I spend far too much time monitoring my portfolio. I'm not all that effective at it, since I haven't created a spreadsheet that automatically tracks dividend growth and revenue growth and price appreciation. However, I'm pretty familiar with all the issues and where they have traded over the last several years. That's from spending time with them. I read alot, particularly on the companies I own, through Seeking Alpha. Some of my issues are covered by newsletters to which I subscribe, but I'm dropping a few of these because they are no longer offering me new ideas that I'd like to purchase.
I'm in the "maintain, grow and occasionally replace" mode, not the acquire more issues mode. In spite of increasing talk about a heated-up market and "are we in a bubble?", I have reviewed each holding using my FastGRAPHS program and none are more than modestly over-valued. Many are merely at their historic P/E, after 5-6years of being relatively under-valued. A few are over their historic valuation, but not by much.
It's hard to imagine that I have built a bullet-proof portfolio of companies that don't swing wildly into over-valued territory, but since essentially all my holdings are broadly in the DG camp, it may well be that earnings determine dividends and dividends anchor valuation. That would be nice, because the DRIP works better when valuations are not inflated, and steady valuations mean less rebalancing, less need to moniter so frequently. When I view all of the other dividend growth portfolios that are posted on the web, I don't see more than another 30 or so companies that I might consider owning, so I guess that means my portfolio is fairly mature.
I suppose reviewing it over and over won't make it any better. New money will flow in January and I'll be back at the decision to either augment holdings or find something new.
Wednesday, December 25, 2013
Wednesday, November 27, 2013
What would it look like to run an "all cash" account?
I've been wondering what it would look like to build a cash based portfolio. I have been keeping a small amount of cash working in my retirement portfolio, selling cash covered puts. What are the reasons for doing this. It starts with a small amount of cash, not enough to make a significant purchase, but enough to cover 100 shares of one stock or another. If I can capture 0.5-1% put premium in 4 weeks or so, it seems like a reasonable way to earn a bit of money and potentially get those 100 shares at a lower price than the market currently values them. I always choose a stock I already own or would like to own.
If I own 100 shares and sell a put on 100 shares, the put premium gain is spread across 200 shares worth of value, so the earning percentage is cut in half. Put premiums are higher when they are near the money, at the money or in the money when you buy them.
An acceptable yearly total gain would be 8-10% on a portfolio. That means that one would have to capture about 0.75% per month and do it regularly on every option sale. That's a tall order. Some shares would be put, so less money would be in motion. On the other hand, there would be dividends paid, some positions would produce gains and it might be possible to make that kind of money. Of course, if all money is wrapped up in puts, a downdraft means a massive stock purchase in a declining market. That shuts down the put premium business and accepts unrealized losses until the market turns again.
Selling calls means you keep all money invested. If the stock goes up alot, it gets called. you book the premiums and any gain up to the strike price. If you don't care about owning and holding, and if a call premium is no worse or better than a dividend payment, then you shouldn't feel bad about using stocks as a step ladder, rather than participating in all of any run-up. you look at two things; call premium and dividends paid and decide if you're making enough money in the short term to satisfy you. you don't think about holding, compounding, etc.
I wouldn't do this in a taxable account, but I could do it my IRA accounts.
what about those stocks that have taken a plunge? I think one can't get all bent out of shape. You just start where-ever they land and sell more calls, collect more call premiums and take the cash when the stock gets called, purchase new stock and do some more call selling, or sell puts. It's a very active strategy, with quick gains, quick losses and you can't leave it alone or it won't work. Not sure that's for me. Using cash covered puts as a means to keep cash working and enter positions with a small discount is a hybrid approach that adds a tiny bit to total portfolio gains. It suits me and I'll continue doing it, but trading for premiums doesn't thrill me.
If I own 100 shares and sell a put on 100 shares, the put premium gain is spread across 200 shares worth of value, so the earning percentage is cut in half. Put premiums are higher when they are near the money, at the money or in the money when you buy them.
An acceptable yearly total gain would be 8-10% on a portfolio. That means that one would have to capture about 0.75% per month and do it regularly on every option sale. That's a tall order. Some shares would be put, so less money would be in motion. On the other hand, there would be dividends paid, some positions would produce gains and it might be possible to make that kind of money. Of course, if all money is wrapped up in puts, a downdraft means a massive stock purchase in a declining market. That shuts down the put premium business and accepts unrealized losses until the market turns again.
Selling calls means you keep all money invested. If the stock goes up alot, it gets called. you book the premiums and any gain up to the strike price. If you don't care about owning and holding, and if a call premium is no worse or better than a dividend payment, then you shouldn't feel bad about using stocks as a step ladder, rather than participating in all of any run-up. you look at two things; call premium and dividends paid and decide if you're making enough money in the short term to satisfy you. you don't think about holding, compounding, etc.
I wouldn't do this in a taxable account, but I could do it my IRA accounts.
what about those stocks that have taken a plunge? I think one can't get all bent out of shape. You just start where-ever they land and sell more calls, collect more call premiums and take the cash when the stock gets called, purchase new stock and do some more call selling, or sell puts. It's a very active strategy, with quick gains, quick losses and you can't leave it alone or it won't work. Not sure that's for me. Using cash covered puts as a means to keep cash working and enter positions with a small discount is a hybrid approach that adds a tiny bit to total portfolio gains. It suits me and I'll continue doing it, but trading for premiums doesn't thrill me.
Not overvalued, surprisingly
the popular media has hijacked my thinking again...
I succumbed to the concern that the market is over-valued. I started looking at which stocks I could jettison, and rotate into more under-valued holdings.
So I went to my "Fast-Graphs" program and checked them all out. I looked a standard means of valuation, as well as historic valuation. To my surprise, I couldn't find a single holding that is significantly over-valued. Plenty fairly valued, a few under-valued and a few slightly over-valued.
But nothing I would choose to sell or partly sell to rotate into something else. Writers that I read have suggested some issues are over-valued at the moment. I'm not contemplating purchasing whole positions at these prices. It doesn't change my average purchase price much to continue to reinvest dividends.
I looked at the last 12 months of dividends; except for May, when I changed from old 401k to IRA and missed most dividend payments in the transition, I earned nearly as much in dividends as I diverted from compensation into the new 401k. So, my diversification is intact, valuation is intact and dividend payments are visibly increasing. A couple of stocks have "melted down" a bit, but nothing dramatic. The biggest damper has been the two speculative stocks I purchased that are way down, but could still perform well. These represent about 3% of the entire portfolio.
Perhaps it's just hard to believe that my portfolio management has "arrived" at a place where I can sleep well at night and spend less time reading and worrying about it. I can see, however, that as I read and look for new opportunities, I'm not finding many new things that look better than what I already own. I guess that's a sign that I am now in the business of monitoring and adjusting as opposed to building.
I suppose I should think about how I would feel about a big correction. The correct action is to use that event to buy up more of the same stocks at bargain prices. However, the emotional reaction is harder to predict. I hope the 2008 experience will prevail and i'll just ride it out and collect those dividends and continue investing and re-investing. Now it's bed-time....
I succumbed to the concern that the market is over-valued. I started looking at which stocks I could jettison, and rotate into more under-valued holdings.
So I went to my "Fast-Graphs" program and checked them all out. I looked a standard means of valuation, as well as historic valuation. To my surprise, I couldn't find a single holding that is significantly over-valued. Plenty fairly valued, a few under-valued and a few slightly over-valued.
But nothing I would choose to sell or partly sell to rotate into something else. Writers that I read have suggested some issues are over-valued at the moment. I'm not contemplating purchasing whole positions at these prices. It doesn't change my average purchase price much to continue to reinvest dividends.
I looked at the last 12 months of dividends; except for May, when I changed from old 401k to IRA and missed most dividend payments in the transition, I earned nearly as much in dividends as I diverted from compensation into the new 401k. So, my diversification is intact, valuation is intact and dividend payments are visibly increasing. A couple of stocks have "melted down" a bit, but nothing dramatic. The biggest damper has been the two speculative stocks I purchased that are way down, but could still perform well. These represent about 3% of the entire portfolio.
Perhaps it's just hard to believe that my portfolio management has "arrived" at a place where I can sleep well at night and spend less time reading and worrying about it. I can see, however, that as I read and look for new opportunities, I'm not finding many new things that look better than what I already own. I guess that's a sign that I am now in the business of monitoring and adjusting as opposed to building.
I suppose I should think about how I would feel about a big correction. The correct action is to use that event to buy up more of the same stocks at bargain prices. However, the emotional reaction is harder to predict. I hope the 2008 experience will prevail and i'll just ride it out and collect those dividends and continue investing and re-investing. Now it's bed-time....
Tuesday, November 19, 2013
When have I achieved the goal?
I've been grappling with the 'when is enough' question for some time now. I got a late start in the retirement savings game, then did poorly at it for about 10 years. Not much to brag about, actually. I got serious in 2007, just before the crash, so I have had 6 years to repair the damage of 12 years of relative neglect during my working life, and about 12 additional years of graduate and post-graduate education, when I didn't have much money to invest. I'm not complaining, mind you. Since age 37, I've been maximizing my pre-tax deferral for 16 years. The first 10, it amounted to little more than a savings account.
So here I am at 53 years of age, wondering how the horse-race to retirement is looking. I'm at the back of the pack, in the back-stretch. I either plan to switch into another gear, or accept a retirement that is more modest than what would have been possible, had I practiced what I now know from the first day I set a dollar aside for the future.
On the one hand, I can continue working as hard as my energy allows, keep socking away as much as the law and my budget allows, and hope my health holds up. Or, I could plan an earlier exit, have more time to do other things of value and accept that I won't have banked as much security by choosing to turn towards other interests. Now there's a dilemna. I can't get those years back, once I've spent them. Some years in the future will be bad years, from an investment standpoint. There'll certainly be some more hard times. Inflation will rear it's ugly head. Another world financial crisis will sweep across the landscape, on the heels of the last one. Just like hurricanes and flu epidemics, these financial ailments are part of the human condition.
What did my parents and grandparents experience with respect to their golden years? One grandfather died in his 40's, probably of a glioblastoma. A grandmother died in her 70's of diabetes. One grandfather had a very modest retirement as a widower, died at age 83 or so, demented. The last grandmother also had a modest retirement, died at age 87, perhaps, also demented. They left behind a house, each couple, and a few thousand dollars.
