Rich By Friday

Your Blueprint for Achieving

Absolute Financial Security
by Bill Spetrino
A Newsmax Media Publication

Congratulations! You are about to take a step

that will make a monumental difference in your
life. Simply by reading this report, youve decided
to take control of your financial future. And that
decision alone puts you ahead of 90 percent of
people.
In the following pages, I am going to share with
you my proprietary system for selecting stocks. I
will take you behind the scenes and show you the
steps I go through to evaluate every stock I select.
Youll be able to see what I do and how I do it, so
that you will have your own blueprint for financial
freedom.
I dont just want you to make money. I want
you to have absolute financial security. Thats
really what this is all about creating a rich life
that puts you in the drivers seat.
The money itself is secondary. What I really
want you to have is freedom, control of your own
destiny. To be able to live where you want, travel
when you want, and provide your family with the
comfort and security you want them to have.
The methods Im going to share with you
include many of the same strategies the worlds
greatest investors have used to become billionaires.
But you dont have to have Warren Buffetts bank
account to use them.
As I walk you through my system for selecting
stocks, I want you to keep one thing in mind: I am
likely no different from you. I wasnt born into
money. I didnt have parents who gave me a trust
fund or even taught me about investing. I learned
it on my own. And if I can master investing, you
can, too.

Three Ways to Use This Report

Before we go into the specific strategies, Im
going to give you three options for using this
information:

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Read through this report, learn the techniques
I outline, and use them on your own to select and
evaluate your own stocks.
You can do quite well going this route, but you
will have to do quite a bit of research I typically

spend a minimum of 50 hours researching every

stock I recommend and you will have to stay
on top of the news that affects every stock in your
portfolio.

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Method
Skim this report, or dont even read it at all. You
can glean a basic understanding of how I go about
selecting stocks with a quick glance over this
report. And you can simply rely on my monthly
Dividend Machine newsletter to guide you to the
best picks.
This is also a perfectly viable option, especially
if you dont have the time to invest in analyzing
stocks yourself.

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Method
Finally, you can go through this tutorial, learn
the methods I use to select stocks then use
the Dividend Machine newsletter in conjunction
with these methods as your own personal stock
screening process.
This is my favorite way to approach this
Bill Spetrino is a professional
investor who has earned millions for
himself and his investors solely through

he graduated from John Carroll Univer-
sity in Ohio and spent a decade teach-
     
Spetrino set out to understand and cod-


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material, because you learn everything you need

to know to become a successful investor. These
are the exact same methods I used to achieve 24.8
percent average annual returns since I started The
Dividend Machine.
But you dont have to take the time to do it
all on your own. You have the newsletter as a
resource to turn to whenever you need it.
In a moment, I will show you my proprietary
system for selecting stocks. I call this system The
Dividend Machine, because once you implement
it, it is like having your own personal ATM that

spits out cash on a regular basis cash that is

yours simply for owning the stocks I recommend.
You wont have a million dollars in your bank
account by Friday. But by focusing on these
concepts for just 15 minutes a day, in just seven
days, you will have a blueprint for achieving all of
your financial goals.
After you read this report, you will see why I
am so passionate about this approach to building
wealth. I sincerely hope you will adopt it, because
I want nothing more than for you to realize the
financial freedom Ive been able to enjoy. J

My 18-Point System
Before I select a new stock, I will spend a
minimum of 50 hours evaluating it. In fact, it isnt
uncommon for me to watch a stock for months or
even years before I recommend it.
I run every stock that I consider through my
proprietary 18-point screening system. I am not
going to give you every screen I use in that system,
but I will share with you the basic rules and
principles that have made my system so successful.
With these rules and my monthly newsletters in
hand, you will have everything you need to build
your own dividend machine.
Just look at the numbers. My Dividend Machine
portfolio has returned an average of 24.8 percent
annually since we launched the newsletter in 2009.

Compare that to the S&P 500, which has gained

just 14.2 annually in the same period.
Thats more than a 10 percent difference! So
what are you waiting for? Lets get started.

