Apple, IBM, Amazon, Intel – while these popular stocks earn a lot of money, they aren't as profitable for investors as you might think.
The financial media loves to buzz about their shiny gadgets and praise their superstar CEOs. But when you stack up the numbers, these "exciting" stocks don't deliver exciting returns.
Meanwhile, in the shadows of the limelight are hundreds of profitable "boring" stocks: the gas companies and power utilities that "do the same old thing" year after year.
"In the stock market, boring is often beautiful." – Wall Street Journal
Don't be fooled: Earning press and earning profits aren't the same thing (and in our confused world, it even seems to be inversely proportional).
How is it that Microsoft is 45x less profitable than a natural gas company or that Oracle can't compete with a water utility that earns a 993% return? The answer may surprise you.
that keeps Yahoo!, Dell, BlackBerry and so many other "popular stocks" from being profitable over the long term.
I love energy stocks – especially their safe earnings and high-yield dividends. It pains me that the financial media continually thinks of utility stocks – the companies that literally power the world – aren't interesting enough to write about. Their loss because the profits are enormous for the investor. I know because I've worked within the sector and have been earning these profits for over 20 years.
I've made a 9.4%-per-year total return since 2000, which translates into a 221% gain—over 18 times as much as the S&P 500's 12% (for comparison, the NASDAQ is underwater by 18% over all those years).
I have also continued to enjoy dividend yields that climb all the way up to 12%.
Add it up over more than two decades, and I've earned 1,667%.
I'm writing to you today because I'd like to show you first-hand why "boring" is better.
So don't mistake the interest in "boring" utilities as a lack of success. The goal here is to give investors insight into a better way to invest and the first step is avoiding overpriced stocks that are overinflated by popularity. It's my firm belief that investors should evaluate investments by the money they make… and nothing else. That's not as simple as it sounds.
Engaging articles in the financial media trick us into focusing our attention on breaking news, emerging technologies and new devices – superfluous fluff that often doesn't translate into profits for the investor.
When it comes to investing, there are really only two outcomes: good investments that make you money and bad investments that don't.
While it's always a smart idea to maintain some diversity in your portfolio, there is only one data point that matters: the total return.
So don't treat your stocks with the generous personal interest that you give to your favorite sports team. I have a lot of respect for die-hard sports fans (especially fans of teams like the Cubs) who support managers and players through thick and thin, but this philosophy has no place in investing.
Only invest in companies that can earn you safe and consistent profits.
So while I enjoy reading about 3D printers, self-driven cars, and quantum computers just like anyone else, at the end of the day I only put my money in companies that I know will deliver a solid return. While this probably doesn't sound like the most exciting philosophy, I can prove to you that it DOES produce the most exciting profits. So let's get started.
I'm about to show you first-hand why most of the articles you read in the financial media are nothing more than hype.
I've compiled a number of facts and direct comparisons so that you can see all of the evidence for yourself.
I'm putting "exciting" vs. "boring"
head-to-head. May the best company win.
Yahoo! (NASDAQ:YHOO) Energen (NYSE:EGN)
Since 2000: -62.4% Since 2000: 540%
Last eight years: -26.9% Last eight years: 73.1%
Just like the exclamation point in their name implies, Yahoo! is a company built on excitement. They've been the subject of hundreds of thousands of magazine, newspaper and blog articles. Forbes has written 9,799 articles about Yahoo! 3.5 billion webpages refer to them by name. Their homepage attracts 700 million visitors per month, yet can you really call all of these visitors "customers"?
Here you see the fatal flaw of excitement: Yahoo! has been traded based on their popularity, not on the fundamentals of their business.
15 million Yahoo! shares are traded every day, but most investors don't have a clue what they're actually buying. They get excited when they read the paper, but then flee when they realize the financial reality behind the shares they own. That's why the stock has plunged by over 25% dozens of times, and why overzealous investors have spent an entire decade underwater.
If you bought Yahoo! in 2000 – their golden age, when Wall Street couldn't talk about anything else – after TEN YEARS you'd have earned -77.59%. Sound like fun?
I feel bad for the hapless investors who read stirring reports in the newspaper, bought a few hundred shares, yet after all these years are still waiting for those exciting dreams to become profitable. This is especially sad when you consider that a safe and predictable option was quietly growing profits the whole time.
I'm talking about "boring" oil and natural gas utility Energen. Only 133,000 webpages refer to Energen by name, which means just one for every 26,316 mentions of Yahoo!
