Do you find yourself spending a great deal of time looking for the latest and greatest investments? To some extent, I suppose every investor does. But tomorrow's leaders are easier to find than you might think. In fact, that's the philosophy on which I base my dividend-stock newsletter, Motley Fool Income Investor, where we're beating the S&P 500 while taking far less risk.
I sometimes marvel at how many folks squander their investing energies looking for the next Microsoft or Dell (Nasdaq: DELL ) , two tech wunderkinds that crushed competitors to post nearly 18% and 41% annualized returns, respectively, over the past 10 years. I receive a good number of emails from such investors, who often ask for my opinion on lesser-known companies. And more often than not, they say, "Word is, it's going to be the next (fill in the blank) of the oil industry" or "the pharmaceutical business" or "the software market."
It seems everybody wants to find the company of the future, not the company of the now. Investors spend countless hours buying in to the dreams of upstart businesses, in the belief that this company or the next will invent a better light bulb and make them rich beyond belief. I certainly see the appeal there, but most investors are better off putting their efforts into researching companies that are already the best at what they do. While a few upstarts might indeed make money for early investors, most won't.
Buy tomorrow, today
In all likelihood, the next Microsoft is probably going to be, well, Microsoft. Companies that generate more than $13 billion a year in free cash flow don't often disappear. In fact, they typically go right on crushing their respective markets -- or at least keeping a sizable share of them -- year after year.
After all, these companies have the capital, the resources, and the global distribution networks. They enjoy multibillion-dollar research-and-development budgets. They own the brand names that roll off our tongues without a second thought. Why wouldn't they dominate tomorrow as they do today? Truth is, most of them will.
The untrodden road is a tough road
The life of a fledgling company is difficult, of course. For every company like Microsoft or Dell that hit it big, thousands of startups never quite made it.
Some businesses didn't have the right leaders or, at some delicate stage of their existence, were sunk by a single bad decision. Consider this: If IBM had recognized that the true profit potential lay in software, not computers, Microsoft might not exist today. Or if Gateway (NYSE: GTW ) had been able to shore up its market share, perhaps it and Dell would have swapped places. There are numerous events that, if they had gone another way, would have resulted in these companies not being here -- at least as we know them.
That's how speculative most of these situations are. Even the most successful companies likely had more "50/50" moments than they'd care to remember. That's just the life of any young company. Yes, when you hit one out of the park, it feels great -- and doing so can result in spectacular returns. But for most of us, one or two great calls won't make up for 20 years of bad ones.
The point is that you can dramatically reduce your risk and most likely enjoy better results by choosing high-quality, dividend-paying companies with which you're already familiar. Putting your research efforts into buying those businesses at great prices will likely generate far superior returns than trying to unearth the company that will cure cancer.
Well done, not well known
Some of these companies are the brands you know and love. I recommended Kraft (NYSE: KFT ) to my members because it is trading for less than its intrinsic value and offers a 3% yield. Then there are companies such as Coca-Cola (NYSE: KO ) and 3M (NYSE: MMM ) that offer slightly less than 3% yields yet boast incredible competitive advantages and moats.
But you also don't have to relegate yourself only to those companies with popular names. For instance, a business such as California Water is hardly a household name. But it is a blue chip in its industry and living proof that you don't have to speculate on biotech to earn sizable gains. The company has generated a total return of 78% for Income Investor subscribers in a little more than two years.
Whether the masses generally recognize it or not, these are conservative businesses operating in proven markets, and those are the types of companies you should commit yourself to owning. We're not looking to build wealth in a week and lose it in a month. We're hoping to build wealth over a lifetime.
Suffice it to say, I don't want to be "50/50" anything. I prefer to succeed far more often than I fail. And by doing so, I believe I can deliver market-beating returns to your portfolio while allowing you to rest your head on your pillow comfortably when the lights go out.
So if you'd like to get some extra sleep while building wealth, consider a no-risk, 30-day free trial to Income Investor. You'll receive access to all past recommendations, and it won't cost you a dime.
This article was originally published on Dec. 12, 2005. It has been updated.
Mathew Emmert sleeps well at night, but he has been known to snore occasionally. In case you didn't notice, he is the author of Motley Fool Income Investor. Of the companies mentioned in this article, he owns shares of Microsoft. 3M and Microsoft are Inside Value recommendations. Dell is a Stock Advisor and Inside Value pick. The Fool has an ironcladdisclosure policy.