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The cornerstone of my system is a focus on

dividend-paying stocks.
Now most folks think that dividend-paying
stocks are for Betty White look-alikes who are
happy to collect pennies on their investments and
give up high returns in exchange for safety.
In reality, it is quite the opposite. Dividend
stocks are actually a shortcut to building wealth
fast.
Ill show you why in a moment.
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But first let me explain how dividend

stocks got this reputation. See, its based

on this idea that companies pay dividends

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only when their prospects for growth are

limited. Otherwise, the thinking goes,

instead of paying shareholders a portion of

their profits as a dividend, non-dividend

paying companies would plow those

profits back into their businesses to grow




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them.
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Now it is true that dividend-paying
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companies tend to be older, more
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established businesses. And it is also true

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that so-called growth companies can often

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be younger, very nimble businesses that are
in an expansion mode, allowing them the
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possibility of generating double-digit gains.
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But it is absolutely NOT true that

dividend stocks have inferior returns.

In fact, study after study shows just the

opposite.

Dividend stocks not only consistently

perform well, they have proven to


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outperform both stocks that dont pay
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dividends and the S&P 500 as a whole over

time.
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And as the chart to the right shows, this
looking for, and thats why having a long history
is true in both bull and bear markets.
of paying dividends is my first screen in selecting a
If you think about it, it makes sense.
stock.
A stock like Intel (INTC) that yields 4 percent
only needs to appreciate 8 percent to give you a 12
,/
percent annual return. Getting that 4 percent yield
How to find dividend-paying stocks? Its easy.
is like getting an 8.6-mile head start when running
My colleague, Sean Hyman, has helped me
a marathon. Youre ahead of the game from the
out by recording a series of videos that show
get-go.
you exactly how to look up this information for
This is why my first rule of selecting stocks
yourself. Go to http://www.dividendmachine.com/
is to find companies that pay dividends. I call
dividends, and you can look over his shoulder and
these stocks warhorse stocks, because they
literally copy this strategy.
are typically mature companies with established
Simply go to:
businesses. Most importantly, they have proven
http://screener.finance.yahoo.com/stocks.html
that they can survive the worst of times and thrive.
The first pull-down box allows you to select
Im talking about well-known names, like Cocastocks by industry, from accident and health
Cola (KO), McDonalds (MCD), Intel (INTC), and
insurance to wireless communication. Choose an
Microsoft (MSFT).
industry youre interested in, or leave it blank.
These are companies that have a long history of
You can then select any other criteria you want,
consistently paying dividends every quarter, year
from market cap to price-to-book ratio, but the
in and year out. Coca-Cola, for example, has paid
most important one for our purposes now is the
a dividend every year since 1920. McDonalds has
dividend yield. Its right under Share Data.
paid a dividend every year since 1976.
Of course, it isnt just about picking highThink about what that means.
yielding stocks. Sometimes stocks have a high
Many of these are companies that have been
yield and theyre also extremely volatile (much
able to meet their obligation to return a portion
too risky). And sometimes they have a high yield
of their profits to shareholders even through the
simply because the price has dropped dramatically.
Great Depression, the 25 percent unemployment
Remember, yield is simply the dollar amount of
rates of 1932, the 18 percent interest rates of the
the dividend divided by the price of the stock. If
1970s, and the financial collapse of 2008 and
the price goes down a lot, the yield will go up, but
2009.
the stock isnt likely to be a great investment.
These businesses arent going away at the first
The trick is to choose a yield that is reasonable.
sign of difficulty. Thats the kind of safety Im

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I normally input a range of say, 1 to 4 percent.

Then just to be sure the company is reasonably
solid and going to be around for a while, Ill input
a market cap of $1 billion. Of course, there are
many other criteria I use (which well discuss in a
moment), but I want to give you a starting point.

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As I mentioned, the dividend by itself is only one
factor. Equally important (if not more important)
is that the company has a track record of
increasing its dividend over time. This is incredibly
powerful.
Thats because an increasing dividend increases
your returns dramatically. And the longer you hold
a stock with an increasing dividend, the greater
your percentage gains.
Let me show you what I mean.
Assume there are two guys, Bob and Tom,
each with $10,000 to invest. Each finds a $10
stock that pays a 5 percent dividend, or 50 cents
annually. That alone is a pretty nice deal.
But it gets better.
Each stock increases in value at a rate of 6
percent per year. So after holding the stock for 30
years, both Bob and Tom have investments worth
about $60,000 ($59,693, to be exact).
Now heres where the difference comes in. Bobs
stock continues to pay 50 cents year in and year
out. It never wavers. That means over the course
of 30 years, Bob collects a total of $15,000 in
dividend income.
1,000 shares x $.50 x 30 = $15,000
Add that to his stock appreciation of 6 percent
annually, and Bob is sitting on a nice $74,693
portfolio:
$59,693 in stock appreciation + $15,000 in
dividend income = $74,693
But Toms stock actually increases its dividend
at a rate of 6 percent per year to keep up with the
stocks increase in value.
At the beginning, that doesnt mean much. The
first year, it means Toms dividend goes from 50
cents to 53 cents. Not a big deal.
But after 30 years of raising dividends, Toms