Forbes has only ever written 66 articles about Energen, yet this company has still faithfully served millions of customers for decades. Their business is a simple one: the progressive expansion of 900 million barrels of proven oil in Texas, a large natural gas division that provides gas for 450,000 homes in Alabama and the operation of several other small energy companies.
Consistency is truly at the core of their business: Energen's headquarters is next to a quiet park in Birmingham, AL, just down the street from an art museum, where they've prospered since 1953.
And now for the results…
You'll notice right away that the final score is easy to evaluate: -62.4% for Yahoo! and 540% for Energen.
Which stock would you rather read about – and which stock is the better investment? If you ask me, the total return tells the better story.
But there's another very important detail that you also need to consider, which brings us to:
Amazon (NYSE:AMZN) Buckeye Partners Ltd (NYSE:BPL)
Since 2000: 491.64% Since 2000: 522%
Last five years: 235.36% Last five years: 114.77%
Dividend yield: 0.0% Dividend yield: 6.37%
Amazon is one of the most innovative companies in the world. They've built an incredible business as the most successful retailer that the Internet has ever seen. They single-handedly changed reading forever with their Kindle platform, and now they're the leader in cloud computing. But is Amazon the best place for your money? I'm afraid that the answer is no.
They're a great company that will prosper for years to come, but they have yet to outpace boring old natural gas. The future won't be any different because according to the latest data, natural gas is just getting warmed up and will grow by 20% over the next decade. It's also about to take on coal for power generation and diesel for transportation – that's an unbeatably bright future, and companies like Buckeye Partners will be the first to bring in the profits.
And the real bonus? Buckeye has maintained an average dividend yield of 5.4% since 1988. This dividend will make all the difference in outperforming Amazon.
So here's the detail you can't afford to miss: Dividends always win out over the long term.
The math says it best, and Ned Davis Research has calculated it for you:
A 1972 investment of $100,000 in stocks would be worth just $240,000 today…
… yet that same $100,000 reinvested in dividend-paying stocks would now be worth $2,861,000.
I want to point out two familiar stocks that demonstrate this powerful method in detail…
The 50-Year Challenge: The Power of "Boring" High-Yield Dividend Stocks
As Jeremy Siegel, professor of finance at Wharton, wrote in his book The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New, high-yield investments will always win out over the long term.
From 1950 – 2003, with an initial investment of $1,000:
IBM Standard Oil (ExxonMobil)
Revenue growth per share: 12.19% Revenue growth per share: 8.04%
Total Return: $961,000 Total return: $1,260,000
IBM is a true innovator. They were granted hundreds of thousands of patents during those 53 years, and they remain one of the most talked-about companies in history. They used their fame to keep their revenue growing. Yet even this wasn't enough…
While revenue growth is always important, this example demonstrates how a dividend is even more powerful. IBM didn't start paying a dividend until 1967 and could never keep pace with the slow power of "boring."
The facts are truly impressive: $1,000 into well over a million, in just 50 years. This is why I love dividends (especially dividends from a high-yielding energy stock).
Here's what happens when you combine steady growth AND a high-yielding dividend.
BlackBerry (NASDAQ:BBRY) Southern Co (NYSE:SO)
Since 2000: 97.54% Since 2000: 429%
Total return – last five years: Last five years: 60.32%-89.76%
Current yield: 0.0% Current yield: 4.6%
Part of me feels bad beating up on BlackBerry, because I've always had respect for their products. They led the way in a competitive market, maintaining quality while the rest of the world settled for cheaper, lesser phones. But I can't say it enough – liking a company doesn't mean you should like its stock.
The historical stock chart shows that BlackBerry is a dangerous, unpredictable investment. It's your own handheld roller coaster: $3.43 in 2003, then $147.55 in 2008, then $14.44 in 2013. Again we see the fatal flaw of excitement.
It doesn't have to be this way…
Atlanta-based Southern Company is a stock that you can love. Their business is electricity, and they currently generate 46,000 megawatts of it for 4.4 million customers.
Their stock chart is almost a perfect rising mountain, starting in 1978 and sloping straight up into the future. Compare this with BlackBerry, and the difference is striking. One rides like a teeth-shattering wooden roller coaster in an old amusement park, while the other climbs like a smooth and silent escalator.
Which would you choose?
Yet again, this is where energy and essential services win the race – because that demand is the most consistent and steadily rising in the entire economy.
And this consistency is what has earned our next winner an almost 1,000% return.
