense of 0.8% ($80/$10,000) over eight years rather than 0.75% every year. When you pay that 0.75% every year for eight years, you end up impacting your return by 6%.

I don’t know about you, but I prefer to keep the 6% for me, rather than pay it to a mutual fund manager who can’t do as good a job as I can.

It’s not that the fund managers aren’t smart. They are. But the size of their funds limits their flexibility. As an individual investor, you can use that flexibility to your advantage by owning smaller cap stocks that have higher yields and better growth potential.

Stay invested in dividend paying stocks. They’re the best way that I know of to grow your wealth and generate increasing amounts of income over the long term. But do it yourself. With just a little bit of work, you’ll make more money and pay less in fees than you would with even the best mutual funds. Because this is one area where the little guy has the advantage.

Good Investing,

Marc Lichtenfeld

P.S. The four quality dividend plays I listed above are just the tip of the iceberg. There are 17 more dividend positions I’m currently recommending in my Perpetual Income Portfolio. As I write this, our 21 open positions are scoring an average gain – including dividends – of 25.40%. And my portfolio is just one of the many resources The Oxford Club provides to help out the little guy.

For more information on how to access our Club’s full repertoire of portfolios along with the rest of our expert connections and financial intelligence, click here.

As you may have heard, golfer Tiger Woods won his second tournament in three months, after having not won an event since before his personal life went over a cliff in 2009.

We’ll have to see if the old Tiger is back, but regardless, it’s a strong comeback for an athlete and a man who seemed completely lost just a short time ago.

Stocks can act the same way.  Sometimes a stock is enormously popular, only to crash and burn.  And if you can find the ones that will rise from the ashes, there is a lot of money to be made.

Let’s look at a few stocks that have had a rough go of it over the past few years, but seem poised to rebound.

Goldman Sachs (NYSE: GS)  – Goldman’s stock is a disaster, trading at about 1/3 of its all-time high of $250, back in 2007.  Main Street despises Wall Street right now and that will likely only increase as we head into a particularly nasty election where the Obama campaign will attempt to position Mitt Romney as everything negative about the industry.

And although Goldman’s reputation doesn’t shine as brightly as it once did, it is still one of, if not the 800 pound gorillas in the business.  With J.P. Morgan Chase’s (NYSE: JPM) CEO Jamie Dimon seeing his formerly beloved status evaporate due to uncontrolled trading losses, Goldman is still arguably the king of Wall Street.

It’s stock isn’t trading like that though. Near its lowest level in three years, the stock is trading at just 7.6 times this year’s expected earnings.  In 2013, earnings per share are projected to grow 11%, increasing to 12% over the next five years.  On a trailing basis, Goldman is surprisingly trading well below its peers at 13.3 times earnings versus the industry average of 18.5

There are all kinds of regulatory reforms aimed at Wall Street firms, which make them out of favor with investors.  But nobody has done it better than Goldman for years and when the group comes back into favor, Goldman Sachs will likely lead the way.

Facebook (Nasdaq: FB) – Facebook hasn’t had a long history as a publicly traded company, but could anything be more out of favor?  On Monday, an analyst was on CNBC saying Facebook wasn’t going to be around in five years.

I’m going to bet he’s wrong.  Facebook might not have lived up to the hype that was generated in order to get the masses to pump up the stock price, but that doesn’t mean there isn’t a real business here that can grow by leaps and bounds.

Facebook has more of its users’ personal information than any company on the planet.  As it begins to figure out how to monetize that information, revenue and earnings will grow significantly.

Keep in mind that internet users spend three times as much time on Facebook than on any other website.

And don’t underestimate Mark Zuckerberg.  Just because he’s soft spoken and a little awkward, don’t mistake him for being complacent.  He is one of the most driven CEOs around.  He wants to be the next Bill Gates. He has the intelligence and the product to get him there.

It’s still in the early stages with Facebook, but I think long-term investors will be just fine with this stock.

It’s hard to know who is disliked more, Tiger Woods or Goldman Sachs and Facebook.  But Tiger appears to be back and I expect Goldman and Facebook to help investors be at the top of their game in the near future too.

You see, I enjoy looking over financial statements and seeing how the numbers interact with each other. I like to look for clues about what the future might hold.

And if there’s a surprise in earnings, I go back to previous quarters to figure out if I could have detected it earlier. It’s kind of like a big puzzle with lots of interconnecting parts that, once you understand them, give you a clear picture of the company and its prospects.

Today, I’m going to use one of the metrics we’ve discussed before to see if we could have predicted an earnings warning by Qualcomm (Nasdaq: QCOM).

That metric is inventory turnover – an often-overlooked measure that can tell you a lot about a company’s operations.

Inventory turnover is essentially how many times a company turns over its inventory in a quarter or a year, or how many times it sells through the products on it shelves.

I decided to look at Qualcomm’s inventory turnover because, although the company reported stellar quarterly results a number of weeks ago, it issued an earnings warning because it couldn’t keep up with demand due to a shortage from one of its vendors. Therefore, I assumed inventory turnover should have spiked.

Let’s see if it did…

Over the last four quarters, Qualcomm’s inventory turnover climbed from 6.8 to 9.7. In other words, a year ago it was selling through its inventory 6.8 times per year. In December, it spiked to over nine, and in the most recent quarter the company was turning over its inventory 9.7 times per year.

In fact, the inventory turnover is higher than it’s been since 2006.

Now, an earnings warning isn’t a positive, but not being able to keep up with demand is a good problem to have. I expect that Qualcomm’s earnings will be excellent once it gets its distribution issues straightened out.

Earnings per share popped in December and March, as well. Qualcomm earned $0.83 per share in December versus $0.61 in the previous quarter. More importantly, the higher inventory turnover may signify what’s going to happen in the next quarter.

In the September quarter, inventory turnover began to rise and we saw a pop in earnings in December. December’s inventory turnover rose sharply, and earnings in March were also strong.

With another quarter of high inventory turnover in March, I would expect a stronger June quarter in terms of earnings than Qualcomm is letting on.

Keep in mind – most companies give very conservative guidance. But even if June isn’t especially strong, I’d expect earnings to pick back up in the September quarter, as it’s clear that Qualcomm is moving product off its shelves at a rapid pace.

Like I always say, earnings can be and are manipulated to tell the story that management wants to tell.

Looking at inventory turnover can give you a strong idea as to how well a company is operating and what the future may be bring.

Good Investing,

Marc Lichtenfeld