stock now pays a whopping $2.84 in dividends

per share or $2,840 on his investment of $10,000.
That means Tom is now effectively earning 28
percent from his dividends alone:
$2,840 $10,000 = 28.4%
Think about that! 28 percent!
When you add up the dividends he has
earned, plus the appreciation in the stock, Toms
investment is now worth $100,638:
$59,693 (appreciation) + $40,945 (the $.50
dividend rising 6% annually over 30 years) =
$100,638
Thats quite a difference. Now I know what
youre thinking: No stock has a dividend that
grows at 6 percent per year, right?
Wrong.
One of my longtime holdings, Altria (MO), has
increased its dividend by 13 percent per year since
1970.
McDonalds (MCD) has raised its dividend 22
percent annually for the past 36 years.
And Intel, one of my newer recommendations,
has raised its dividend by 24 percent annually for
the past 20 years.
So yes, it is entirely possible to find stocks that
raise their dividends by 6 percent or more every
year.

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But it isnt just a growing dividend itself that
accounts for outsized returns. It turns out that
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Special Report

companies that have grown their dividends

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actually deliver better total returns, too.

In looking at stock market returns

spanning 37 years, researchers Robert

Arnott and Clifford Asness found that a

companys earnings actually grow fastest

when dividend payouts are growing.

Stock performance grows fastest, too.

From 1973 to 2010, stocks that grew

their dividends returned on average 9.27



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percent. Stocks that paid dividends, but did



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not increase those dividends, performed


almost as well, returning an average of 7.11

percent annually.
How did the so-called growth stocks
next to it are four options: Daily, Weekly, Monthly,
perform? Non-dividend payers returned
or Dividends Only. Click on the Dividends Only
an average of just 1.82 percent annually over
button.
the same time period. Kind of makes the term
4. Then click Get Prices.
growth seem like a bit of a contradiction,
5. It automatically comes up with 1986 to 2013, but
doesnt it?
you can adjust the range as far back as you like. If
Consider this: Had you invested $10,000
you scroll down, you will see that the last dividend
in stocks that were growing their dividends in
was $0.225 on Feb. 5, 2013.
1973, that investment would have blown up to
As you scroll down, and click on the next page,
$265,787, while the same investment in stocks
you will see that the dividend started in 1992 at
that paid dividends but didnt grow them would
$.00313 and has increased every quarter since.
have grown to just $126,972 and an investment
This is what were looking for.
in non-dividend payers would have ended up with
just $19,490.
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Thats a 109 percent difference between stocks
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that were growing their dividends and stocks with
So its important to look for stocks that have
dividends that remained flat!
dividends and have paid them consistently over
time.
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And the second principle of my system is to
To find if a stock has regularly increased its
find stocks that have consistently increased their
dividend, follow these steps (again, my colleague,
dividends year after year.
Sean Hyman, has recorded a video to guide
Those two strategies alone will put you ahead of
you through this step-by-step. http://www.
the majority of investors. Now I want to introduce
dividendmachine.com/increasing to see it.):
you to the third tenet of my system: Take
1. Go to Yahoo Finance (http://finance.yahoo.com) and
advantage of the power of compounding.
type in the stocks symbol (or company name if you
Make this a part of your investing system, and
dont know the symbol) in the Get Quotes box in
you will literally turbocharge your returns.
the upper left corner.
Let me show you why.
Lets use Intel as an example. I type INTC in the
Consider the two fictional investors I introduced
Get Quotes box.
you
to earlier, Bob and Tom. In the examples
2. Click on Historical Prices on the left side. Its
under the Quotes section.
above, Bobs portfolio was worth $74,693,
because he invested in a stock with a steady
3. Now you will see an option to Set Date Range, and

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dividend, but it didnt grow over time.