Oracle (NASDAQ:ORCL) Aqua America (NYSE:WTR)
Since 2000: -22.76% Since 2000: 442.21%
Last five years: 57.78% Last five years: 115.10%
Current yield: 0.70% Current yield: 2.4%
There's nothing more exciting than a tech company that sponsors the world's fastest sailboat race! Oracle foots a $100 million bill to support not one, but TWO teams in the America's Cup Yacht Race. They've introduced ultra-sleek fixed-wing catamarans to the high seas.
The speed and thrills of the 2013 race have brought an enormous amount of exposure to Oracle.
But sadly, in the same way that Team Oracle wrecked a boat during training (a $30 million loss), this database company has a bad track record of turning innovation into profits. Their current database products aren't retaining customers, and a new cloud-based platform is having trouble gaining subscriptions.
CEO Larry Ellison is America's highest-paid executive, yet that hasn't helped sell more database subscriptions or bring about lasting growth.
Yet again, "boring" proves that it's better…
While they don't have a yachting team, our pick does know a thing or two about water. My guess is that you probably haven't heard about Aqua America (NYSE:WTR), even though they provide water utilities to over 3 million customers in 10 different states. A sizable portion of Philadelphia's 1.56 million residents also receive the benefit of their services.
Their headquarters is next to the city library in bucolic Bryn Mawr, PA, and since 1968 they've slowly expanded water operations from state to state. They certainly aren't finished yet, and their reach and customer base continue to expand. Management has a goal of 10% annual profit growth and 5% dividend growth, and so far they've hit that growth every year for the last 10. The 2.4% dividend is a nice bonus.
Now, let's scale up this fight a bit…
Microsoft (NASDAQ:MSFT) Enterprise Products (NYSE:EPD)
Since 2000: 24.95% Since 2000: 1,135.93%
Last five years: 35.22% Last five years: 168.23%
Current yield: 2.63% Current yield: 4.43%
Yes, even the software king of the personal computer is disappointing. Even if you give them well over a decade, Microsoft can't muster a bare-minimum return of 25% for their investors. That's the best they could do, even though the Wall Street Journal mentioned Microsoft in 13,231 articles in the last four years.
Compare this with Enterprise, who managed a whopping 4-bagger return, even though the Wall Street Journal has only ever mentioned them 115 times.
Or look at the web for a glance at popularity. Microsoft is mentioned by name in 1.2 billion websites, compared with the mere 307,000 that cite Enterprise.
Talk is cheap:
The "exciting" tech stock is 3,908 times more popular,
yet the "boring" utility stock is 45 times more profitable for the investor.
Enterprise is a Houston petrol king. They refine oil, operate pipelines and play an increasing role in liquefying natural gas. While Microsoft has been wowing the business world with computer software, Enterprise has been quietly wowing investors with solid dividends. Since 1988 they've paid 59 dividends, with an average historical yield of 7.81%.
When you compare how much they've paid back to investors per 1,000 shares over the past 10 years, you can see how Enterprise got so far ahead. The research leaves no doubt:
The investors who purchased 1,000 shares of Microsoft 10 years ago have been paid $7,920 in dividends.
Now compare this with investors who bought 1,000 shares of Enterprise 10 years ago and have earned $20,380 in dividends.
The up-front costs were about the same ($25.64 per share versus $27.53 per share), but the dividends made all of the difference. So while Microsoft grew by 81%, Enterprise did 5x better with 423%.
But what about Google and Apple?
Ahh, yes, tech's greatest darlings. There's no denying that these are two of the most impressive companies on the planet. Since 2000 they've managed a total return of 777% and 1,534%, respectively.
But "boring" also has its big earners. LNG/natural gas company Cheniere (NYSE:LNG) has a total return of 5,144% since 2000 (including a five-year run of 9,604.88% from Oct. 2002 – Oct. 2007!).
Other gas companies like Chesapeake (NYSE:CHK), with 1,017.79%, have also done well.
With 667,000 websites that refer to them by name, Cheniere is popular for a "boring" stock, but still nothing compared to the 10 billion websites mention Google by name, or the 500 million sites have something to say about Apple.
But what's most important is the perspective: "Boring" doesn't have to work that hard to keep pace with the strongest popular companies of recent history.
