It’s Friday… That means it’s mailbag day here at the Cut.
You’ve been sending in your questions to our experts here at the Legacy Research team.
And they’ve been weighing in with answers.
Today, friend of Legacy Imre Gams breaks down how a currency trade works.
And income investing expert Brad Thomas reveals why dividend growth is the key to his SWAN (sleep well at night) strategy.
But first a question about crypto for our tech and digital assets expert, Jeff Brown.
It’s about one of the biggest developments in crypto – one that’s been drowned out by the collapse of Sam Bankman-Fried’s FTX exchange.
Reader question: What are your feelings about Ethereum and its ecosystem? I looked at price projections. They’re often overly optimistic. But the crypto is projected to reach its previous peak within 5 years.
That is vastly different from your projections based on the long-awaited Merge, which finally happened in September. I would be interested in an update from you on this important crypto. Keep up the good work! Thanks!
– Gordon E.
Jeff’s response: Hi, Gordon. ETH didn’t perform as I expected after the Merge. Instead of rallying, it’s been moving lower… along with the rest of the crypto market and the stock market.
That’s been tough on crypto investors. But despite what’s been going on with crypto lately – including the FTX collapse – I’m still long-term bullish on ETH.
To catch readers up, ETH – or ether – is the token associated with the Ethereum blockchain. You need to spend ETH to use decentralized applications built on Ethereum. And its price rises or falls, broadly speaking, based on how many people are using these apps.
ETH has also become the crypto industry’s second reserve currency after bitcoin (BTC).
At a high level, the Merge was a software update. It switched Ethereum from a Proof of Work (PoW) blockchain to Proof of Stake (PoS) one.
Don’t worry if that sounds like a bunch of technical jargon. What you need to know is that Ethereum has become less of an energy hog since the Merge. Before the switch, it used roughly the same amount of energy each year as Chile, a country of more than 19 million people. It now uses just 1% of that energy.
In short, Ethereum went green.
This will help attract investments from Wall Street institutions. Many of them have charters that require them to deploy capital into ESG investments. That stands for environmental, social, and governance. It’s a catch-all term for sustainable investments.
That was reason enough to recommend ETH. But it’s only one part of the bull case.
The Merge also cuts ETH supply. And as you know, if demand for an asset is steady or rising, and its supply falls, its price must go up.
First, the supply of newly minted ETH is going to shrink after the Merge. That’s because the network no longer needs to pay “miners” with new coins.
Second, users must now “stake” their ETH if they want to verify transactions and earn rewards. Think of staking as the crypto version of an escrow account. You lock up your ETH when you stake it. If you infringe on the rules of the network… you lose your staked coins. This removes the ETH from circulation.
Third, Ethereum will now “burn” – or destroy – part of the transaction fee folks pay to use Ethereum. This shrinks supply even more.
That’s why, since the Merge, issuance of ETH has dropped by about 88%.
And there are bullish developments on the demand side, too.
Investment firm Fidelity will allow its customers to own bitcoin in their 401(k). It’s only a matter of time before Fidelity adds ETH to that list.
ForUsAll is another 401(k) provider. It also allows its investors to add bitcoin and ether in their retirement accounts.
Last week, JPMorgan executed its first live trade on a public blockchain. It used the Polygon network but said it wants to also use Ethereum.
We can expect some setbacks thanks to the collapse of crypto exchange FTX. But crypto isn’t going away. It’s still early in its journey toward mainstream adoption.
Next up, a question for trader Imre Gams.
Imre works alongside master trader Jeff Clark. And he recently launched a new advisory called Currency Trader.
As the name suggests, it focuses on profiting as currencies move up and down relative to one another.
Out of the 16 trades Imre has recommended since July… 15 have been winners.
And his mailbag has been spilling over with questions from new subscribers…
Reader question: Your last two trades have been “sells.” Could you explain more about how that works?
Thanks for the continued education videos! I’m enjoying learning!
– Sheila H.
Imre’s response: Hi, Sheila. The currency markets are unique because each trade is a twofer.
You’re buying one currency and “shorting” – or betting against – another at the same time. This is what’s known as a “pairs trade.”
These trades allow us to buy or sell a currency pair at any time. We don’t need to buy something first (like a stock) before we can sell it.
Shorting can be confusing at first. But let me give you an example.
Let’s say you want to buy a car. And I want to sell you a car.
I don’t have the car you want – yet. But I know I can get one for $20,000. And you’re willing to buy it from me for $25,000.
So I’ll charge you $25,000 for the car now… and promise to deliver it to you later.
Then I buy it for $20,000 and keep the $5,000 as profit.
This is how short-selling works in the currency markets.
We sell a currency pair at a higher price, then buy it back at a lower price, keeping the profits.
Last up today, a question for income investing expert Brad Thomas.
As regular readers will know, Brad started out as a real estate developer. But he lost it all in 2008. And he built back his millions by buying what he calls SWAN – or sleep well at night – stocks.
These are stocks with long track records of paying reliably increasing dividends to shareholders. Year in and year out, no matter what’s happening in the markets, SWAN stocks let you rest easy.
They’re a time-tested way to profit through any crisis.
And the questions on SWAN investing have been coming in fast at his new Intelligent Income Investor advisory.
It’s where Brad recommends a model portfolio of his top SWAN stocks.
Reader comment: You had a list of SWAN stocks, but many of these had a current yield that was quite low, most under 2%. Even with dividend growth, it appears to me this will not approach an acceptable yield for many years. Please explain.
– Kenneth M.
Brad’s response: Don’t worry, Kenneth. I’ll be adding other higher-yielding stocks to the model portfolio.
I’m looking at an average yield of 5% across the SWAN stocks I recommend. But I’m more focused on total return. I’m also looking for stocks with proven track records of paying rising dividends.
As the old-timers on Wall Street say, “The safest dividend is the one that’s just been raised.” Companies with long records of raising their dividends each year are the companies that will continue to do so in the years ahead. And it’s that dividend growth that really boosts our total returns.
Most importantly, I recommend stocks that are trading with a wide margin of safety. That means the shares are trading below intrinsic value. So when you combine your current dividend yield, its future growth prospects, and discounted valuation, you’re increasing the odds the stock will deliver exceptional returns.
It may seem counterintuitive. But I try to steer subscribers away from companies yielding 10% or higher. These dividend yields are usually unsustainable. And falling dividends are a recipe for destroying shareholder value.
My goal is to help my subscribers protect and grow their nest eggs in all markets… through any crisis. And SWAN stocks have proven to be great for doing just that.
Altria (MO) is an excellent example.
It’s the 190-year-old tobacco company behind the Marlboro cigarette brands.
It carries a yield of 8.6%. And the company has raised its dividend every year for 53 years straight. And Altria plans to grow that dividend by about 5% a year.
Had you bought Altria in 1986, and reinvested your dividends, your income stream would have grown to $25 for every $1 you invested.
That’s an 18% annual income growth over 36 years.
So it offers a yield of 8.6% you can count on today… along with dividend growth you can count on in the future.
That’s the nature of SWAN investing. It’s a slow-and-steady approach with a high rate of success. Dependable stocks with long histories of delivering steadily rising income streams to shareholders.
That’s all we have time for in today’s mailbag.
Remember, if you have a pressing question or concern for any of our team of experts here at Legacy, write them in at [email protected].
My team and I read everything you send. We look forward to hearing from you.
Have a good weekend.
Editor, The Daily Cut