Toms portfolio, on the other hand, was worth
$100,638, because he invested in a stock with a
steady dividend that grew by 6 percent annually.
But in both cases, our investors took those
dividends and spent them. Youre perfectly free
to do that. You will still enjoy appreciation in the
stock price and still enjoy a nice dividend along
the way.
But what if, instead, they reinvest those
dividends?
The first year, they each earn $500 in dividends
($.50 x 1,000 shares = $500).
By taking that $500 and using it to buy more
stock, they each now own 10,050 shares.
If they continue to do that year after year, they
compound their returns dramatically, because
they are now not only realizing appreciation and
dividends on their initial investments, but also
appreciation and dividends on their appreciation
and dividends!
Lets see just how powerful this is:
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Bobs total return now jumps to $119,158 over

30 years.
But Toms total return, with its growing
dividends and the power of compounding,
balloons to a whopping $254,788.
That means Tom is getting an additional
$136,630 essentially for free, simply by reinvesting
his dividends and letting them compound over
time. Pretty impressive for an initial investment of
just $10,000.

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And consider this: The stock in our example
raised its dividend by only 6 percent annually.
Many of my recommended stocks beat that by 50
to 100 percent or more.
Now do you see how important the power of
compounding is to your nest egg?

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When clients come to me for my accounting
services, one of the first things I look at is their
cash flow. How much money do they have coming
in and how much do they have going out?
Its pretty basic, right? Obviously, the more
money coming in, the better. And the more cash
they have on hand, the better. The same is true
with the stocks I invest in.
One of the things I like about companies
like Microsoft (MSFT), Apple (AAPL) and Old
Republic International (ORI) is that they are
sitting on a ton of cash.
Microsoft has over $68 billion in cash. Apple is
sitting on $137 billion in cash, and Old Republic
has nearly $10 billion in cash.
This shows me that these companies have
enough of a stockpile to maintain their dividends.
Of course, a storehouse of cash also gives these
companies the ability to invest in new products if
they choose or acquire new business or even whole
companies if they want to.

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,
Go to http://www.dividendmachine.com/cash to
see a video of how to do this, or follow these steps:
1. Go to Yahoo Finance (http://finance.yahoo.com).
Enter the stock name or symbol in the Get Quotes
box.
Lets use Intel as an example. Type in INTC.
2. Click on Key Statistics. Scroll down to where it
says Balance Sheet. Take the Total Cash number
in this case, its $18.2 billion and subtract the
Total Debt number, which is $13.57 billion.

That leaves $4.63 billion in cash. Now that

figure isnt always perfect. It doesnt include

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marketable securities and the like, but it gives you

an idea.

generally not a good sign.

I am even happier when a company has little or
no debt. Apple (AAPL), Marvell (MRVL) and Visa
(V), for example, have no debt at all.
Of course, there are many variables, and there
are plenty of good reasons that companies take on
debt (like investing in other companies or growing
certain parts of their businesses).
If that debt is at a reasonable rate and the
company has the cash flow to pay it down, its
perfectly fine.
Now, when a company is not saddled with
debt, it is just like when a person is free of debt.
They have much more freedom to spend or invest
their cash as they see fit. And these are often the
companies that either buy back their own shares
or return their cash flow to investors in the form
of dividends.

//
The second part of rule No. 4 is that I look at
debt. If individuals are spending a large percentage
of their income or worse than that, more than
they make on paying off debt, its a concern.
Its the same with the companies I evaluate.
There is a statistic called the current ratio. This is
basically a companys current assets divided by its
current liabilities:
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The current ratio shows how easy it is for the

company to pay back its short-term debt.
The higher the ratio, the better.
For example, if a companys current assets total
$200 million and its current short-term debt is
$100 million, its current ratio is 2. It has twice as
much cash (and inventory and receivables) as it
needs to pay its current obligations.
This is what I like to see.
If, on the other hand, it has more debt than
assets, its current ratio will be less than 1. This is
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OK, so having a lot of cash on hand is good.

Having well-financed, low-rate debt is good.
Having little or no debt is better.
What else makes a stock a solid investment? I
want to see that a company has growing earnings.
To start with, I look at earnings per share (EPS).
Specifically, I want to see that a company has a
track record of growing its earnings.
So with EPS, for example, I start by looking at a
companys earnings history. The longer the history
and the more consistently the company has grown
earnings, the better. Take a look at how
McDonalds (MCD) has grown EPS over
the past 10 years:
Thats pretty darned consistent.
But Im not just looking at past earnings.
I want to see future earnings growth
potential, too.
In the case of McDonalds, the company
is projected to post earnings of $5.79 per
share in 2013 and $6.35 per share in 2014.
Microsoft (MSFT) is on a similar steady

growth path. The computer software giant

had EPS of $1.82 in 2012, but it is forecast
to have EPS of $2.85 for 2013 and $3.16
for 2014.

