The Radically Simple Way to Make Money in Stocks

Paul Tracy
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Posted: Nov 05, 2011 12:01 AM

We first brought this stock to our readers' attention when we selected it for "The 10 Best Stocks to Hold Forever" report. A couple of months later, in September, I added 350 shares to my $100,000 "real-money" Top 10 Stocks Portfolio.

The stock was Intel (Nasdaq: INTC). If you asked most investors, they'd tell you Intel is a "boring" company that hasn't gone anywhere for years. But the stock is up more than 20% in a matter of weeks, and that's after a recent pullback.

I'm not telling you this to blow my own horn, or brag about our success.

I'm bringing it up because what led my team and I to this gem was an investing philosophy we like to follow here at StreetAuthority. And it's so simple, anyone can use the exact same strategy in their own investing.

Let's face it. We're not Warren Buffett, nor Wall Street Insiders. And while StreetAuthority spends a small fortune (more than $1 million annually) on a research team and tools to find some of the best stocks on the market, we don't have access to "inside" information that any other well-researched investor wouldn't. We don't use some complex formula to derive our picks, either.

So what's our secret then?

Well, for years, investing has seemingly become more complicated. Options strategies, complex derivatives, high-frequency trading, and dozens of other investing methods that only a person with a doctorate degree could understand have been used to make money in stocks.

But we don't use any of those... and I doubt you do either.

In fact, we don't recommend these strategies to the vast majority of investors. Unless you're an experienced professional, the majority of them are ineffective.

Instead, when we decided to tab Intel for our report... and when I added 350 shares to my real-money Top 10 Stocks portfolio, the reasoning behind it was simple.

First and foremost, Intel is a bellwether of the tech industry. With more than 80% of the market share for microprocessors, it is one of the most prominent tech companies in the business.

To add to the allure, Intel is using its stockpiled cash to buy back stock... and lots of it.

In the first three quarters of 2011, Intel bought back 468 million shares -- a value worth roughly $10 billion dollars. Management still has another $14 billion allocated future buybacks. At recent prices, this adds up to more than 587 million shares -- nearly 10% of all shares outstanding.

While this was good to see, something else drew us to Intel. It's something unique that makes Intel stand out against a backdrop of other tech companies... a dividend.

Paying a dividend is rather uncommon in the technology sector. Major tech companies Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG), and Intel's rival Advanced Micro Devices (NYSE: AMD) don't pay a cent.

So when we see a major tech player such as Intel offering a quarterly dividend of $0.21 a share, it doesn't go unnoticed.

While the current 3.5% yield might not sound exciting, Intel has boasted 110% dividend growth during the past five years.

If this pace continues -- and right now there is little reason to think it won't -- just five years from now Intel would pay $0.44 per share every quarter, giving today's investors a future yield of 7.4% based on today's purchase price...

When a $130 billion titan like Intel shows this kind of dividend growth, it certainly grabs our attention.

Add it all up, and Intel meets all three of the simple criteria I like to use to identify stocks with the potential to outperform in the long term...

  • It enjoys huge (and lasting) advantages over the competition.
     
  • It buys back massive amounts of its own stock.
     
  • It pays its investors each and every year by dishing out fat dividends.

After years of research, I've found that more often than not, companies that fit in these three simple categories are the ones that can make you money long-term.

It makes sense -- strong companies that take care of their shareholders tend to do better in the long-run. It doesn't take a doctorate degree to understand this.

Of course, there's never a surefire thing with investing. Even the seemingly strongest companies growing dividends and buying back shares aren't guaranteed to see a positive return.

Action to Take --> That said, I think investing in companies with these traits gives you the best chance of making money. After all, I don't know a better long-term strategy than picking competitive, shareholder-friendly companies with a history of success. It's easy, it's simple, but better yet... it works.

[Note: This philosophy was the inspiration behind my "10 Best Stocks to Hold Forever" report. Not all the stocks I selected meet each of these criteria, but most do... including Intel.

You can learn more about the rest of the 10 "Forever" ideas -- including several names and ticker symbols -- by viewing our latest research here.]

Disclosure: P. Tracy and/or StreetAuthority, LLC hold a position in INTC.

This article first appeared at StreetAuthority: The Radically Simple Way to Make Money in Stocks