My father worked like a slave, died at age 64, just prior to scheduled retirement. My mother is in the latter phase of a comfortable retirement, but much of it was spent looking after my disabled sister, who died when my mother was about 80. My mother ended up being worth about $2 million, between properties and my father's retirement savings. That's a big step up from the last generation.
At the rate I'm saving and investing, my wife and I may have more than that, but with inflation, we'll be in a similar position as my mother, perhaps. Comfortable, but not rich by any stretch of the imagination. My Mom's estate will split between 4 heirs, and that will add substantially to our wealth. My portion of that, which will accrue to me sometime in the next 15 years, will add perhaps 20% to our expendable resources.
Our estate will pass to a single heir. Depending on the stewardship of the estate, he could be wealthy in his later years, purely on passive income. That's dirt poor to rich, in 4 generations. Not a bad story for an American family. I'll have to attend to the terms of this transfer of wealth, to assure that youth and indiscretion don't cause it to be squandered.
For my wife and I, we'd like to have the energy, the health and the money to do more in our retirement than sit around eating, reading and paying bills. That means using the time while our health persists to do things that others might not do. Perhaps it means starting earlier than some others, so the energy to do those things will be there.
This will take some life planning, as my son is 9 and he won't be independent for another 15 years.
If we were to wind up our current lives, leave our retirement funds in moderately managed portfolios, head off to the hinterlands to do God's work, we'd come home in 10 years to an income stream that would moderately support us into our later years, provided no global meltdown occurs. Were we to retire in a low cost country, we'd be very comfortable.
The biggest question is; why continue what we're doing? Why the big house and big mortgage? Why the 60+ hour work week, the stress, the wondering if I'll drop dead before salad time?
Well, I AM afraid of boredom. I am afraid of being confronted with the task of actually doing all those things I have thought I might do, were I not too busy. It's easier to dream about a bunch of them than to actually go out and try to accomplish them. There's alot of me that says: don't abandon my partners, to whom I am obligated and they to me. Probably bull@#$%, but still a powerful mantra in my subconscience.
I have a friend running for US senator. Now, that's definitely NOT an adventure I'd like to embark on. On the other hand, I'd like to do something that makes a big difference for someone who can't make it happen for themselves. I don't mean fixing people one at a time. I want to change life for the better for a lot of people. That would make me think all the effort was worthwhile.
I think I'll have to find an adventure that means I still work hard, at something I'm already capable of, in some place where the need is great and the hassle factor is low. That may mean medical missions, or some other non-profit endeavor. Right now, I have to put myself in a position where there aren't roadblocks, competing obligations. I have to get out from under those mortgages. I have to adequately replace myself so if I leave, my partners don't unduly suffer. I have to have a place to come back to now and again to recharge the battery, so to speak. Gotta figure all that out.
In fact, I think there's enough money in the bank. There are also too many bills.
So here I am at 53 years of age, wondering how the horse-race to retirement is looking. I'm at the back of the pack, in the back-stretch. I either plan to switch into another gear, or accept a retirement that is more modest than what would have been possible, had I practiced what I now know from the first day I set a dollar aside for the future.
On the one hand, I can continue working as hard as my energy allows, keep socking away as much as the law and my budget allows, and hope my health holds up. Or, I could plan an earlier exit, have more time to do other things of value and accept that I won't have banked as much security by choosing to turn towards other interests. Now there's a dilemna. I can't get those years back, once I've spent them. Some years in the future will be bad years, from an investment standpoint. There'll certainly be some more hard times. Inflation will rear it's ugly head. Another world financial crisis will sweep across the landscape, on the heels of the last one. Just like hurricanes and flu epidemics, these financial ailments are part of the human condition.
What did my parents and grandparents experience with respect to their golden years? One grandfather died in his 40's, probably of a glioblastoma. A grandmother died in her 70's of diabetes. One grandfather had a very modest retirement as a widower, died at age 83 or so, demented. The last grandmother also had a modest retirement, died at age 87, perhaps, also demented. They left behind a house, each couple, and a few thousand dollars.
My father worked like a slave, died at age 64, just prior to scheduled retirement. My mother is in the latter phase of a comfortable retirement, but much of it was spent looking after my disabled sister, who died when my mother was about 80. My mother ended up being worth about $2 million, between properties and my father's retirement savings. That's a big step up from the last generation.
At the rate I'm saving and investing, my wife and I may have more than that, but with inflation, we'll be in a similar position as my mother, perhaps. Comfortable, but not rich by any stretch of the imagination. My Mom's estate will split between 4 heirs, and that will add substantially to our wealth. My portion of that, which will accrue to me sometime in the next 15 years, will add perhaps 20% to our expendable resources.
Our estate will pass to a single heir. Depending on the stewardship of the estate, he could be wealthy in his later years, purely on passive income. That's dirt poor to rich, in 4 generations. Not a bad story for an American family. I'll have to attend to the terms of this transfer of wealth, to assure that youth and indiscretion don't cause it to be squandered.
For my wife and I, we'd like to have the energy, the health and the money to do more in our retirement than sit around eating, reading and paying bills. That means using the time while our health persists to do things that others might not do. Perhaps it means starting earlier than some others, so the energy to do those things will be there.
This will take some life planning, as my son is 9 and he won't be independent for another 15 years.
If we were to wind up our current lives, leave our retirement funds in moderately managed portfolios, head off to the hinterlands to do God's work, we'd come home in 10 years to an income stream that would moderately support us into our later years, provided no global meltdown occurs. Were we to retire in a low cost country, we'd be very comfortable.
The biggest question is; why continue what we're doing? Why the big house and big mortgage? Why the 60+ hour work week, the stress, the wondering if I'll drop dead before salad time?
Well, I AM afraid of boredom. I am afraid of being confronted with the task of actually doing all those things I have thought I might do, were I not too busy. It's easier to dream about a bunch of them than to actually go out and try to accomplish them. There's alot of me that says: don't abandon my partners, to whom I am obligated and they to me. Probably bull@#$%, but still a powerful mantra in my subconscience.
I have a friend running for US senator. Now, that's definitely NOT an adventure I'd like to embark on. On the other hand, I'd like to do something that makes a big difference for someone who can't make it happen for themselves. I don't mean fixing people one at a time. I want to change life for the better for a lot of people. That would make me think all the effort was worthwhile.
I think I'll have to find an adventure that means I still work hard, at something I'm already capable of, in some place where the need is great and the hassle factor is low. That may mean medical missions, or some other non-profit endeavor. Right now, I have to put myself in a position where there aren't roadblocks, competing obligations. I have to get out from under those mortgages. I have to adequately replace myself so if I leave, my partners don't unduly suffer. I have to have a place to come back to now and again to recharge the battery, so to speak. Gotta figure all that out.
In fact, I think there's enough money in the bank. There are also too many bills.
Wednesday, October 23, 2013
what's worth worrying about?
let's face it, we're facing an absolute firehose of information about bad things happening in the world.
A bomb goes off in Sri Lanka, and we here about it. A child is taken by the gypsies and we hear about it. The wheels come off at congress and they send the entire federal workforce home for 2 weeks. No way you're not going to hear about that! You wonder about your job, your bills, whether your child is getting bullied at school. Maybe you have cancer and don't know about it!
God, just let me live until my boy graduates from high school....no, college...or maybe grad school!
In the last 10 years, one of the biggest stressors I have experienced is money. Interesting, because the last 10 years have been the my highest earning years. So what's to worry about, then? Well, everything.
Too much obligation...too big a house, too big a mortgage, too many ventures, too much leverage.
That's a lesson you can only learn by experience. I can't imagine a personal finance class in junior college that will bring home the impact of having signed up for obligations that make the things you own end up owning you.
What does that have to do with retirement investing? First, it has to do with living within your means. You get used to your lifestyle and it's hard to give up stuff. Better to have never reached for that extra luxury when you're buying on credit. Second; it has to do with following the right metrics.
Running in the background are the security things...insurance, savings, dental appointments, vaccinations. You have to have these things in order, or your foundation is shaky.
Then, there's the worry about whether your savings and investments are doing at least as well as expected. I have a very hard time understanding whether my wife's company plan funds are doing well or not. I have a hard time with the TIAA CREF account ( all 10 grand of it) where I invested 3K in 1994-5. That's 18 years ago, so I guess it's doing a bit better than 5%. Hmm.... I cashed out the annuity; clearly not doing well when they charged yearly fees and it wasn't worth a dime more than the day I bought it.
Since I took over the management of my retirement plan, the performance is purely my responsibility. I find that anxiety easier to manage than the constant concern about the performance and trustworthiness of the adviser. I could see he was earning commissions; whose interest came first?
Well, I aligned ALL the interests when I hired me for the job.
I'm still in the process of switching my focus from the size of the account to how it is growing income. After all, the nature of the value of a stock portfolio is to fluctuate. Dividends blunt the dips by a few percent, but they aren't adequate to hide a "market correction". One problem is that all of the brokerage reporting is designed to look at capital gain/loss, realized or not. There isn't a screen that tracks the current value of the dividend stream, computed to a yearly income. That' a shame for us dividend growth investors. After all, along with the monitering of the health of our companies' earnings growth, profits, payout ratio, dividend growth, it's the yearly dividend income that is the primary metric for success in DG investing. If that number is rising, most likely all else is well.
I've learned to live with some uncertainty. I've learned the hard way not to over-leverage. I have learned the true meaning of "margin of safety" where it comes to personal finance. It's not worth sleepless nights and financial brinksmanship to reach for a few more dollars of investment gains.
Those are worries you can easily avoid if you see them coming. That's the trick, to see them coming.
More on that later....
let's face it, we're facing an absolute firehose of information about bad things happening in the world.
A bomb goes off in Sri Lanka, and we here about it. A child is taken by the gypsies and we hear about it. The wheels come off at congress and they send the entire federal workforce home for 2 weeks. No way you're not going to hear about that! You wonder about your job, your bills, whether your child is getting bullied at school. Maybe you have cancer and don't know about it!
God, just let me live until my boy graduates from high school....no, college...or maybe grad school!
In the last 10 years, one of the biggest stressors I have experienced is money. Interesting, because the last 10 years have been the my highest earning years. So what's to worry about, then? Well, everything.
Too much obligation...too big a house, too big a mortgage, too many ventures, too much leverage.
