This Simple Question Reveals Great Dividend Stocks
January 1, 2018
30-Second Quiz Reveals Top Dividend Stocks
For years, I’ve used one question to uncover many of my top dividend stocks.
This question has helped my Passive Monthly Income newsletter readers close 39 out of 42 recommendations with a profit. And it’s allowed my Passive Monthly Income readers to safely make more than a 25% average return on each idea.
This exercise usually takes less than a minute to complete. Around our research office, we use it all the time to find winning income ideas. And if you start using it, it could dramatically improve your investment returns, too.
All you have to do is ask, “If I were a customer of this business, could I easily switch to a competitor’s product?”
If you answered “yes,” you can likely give the stock a pass. But if you answered “no,” you might have just found a wonderful business. A potential long-term investment that could pay out a growing stream of dividend income for decades.
Take The Bank of Nova Scotia (NYSE:BNS), for example.
Switching bank accounts can be a hassle. Customers can often pay lower fees elsewhere, but only after filling out a lot of paperwork.
The bank’s deep customer relationships also tends to lock in deposits. The Bank of Nova Scotia offers everything from investments and insurance to credit cards and lines of credit. Once you start doing a lot of business with the same bank, switching becomes an even bigger challenge.
For investors, these high switching costs have created a tidy income stream. The Bank of Nova Scotia can pay lower interest rates on deposits and pass on small fee hikes each year. Since we first highlighted shares to our readers in 2015, the stock has delivered a total return–including dividends–of 120%.
Or consider pipeline giant Enbridge Inc (NYSE:ENB).
In most cases, it only makes economic sense to have one pipeline serving a market. And even if you can make a business case for two routes, companies often have trouble securing the needed rights-of-way for construction.
As a result, Enbridge often owns the only pipeline between two points. If you’re an oil company, you often have no other choice but to pay Enbridge. This monopoly position has allowed the company to deliver 22 consecutive years of dividend hikes to shareholders.
Source: Corporate Filings
On the other hand, you can use this question to avoid bad investment ideas.
Restaurants and retailers often have a hard time building a competitive advantage. After all, customers can just walk down the street to another shop or cafe, and popular concepts can be easily copied.
Airlines have historically made bad investments for this reason. Customers usually pick the cheapest fare when choosing flights. With few exceptions, flyers can switch between airlines with the click of a mouse.
Remember that business is a dog eat dog world. Companies need every possible edge to survive, let alone earn a decent profit. Otherwise, it will eventually go under and leave investors holding the bag.
Bottom line, buying wonderful dividend-paying stocks is the key to investment success. These businesses provide steady, compound returns, which can really pay off over time.
You can almost always find these stocks by sniffing out companies with high switching costs. These ensure steady sales, thick profit margins, and robust protection from rivals. That’s why I tend to stick to these businesses in all of my advisories.
And all it takes to pick them out is one simple question.
