More from this Author
- March 1, 2012
- February 29, 2012
- January 27, 2012
- January 4, 2012
For more than a decade, I’ve used a simple quiz to guide my investments.
This quiz has helped my Retirement Trader readers close 61 consecutive trades with a profit. And it’s allowed my Retirement Millionaire readers to safely make more than 20% per year in regular stocks.
All you have to do to take the quiz is ask, “Does the company I’m investing in enjoy tremendous customer loyalty?
If the answer is no, chances are good that you should pass on the stock.
But if the answer is yes, chances are good that you’ve found a safe, long-term stock investment… one you can hold for years and compound wealth at 10%-15% per year.
Take Coca-Cola for example. Coke enjoys customer loyalty because its products taste good. They are consistent. They are everywhere. And for less than a dollar, a customer can enjoy a brief bit of pleasure. Since 1995, Coke’s shareholders are up 250%, including dividends.
Other great consumer brands like Hershey (chocolate) and McDonald’s (fast food) enjoy this loyalty as well.
These are familiar examples of “retail” loyalty. But there’s another little-known type of loyalty… This form of loyalty comes down to “switching costs” for larger companies.
You see, when company is considering moving its business from one service provider to another, it must consider the costs.
Take Microsoft, for example. If your 500-employee office is used to using Windows and Office software, it’s going to be difficult for your company to ever switch to a new software.
If your company is going to switch 401(k) providers or payroll managers, there’s going to be a big cost. If it’s going to switch the phone system it uses on thousands of phones, there’s a big cost. A company might think another service provider would be better, but it won’t ever switch from its current provider because the “switching costs” are too high.
This means constant sales and insulation from competition for Microsoft, communication equipment provider Cisco, and tech giant IBM. Since 1995, IBM investors have seen a total return of more than 1,100%.
No matter what form it comes in, loyalty ensures a constant and unrelenting demand for products… which keeps profit margins high and sales growth strong. It also helps insulate a company from competition… which is a crucial attribute for a long-term investment.
Remember… in the “survival of the fittest” world of capitalism, a business must get every possible bit of insulation from upstart competitors. Otherwise, it will eventually fail and leave its shareholders empty-handed.
By now, most DailyWealth readers know that owning great dividend-paying businesses is the key to long-term stock market success. These companies get you on the road to compounding.
These businesses are almost always identified by their extreme customer loyalty. And this loyalty ensures big profit margins, steady sales growth, and extreme resistance to competition. Plus, they allow you to sleep well at night. These are the sorts of companies I look for in my advisories.
And all it takes to recognize them is a 30-second quiz.
Here’s to our health, wealth, and a great retirement,
– Doc EifrigSource: Daily Wealth
Where Harvard, Yale and MIT Go for 10% Yields
When some of the brightest people on the planet need safe and sky-high dividend yields, they go to one man -- StreetAuthority co-founder Paul Tracy. Click here to read his latest report and to learn about 13 stocks yielding up to 10%.