That's a lesson you can only learn by experience. I can't imagine a personal finance class in junior college that will bring home the impact of having signed up for obligations that make the things you own end up owning you.
What does that have to do with retirement investing? First, it has to do with living within your means. You get used to your lifestyle and it's hard to give up stuff. Better to have never reached for that extra luxury when you're buying on credit. Second; it has to do with following the right metrics.
Running in the background are the security things...insurance, savings, dental appointments, vaccinations. You have to have these things in order, or your foundation is shaky.
Then, there's the worry about whether your savings and investments are doing at least as well as expected. I have a very hard time understanding whether my wife's company plan funds are doing well or not. I have a hard time with the TIAA CREF account ( all 10 grand of it) where I invested 3K in 1994-5. That's 18 years ago, so I guess it's doing a bit better than 5%. Hmm.... I cashed out the annuity; clearly not doing well when they charged yearly fees and it wasn't worth a dime more than the day I bought it.
Since I took over the management of my retirement plan, the performance is purely my responsibility. I find that anxiety easier to manage than the constant concern about the performance and trustworthiness of the adviser. I could see he was earning commissions; whose interest came first?
Well, I aligned ALL the interests when I hired me for the job.
I'm still in the process of switching my focus from the size of the account to how it is growing income. After all, the nature of the value of a stock portfolio is to fluctuate. Dividends blunt the dips by a few percent, but they aren't adequate to hide a "market correction". One problem is that all of the brokerage reporting is designed to look at capital gain/loss, realized or not. There isn't a screen that tracks the current value of the dividend stream, computed to a yearly income. That' a shame for us dividend growth investors. After all, along with the monitering of the health of our companies' earnings growth, profits, payout ratio, dividend growth, it's the yearly dividend income that is the primary metric for success in DG investing. If that number is rising, most likely all else is well.
I've learned to live with some uncertainty. I've learned the hard way not to over-leverage. I have learned the true meaning of "margin of safety" where it comes to personal finance. It's not worth sleepless nights and financial brinksmanship to reach for a few more dollars of investment gains.
Those are worries you can easily avoid if you see them coming. That's the trick, to see them coming.
More on that later....
Saturday, October 12, 2013
What is a good dividend stock?
People buy stocks with the objective the ownership in a company will earn them money. There are three ways to profit from stock ownership; growth in the value of a share, acquisition of more shares, and receipt of dividends.
Value grows with rising earnings. Companies that pay dividends also increase in value as the dividend rises, with one caveat; the earnings have to be rising as well. Another way to see one's personal stake grow is if the company is reducing share count by buying back and retiring shares. If the company is merely buying back shares to offset large executive options grants, then buybacks probably won't do much to grow value. A declining share count with static earnings results in higher earnings per share and rising stock price. A declining share count with rising earnings is a ticket to substantial capital gains.
If you are buying dividend paying stocks it makes sense to look for stocks whose dividends are rising over time. Rising earnings and rising dividends means more cash in your pocket, as well as rising valuation of your holdings. if you then add in reinvestment of dividends, the virtuous cycle of compounding accelerates the value of your growing position.
So how do you spot a good investment prospect?
Start with a history of rising earnings. Determine the rate of growth in earnings over 5 and 10 years
Check against rising earnings per share, and growth or decline in share count.
Look for rising dividends. Determine the rate of growth of dividends over 5 and 10 years.
A smart investor who writes on Seeking Alpha recommends that stocks meet a threshold of
dividend yield + dividend growth rate over 5 years >/= 12. For REITS and MLPs, >/= 8
Understand that a company paying 2% dividend with a 10% dividend growth rate will take some time to double the dividend; 7 years to be exact. During that time, share count isn't growing all that fast, but you hope that valuation is growing, if the majority of earnings are retained to reinvest in the company, or retire shares.
The REIT or MLP, which tend to have higher dividend payments, will result in more rapid share accumulation if you are reinvesting dividends, so a slower growth in valuation will still yield an acceptable total return.
I tend to be a "show me the money" kind of guy, so I have tended to purchase higher yielding companies and have allowed the DRIP to accelerate the total yield.
I have learned the hard way that high dividend paying companies are more risky, because anything that effects earnings puts the dividend at risk, and a dividend cut always produces a big loss in valuation of shares. If you want to follow WB's first rule; "never lose money", you'd better avoid dividend cuts. That means buying companies whose earnings are rising and who can easily cover the dividend out of operating cash flow.
So, the ideal dividend growth stock is one where earnings rise steadily, the dividend rises steadily and the dividend is well covered by cash flow.
There are a number of other things to think about; On what are earnings dependent ? mREITs earnings are dependent on interest rate spreads. Drilling company's earnings are often dependent on the price of oil. If prices drop, drilling slows. Drilling companies with lots of debt incurred to buy expensive driling equipment will be at risk for plummeting earnings and loss of dividend payments.
So what about debt? Is debt covered well by earnings? In the case of utilities, they carry substantial
debt, but earnings are assured through regulated rates. The last thing people do is turn off the electricity, even in hard times. So, lower payout ratios mean plenty of room for dividend growth.
Finally, if earnings growth rates are declining, dividend growth rates are declining, it may be time to move your money elsewhere.
I have come to the conclusion that low volatility and reliable and steady total return in the 8-10% range is a very acceptable goal. "Beating the market" is a fools game. A 3% dividend, reinvested and 5% growth rate in valuation can be quite adequate, if it is relentless. The fact is, large cap, blue blood dividend paying stocks are returning 8-15% per year total return and you don't have to find hidden gems to do very well. I am increasingly confident that I can manage my own retirement savings with acceptable yields and very low costs of investing and never access another "expert" again. After building a foundation of some of the best dividend stocks in the world, I'm now adding some lower yield, faster growth companies to the mix.
There's lots to learn about picking dividend stocks, but the good news is there's lots of help. The Dividend Champion, Contenders and Challengers list is extraordinarily helpful. Seeking Alpha Dividend and Income Investing has a number of excellent writers who can clarify important concepts. I learned what I know by reading, reading, reading. I have made my mistakes. I'll certainly make some more. On the balance, though, I'm doing pretty well managing my own future security.
Value grows with rising earnings. Companies that pay dividends also increase in value as the dividend rises, with one caveat; the earnings have to be rising as well. Another way to see one's personal stake grow is if the company is reducing share count by buying back and retiring shares. If the company is merely buying back shares to offset large executive options grants, then buybacks probably won't do much to grow value. A declining share count with static earnings results in higher earnings per share and rising stock price. A declining share count with rising earnings is a ticket to substantial capital gains.
If you are buying dividend paying stocks it makes sense to look for stocks whose dividends are rising over time. Rising earnings and rising dividends means more cash in your pocket, as well as rising valuation of your holdings. if you then add in reinvestment of dividends, the virtuous cycle of compounding accelerates the value of your growing position.
So how do you spot a good investment prospect?
Start with a history of rising earnings. Determine the rate of growth in earnings over 5 and 10 years
Check against rising earnings per share, and growth or decline in share count.
Look for rising dividends. Determine the rate of growth of dividends over 5 and 10 years.
A smart investor who writes on Seeking Alpha recommends that stocks meet a threshold of
dividend yield + dividend growth rate over 5 years >/= 12. For REITS and MLPs, >/= 8
Understand that a company paying 2% dividend with a 10% dividend growth rate will take some time to double the dividend; 7 years to be exact. During that time, share count isn't growing all that fast, but you hope that valuation is growing, if the majority of earnings are retained to reinvest in the company, or retire shares.
The REIT or MLP, which tend to have higher dividend payments, will result in more rapid share accumulation if you are reinvesting dividends, so a slower growth in valuation will still yield an acceptable total return.
I tend to be a "show me the money" kind of guy, so I have tended to purchase higher yielding companies and have allowed the DRIP to accelerate the total yield.
I have learned the hard way that high dividend paying companies are more risky, because anything that effects earnings puts the dividend at risk, and a dividend cut always produces a big loss in valuation of shares. If you want to follow WB's first rule; "never lose money", you'd better avoid dividend cuts. That means buying companies whose earnings are rising and who can easily cover the dividend out of operating cash flow.
So, the ideal dividend growth stock is one where earnings rise steadily, the dividend rises steadily and the dividend is well covered by cash flow.
There are a number of other things to think about; On what are earnings dependent ? mREITs earnings are dependent on interest rate spreads. Drilling company's earnings are often dependent on the price of oil. If prices drop, drilling slows. Drilling companies with lots of debt incurred to buy expensive driling equipment will be at risk for plummeting earnings and loss of dividend payments.
So what about debt? Is debt covered well by earnings? In the case of utilities, they carry substantial
debt, but earnings are assured through regulated rates. The last thing people do is turn off the electricity, even in hard times. So, lower payout ratios mean plenty of room for dividend growth.
Finally, if earnings growth rates are declining, dividend growth rates are declining, it may be time to move your money elsewhere.
I have come to the conclusion that low volatility and reliable and steady total return in the 8-10% range is a very acceptable goal. "Beating the market" is a fools game. A 3% dividend, reinvested and 5% growth rate in valuation can be quite adequate, if it is relentless. The fact is, large cap, blue blood dividend paying stocks are returning 8-15% per year total return and you don't have to find hidden gems to do very well. I am increasingly confident that I can manage my own retirement savings with acceptable yields and very low costs of investing and never access another "expert" again. After building a foundation of some of the best dividend stocks in the world, I'm now adding some lower yield, faster growth companies to the mix.
There's lots to learn about picking dividend stocks, but the good news is there's lots of help. The Dividend Champion, Contenders and Challengers list is extraordinarily helpful. Seeking Alpha Dividend and Income Investing has a number of excellent writers who can clarify important concepts. I learned what I know by reading, reading, reading. I have made my mistakes. I'll certainly make some more. On the balance, though, I'm doing pretty well managing my own future security.
Thursday, October 10, 2013
A bit more of the "wisdom compendium"
Why should one consider dividend-producing stocks as a basis for long term investment. First, there's evidence that these stocks, as a group, outperform those that don't pay dividends. One can speculate why that is the case, but it appears to be true.
Second, they allow you, the owner, to decide how you'd like to allocate the income that dividends represent. You can DRIP, or selectively reinvest, hold cash, take cash and pay living expenses. Eventually, all of us will have to draw against that retirement account.
