This One Minute Test Could Dramatically Boost Your Investment Returns
February 22, 2018
One Question Reveals Top Dividend Stocks
For over a decade, I’ve used a quick test to guide all of my investment decisions.
This quiz has helped my Automated Income readers earn a profit on 50 out of 69 recommendations. It has also allowed subscribers to safely make more income from the stock market.
This test takes less than a minute to complete. During our weekly meetings, it’s the first question I ask analysts. And if you start using it, this test could dramatically boost your portfolio returns.
All you have to do is ask, “If I had a few billion dollars, could I easily build a competitor to this business?” If the answer is “yes,” you should probably pass on the stock. But if the answer is “no,” you have have found a wonderful business. You may have even spotted a company that can pay out dividends for decades and and compound your wealth at 10% to 15% per year.
You often find such situations in companies that own irreplaceable assets.
These represent businesses that deliver an essential service, but don’t lend themselves well to having multiple providers (think pipelines, airports, toll roads). When you own assets like these, you tend to do pretty well over time.
Take Automated Income recommendation CSX Corporation (NYSE:CSX), for example. The company owns thousands of miles of rail track across the eastern United States. CSX built these lines over a century ago, back when you could buy land for pennies an acre.
Today, towns and cities have sprung up along these tracks. If you wanted to build a competitor, you would have to spend hundreds of billions of dollars buying out landowners. And in most cases, the government would never grant you the right-of-ways needed to construct a second line.
Good news for CSX. Without the worry of competitors eating into their margins, the company can earn a respectable profit year after year. Shares have crushed the broader market since 1993, earning a total return (including dividends) of 1,350%.
You see similar situations pop up in businesses with high switching costs.
Setting up a rival company could be a simple proposition. But actually getting customers to switch over from competitors could costly.
Consider long-time Automated Income favorite, Paychex. Inc. (NASDAQ:PAYX). If you switch 401(k) providers or payroll managers, you’ll have to update a lot of processes in your business. A manager might think about moving to a cheaper, better provider elsewhere, but the cost incurred by switching is just too high.
Or consider cell phone tower landlord Crown Castle International Corp. (NYSE:CCI). Telecom companies spend over $100,000 to install their equipment at each site. It doesn’t make sense to switch to a rival just to save a few thousand bucks each year.
Or how about asset manager BlackRock, Inc. (NYSE:BLK)? Savers might save a few bucks by switching to a rival set of mutual or exchange-traded funds. Researching new products, though, takes time, never mind the taxes and commissions incurred to move money around.
In each case here, these firms enjoy constant sales and insulation from rivals. Even if you and I could cough up a few billion dollars to start a competitor, we’d have a tough time stealing customers. For investors in these firms, that means steady dividends and higher returns.
Finally, great brands sometimes pass this test as well.
These business might not be irreplaceable or enjoy high switching costs, per se. Building a competitor from scratch would still represent a costly proposition, though.
Consider The Hershey Company (NYSE:HSY). We haven’t recommended this stock in Automated Income, but it will get picked one day. The company has built a trusted brand with customers over a century; that would be pretty tough to replicate with a glitzy ad campaign. Hershey has also developed relationships with retailers who don’t want to risk sales on unproven upstarts.
We’d have a tough time building a rival to PepsiCo, Inc. (NASDAQ:PEP). Decades of ad spending distinguishes its products on store shelves, allowing the business to command premium prices. Customers also tend to be picky about what they put into their mouths. For that reason, most folks will reach for a bag of “Lay’s” chips over a generic brand.
The list of great brands goes on and on. You have McDonald’s Corporation (NYSE:MCD), Dunkin’ Brands Group, Inc. (NYSE:DNKN), and The Walt Disney Company (NYSE:DIS). These firms all enjoy entrenched market positions, which translates into growing dividends for shareholders. Even with a big wad of cash, you’d have a tough time building a viable competitor to these businesses.
By now, most Automated Income readers know that owning wonderful, dividend-paying stocks is a great formula for investment success. These businesses can become wealth-building machines, given enough time.
But there is one little trick for spotting the best ones.: you have to identify companies that can fend off competitors, even potential rivals with deep pockets. That competitive advantage allows owners to sleep sound at night. I look for that type of edge in all of the companies I recommend in my advisories.
And all it takes to spot them is a one minute test.