This comparison isn't an isolated case…
Dell (NASDAQ:DELL) Dominion (NYSE:D)
Since 2000: -72.40% Since 2000: 336.79%
Last five years: -43.36 Last five years: 49.96%
Current yield: 2.39% Current yield: 4.0%
"Dude, you're getting a Dell!" is the memorable line from Dell's popular 2001 commercial. It helped sell a lot of computers. Unfortunately, the magic didn't last. With tech, hindsight is -20/20, because the losers aren't around anymore, leaving you with one blind eye. Such as the aftermath of the dot-com bubble.
AOL, Worldcom, Nortel Networks and many others all came crashing down from what Fed Chairman Alan Greenspan blithely termed "irrational exuberance." Or, to paraphrase: way, way too much excitement.
But not utilities: After the dot-com bubble burst in 2000, utilities were up 28% nine months later and have since risen by 170%.
Dominion is the poster child for this "boring" kind of stability. It's a hundred-year-old utility that has focused solely on providing consumers with electricity and natural gas in the Mid-Atlantic. That's it.
But with 27,000 megawatts of power generation, 11,000 miles of gas lines, 6,400 miles of power lines and a market of 50 million homes, they're the seventh-largest power company in the U.S.
The last few years had them trying to shed their boring image with a social media campaign (they were recently name the MOST popular U.S. utility). But in this case I'll forgive them their newfound 31,000 Facebook friends, as long as they keep paying their dividend.
And speaking of friends on social media…
The Quick and the Dead
At the moment, social media doesn't pay. Will it be profitable in the future? Quite possibly. But given the unrest and level of risk, it's more like gambling than investing:
Unfortunately, innovation comes at the price of stability: 75% of tech startups will fail. But even seasoned companies have trouble making it more than a decade or so.
Here are some familiar tech names that will soon be gone forever:
Nextel – Purchased by Sprint (NYSE:S); shuttered on June 30th, 2013.
TechNet – Purchased by Microsoft; will close on September 30th, 2014.
AltaVista – Purchased by Yahoo!; closed on July 8th, 2013.
All of this data forces us to acknowledge the paradox of investing:
"Excitement" leads to boring profits and "boring" leads to exciting profits.
Or, to put it another way, just as Warren Buffett has often quoted: Buy when everyone is selling, and sell when everyone is buying.
And speaking of Buffett, he's a believer in utilities…
UPDATE: Warren Buffett Becomes a Utility Monopoly
Warren Buffett is famous for avoiding popular stocks and trendy investing techniques.
He's owned utilities for years, using their consistent income to balance his portfolio – in most years, insurance and utilities have made up about half of Berkshire Hathaway's net income.
But now he's all in: Warren Buffett just invested an additional $5.6 billion in Nevada Energy (NYSE:NVE), making him the largest owner of electricity accounts in the U.S.
It's his belief that utilities are a good place to safely grow money over the years to come. He's not looking for a quick run-up. As he said at the acquisition: "We are pleased to make a long-term investment in Nevada's economy."
This is a significant moment. But will it bring the rest of Wall Street running? Probably not. It's certainly earned electricity a few write-ups, but my guess is that everyone will forget in a few months – they'll be too distracted by whatever tech toy is trending at that moment.
But years from now, when everyone has bought and sold dozens of winning and losing stocks, Buffett will be quietly earning an outstanding return, just like he always does.
We'll be right there with him. Will you?
It's research that makes all the difference for investment decisions.
So why do investors fall so easily into the trap of chasing the newest fad? It seems that most can't help themselves – it's a built-in human tendency.
As Mark Hulbert reports in the Wall Street Journal, a recent study by Terrance Odean at UC Berkley shows that investors are strongly influenced by excitement, even against their better judgment:
"They buy the stocks that catch their attention. These tend to be volatile stocks, with big price moves, about which exciting stories can be told. More overpricing in the short run and underperformance in the long run." – Terrance Odean, UC Berkley (as reported in the Wall Street Journal)
Neurologists have explained that the human brain's chemical reward system is more responsive to notable events than to everyday living. There is also a "herd effect" in psychology that makes individuals look to a group for confirmation when making important decisions.
It's amazing that humans can decide anything at all.
Dividends Don't Lie
I'm confident that you won't be bored by your dividend checks.
6.1% – an energy company
7.1% – an energy utility
8.1% – a natural gas utility
8.9% – a communications company
9.4% – an energy company
9.7% – an energy utility
12.8% – an energy company
… and dozens more.
Yields like this are essential for income investors.
You won't be bored by "boring" when you can take an extra vacation, or when you put away a lot more money from retirement.
You'll be content to leave the Wall Street Journal sitting unread on the table as you head for the golf links.