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And oil services company Halliburton (HAL)

posted EPS of $2.84 in 2012, but is expected to
have EPS of $3.00 for 2013 and $3.96 for 2014.
Growing earnings is one reason these stocks
are on my buy list. But I want to make sure these
stocks are well-priced, too.

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Follow these steps (you can also go to http://www.
dividendmachine.com/earnings to see a video of how to
do this):
1. Go to http://www.nasdaq.com. Type in the company
name or stock symbol in the Get a Quote box at
the top of the page.

2. Look on the left column under Fundamentals for

a button that says, Revenue/EPS. Click on that.

You will see Revenue, EPS, and Dividends for

the last three years. At the bottom of the page,
you can click on the Previous 3 Years link to get
information for the three prior years. Continue
clicking back to get an idea of the companys trend
in earnings per share.

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Value is an interesting thing. We like to think
that we are smart enough to assess whether
something has intrinsic value or not.
For example, we assume that a $175 bottle of
wine tastes better than a $7 bottle of wine. Or that
a $16 million baseball player is more valuable to a
team than a $500,000 one.
Both assumptions are often wrong.
Michael Youngs salary for the Texas Rangers in
2012 was $16 million. Yet with 651 at bats, Young
only managed to get 169 hits and eight home runs.
Youngs cost to the Rangers: $2 million per
homer.
Andrew McCutchen, on the other hand, earned
just $500,000 from the Pittsburgh Pirates in 2012.
Yet he managed to score 31 home runs on 673
at-bats, making his cost per home run a meager
$16,129.
On top of that, McCutchen finished the 2012
season with 194 hits, making him the leading
hitter in the National League.

Which player is the better investment?

McCutchen, of course. Not surprisingly, his salary
ballooned to $4.5 million after that season.
Value is subjective. It isnt often fully realized
by the market, because the market frequently gets
distracted by outer variables that have little to do
with an investments real value.
Like the Pittsburgh Pirates, we can snag bargain
investments that are worth far more than what the
market currently values them at if we know how
to evaluate them objectively.
One way to do that is by looking at the price-toearnings ratio (P/E ratio). The P/E ratio is the price
of the stock divided by its earnings per share.
The lower the ratio, the better. It means either
the earnings are high relative to the price of the
stock, or the price of the stock is low compared to
its earnings. Either way, its a good indicator that a
stock is undervalued.
But as with EPS, I dont look only at the current
or trailing P/E ratio. Doing that is like driving a
car and trying to figure out your destination by
looking in the rearview mirror. You have to look
ahead. So I look at the forward P/E ratio as well.
A stock like Marvell (MRVL) has a current P/E
ratio of 16.2, but a forward P/E ratio of 13.12.
But I dont stop there. A P/E ratio means little
by itself. You have to compare it to other stocks in
the industry, as some industries just by their nature
grow faster than others.
In Marvells case, the industry average is 22.
Since Marvell is trading well below the average,
its a good sign. Thats one reason this stock is on
my buy list.

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Looking at P/E ratio is a very simple idea, but
in actuality, it is a bit more complex. It is really a
function of growth.
A large company will not typically grow nearly
as fast as a smaller one. Chipotle, for example, has
more room to grow than McDonalds, because it is
newer, can expand to more locations, etc.
Because of this, fast-growing companies tend to
have higher P/E ratios. Chipotles P/E ratio is 35,
while McDonalds P/E ratio is 17.

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Which is the better buy?

To answer that, you would have to take
into account how fast earnings are growing
and whether or not earnings can continue at a
fast enough clip to make the price of the stock
reasonable.
One way to do that is to look at the price-toearnings-to-growth ratio (PEG ratio). The PEG
ratio can give you a better idea of a companys
price relative to both its current earnings and its
earnings growth.
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Follow these steps, or go to http://www.
dividendmachine.com/peg to see a video of how to find
the PEG ratio:
1. Go to Yahoo Finance (http://finance.yahoo.com).
Type in the company name or stock symbol in the
Get Quotes box in the top left of the page.
2. Click on Key Statistics in the left column under
Company. Under Valuation Measures, you will
see the PEG Ratio about halfway down.

But I dont look at these ratios independently.