I, for one, don't want to have to start converting investments into cash producing vehicles at retirement, or sell a piece of the portfolio to pay the bills. I'm developing my cash-producing machine now, so when it's time to flip the switch to distributions, the machine is already in place and mature.
The other is that dividends allow one to compound the growth in the position. A company that pays no dividends may invest all earnings in excess of expenses back into the income producing activity. Or, they may buy up stuff that isn't relevant to the business. They may pay way too much for that stuff. They may buy back their own shares at high valuation points. I wouldn't buy the stock when it's overvalued!? They may make outsize options grants to executives. They may hold cash in overseas accounts to avoid US taxation. They may do any number of things, except help you grow your position with more cash. Changes in valuation are un-realized gains or losses. They may be here today and gone tomorrow. Cash in your hand is tangible.
So dividends are nice. What about really big dividends? Remember, the company has to have cash to pay a dividend. It could issue stock, but if that dilutes the value of the existing stock, how can that help? Really big dividends mean the cash flow has to be large, and secure, or the dividend isn't secure. Most people think the sweet spot for dividends is around 3%, with payout ratio below 50%, except for certain classes of company like utilities, whose regulated rates produce earnings that are extraordinarily predictable, and REITS who are required by law to distribute 90% of their profits to shareholders. For these types of company, the growing value of your position is even more dependent on re-investment of dividends, as retained earnings within the company would be the engine for expansion and earnings growth. If you're giving it all away to shareholders, there isn't that much left over to invest in the business.
more on this later....
Why should one consider dividend-producing stocks as a basis for long term investment. First, there's evidence that these stocks, as a group, outperform those that don't pay dividends. One can speculate why that is the case, but it appears to be true.
Second, they allow you, the owner, to decide how you'd like to allocate the income that dividends represent. You can DRIP, or selectively reinvest, hold cash, take cash and pay living expenses. Eventually, all of us will have to draw against that retirement account.
I, for one, don't want to have to start converting investments into cash producing vehicles at retirement, or sell a piece of the portfolio to pay the bills. I'm developing my cash-producing machine now, so when it's time to flip the switch to distributions, the machine is already in place and mature.
The other is that dividends allow one to compound the growth in the position. A company that pays no dividends may invest all earnings in excess of expenses back into the income producing activity. Or, they may buy up stuff that isn't relevant to the business. They may pay way too much for that stuff. They may buy back their own shares at high valuation points. I wouldn't buy the stock when it's overvalued!? They may make outsize options grants to executives. They may hold cash in overseas accounts to avoid US taxation. They may do any number of things, except help you grow your position with more cash. Changes in valuation are un-realized gains or losses. They may be here today and gone tomorrow. Cash in your hand is tangible.
So dividends are nice. What about really big dividends? Remember, the company has to have cash to pay a dividend. It could issue stock, but if that dilutes the value of the existing stock, how can that help? Really big dividends mean the cash flow has to be large, and secure, or the dividend isn't secure. Most people think the sweet spot for dividends is around 3%, with payout ratio below 50%, except for certain classes of company like utilities, whose regulated rates produce earnings that are extraordinarily predictable, and REITS who are required by law to distribute 90% of their profits to shareholders. For these types of company, the growing value of your position is even more dependent on re-investment of dividends, as retained earnings within the company would be the engine for expansion and earnings growth. If you're giving it all away to shareholders, there isn't that much left over to invest in the business.
more on this later....
moving down the yield and risk curve
An interesting phenomenon has occurred;
Since I rolled my old 401k accounts to IRAs, no new money is going into them. Also, my new Schwab 401k (hybrid of traditonal and roth, rolled into one account) has been fully funded, I don't have any new money to play with.
What is occurring is that I am looking very hard at the holdings, comparing and contrasting them and reducing exposure to the more risky of them.
For example, as a part of my reading on bond funds, I learned that one should look hard at leverage in a rising interest rate environment. Funds borrow to invest. If interest costs go up, then investment performance tanks. So, I looked at the leverage ratios in the 4 funds I held, completely sold one and reduced exposure in another. Magically, some new cash was available to shore up some lower risk positions.
As another example, I realized that a high yield holding in the energy patch (SDRL) had returned almost 100% over the 4 years I have held it. SDRL carries a huge amount of debt as it buys and builds deep water drilling rigs. As long as they are constantly in use, the debt is covered and the payouts continue. If however, something causes a slow-down in drilling, those debts still have to be serviced, so down will go the payouts and down will go the valuation. So, I took my initial investment out and left the house money in the position. Alikazam! more cash to re-balance into higher quality dividends. My dividend income certainly took a hit, but I purchased more dividend growth prospects by working my way down the yield curve and purchasing lower risk stocks.
I'm still generally using the 3% dividend floor, but making minor exceptions for some blue-blood DGI issues such as KO, PG, GIS, KMB. I'm also driving down the entry price on some of these by using short-term at- or in-the-money cash covered puts. I can get 1-2% per month of premiums and keep the cash working; not bad for an amateur! I'll own the shares soon, at the premium discount.
I think it's now 6 years since I opened the first Roth 401k in Fidelity and started managing some money. It seems a lot less fearful now, since I have a strategy and understand much better how to select stocks that adhere to that strategy, as well as when and how to sell. I doubt that I have the "10,000 hours to mastery" under my belt, but I have a good 30-40% of that, and I pay alot of attention when I AM studying. I'm clocking along at 8-10% year in and year out, which makes me quite satisfied. I'm not constantly comparing my results to the S&P 500, rather paying attention that my dividend yield keeps rising. That'll be my retirement paycheck someday, and it keeps me less worried about valuation. Good news is, as dividends rise, valuation tends to follow.
Now it's late, and time for bed...
Since I rolled my old 401k accounts to IRAs, no new money is going into them. Also, my new Schwab 401k (hybrid of traditonal and roth, rolled into one account) has been fully funded, I don't have any new money to play with.
What is occurring is that I am looking very hard at the holdings, comparing and contrasting them and reducing exposure to the more risky of them.
For example, as a part of my reading on bond funds, I learned that one should look hard at leverage in a rising interest rate environment. Funds borrow to invest. If interest costs go up, then investment performance tanks. So, I looked at the leverage ratios in the 4 funds I held, completely sold one and reduced exposure in another. Magically, some new cash was available to shore up some lower risk positions.
As another example, I realized that a high yield holding in the energy patch (SDRL) had returned almost 100% over the 4 years I have held it. SDRL carries a huge amount of debt as it buys and builds deep water drilling rigs. As long as they are constantly in use, the debt is covered and the payouts continue. If however, something causes a slow-down in drilling, those debts still have to be serviced, so down will go the payouts and down will go the valuation. So, I took my initial investment out and left the house money in the position. Alikazam! more cash to re-balance into higher quality dividends. My dividend income certainly took a hit, but I purchased more dividend growth prospects by working my way down the yield curve and purchasing lower risk stocks.
I'm still generally using the 3% dividend floor, but making minor exceptions for some blue-blood DGI issues such as KO, PG, GIS, KMB. I'm also driving down the entry price on some of these by using short-term at- or in-the-money cash covered puts. I can get 1-2% per month of premiums and keep the cash working; not bad for an amateur! I'll own the shares soon, at the premium discount.
I think it's now 6 years since I opened the first Roth 401k in Fidelity and started managing some money. It seems a lot less fearful now, since I have a strategy and understand much better how to select stocks that adhere to that strategy, as well as when and how to sell. I doubt that I have the "10,000 hours to mastery" under my belt, but I have a good 30-40% of that, and I pay alot of attention when I AM studying. I'm clocking along at 8-10% year in and year out, which makes me quite satisfied. I'm not constantly comparing my results to the S&P 500, rather paying attention that my dividend yield keeps rising. That'll be my retirement paycheck someday, and it keeps me less worried about valuation. Good news is, as dividends rise, valuation tends to follow.
Now it's late, and time for bed...
Sunday, September 22, 2013
Fall has slipped in without an announcement;
well, actually, it rained yesterday, so perhaps it was announced. It's been 2+ months since the last time I visited. Earnings season came and went. I took a trip overseas to Africa. The "correction" has corrected. Earnings season was a mixed bag. Nothing too dramatic. Some did better than expected, some not so... dividend growth occurred, but subdued. I ditched two holdings this year due to slowing business growth. Sysco, after 3 years of minimal dividend growth, and Waste Management.
Silly me, Waste Management is up 50% this year! On the other hand, Sysco has barely moved in either valuation or dividend payment.
I'm still holding LNCO, in spite of ongoing controversy. Perhaps I should have sold at first warning, but I think I'll let it play out.
My new 401k/roth401k combo received it's full yearly distribution and I bought a suite of smaller cap DGI candidates. Thus far they're doing ok as a group. As predicted, my DGI porfolio is lagging the S&P 500 in the run-up, but will surely hold up better in a down-year. I like less volatility. I like the rising dividends. I like the diversity in the portfolio. I like that fact that dividends in the IRA portion of the portfolio have reached the point where they are equal to the new money I am allowed to invest under the law.
My newest idea is to weight the portfolio for dividend payment. That means that companies with lower dividends (presumably faster growing earnings and dividends) would be held at higher capitalization levels than the higher dividend paying kind. That would slant the holdings a bit towards dividend growth and capital gains than towards income alone. That might render a porfolio that performs better from a total yield standpoint. Rather than re-balancing by selling shares of some higher dividend producing stocks, I think I'd just try to buy more of those that have the smaller dividend but higher dividend growth.
The big task for the next interval is to get all my holdings into a spread-sheet that tracks earnings growth, dividend growth and dividend production, as well as total yield with dividends re-invested. If I can do that, I have the whole thing captured. I think I'm ready to start running the portfolio based on metrics, rather than using the analysis of others to guide me. I'll have to decide whether to hire someone to build the spread-sheet I want, or try to develop it myself...
Nothing has fundamentally changed about my approach since I last penned a note. I'm becoming more comfortable jettisoning the high yield side of the portfolio, as it appears to be where all the business risk lies. Next time there's cash, I'll be sniffing around the Canadian banking sector, the small cap consumer staples and manufacturing sectors.
