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Continuing our series (see Part 2 here) on investing for an income stream through companies who sell products people have to buy, even in a depression, I will today be covering companies that are growing their dividends. The best part about them is that they continued to grow their dividends, and had enough money to do so over the past decade while the overall stock market lost money. How is that possible? Their share prices dropped just like nearly every other stock out there. It is because their business remained solid as they sold products people have to buy, even though the owners of the shares were freaking out and selling without thinking. Oh yeah, and they meet our other requirement - they yield more than the 10 year Treasury Bond.

As you are getting used to now, I like to give examples to help re-train the way you view your investments. There are two parts to our dividend paying, publicly traded companies. There is the actual business which sells products and is run by management teams who are in agreement in thinking that we the owners should get some of the profits from the business. This is the most important part of our investment plan, as we want the income from the business. The other part of a publicly traded company is the stock price. This usually has nothing to do with the income producing power of the business in the short term, and has more to do with how your neighbors and co-workers feel that day. If they are excited, they pay higher prices for the stock. If they are sad and scared, they will sell it at any price.

Mind-set change ALERT:

DO NOT JUDGE THE SUCCESS OF YOUR INVESTMENT PLAN ON WHETHER YOUR SCHIZO NEIGHBOR IS WILLING TO BUY OR SELL AT HIGHER OR LOWER PRICES. JUDGE IT BASED ON THE INCOME IT PROVIDES YOU.

We buy businesses that have solid income streams. Even though the income stream does not change on a daily basis, the value of the company will. Sometimes it makes sense to buy the income stream, other times it makes sense to pass, because the stock price is too high compared to the income stream it provides. The stock price should only be important to you when you go to buy the income stream. The price you pay will determine the rate of return that the income stream will provide. After you buy, you should not really care too much what someone is willing to pay for that income stream. I mean, why get excited if the value of our shares go up by 20%? In order to take advantage of that 20% gain, we would have to sell our business. When we sell our business, we lose our income stream. If we lose our income stream, we have to start living off the principal of our account, which guarantees a slow death of our money. We can always attempt to re-invest our bounty into another income stream, but more often than not, if our income stream business increased 20%, we are probably going to pay 20% more for the new income stream, as their stock price probably rose as well.

In the same way you shouldn't be excited if the price rose 20%, you shouldn't be sad if it falls 20%.

It's kind of like the real estate owner who buys a house for $250,000 and then sells it for 20% more at $300,000. They think they "made" $50,000. When they go and buy the next house at $500,000, they forget that the $500,000 was selling for $416,666 back when they bought their $250,000 house. They collected $50,000 of gains on their house, but paid $83,334 of gains to the seller of the $500,000 house.

Are they really getting ahead?

This is similar to thinking we are richer because our stock price goes up and we sell. When you are income stream focused though, you like lower prices. If a company were offering you a $1 per share income stream that was solid because they sell products people have to buy, and you had money to re-invest, what price would you rather pay? $10 per share, or $20 per share?

The answer is obvious. Therefore, if you are buying income streams and not taking out all of the dividends in order to live, but instead are reinvesting some of the income stream, would you rather have the stock market go up, or down?

As income stream investors, we feel sad on dividend reinvestment day if the market is up 200 points, and will feel ecstatic on dividend reinvestment day when the market is down 200 points. Go figure.

It's a wonderful, and freeing, mindset change.

Another example I like to give our clients is to have them imagine there are two real estate investors. Suppose each buys a home for $500,000 and puts $100,000 down to buy their respective home. One home, after paying all expenses including the mortgage, produces a net profit of $1500 per month. The neighborhood is very plain, boring,and older, which is why the investor gets a nice income stream. They are a bit bigger too, thus providing more home for the dollar invested. This investor uses the cash from the rent and pays their bills, goes out to eat, and enjoys life. They don't plan to sell.

The other investor buys a home that does not cash flow, but is in a better neighborhood with good growth prospects because it is where they think everyone wants to live. It's the" cutting edge neighborhood." The homes are new, so the prices are higher, meaning the investor gets no cash flow after paying expenses. This investor plans to sell that home in 1 year for a $50,000 gain and realize a 50% profit, for they figure home prices over the last 100 years have gone up in value. He will need to live off those gains in 1 year when he sells, and look to re-invest the remaining money in the next deal.

You see where I am going with this.

Real life hits, and both homes drop in value to $400,000.

