This technique let’s you invest in penny stocks practically for free. It’s a two-part system that should protect you in all markets, without limiting your returns. This simple system is based on both income investing and high growth investing.

To start, you have to figure out how much of your money you are willing to part with for a few years. This money will be tied up, so be sure not to use the cash you need to pay next month’s mortgage.

Your best bet is to start a separate online account to handle this portfolio. You must make sure that you don’t continue to pour all of your savings into it — just as much as you can stand to lose.

Once you do that, you need to put all or nearly all of your new account’s money into income stocks. By income, we mean stocks that pay out dividends to shareholders.

Many blue chips pay dividends to entice investors seeking cash as you go. Companies like McDonalds and Wal-Mart cut dividend checks to investors every quarter. Some pay less, and others pay as often as monthly.

When deciding which companies to invest in, there are a number of questions you need to ask yourself:

Question to Ask: How much will this company pay through dividends?
Why the Answer is Important: For the sake of this technique, you want companies that pay a higher percentage. To find this, look for companies with dividend yields above 7%. That means, every year the company will pay at least $700 for every $10,000 invested.

Question to Ask: Is the company growing its dividend?
Why the Answer is Important: A growing dividend can lead to larger payments the longer you are invested. It also shows the company is strong and growing.

Question to Ask: How strong is the company’s financial health?
Why the Answer is Important: If the company is struggling to make money, you can bet that they’ll eventually stop paying dividends. That would leave you without the income you need for Step Two.

These are the basic questions you need to ask yourself in the first step of this system.

Once you find a few companies that you feel comfortable in, you are ready for step two. This is where the big money comes in…

Fast-forward a few months after your initial income investments. You should start receiving dividend checks. With that money, you can use it how you want. But to truly take advantage of this system, you should take it and invest in penny stocks.

That’s right, be aggressive. You don’t have to take any money out of your initial income investments, so these dividends are more or less fair game. Make the most of it.

If you like a small component maker in the tech industry, go ahead and put some of your dividend money in it. Find a junior exploration miner that you like? Buy some shares of it.

After awhile, you’ll find yourself with a fairly even portfolio. You’ll have safe income plays along side your high-risk, high-reward penny stocks. As the income payments grow, so do your penny stock investments.

This system gives you more than just a growing portfolio. It gives you safety in bear markets like this one, and profit potential in bull markets.

You see, income investments typically perform better in bear markets because of their stable dividend plans. Investors, with nowhere left to turn, will look for ways to profit even if stocks go down. These investors put their money in dividend payers to collect those payments, while the market finds a bottom.

You’ll benefit from this flood of investment. It’s certainly not going to push shares up to astronomical prices, but it does deliver safety in falling markets.

Then, when stocks begin to recover, those investors will be buying aggressive stocks, such as your penny stocks. That will push prices up to astronomical heights. You benefit from both the safety of your income stocks, and the potential gains of your penny stocks.

While this sounds like the perfect way to invest, the most difficult part — as always — is finding the right companies to invest in.

But, if you do it right, you’ll be practically bulletproof in all markets.

Sincerely,
Jim Nelson

October 31, 2008

P.S.: Over the next few weeks, we’ll be sending you a report that outlines a detailed income investing strategy. It will be called Retirement Plan B and it will take an in-depth look at the world of dividend stocks.

Bulletproof in Any Market was originally featured in the Penny Sleuth.

If you’re sick of the gloom and doom permeating markets right now, you can find solace in one investment… Well, it’s actually a type of investment. I’m not talking about options or shorting or even bonds. We still like to buy low and sell high, but we also like our investments to pay us as we go.

Income investing is a great way to do that. It gives you the chance to take cash out of your investments without selling shares. One way to successfully do this, while staying aggressive, is to reinvest your dividends in penny stocks. That way, you have the best of both worlds: Security and potential money multipliers.

There’s never been a better time to start. With the recent thrashing in the markets, many companies are sporting unbelievably high yields.

More Income Than Ever Before

The S&P 500 is now sporting a yield of 2.65%, up from its low of 1% in 2000. The same goes for the Dow, which is now at 3.74%, up from its 2000 low of 1.5%. These yields may not sound high to you, but they both factor in non-dividend paying companies.

We are seeing enormous yields everywhere we look. Others are too…

Warren Buffett, you might have heard, is buying up depressed stocks. But instead of buying just any old ones, he’s investing his hard-earned money in these high yields.

The Oracle of Omaha recently bought up $5 billion worth of Goldman Sachs preferred shares. For his gutsy investment, the company is going to send Buffett a check for $500 million every year. That’s a 10% yield on one of the largest banks in the country.

Yields that high can mean one of two things: Either the company’s payments are too high and a drop is coming, or its shares are depressed and should rise. In this market, most companies fall into the second category.

Sure, companies like Bank of America and Citigroup cut their dividends. But, there are many others riding through this stormy market with consistent dividend payments. Just take a look at JP Morgan Chase and Wells Fargo. Those are two banks still paying nice premiums to shareholders.

We aren’t interested in banks though. You don’t want to stand too close to this economic fire. That’s why we are looking for companies with consistent dividend payment and piles of cash in their coffers in other industries. We are finding tons out here.

As Chris Mayer puts it, “According to the WSJ, nearly one in 10 stocks trades below the value of its per share cash holdings, an even greater proportion than Graham found in 1932.” Combine that with a high yield in a safe industry, and you are looking at a monster of a buying opportunity.

We are seeing stocks tied to real resources — like oil, natural gas, and coal — paying enormous dividends. Take BP for instance. It’s one of the largest integrated oil companies in the world and it’s paying 7.6%. That’s absurd. Last year this time, the company only paid 3.5%.

Royal Dutch Shell is another massive oil and gas company that’s offering a relatively astronomical yield. Shares of Shell fell from $88 in October 2007 to just $55 today. That fall from grace set up a yield rally from just 2.2% to 5.9% in that 12-month period.

Double Your Income Even As Jobs Disappear

Think of it this way: While millions are taking pay cuts or even losing their jobs, both BP and Shell are offering more than double last year’s income to shareholders.

If you are wondering how income investments like these will hold up as this bear market continues, take a look here: From 1970 through 2005, dividend stocks returned twice the gains of non-dividend paying stocks in the S&P 500. In that period, there were at least seven bear markets and economic crises. So maybe now, more than ever, you should be looking into income stocks.

But before you start buying the highest yields out there, remember that it’s only based on previous or planned dividends. No one knows when a company will cut its payments. If a company is paying more than 15%, take a serious look at why. If the business is still producing solid gains at a respectable growth rate, you may be ok. But if it’s starting to take a loss, that yield may not be an attractive opportunity.

Keep a lookout now more than ever. You don’t want to miss the chance to grab shares of solid companies like BP and Shell while they are willing to pay you this well.

Sincerely,
Jim Nelson

October 29, 2008

P.S.: This is a story we’ll be following for a while. In the coming weeks, we’ll be sending you an opportunity called Retirement: Plan B. It focuses on these investments. So keep your eyes peeled.

The Market’s Unintended Opportunity was originally featured in the Penny Sleuth.