Earnings growth, minimum dividend threshold, dividends growth, goods and services people need in good times and bad....seems like a formula that can work over the long haul.
well, actually, it rained yesterday, so perhaps it was announced. It's been 2+ months since the last time I visited. Earnings season came and went. I took a trip overseas to Africa. The "correction" has corrected. Earnings season was a mixed bag. Nothing too dramatic. Some did better than expected, some not so... dividend growth occurred, but subdued. I ditched two holdings this year due to slowing business growth. Sysco, after 3 years of minimal dividend growth, and Waste Management.
Silly me, Waste Management is up 50% this year! On the other hand, Sysco has barely moved in either valuation or dividend payment.
I'm still holding LNCO, in spite of ongoing controversy. Perhaps I should have sold at first warning, but I think I'll let it play out.
My new 401k/roth401k combo received it's full yearly distribution and I bought a suite of smaller cap DGI candidates. Thus far they're doing ok as a group. As predicted, my DGI porfolio is lagging the S&P 500 in the run-up, but will surely hold up better in a down-year. I like less volatility. I like the rising dividends. I like the diversity in the portfolio. I like that fact that dividends in the IRA portion of the portfolio have reached the point where they are equal to the new money I am allowed to invest under the law.
My newest idea is to weight the portfolio for dividend payment. That means that companies with lower dividends (presumably faster growing earnings and dividends) would be held at higher capitalization levels than the higher dividend paying kind. That would slant the holdings a bit towards dividend growth and capital gains than towards income alone. That might render a porfolio that performs better from a total yield standpoint. Rather than re-balancing by selling shares of some higher dividend producing stocks, I think I'd just try to buy more of those that have the smaller dividend but higher dividend growth.
The big task for the next interval is to get all my holdings into a spread-sheet that tracks earnings growth, dividend growth and dividend production, as well as total yield with dividends re-invested. If I can do that, I have the whole thing captured. I think I'm ready to start running the portfolio based on metrics, rather than using the analysis of others to guide me. I'll have to decide whether to hire someone to build the spread-sheet I want, or try to develop it myself...
Nothing has fundamentally changed about my approach since I last penned a note. I'm becoming more comfortable jettisoning the high yield side of the portfolio, as it appears to be where all the business risk lies. Next time there's cash, I'll be sniffing around the Canadian banking sector, the small cap consumer staples and manufacturing sectors.
Earnings growth, minimum dividend threshold, dividends growth, goods and services people need in good times and bad....seems like a formula that can work over the long haul.
Saturday, July 6, 2013
Another one bites the dust
Perhaps I'm doomed to experience melt-downs. Perhaps I should stick to large-cap multi-national conglomerates. The pundits are everywhere, telling everyone how they saw it coming, warned us all, etc.
LinnCo took a dive; first by negative press, then by a knock on the door by the feds. No-one has found any wrong-doing, but the mere inference that they may have incorrectly booked the cost of their hedging strategy has punished the stock and it's holders. Many have run for the exits. Others refuse to budge. Critics say the company won't recover until the feds leave the building.
If I stick to my dividend guns, I won't run until the dividend is cut or frozen, or the business model is proven to be faulty. One critic called it a Ponzi scheme. Funny, he never said that before Barron's came out with a critical article. I hate the post-hoc prophets. They feel the need to cover their egos with "I told you so" messages. I'm sticking, because the 40% dive has already occurred, before I understood the nature of the complaint. I can lock in the losses, or simply collect the dividend and see what happens.
My security is that LinnCo is 2% of my holdings. So, I'm down 0.8% as a result. It's not much of a hit in the big picture. I'll be disappointed if other MLPs go a similar way, but the others that I hold are huge pipeline MLPs and they don't have the same exposure to fluctuations in the price of oil and gas, therefore they don't need a hedge strategy, therefore they don't have this kind of opacity in their books. My issue is there are many things I don't know about accounting, so I'm vulnerable to any kind of event like this. Thus, the 50+ stocks in the portfolio.
What about the rest? We've had a 5% correction, thereabouts. It doesn't look like it's headed much lower. Earning season is sneaking up on us again. I'm pretty much fully invested, so there's not much to do but either go gardening or watch for news. I'm sticking to my DGI strategy, checking valuations, dividend updates and learning those new graphs on my FastGraph's subscription.
I think I'll let some subscriptions expire. Newsletter editors have changed and I am no longer in need of the guidance from most of them. There's vague unease in the air, but it's about whether we've run too far too fast, not whether the world is coming to an end, so one can be thankful for the lack of drama in the angst. I'm pretty secure in the new orthodoxy of watching the dividend stream as the primary indicator of health of the portfolio. If my DRIPs are resulting in me buying some stocks at premium valuations, it's a misdemeaner, not a felony. Since I don't really want to keep growing the number of companies in the portfolio, I'd prefer to just let each issue grow as it can. I'm not motivated to selectively purchase the one with the lowest PE and the highest dividend yield.
I'm looking for small cap dividend growth companies for the new 401k. I'd like to move down the capitation curve and see if I can pick up some additional growth even in the face of 3+% dividends.
My large-cap multi-national credentials are pretty solid now, so I can afford to look a little further into the field for smaller companies that have good DGI credentials and bigger growth opportunities.
Happy hunting...
LinnCo took a dive; first by negative press, then by a knock on the door by the feds. No-one has found any wrong-doing, but the mere inference that they may have incorrectly booked the cost of their hedging strategy has punished the stock and it's holders. Many have run for the exits. Others refuse to budge. Critics say the company won't recover until the feds leave the building.
If I stick to my dividend guns, I won't run until the dividend is cut or frozen, or the business model is proven to be faulty. One critic called it a Ponzi scheme. Funny, he never said that before Barron's came out with a critical article. I hate the post-hoc prophets. They feel the need to cover their egos with "I told you so" messages. I'm sticking, because the 40% dive has already occurred, before I understood the nature of the complaint. I can lock in the losses, or simply collect the dividend and see what happens.
My security is that LinnCo is 2% of my holdings. So, I'm down 0.8% as a result. It's not much of a hit in the big picture. I'll be disappointed if other MLPs go a similar way, but the others that I hold are huge pipeline MLPs and they don't have the same exposure to fluctuations in the price of oil and gas, therefore they don't need a hedge strategy, therefore they don't have this kind of opacity in their books. My issue is there are many things I don't know about accounting, so I'm vulnerable to any kind of event like this. Thus, the 50+ stocks in the portfolio.
What about the rest? We've had a 5% correction, thereabouts. It doesn't look like it's headed much lower. Earning season is sneaking up on us again. I'm pretty much fully invested, so there's not much to do but either go gardening or watch for news. I'm sticking to my DGI strategy, checking valuations, dividend updates and learning those new graphs on my FastGraph's subscription.
I think I'll let some subscriptions expire. Newsletter editors have changed and I am no longer in need of the guidance from most of them. There's vague unease in the air, but it's about whether we've run too far too fast, not whether the world is coming to an end, so one can be thankful for the lack of drama in the angst. I'm pretty secure in the new orthodoxy of watching the dividend stream as the primary indicator of health of the portfolio. If my DRIPs are resulting in me buying some stocks at premium valuations, it's a misdemeaner, not a felony. Since I don't really want to keep growing the number of companies in the portfolio, I'd prefer to just let each issue grow as it can. I'm not motivated to selectively purchase the one with the lowest PE and the highest dividend yield.
I'm looking for small cap dividend growth companies for the new 401k. I'd like to move down the capitation curve and see if I can pick up some additional growth even in the face of 3+% dividends.
My large-cap multi-national credentials are pretty solid now, so I can afford to look a little further into the field for smaller companies that have good DGI credentials and bigger growth opportunities.
Happy hunting...
Sunday, June 30, 2013
Correct, already?
So, stocks are down. sort of. They're actually up, but down a bit from last month.
We were all shocked by the run-up, then shocked by the reaction to Ben Bernanke's hint about something...something about maybe he would eventually stop buying treasuries.
We're through another earnings season. I think it said that earnings are up, but guidance for the end of the year is down. Or maybe not...Everyone is worried that interest rates will rise, in fact they are rising in response to the worry, since noone is willing to pay that much for a bond now that they are worrying. Now they're worrying that since bond prices will swoon as rates go up that dividend paying stocks will follow.
It's not a wall of worry, it's an entire landscape of worry. I think I won't worry. My portfolio is down a bit, but it's up from last year. The dividends keep rolling in. I'm continuing to contribute to the 401k, and now have the IRA and the Roth IRA to keep me occupied.
I guess I could worry that my DRIPs are resulting in a slowly rising cost basis, or that I'm purchasing shares near their all-time highs. I could be building cash. But then I always have the strong desire to spend it, so perhaps it's better just spread throughout the entire portfolio. When I check in on my holdings, they all seem to be no more than mildly over-valued and some aren't at all.
One thing is clear; my share count continues to rise, by 3-4% yearly, not counting new money. If values increase by another 5%, I have an 8% return; just like PERS. I think Chuck Carnevale is right; the stocks are valued by their earnings, and the market forgets about the additional 3% they spin out in dividends. I'll be happy if they keep forgetting. I'll also be happy if the whole market corrects some more. I could use a higher dividend yield. In my case it's the rate at which I acquire more shares.
more shares, more dividends. bring on the dividends; they're my paycheck. I'll continue to reinvest because my real paycheck is paying the bills these days.
I have a new 401k account. I'm self -directing, even though there is a plan manager. The plan manager doesn't know what to do with me. Apparently I'm about the only one who wants to self direct, out of hundreds of employees and over 130 physicians. For that they charge a fee! I guess it's because they have to do some accounting and report what I'm up to. I'm not sure how they are separating out the Roth contributions from the profit sharing, which goes into a traditional 401k account. I only see one account. Their problem, I guess. They haven't granted options permission, although I've asked. I guess I'm the only one with enough interests in covered calls and cash covered puts to inquire about them.
So; when values spiked, I trimmed out a piece from the most ludicrously over-valued shares. Now I can repurchase them since they have fallen back to earth. I'd still like to put a few more stalwarts in the portfolio, but I'm waiting for a good buying opportunity, as some are still at historic highs. Patience isn't my highest virtue. I keep looking for that truffle that I can slip in there. I uncovered a couple using my FastGraph screening tool, but I'll have to think about them for a bit...
not much of value to report...
We were all shocked by the run-up, then shocked by the reaction to Ben Bernanke's hint about something...something about maybe he would eventually stop buying treasuries.