I have a special formula that Ive created, using
my insights from 25 years as an accountant, to
ascertain how likely a company is to consistently
grow both its earnings and its stock price.
This gives me a much clearer picture of whether
or not a stock is undervalued.
For example, when we bought Visa (V) in
February of 2011, it had a P/E ratio of 25. Thats
pretty high. But my formula projected out a
growth rate that was high enough to sustain that
price. In fact, my formula showed me that Visas
then-price of $73.50 was quite reasonable.
As Im writing this, Visa is now trading at $156,
and weve made over 114 percent in the stock.
Interestingly, many people told me to sell Visa at
$90, $100, $110, $120 and $130.

I havent sold Visa because I continue to see

strong growth going forward. However, I do not
recommend putting new money into Visa at the
current price.
Which brings me to my next rule

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This seems pretty obvious. Naturally, you
want to buy stocks when they are priced low and
sell when they are priced high. Yet the obvious
question becomes: When is a stock priced low, and
when is it high?
You see, even good companies arent great
investments if you buy at the wrong price. You
know this intuitively. If you overpay for anything,
whether its a washing machine or a smartphone,
you feel cheated.
But in investing, the consequences are even more
dire: Such mistakes could seriously eat into your
nest egg.
And if you are like most investors, you will then
make even more dangerous decisions, trying to
chase returns to make up for the mistake of buying
at the top. Its a never-ending cycle.
Thats why I have buy prices in the Dividend
Machine newsletter. I set these prices carefully,
pulling together a number of calculations based on
projected earnings, growth rates, current market
conditions and more. I then add a set of personal
filters to arrive at a price that will give us a betterthan-average return over time.
These buy prices are not just suggestions.
The only way to make money is buying low and
selling high. Dont make the mistake of thinking
that a good stock will make you money no matter
what. It wont if you overpay for it.

^'
tW
To illustrate just how serious I am about this,
I want tell you about one particular stock. I have
owned this stock longer than Ive owned my
home, longer than my daughter has been alive,
longer than Ive known many of my friends.
This stock has been fantastic for me. It is a key
reason Ive been able to reach a place of financial
freedom, where I no longer have to work. I earn

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more than my familys living expenses from the

dividends on this and my other stocks.
So naturally, Im a big fan of the company.
You have heard me recommend it before: Altria
(MO). But no stock, not even Altria, which has
been so good to me, is worth buying if it isnt at
the right price.
I use my proprietary statistical filters to come
up with a target buy price and a general target sell
price for every stock I recommend. .
I take that buy price very seriously, and I want
you to, as well.

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/&,
Up until this point, I havent told you much that
you couldnt find by studying the great investors of
all time.
But successful investing involves more than
just comparing the statistics of one company to
another. It is as much an art as it is a science.
Part of that art lies in understanding that each
company has its own key indicators for financial
health. And those indicators differ from company
to company, just as key indicators for personal
health can differ from person to person.
In a way, I look at each company as its own
market. I get to know what has propelled the
company forward in the past and what has caused
it to lag.
For example, a key indicator for Altria is its
market share on Marlboro cigarettes.
For Coca-Cola, it is about how many 12-ounce
servings they sell.
In my 20-plus years of investing and almost 30
years of studying accounting and tax planning, I
have discovered that these key indicators can often
be the tipping point between an average year and
a stellar one for a business.

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&,
A lot of this is an art and takes some experience
to interpret, but you can get started simply by
following the companys news. The easiest way to
do that is to set up a Google Alert.
Go to http://www.dividendmachine.com/health

to see a video of how to do it, or follow these simple

steps:
1. Go to http://www.google.com/alerts
2. In the Search Query box, type in the company
name.
3. In the drop-down boxes, select the kind of
information you want (I usually choose News),
how often you want to receive results (once a day,
etc.), how many results (I usually choose Only the
best results), then enter your email address.

You will receive news updates on the company

by email as often as you selected.
In addition, I will share with you news and
updates about our stocks each week in my weekly
email updates and each month in your Dividend
Machine newsletter.

