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3 Must-Follow Rules for Your 401(k)

December 11, 2006 – by Richard Band

I don’t know when you’re planning to pull money out of your 401(k), but I know this: Millions of investors are going to get the shock of their investing lives when they begin to withdraw their funds.

If you are one of them, you may realize, too late, that your 401(k) has failed to give you the capital gains your growth investment promised. And you may soon discover that your most-loved holdings will never deliver the income you need. But worst of all, you’re going to be shocked to see years of struggle, saving and investment not pay off, ultimately setting back your standard of living during what should have been your golden years.

I don’t want to see that happen to you. I’m going to help you learn the new rules of 401(k) investing so you don’t get stuck in the dangerous and costly trap that most investors have already fallen into—and I’ll share with you the same cash-on-cash investment approach that my Profitable Investing readers are following right now—investments that have already helped my readers grow 60% richer over the past two years and can help you, too, claim a richer, more affluent retirement lifestyle.

Rule #1: Buy Income Streams, Not Growth Stocks

As you’ll remember, when you first started saving for your retirement, you were advised to invest for growth, right? At the time, you were told that income investments simply wouldn’t give you the growth you needed to fund your retirement. And it was true.

Tragically, that all changed over the past three years as income stocks have outperformed the indexes. In fact, in 2004, as the DOW, NASDAQ and NYSE slid sideways, dividend-paying stocks out-gained all indexes by more than $2-to-$1 while, at the same time, the bottom fell out on America’s biggest growth stocks, with Cisco, Intel, Merck and JDS Uniphase collapsing an average of 20%!

And this is no one-year anomaly, but a powerful new mega-trend that will continue for the next 10 years—not only affecting your 401(k), but everything you own.

The Reason Is Simple

Millions of retirement-age investors are beginning to pull trillions of dollars out of the growth market to generate income for their retirement. This is the same money, mind you—the very same IRA, investment and 401(k) money—that flooded Wall Street and not only pushed the indexes to new heights but also fueled the great bull market of the 1990s and made visionary investors rich beyond their wildest dreams.

Yet, in the next 10 years, half of this capital will be out of growth stocks for good. And within a decade after that, all of it will be sitting in income-producing stocks and bonds.

Frankly, this should come as no surprise.

For our entire investing lives, we’ve been conditioned by the brokerage houses, the financial media and the mutual fund companies to shift our assets to income-producing investments as we approach retirement.

This is why you’ve seen dividend stocks outperform the major market indexes 2-to-1 in 2004… why growth-stock valuations will continue to drop, as our projections show, over the next 15 years… and why the 401(k) investing rules have changed so dramatically.

For these reasons, if you fail to reposition your 401(k) and other assets in light of this new rule, you’ll enter retirement with a fraction of the assets you need. And you’ll kick yourself for not following this first and most important rule: Buy income streams, not growth stocks.

In your 401(k), you’re probably over-weighted in growth mutual funds and underinvested in growth and income funds – the kind of funds that pay good dividends and will do best over the next decade and beyond. As you’ll see, using this rule by itself, you’ll eliminate nonperforming growth stocks from ever ruining your retirement.

Rule #2: Buy Companies with Long-Term Histories of Raising Dividends

The days when you could live happily ever after on a fixed income are long gone. While the government hates to admit it, higher gas prices, consumer prices and food prices are all indicators of rising inflation.

So by locking yourself into companies that are stingy with their payouts, you’re locking yourself into a lower lifestyle. This is why you want to always—I repeat, always—invest in companies that pay consistently rising dividends. That way you get the best of both worlds—solid income now and proportionally greater income later.

A great example is Kinder Morgan. For every $1 you invested just seven years ago, you would be receiving—hold on to your hat—an incredible 35% annually in dividends!

By investing with this second rule in mind, over the past 12 months my top five cash-on-cash companies have not only handed my readers gains of 47% but have also given them a rich source of rising income that’s on track to deliver more than 16% in annual dividends for every dollar they invest now.

That’s why I call them “cash-on-cash” stocks. They hand you an immediate return for every single dollar you invest in them now—along with a juggernaut of capital growth that you won’t find in any other investment on Wall Street.

Rule #3: Buy High-Yielding Companies Before the Rest of Wall Street Dives In

The fact is the leading edge of baby boomers (those born between 1946 and 1964) will turn 60 years old next year. This means that millions of Americans will be making the shift from growth to income, which will continue to undermine growth stocks.

The end result will put powerful upward pressure under the prices of our top high-yielding income stocks. If you act quickly, you can still buy these companies for one-tenth of what they’ll be worth in the future and lock in a rising source of income that could hand you 15%, 20% or even 30% in annual future dividends for every $1 that you invest now.

For over two decades, my readers have earned $10-for-$1 by investing light-years ahead of the most powerful trends of our time. And I can tell you with absolute certainty that if you follow these new 401(k) rules now, you’ll easily pyramid your wealth year after year as every graduating class of baby boomer retirees funnels money out of growth stocks and into income stocks.

Get Started with this Winner

One of my recommended companies is a powerhouse telecom and "the triple crown" winner of investments for America’s 50 million retirement-bound investors. All thanks to the company’s outstanding dividend, armored-car-like safety and explosive profit potential. This is the AT&T monopoly story played out across the Atlantic Ocean—with higher income and bigger gains.

Here’s why:

1. Because it’s an offshore telecom, U.S. government regulators couldn’t break its stranglehold on the nation’s phone system if they tried. For this reason, profits are 42% higher now than during the big telecom boom of the 1990s and will continue to explode over the next five years.

2. What’s more, because the company is valued in its home currency, you’re going to enjoy another 15% to 20% in currency appreciation over the next two years.

How can this be? Because the dollar has been in decline around the world for the past 12 months and will continue to fall because of America’s mammoth trade deficit.

These are just two reasons why profits are higher now than during the big telecom boom of the 1990s and just a sneak preview of what lies ahead. In fact, profits were so good last year, the company raised its annual dividend—get this—an incredible 54%. I’m banking that this company will continue to richly reward investors year after year.

The result could easily push your profits past 100% and hand you future dividend yields of 12% to 15% for every $1 invested now.

The last time I felt this strongly about a telecom, I urged the readers of Profitable Investing to buy Baby Bell Ameritech when it was selling for a rock-bottom 12-times earnings. That’s before its shares skyrocketed 288%, turning a $10,000 stake into a whopping $38,000. I’m betting the results this time around will be even better.