We're through another earnings season. I think it said that earnings are up, but guidance for the end of the year is down. Or maybe not...Everyone is worried that interest rates will rise, in fact they are rising in response to the worry, since noone is willing to pay that much for a bond now that they are worrying. Now they're worrying that since bond prices will swoon as rates go up that dividend paying stocks will follow.
It's not a wall of worry, it's an entire landscape of worry. I think I won't worry. My portfolio is down a bit, but it's up from last year. The dividends keep rolling in. I'm continuing to contribute to the 401k, and now have the IRA and the Roth IRA to keep me occupied.
I guess I could worry that my DRIPs are resulting in a slowly rising cost basis, or that I'm purchasing shares near their all-time highs. I could be building cash. But then I always have the strong desire to spend it, so perhaps it's better just spread throughout the entire portfolio. When I check in on my holdings, they all seem to be no more than mildly over-valued and some aren't at all.
One thing is clear; my share count continues to rise, by 3-4% yearly, not counting new money. If values increase by another 5%, I have an 8% return; just like PERS. I think Chuck Carnevale is right; the stocks are valued by their earnings, and the market forgets about the additional 3% they spin out in dividends. I'll be happy if they keep forgetting. I'll also be happy if the whole market corrects some more. I could use a higher dividend yield. In my case it's the rate at which I acquire more shares.
more shares, more dividends. bring on the dividends; they're my paycheck. I'll continue to reinvest because my real paycheck is paying the bills these days.
I have a new 401k account. I'm self -directing, even though there is a plan manager. The plan manager doesn't know what to do with me. Apparently I'm about the only one who wants to self direct, out of hundreds of employees and over 130 physicians. For that they charge a fee! I guess it's because they have to do some accounting and report what I'm up to. I'm not sure how they are separating out the Roth contributions from the profit sharing, which goes into a traditional 401k account. I only see one account. Their problem, I guess. They haven't granted options permission, although I've asked. I guess I'm the only one with enough interests in covered calls and cash covered puts to inquire about them.
So; when values spiked, I trimmed out a piece from the most ludicrously over-valued shares. Now I can repurchase them since they have fallen back to earth. I'd still like to put a few more stalwarts in the portfolio, but I'm waiting for a good buying opportunity, as some are still at historic highs. Patience isn't my highest virtue. I keep looking for that truffle that I can slip in there. I uncovered a couple using my FastGraph screening tool, but I'll have to think about them for a bit...
not much of value to report...
Saturday, May 25, 2013
what's that stock worth?
What's that stock worth?
When you buy a stock, you're buying the future earnings of the company and their effect your wealth. Your future depends on purchasing stocks that grow earnings and increase in value.
If you pay too much for a company's stock, you won't make much money on it.
If your stock pays a dividend, you'll collect that dividend, regardless of the price you pay.
On the other hand, part of the total investment yield is based on what happens to the stock price.
If the company whose stock you purchase pays no dividend, how can you earn anything at all from your investment? Only one way; by appreciation in the stock price. What drives stock prices up? Expectations of future earnings! The company earns money. It takes that money and does something with it. What? hopefully it re-invests in the business, so the next year it earns more money. If so, rising earnings, and rising earnings per share should result in a higher price for the stock.
If the company decides to pay some of it's earnings to it's owners in the form of a dividend, you can do one of three things with that dividend: use it buy something you want, use it to buy more of the company's stock, or use it to buy a position in some other company.
Most folks think that you shouldn't pay more than 15-20x earnings to own a stock. That would be an earnings return (return on invested capital or ROIC) of 5-7%. Some companies make a lot more money than that. If the executives use some of the earnings to grow the company, stock price tends to drift up to keep the price/earnings in a historical range. You have to pay attention to whether the company is issuing a lot of new shares, since that will dilute earnings per share and adversely effect price per share. Some companies use excess earnings. over and above what's needed to grow the business, to purchase shares and retire them. That reduction in shares tends to boost the price per share, thus making the value of your holding higher, as earnings are distributed amongst fewer shares.
Certainly, a company that is generating loads of cash, paying some of it to owners as dividends, using some of it to grow the business, and some of it to buy back shares sounds like an investment you'd like to own. The good news is, there are plenty of such companies out there; you just have to know how to identify them.
There are lots of ways you can start; one would be to use a screening tool. There are many, from value line, Morning-star, investors daily, etc. I like a subscription service called FASTGraphs.
You can read websites that are devoted to investing, develop a screening list and use any number of resources to find the metrics you need to decide if a company is worth your attention.
I got to my roughly 50 issue portfolio by following my nose, subscribing to newsletters and reading Seeking Alpha. Over time I collected enough understanding of valuation to have a rough understanding of how to decide if a company is on a good footing or not. I don't do formal valuation, but I have some understanding of how it works. Others do it and publish it routinely online.
I check my holdings regularly via FASTGraphs to see if the rate of earnings growth is declining, if the dividend growth rate is changing, if the valuation is getting too high.
Dividend growth investors live in the tension between two desires; the first is to have a growing stream of income. The second is to see the portfolio value increase. The problem is, high stock prices mean less accumulated shares when the dividends are reinvested. Low stock prices mean the stock value isn't appreciating. What's an investor to do? Find a company that constantly raises dividends. That allows continue accumulation of meaningful amounts of additional shares, and drives the appreciation of stock value as well. If valuation outstrips dividend growth, then you rotate to another more appropriately valued company. That means you need a reserve team. You need to know some companies that you'd buy if one of your holdings needs replacing for one reason or another. So, you keep a watch list; companies you'd own if you had twice the money.
In order to grow income and grow wealth, you need both dividends as well as appreciation in the value of your holdings. The good news is, there are plenty of companies who have done this in good times and bad. You can find them. They're not hidden. They're right in plain sight. Ditch the adviser. Ditch the fees. Study hard, read a lot. Keep listening until you hear the truth. You'll be able to recognize it. Sound principles are not obscure.
When you buy a stock, you're buying the future earnings of the company and their effect your wealth. Your future depends on purchasing stocks that grow earnings and increase in value.
If you pay too much for a company's stock, you won't make much money on it.
If your stock pays a dividend, you'll collect that dividend, regardless of the price you pay.
On the other hand, part of the total investment yield is based on what happens to the stock price.
If the company whose stock you purchase pays no dividend, how can you earn anything at all from your investment? Only one way; by appreciation in the stock price. What drives stock prices up? Expectations of future earnings! The company earns money. It takes that money and does something with it. What? hopefully it re-invests in the business, so the next year it earns more money. If so, rising earnings, and rising earnings per share should result in a higher price for the stock.
If the company decides to pay some of it's earnings to it's owners in the form of a dividend, you can do one of three things with that dividend: use it buy something you want, use it to buy more of the company's stock, or use it to buy a position in some other company.
Most folks think that you shouldn't pay more than 15-20x earnings to own a stock. That would be an earnings return (return on invested capital or ROIC) of 5-7%. Some companies make a lot more money than that. If the executives use some of the earnings to grow the company, stock price tends to drift up to keep the price/earnings in a historical range. You have to pay attention to whether the company is issuing a lot of new shares, since that will dilute earnings per share and adversely effect price per share. Some companies use excess earnings. over and above what's needed to grow the business, to purchase shares and retire them. That reduction in shares tends to boost the price per share, thus making the value of your holding higher, as earnings are distributed amongst fewer shares.
Certainly, a company that is generating loads of cash, paying some of it to owners as dividends, using some of it to grow the business, and some of it to buy back shares sounds like an investment you'd like to own. The good news is, there are plenty of such companies out there; you just have to know how to identify them.
There are lots of ways you can start; one would be to use a screening tool. There are many, from value line, Morning-star, investors daily, etc. I like a subscription service called FASTGraphs.
You can read websites that are devoted to investing, develop a screening list and use any number of resources to find the metrics you need to decide if a company is worth your attention.
I got to my roughly 50 issue portfolio by following my nose, subscribing to newsletters and reading Seeking Alpha. Over time I collected enough understanding of valuation to have a rough understanding of how to decide if a company is on a good footing or not. I don't do formal valuation, but I have some understanding of how it works. Others do it and publish it routinely online.
I check my holdings regularly via FASTGraphs to see if the rate of earnings growth is declining, if the dividend growth rate is changing, if the valuation is getting too high.
Dividend growth investors live in the tension between two desires; the first is to have a growing stream of income. The second is to see the portfolio value increase. The problem is, high stock prices mean less accumulated shares when the dividends are reinvested. Low stock prices mean the stock value isn't appreciating. What's an investor to do? Find a company that constantly raises dividends. That allows continue accumulation of meaningful amounts of additional shares, and drives the appreciation of stock value as well. If valuation outstrips dividend growth, then you rotate to another more appropriately valued company. That means you need a reserve team. You need to know some companies that you'd buy if one of your holdings needs replacing for one reason or another. So, you keep a watch list; companies you'd own if you had twice the money.
In order to grow income and grow wealth, you need both dividends as well as appreciation in the value of your holdings. The good news is, there are plenty of companies who have done this in good times and bad. You can find them. They're not hidden. They're right in plain sight. Ditch the adviser. Ditch the fees. Study hard, read a lot. Keep listening until you hear the truth. You'll be able to recognize it. Sound principles are not obscure.
Saturday, May 4, 2013
The beginnings of my "wisdom" compendeum
I read a lot on Seeking Alpha. I've been doing so for about 3-4 years now. Slowly, it's replacing my interest in investing newsletters. First, it's free and second, I've amassed a portfolio of favorite authors that I can learn from, so the "gurus" don't matter as much anymore.
I'm beginning to have the makings of a book of wisdom in my head. Writing down the outline of that book helps it to grow, so I'll start with a few thoughts that could grow into a real useful guideline.
Chapter One;
You're just starting out in your adult life. You have a job, are earning money, and have a bit left over each month after expenses. What do you intend to do with the extra, after you have purchased enough ice cream and movie tickets to satisfy yourself? Some gray haired associate suggests it's time to think about your future and begin investing for your future security. So off you go, looking for advice to help you on your way. Beware, you are entering a mine-field of swindlers, who exist to strip you of your money.