ZDDd
The numbers always grab the headlines. Are
earnings up or down? Is the stock price up or
down? What is the P/E ratio, the PEG ratio, the
return on assets, the price to book value; the list
goes on and on.
As Ive said, these numbers can certainly be
important indicators. But they can also mask the
importance of management, which is crucial to a
companys success.
Remember, when you buy stocks, you are
investing in businesses. Those businesses may
be in a growing industry. They may have a great
product. They may even own the lions share of
the market. But if management isnt top-notch,
those businesses wont realize their full potential
and in the worst-case scenario, they can get
really screwed up.
General Electric (GE) is a great example of
this. From 1981 to 2001 under CEO Jack Welch,
GE thrived. His focus was on streamlining the
company, famously saying that GE had to be
either No. 1 or No. 2 in any industry it was doing
business in or leave that business.
But since Jeff Immelt took over as CEO of GE
in 2001, the stock has dropped 63 percent, due to
what many claim is a lack of vision on Immelts
part (and I am inclined to agree).
The flip side is even more important. If
management is exceptional, even a seemingly

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Special Report

horrible business can be turned around. I have

Other great CEOs include Larry Ellison
seen this happen time and time again. One of my
of Oracle Corporation and Steve Ballmer of
favorite examples is American International Group
Microsoft. They have the skills and instincts to
(AIG).
drive their companies forward. Not surprisingly,
AIG was, of course, beaten to a pulp in the
these stocks are also on my buy list.
financial crisis of 2008. From a high of $42 a share
As Ive said many times, investing is 50 percent
in March of 2008 to 33 cents a share by March
science (the numbers) and 50 percent art (instinct).
2009, AIG was in such bad shape that many
CEO evaluation is a large part of that art.
thought the giant insurer would never recover.
Ztt
After all, the company had been the recipient of
Zt
the largest government bailout in U.S. history.
But when tough-talking, Brooklyn-born Robert
John Paulson became a billionaire by shorting
Benmosche took over as CEO after the crisis,
the subprime mortgage market in 2007.
everything changed.
Hedge fund manager David Einhorn made a
Jim Millstein was the restructuring officer
similar call with Lehman Brothers in July of 2007
hired by the Treasury Department
and again in October of 2011 with
to work with AIG. In a recent
Green Mountain Coffee Roasters
Barrons magazine article, Millstein
(GMCR), which subsequently
/
said of Benmosche, He was the
plunged over 35 percent in a
right combination of bull in the
month.

china shop and crazy like a fox.
Do you think it would have

Its a skill that has served AIG
made sense to follow the advice
 of these successful hedge fund
well. AIG has nearly paid back all
/
of the bailout money, and its stock
managers back then?
is on the rise.

Of course.
CEO Benmosche used his tough
If the biggest, richest, and most
K
reputation and can-do attitude
successful investors are buying a

to get risks under control and the
stock, why shouldnt the little guy
/ get in on the action? Wouldnt
government repaid. To do this, he
'/'
needed to reduce AIGs footprint.
that be a simple and smart way to
He wound down the financial
invest?
products unit and put everything
Easy? Yes. Successful? Maybe.
Consider this: In 2012, a cat beat a group of
up for sale.
professional investment managers by throwing a
As for the portfolios of mortgage-backed
toy mouse on a grid to pick stocks. The cat racked
securities and collateralized debt obligations,
up an 11 percent gain, while the pros turned in
which were collateral for the Feds loans to AIG,
just 4 percent, according to the London Observer.
they were auctioned off by the Federal Reserve.
Yes, even the big guys (those so-called whales
Now those loans are paid, and as prices have risen,
that the financial press loves to follow) get it
the Fed made money, and AIG recovered some of
wrong sometimes.
its losses.
Billionaire Ray Dalio and his firm, Bridgewater
I watched AIG closely for over three years
Associates, manage the largest hedge fund in the
before recommending it. I liked what I saw
United States. Yet in 2012, a year when the S&P
Benmosche doing, but I wanted to see him make
gained 13 percent, Dalios flagship fund was up
greater strides to financial solvency. AIG hit my
just 0.8 percent.
sweet spot in December of 2012, when the price
And after consistently beating the S&P 500 for
was low enough to still be a great bargain, but the
15 straight years through 2005, Legg Masons Bill
company was sound enough to have limited risk.

