[Originally published on 4/16/2014]
Like most great investment ideas, the story behind "Digital Utilities" is simple... and it doesn't change much...
Over the past three years, I've urged Retirement Millionaire readers to own shares in the world's most profitable large-tech companies. I'm talking about companies like software giant Microsoft (NASDAQ:MSFT) and semiconductor giant Intel (NASDAQ:INTC).
Both of these companies rule their industries. They have strong balance sheets. They generate steady cash flows... and direct those cash flows to shareholders. If you're interested in investment income, these stocks are for you.
And, as I'll explain below, it's still a great time to buy...
To get a better idea of why these stocks are so great... we need to cover why I've nicknamed them "Digital Utilities."
For more than 80 years, income investors have had a good friend in the utility sector.
Traditional utility stocks – like power, water, and natural gas providers – enjoy guaranteed profits.
If you want running water, cold soda in your refrigerator, or a hot stove, you have to do business with the municipal utility company. Because they enjoy legal monopoly positions, utilities accept regulations that limit their ability to raise prices. Essentially, states and towns assure themselves reliable power in exchange for guaranteeing the companies' profits.
These companies have historically been income-producing machines... Their payments were so secure and safe, bankers stuffed income-producing utilities into everyone's portfolios. They're said to be so safe, they're "fit for widows and orphans." (This is still largely true today...)
However, the modern, digital world has given rise to a new kind of utility... one that will be an even better "friend" to folks interested in generating big, safe income.
These new "digital" utilities, as I call them, supply the crucial services and infrastructure of telecommunication. I'm talking about the companies that provide wireless services, semiconductors, software, data storage, and broadband connections.
These companies aren't in super-growth mode anymore... so many investors write them off. But these companies hold dominant positions in their industries... which allows them to produce steady cash flows.
I first introduced this idea to DailyWealth readers in 2011. As I explained, two of my favorite names in this sector are Intel and Microsoft...
Both companies hold near-monopoly positions in their industries. Intel dominates the semiconductor industry. Microsoft dominates the software industry. Each time you hop on the computer, chances are good these companies will make a tiny bit of money.
But Intel and Microsoft are even better than traditional utilities. They sell their goods and services around the world, so local government regulators can't control them. Regulators can't limit their profits, prices, and return on capital the way they can with traditional utilities. This allows Digital Utilities to pay reliable and growing dividends in the 3%-4% range.
As I mentioned, these Digital Utilities have steady businesses and real profits that they return to shareholders. They aren't unproven, flash-in-the-pan tech stocks that put hype before real earnings.
Sure, the young guns have put up big returns in this bull market. Since its 2012 initial public offering, social-media service Facebook (NASDAQ:FB) is up 48%. Other social-media stocks have gathered a lot of attention.
But over the past month, the market has started to separate the long-term winners from the passing fads.
After years of plowing ahead, the market is turning against wild tech stocks. The fastest risers have become the fastest fallers, as investors have questioned the wisdom of paying 95 times earnings for shares of Facebook... a business that could be on the decline already.
Shares of these "exciting," but risky, tech names have collapsed. Meanwhile, Digital Utilities like Microsoft and Intel have remained strong... They've continued to pay their dividends.
These two companies are still "buys" in my book, especially if you're looking for safe and growing income.