Don't believe the common wisdom. When you're young, you can't afford to reach out onto the outer branches of the risk-reward curve. Forget about capital gains as a metric of good investing. The idea that you have several "market cycles" in you and can afford to take some risks is a form of swindle that the "professional advisers" pitch as a means to capture your money as they trade your shares for you. The conventional wisdom that says you can't have outsized returns without taking on risk is just plain wrong. The truth is that you don't need either outsized returns OR high risk to meet your goals. What you really need is a means to fulfill Warren Buffet's first rule of investing; "don't lose money". And also, his second rule; "never forget rule number one".
Purchase earning power. Purchase earning power at a bargain when you can, and purchase it at a fair price when there aren't bargains to be found. The most simple metric of this advice is the P/E ratio. However, this isn't enough. Look at earnings history. The best indication of future growth in earnings is a long history of prior growth in earnings. The thoroughbreds with long histories of rising earnings tend to be large-cap multinational companies. Now, there is no free lunch, and one can always find an example that refutes the wisdom. However, toothpaste and toilet paper won't be replaced anytime soon, so trotting out an example like Eastman Kodak as a reason to avoid stalwart steady investments isn't fair. Most products of most companies aren't going to be made obsolete by new technology.
If low-risk is actually a better place to start, then you are starting with more conservative, probably slower growing investments. This is not what the conventional wisdom tells you. However, one of the hardest lessons learned by the amateur investor is making a bet on a company with a great story and a rocket-like trajectory in stock price, is that the price is a bet on future earnings, and if that meteoric growth in earnings doesn't occur, the stock price crashes to earth and your hard-earned money evaporates in the crash. Been there, done that...
So, you think, "I'm doomed to either expose myself to the boom/bust world of the speculative high growth stocks, or be safely and boringly trapped in the slow-growth sector of large-cap stock universe". Not actually...because you haven't yet considered the amazingly powerful opportunity that exists in dividend-growth and the compounding effects of dividend reinvestment. That's a story for another chapter. This chapter is about the counter-intuitive wisdom that you need to assimilate; your first investments should be in places where your money is safe, produces predictable and reliable returns, so you aren't trying to play catch-up later in life with a portfolio full of regrets. Many of those "safe" investments have produced outsized returns through the last 14 years of incredible volatility in the equity markets, so the tortoise has truly beaten the hare and all of it's sycophants who masquerade as advisers.
Next point; the conservative investments you make early will be very powerful engines of wealth accumulation later in life, when your energy is flagging and you're thinking about the endpoint of your labors. If you learned anything in high-school physics, imagine the effects of acceleration when it just goes on and on and on. That's what compounding is about. If you can lock in an inflation-beating compounding engine and let it run over 30-40 years time, it has incredible inertia and momentum that will sustain you in the last 3rd of your life, when you aren't interested in running the race of the workaday world anymore.
What is the inevitable result when you purchase a source of rising earnings? Eventually, if not immediately or constantly, the value of the holding rises (Price per share, silly!). The market is fickle and often ignores rising earnings for quite a while, or sometimes gets a crush on an individual stock and drives price up far in excess of what is appropriate for current or projected earnings for a given stock. This is called over-valuation and it can be used to your advantage if you already own the stock, but it's a trap if you are in the purchasing mode, since paying too much for future earnings means you just won't see the growth in value of your investment if you pay too high a price for control of those future earnings.
One piece of this wisdom is that you should purchase stocks like you purchase a house. You don't purchase a house with the intention of moving in, then selling, moving out, buying and moving in again, selling and moving out very frequently. That's a ticket to bleeding from a thousand cuts. Same for the investment world. You need to purchase for the long haul. Then, short term fluctuations in price are less damaging to your overall investment performance. You don't see your money dribble out of your hands through hundreds of buy/sell transaction costs. Buy something that you won't sell, even if the market chooses to discount the value for significant periods of time. The key is to pay attention to the business performance and ignore the short-term fluctuations in stock price. After all, are you purchasing a piece of the business, or a stock certificate? Well, you're purchasing both, but unlike baseball cards, the stock certificate is merely representative of what you actually own, which is a part-ownership in a business. You buy a business so it can produce returns on your investment over time, like income and appreciation in value.
So, ask yourself, is that micro-cap, dot-com, start-up company more likely to be there in 10 years, or is Coca Cola? What is a "sure thing" for your long term security?
Mature companies that earn lots of cash often already have significant market penetration, so they aren't spending every dime trying to expand further. They have learned the dangers of rapid growth, so they have methodical, incremental growth and reinvestment strategies. However, they sell stuff that earns lots of cash. What do they do with that cash? Some of them hoard huge amounts of it. Others use it to reward the owners (stockholders).
They can do so in two ways; One is to repurchase shares with cash. This reduces the overall share-count and the share price tends to rise. You should be somewhat suspicious of this activity however; first, some companies buy back stock regardless of whether the price is low or high, taking some of YOUR money and spending it in a way that you WOULDN'T, buying stock at too high a price. Also, they buy shares, reissue them as options to executives, so the actual share count doesn't decline and the repurchase is a sneaky way of shoveling more money into the pockets of company insiders, instead of distributing profits to all owners proportionately.
A more transparent way for a company to reward it's owners is with dividends. Many, but not all companies pay out a portion of the profits from the business as dividends. The best of these companies, whose earnings rise year by year, also pay dividends that rise year by year. That is called 'dividend growth'. The rate of dividend growth can be measured. The proportion of earnings payed out as dividends can be calculated. These metrics can be tracked as a means to monitor company performance, just like earnings.
The key value in dividends is what happens when you turn them back into more shares of the same (or different) company. That introduces compounding into your investment performance. You not only benefit if the stock price rises, but you have more shares, each of which allows you to claim a piece of the next distribution of dividends. The practice of purchasing dividend-paying investments in companies that raise dividends reliably, then reinvesting the dividends to produce a rising stream of dividend income, is called Dividend Growth Investing. It's not the only strategy for growing wealth, but it has some very attractive features that make it a sound strategy for many reasons. We'll explore some of those reasons in future chapters. However, just as a taste of what is to come, think of this; you purchase a company that grows earnings by 7% every year. It pays out a fixed portion of earnings as dividends, say 50%. That means the dividend is going to grow by 7% per year. The fact that earnings grow by 7% per year, means that stock price will rise over time, unless the company is rampantly issuing more stock, diluting earnings per share (you have to keep an eye on this). If share count is static, earnings per share are rising 7% per year, so stock price will eventually rise about 7% per year. Are you trapped with a 7% investment yield? No...if you reinvest your dividends, you grow the value of your holdings at about 10.5 % per year, so you're accumulating wealth faster than the company is growing! That's the power of compounding.
More on this later...
There's a whole world of dividend investing resources out there, from subscription based investing newsletters (not free) to a bunch of web-based stuff, some of which is quite useful. Like anything else you have invested in, like your education, if you spend some time and effort, you can become knowledgeable and self-directed and you don't need to pay an "expert" to do it for you. After all, they don't guarantee results and they cost you investment performance due to fees. Trust me, you don't need them. What you need is knowledge, reliable sources of information, and a strategy that keeps you safe. You can acquire all of this without paying an adviser. Some tools are proprietary and you can choose to pay for them if you wish. I choose to subscribe to a few services that provide both intellectual content and screening tools. However, they make up a very small fraction of the investment expense, much less than an adviser or a mutual fund fee. Stroll along with me and I'll show you one way to do it yourself.
I'm beginning to have the makings of a book of wisdom in my head. Writing down the outline of that book helps it to grow, so I'll start with a few thoughts that could grow into a real useful guideline.
Chapter One;
You're just starting out in your adult life. You have a job, are earning money, and have a bit left over each month after expenses. What do you intend to do with the extra, after you have purchased enough ice cream and movie tickets to satisfy yourself? Some gray haired associate suggests it's time to think about your future and begin investing for your future security. So off you go, looking for advice to help you on your way. Beware, you are entering a mine-field of swindlers, who exist to strip you of your money.
Don't believe the common wisdom. When you're young, you can't afford to reach out onto the outer branches of the risk-reward curve. Forget about capital gains as a metric of good investing. The idea that you have several "market cycles" in you and can afford to take some risks is a form of swindle that the "professional advisers" pitch as a means to capture your money as they trade your shares for you. The conventional wisdom that says you can't have outsized returns without taking on risk is just plain wrong. The truth is that you don't need either outsized returns OR high risk to meet your goals. What you really need is a means to fulfill Warren Buffet's first rule of investing; "don't lose money". And also, his second rule; "never forget rule number one".
Purchase earning power. Purchase earning power at a bargain when you can, and purchase it at a fair price when there aren't bargains to be found. The most simple metric of this advice is the P/E ratio. However, this isn't enough. Look at earnings history. The best indication of future growth in earnings is a long history of prior growth in earnings. The thoroughbreds with long histories of rising earnings tend to be large-cap multinational companies. Now, there is no free lunch, and one can always find an example that refutes the wisdom. However, toothpaste and toilet paper won't be replaced anytime soon, so trotting out an example like Eastman Kodak as a reason to avoid stalwart steady investments isn't fair. Most products of most companies aren't going to be made obsolete by new technology.
If low-risk is actually a better place to start, then you are starting with more conservative, probably slower growing investments. This is not what the conventional wisdom tells you. However, one of the hardest lessons learned by the amateur investor is making a bet on a company with a great story and a rocket-like trajectory in stock price, is that the price is a bet on future earnings, and if that meteoric growth in earnings doesn't occur, the stock price crashes to earth and your hard-earned money evaporates in the crash. Been there, done that...
So, you think, "I'm doomed to either expose myself to the boom/bust world of the speculative high growth stocks, or be safely and boringly trapped in the slow-growth sector of large-cap stock universe". Not actually...because you haven't yet considered the amazingly powerful opportunity that exists in dividend-growth and the compounding effects of dividend reinvestment. That's a story for another chapter. This chapter is about the counter-intuitive wisdom that you need to assimilate; your first investments should be in places where your money is safe, produces predictable and reliable returns, so you aren't trying to play catch-up later in life with a portfolio full of regrets. Many of those "safe" investments have produced outsized returns through the last 14 years of incredible volatility in the equity markets, so the tortoise has truly beaten the hare and all of it's sycophants who masquerade as advisers.