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Special Report

Miller then promptly underperformed the market

for the next four years straight.
Clearly, whale watching doesnt guarantee gains.

tzZtd/
Dd>
There are many reasons for this. For one,
whales, like all investors, have certainindustries
thatthey know better than others.
Warren Buffett, for instance, is much better at
choosing financial stocks than he is atpicking oil
companies or airlinesor technology.
Another reason is that the 13F forms that the
whales file with the SEC are reporting what these
investors have already bought. If youre buying
after the forms become public, chances are the
whale got in at a much better price.
And if the whale is a trader, like David Tepper
or John Paulson, he may already be out of the
stock by the time the 13F form becomes public.

dZt'
tt
Now, whale watching is a part of my investment
approach, but not in the way most people view
it. I dont look at what the whales are buying and
follow their picks. I do the opposite.
I evaluate stocks using my own proprietary
system. But if a whale happens to be buying one of
the stocks Im evaluating, I take note of it.
If the whale has had success in that industry
or sector, I consider it a good sign. For example,
when I recommended AIG, as I said, it was after
watching the stock for over three years.
During that time, I also noticed that legendary
investor George Soros had bought over 15 million
shares of the stock. And hedge fund managers
David Tepper, Leon Cooperman and Daniel Loeb
also had big stakes in the beleaguered insurer.
These are guys who have had success investing
in financials. When I saw they moved in, it was
definitely a vote of confidence the cherry on top
of what promises to be quite a wallet-fattening
sundae.
Now, I never choose a stock based on what
someone else does. But when my formula and the
whales agree, that bodes well for us.

,&Ktt

You wont be able to find out what the whales
are buying now, but you can get an idea of what
they have bought in the last quarter.
Heres how. (Go to http://www.dividendmachine.
com/whales to see a video or follow these steps):
1. Go to Guru Focus (http://www.gurufocus.com).
Type in a stock name or symbol in the search box in
the upper left corner.

2. Click on Guru Trades, and scroll down. You will

see a list of guru names (for example, George Soros,
Leon Cooperman, David Dreman, Daniel Loeb,
etc.), followed by whether theyve bought or sold the
stock, the time frame, the price they paid and how
many shares they acquired.

You can use this information to spot trends (Are

more whales buying than selling?) as well as to
determine what is a good price for the stock. Most
often, we will get into a stock at a far lower price
than the whales.

tt&h
In fact, a lot of whales have followed us into
stocks.
We bought Wells Fargo (WFC) in September
of 2011 at $23.96 a share. One year later,
multibillionaire Ray Dalio bought WFC, too. But
he paid between $32.85 and $36.10 per share.
We bought Gilead Sciences (GILD) in August of
2010 at $16.89 a share. Billionaire George Soros
just got on the Gilead train in the third quarter of
2012, paying between $25.34 and $33.89 a share.
Am I happy when the whales buy what were
buying? Heck yeah!
It isnt something I think about consciously
when I select a stock. But if some of the greatest
investment minds on the planet are following what
Im doing, Im pleased.
Im never going to recommend trading like some
of the big whales do. When little fish swim in big
ponds, they can get eaten, after all.
The good news is we dont have to. We can
enjoy plenty of sleep-well-at-night, market-beating
gains simply by doing what were already doing:
buying quality, dividend-paying stocks that
consistently beat the market over time. J

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The information in this publication is not to
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Closing Thoughts
There are many factors that go into my 18-point proprietary stock
screening system. Ive shared 10 of those criteria with you today.
These form not only the basis for my stock-screening methodology,
but also my philosophy about investing in general.
Trying to time the market is like trying to bet against the house in a
casino. You may win one or two hands, but the house will always beat
you over the long term.
Instead, we make the choices that are proven to stack the odds in our
favor. Study after study proves that dividend investing provides the best
long-term results. Study after study proves that stocks with increasing
dividends provide superior returns. And study after study proves that
reinvesting dividends compounds your returns exponentially.
That is how you beat 90 percent of investors out there, including
many of the big hedge fund managers and traders.

z,zE
Over the next seven days, I want you to put these principles into
practice. Use them to evaluate every stock that comes across your radar.
With this blueprint in hand, you will have everything you need to go
it alone, and you will do just fine.
Or you can let me help. Theres no reason you have to spend all that
time on research yourself. Let me do the legwork for you.
Take a look at past issues of The Dividend Machine at http://www.
thedividendmachine.com to get an idea of how I have guided investors
over the past four years.
In each issue, I not only tell you what to buy and sell and at what
price but Ill also take you behind the scenes and share with you my
reasons for every action I recommend.
And the best part is my monthly newsletter and weekly email
updates are all part of your annual subscription.
Do you ever get coffee on your way to work? For less than that
coffee costs you in a week, you now have all the investment advice you
need for a year. Lets get started!
Sincerely,

Bill Spetrino
d

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