Let's imagine what the mental response would be of each investor. The first investor is probably a little sad. It is more fun when their net worth is climbing, even if they don't benefit from the gains. They didn't plan to sell and re-invest at higher prices for a different home. While it's a bummer, they go to sleep that night early, and wake up the next day to go spend some of the rent money they earned, not caring too strongly at the value of the home. He does start wondering though if he can buy the home next door to increase his cash flow at a lower cost.

The other investor, well, they are sweating. They REALLY need the market to come back. Not only are they getting no income, but their $100,000 is gone at the moment. What will they do next year when they are out of money? What if the home in 1 year only goes back to $420,000? They will need to sell the investment at lower prices in order to get their hands on the $20,000 remaining and pay their bills. Their next year will be full of sleepless nights and filling out job applications.

What type of investor do you want to be? If income streams are not the sole focus of the reason why you are buying a stock, then you are putting yourself at the whim of the market. You have a 50/50 chance of being right the moment you buy, as the price can either go below or above your buy price. If you buy and the price goes up, you are golden. You can sell a little bit of your shares every year and live off those proceeds, never having to worry about running out of money because the value keeps climbing.

If you are wrong in your timing though, and the price drops, now you have a very stressful decision to make. Do you sell shares at a loss so you have money to live, and risk running out of money because now you have less shares that can gain in value in the future? Or do you go on a Top Ramen and Taco Bell diet and cut expenses while you wait for your share prices to come back?

No thanks. I would rather never be forced to sell shares at a loss just to eat. I'd rather just live off the income those shares give me.

Let's now move on to some more investments that meet this requirement of paying us more than the 10 year Treasury while selling products people have to buy. As stated earlier, these stocks have grown their dividends the past 7-10 years. They are dividends and growth in one investment.

Flowers Foods (NYSE:FLO) 3.% current yield. Flowers Foods, Inc. produces and markets bakery products in the United States. The company operates in two segments, Direct-Store-Delivery (DSD) and Warehouse Delivery. The DSD segment produces fresh and frozen packaged bread, breakfast breads, whole grain bread, rolls, wheat buns, sandwich rounds, thin sliced bagels, and tortillas. The dividend since 2000 has grown over 750%. Not to say it continues at this pace, but if it did, the yield in 10 years on shares purchased today would be 23.25%. Can you imagine getting paid 23.25% per year on your original investment from a boring company that sells bread?

Middlesex Water Company (NASDAQ:MSEX) 4.2% current yield. Middlesex Water Company, together with its subsidiaries, owns and operates regulated water utility and wastewater systems in New Jersey, Delaware, and Pennsylvania. Like a boring old home, there is nothing sexy about this cash machine. It currently pays more than the 30 year Treasury bond, and has grown the dividend by 18% over the past 10 years, again, while the market has lost money. People have to drink water, so I would guess we will continue to get paid.

Colgate-Palmolive (NYSE:CL) 2.8% current yield. Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide. It offers oral care products including toothpaste, toothbrushes, and mouth rinses, as well as dental floss and pharmaceutical products for dentists and other oral health professionals; personal care products, such as liquid hand soap, shower gels, bar soaps, deodorants, antiperspirants, shampoos, and conditioners; and home care products comprising laundry detergents, dishwashing liquids and detergents, household cleaners, and oil soaps, as well as fabric conditioners. While not one of the higher paying stocks in our list, CL has increased their paychecks to the stock holders by 335% in the past 10 years. So imagine if this pace continued. In ten years, you would be getting 9.38% on your original investment from people brushing their teeth and washing their hands.

Healthcare Services Group (NASDAQ:HCSG) 4.1% Current yield. Healthcare Services Group, Inc., through its subsidiaries, provides housekeeping, laundry, linen, facility maintenance, and food services to nursing homes, retirement complexes, rehabilitation centers, and hospitals in the United States. With the baby boomers, the largest population group we have seen getting older, the demographics show the higher usage of hospitals and nursing homes. They will need clean rooms and linens, as well as food at these establishments. If the 4.1% current yield is not juicy enough for you, the company has raised their dividend 1293% since 2003! Talk about a pay raise. That is over 30% a year. At that pace - in another 7 years, you would be getting paid 53% per year on money invested today. Who knows if this pace continues, but I sure like the 4.1% it pays today.

There is no guarantee that these companies will continue to grow their paychecks. But the bottom line is in the current environment, they are paying more than you can get from a 10 year treasury bond, and the income they pay currently should remain solid as they sell products that people have to buy: Food, Soap, Hospital Care Services, Water.

Now the only question you need to ask yourself - what type of retirement do you want to have?

Disclosure: Long MSEX, CL, HCSG, FLO in either client or personal, or both accounts

Source: Dividends for Depression Era Investing, Part 3