One Of The Most Powerful Moats You'll Ever Find

Nathan Slaughter's picture

Tuesday, October 29, 2019 - 2:30pm

by Nathan Slaughter

Last month, I hauled the family from Shreveport, Louisiana, to Myrtle Beach, South Carolina, for a few days of fun and relaxation at the end of the summer. That's about a 1,900-mile journey round-trip. 

I'm not sure how many interstate exits there are along that particular stretch of road, but I think we must have taken pit stops at about half of them for fuel, snacks, and/or bathroom breaks.

Years ago, weary travelers had no clue what amenities could be found at upcoming exits (except whatever tall signs were visible from a distance). Of course, we have a wealth of information at our fingertips these days. GPS-enabled navigation systems not only provide turn-by-turn directions but an alphabetized list of food and lodging options at the push of a button. This amazing technology can even alert drivers to upcoming traffic jams and suggest an alternate course.

But even without digital assistance, travelers can still rely on those faithful blue signs along the way. You know... the ones that display the logos of nearby restaurants, hotels and gas stations. 

billboard-moat

Hungry? One glance and you will know there's a Wendy's, Taco Bell, and Subway coming up just a mile or two down the road. 

For most people, these signs are informational. For me, they proved to be inspirational. As I've always said, the inspiration behind your next investment idea can come from anywhere. And as we sped down I-20, I couldn't help but see dollar signs every few miles -- because those blue signs generate revenue morning, noon, and night.

After all, advertisers like Taco Bell owner Yum Brands! (Nasdaq: YUM) must pay to display their logos. And one company is on the receiving end of all those thousands of checks. It has been awarded exclusive logo signage contracts by two dozen states -- including every single exit from the Gulf Coast to the Eastern Seaboard.

I love those two words. "Exclusive" means all other competitors are excluded, so one business enjoys all the spoils. That's another way of saying "monopoly." And "contract" implies a written agreement that will stay in force for a predetermined period, generally five to ten years in this case.

Not only that, but the federal government has passed laws restricting the erection of new highway billboards. All 50 states have their own individual laws, most of which are even more stringent -- which means that in many places, competition isn't just discouraged, but illegal.

That's what we call a "wide moat" in the investing business.

What does all that mean for investors? 

How about a dividend yield that has raced from zero in 2014 to 4.8% today -- higher than 95% of the S&P 500? That payout, by the way, has marched higher by more than 40% in just a few years. And it routinely converts every dollar of revenues into 30 cents of pure free cash flow.

Action To Take

As I mentioned back in my recent piece on barriers to entry, I can't share the name of this recent pick with you, out of fairness to my premium subscribers. But I'll reiterate what I said back then... a "moat" (or barrier to entry) can come in many different forms. 

But however they appear, they can be one of the most powerful tools of wealth creation you'll ever come across. As such, I place a big emphasis on companies that have one or more of these barriers in play. You should, too.

 

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Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.