Next point; the conservative investments you make early will be very powerful engines of wealth accumulation later in life, when your energy is flagging and you're thinking about the endpoint of your labors. If you learned anything in high-school physics, imagine the effects of acceleration when it just goes on and on and on. That's what compounding is about. If you can lock in an inflation-beating compounding engine and let it run over 30-40 years time, it has incredible inertia and momentum that will sustain you in the last 3rd of your life, when you aren't interested in running the race of the workaday world anymore.
What is the inevitable result when you purchase a source of rising earnings? Eventually, if not immediately or constantly, the value of the holding rises (Price per share, silly!). The market is fickle and often ignores rising earnings for quite a while, or sometimes gets a crush on an individual stock and drives price up far in excess of what is appropriate for current or projected earnings for a given stock. This is called over-valuation and it can be used to your advantage if you already own the stock, but it's a trap if you are in the purchasing mode, since paying too much for future earnings means you just won't see the growth in value of your investment if you pay too high a price for control of those future earnings.
One piece of this wisdom is that you should purchase stocks like you purchase a house. You don't purchase a house with the intention of moving in, then selling, moving out, buying and moving in again, selling and moving out very frequently. That's a ticket to bleeding from a thousand cuts. Same for the investment world. You need to purchase for the long haul. Then, short term fluctuations in price are less damaging to your overall investment performance. You don't see your money dribble out of your hands through hundreds of buy/sell transaction costs. Buy something that you won't sell, even if the market chooses to discount the value for significant periods of time. The key is to pay attention to the business performance and ignore the short-term fluctuations in stock price. After all, are you purchasing a piece of the business, or a stock certificate? Well, you're purchasing both, but unlike baseball cards, the stock certificate is merely representative of what you actually own, which is a part-ownership in a business. You buy a business so it can produce returns on your investment over time, like income and appreciation in value.
So, ask yourself, is that micro-cap, dot-com, start-up company more likely to be there in 10 years, or is Coca Cola? What is a "sure thing" for your long term security?
Mature companies that earn lots of cash often already have significant market penetration, so they aren't spending every dime trying to expand further. They have learned the dangers of rapid growth, so they have methodical, incremental growth and reinvestment strategies. However, they sell stuff that earns lots of cash. What do they do with that cash? Some of them hoard huge amounts of it. Others use it to reward the owners (stockholders).
They can do so in two ways; One is to repurchase shares with cash. This reduces the overall share-count and the share price tends to rise. You should be somewhat suspicious of this activity however; first, some companies buy back stock regardless of whether the price is low or high, taking some of YOUR money and spending it in a way that you WOULDN'T, buying stock at too high a price. Also, they buy shares, reissue them as options to executives, so the actual share count doesn't decline and the repurchase is a sneaky way of shoveling more money into the pockets of company insiders, instead of distributing profits to all owners proportionately.
A more transparent way for a company to reward it's owners is with dividends. Many, but not all companies pay out a portion of the profits from the business as dividends. The best of these companies, whose earnings rise year by year, also pay dividends that rise year by year. That is called 'dividend growth'. The rate of dividend growth can be measured. The proportion of earnings payed out as dividends can be calculated. These metrics can be tracked as a means to monitor company performance, just like earnings.
The key value in dividends is what happens when you turn them back into more shares of the same (or different) company. That introduces compounding into your investment performance. You not only benefit if the stock price rises, but you have more shares, each of which allows you to claim a piece of the next distribution of dividends. The practice of purchasing dividend-paying investments in companies that raise dividends reliably, then reinvesting the dividends to produce a rising stream of dividend income, is called Dividend Growth Investing. It's not the only strategy for growing wealth, but it has some very attractive features that make it a sound strategy for many reasons. We'll explore some of those reasons in future chapters. However, just as a taste of what is to come, think of this; you purchase a company that grows earnings by 7% every year. It pays out a fixed portion of earnings as dividends, say 50%. That means the dividend is going to grow by 7% per year. The fact that earnings grow by 7% per year, means that stock price will rise over time, unless the company is rampantly issuing more stock, diluting earnings per share (you have to keep an eye on this). If share count is static, earnings per share are rising 7% per year, so stock price will eventually rise about 7% per year. Are you trapped with a 7% investment yield? No...if you reinvest your dividends, you grow the value of your holdings at about 10.5 % per year, so you're accumulating wealth faster than the company is growing! That's the power of compounding.
More on this later...
There's a whole world of dividend investing resources out there, from subscription based investing newsletters (not free) to a bunch of web-based stuff, some of which is quite useful. Like anything else you have invested in, like your education, if you spend some time and effort, you can become knowledgeable and self-directed and you don't need to pay an "expert" to do it for you. After all, they don't guarantee results and they cost you investment performance due to fees. Trust me, you don't need them. What you need is knowledge, reliable sources of information, and a strategy that keeps you safe. You can acquire all of this without paying an adviser. Some tools are proprietary and you can choose to pay for them if you wish. I choose to subscribe to a few services that provide both intellectual content and screening tools. However, they make up a very small fraction of the investment expense, much less than an adviser or a mutual fund fee. Stroll along with me and I'll show you one way to do it yourself.
Saturday, April 27, 2013
where are the bargains?
I may have purchased my last covered call. My use of covered calls is impulsive and I invariably sell the call just in front of a run-up in price. That cost me about 10% short term gains in two holdings recently. I still like cash-covered puts. However, they are a cash management tool in rising markets, not a means to acquire stocks at a discount to current price.
I'm becoming more adept at rebalancing, thanks to that superb tool from Chuck Carnevale called FastGraphs. I'm paying up for the premium version, which allows me to review valuation any time I want. The chart immediately identifies companies whose P/E ratio has risen above historical norms. I did some selective rebalancing, got myself a couple of industrials I had been thinking about as well as raising my yield a bit.
I think I'm prepared for a pull-back. None of my stuff is significantly overvalued except a few that I trimmed. I'm clearly in the issue swapping mode now, rather than the portfolio building mode. It would be wise to start building the bench, so that I have a short list to pull from when it's time to rebalance. I've been pulling from the dividend champion's/challenger/contender lists thus far.
I don't care what the total return guys say; I love those dividends.
I have a new Schwab account with a few shekels in it, will have to go visit and decide what I'm going to do with it.
ciao
I'm becoming more adept at rebalancing, thanks to that superb tool from Chuck Carnevale called FastGraphs. I'm paying up for the premium version, which allows me to review valuation any time I want. The chart immediately identifies companies whose P/E ratio has risen above historical norms. I did some selective rebalancing, got myself a couple of industrials I had been thinking about as well as raising my yield a bit.
I think I'm prepared for a pull-back. None of my stuff is significantly overvalued except a few that I trimmed. I'm clearly in the issue swapping mode now, rather than the portfolio building mode. It would be wise to start building the bench, so that I have a short list to pull from when it's time to rebalance. I've been pulling from the dividend champion's/challenger/contender lists thus far.
I don't care what the total return guys say; I love those dividends.
I have a new Schwab account with a few shekels in it, will have to go visit and decide what I'm going to do with it.
ciao
Saturday, April 6, 2013
I have resolved the DRIP versus targeted reinvestment dilemna. I'm still a DRIPer
I read several treatments of the issue and nothing changed my mind from the current position.
All of my holdings reinvest. That means between 2 and 10% growth in shares in each holding yearly.
Valuation may go up or down, but even if down, it's cushioned by the reinvested dividend. The growth in share count assures that dividends will grow. Since most of the companies I hold also raise dividends yearly, that also produces compounding as the position grows.
Since all positions are growing, the portfolio holdings grow in parallel, making less re-balancing required. A lot of discussion results from concern about whether reinvestment produces less growth in the portfolio because some holdings are over-valued. Those who espouse targeted reinvestment claim that they can purchase the most under-valued holdings in their investment universe which produces greater dividend growth. I'm not convinced.
Most investors will agree that rising earnings results in rising stock price as well as rising dividends.
If rising stock price outstrips rising dividend, then the ability of reinvestment to purchase more shares is blunted. However, if rising earnings also result in rising dividends, one benefits from both factors in appreciation of the value of the position. Then, if one rebalances, one harvests the capital gain and the reinvestment goes into another holding with favorable dividend growth characteristics. The portfolio is reinvesting, even when one is moving money from one holding to another. Both new money and rebalancing are forms of targeted reinvestment, so the portfolio has both forms of reinvestment working simultaneously.
At the moment, most high quality dividend stocks are at fair value or above. The ones that aren't (amongst those I wish to own) already occupy a full position in my portfolio. So, I am accumulating some cash. I continue to get stung on covered calls. One makes money, but if the stock appreciates above the strike price, you lose the difference and the stock is called, or you have to purchase the call back at a loss. I do better with cash covered puts; I either get premium payments or stocks at discount to strike price.
When I can't find stocks I want to own at current prices, purchasing cash-covered puts keeps the cash in motion, and keeps the over-valued stocks on the radar screen, so when they come into acceptable purchase range, then I can purchase or sell an in-the-money put so that the shares will be assigned at expiration of the put.
What has transpired over the last few years is that I have become comfortable with a strategy and knowledgable about how to moniter that strategy. It means I can spend less time worrying, more time studying how to find better performance. It's a nice place to be, compared with where I started
I read several treatments of the issue and nothing changed my mind from the current position.
All of my holdings reinvest. That means between 2 and 10% growth in shares in each holding yearly.
Valuation may go up or down, but even if down, it's cushioned by the reinvested dividend. The growth in share count assures that dividends will grow. Since most of the companies I hold also raise dividends yearly, that also produces compounding as the position grows.
Since all positions are growing, the portfolio holdings grow in parallel, making less re-balancing required. A lot of discussion results from concern about whether reinvestment produces less growth in the portfolio because some holdings are over-valued. Those who espouse targeted reinvestment claim that they can purchase the most under-valued holdings in their investment universe which produces greater dividend growth. I'm not convinced.
Most investors will agree that rising earnings results in rising stock price as well as rising dividends.
If rising stock price outstrips rising dividend, then the ability of reinvestment to purchase more shares is blunted. However, if rising earnings also result in rising dividends, one benefits from both factors in appreciation of the value of the position. Then, if one rebalances, one harvests the capital gain and the reinvestment goes into another holding with favorable dividend growth characteristics. The portfolio is reinvesting, even when one is moving money from one holding to another. Both new money and rebalancing are forms of targeted reinvestment, so the portfolio has both forms of reinvestment working simultaneously.
At the moment, most high quality dividend stocks are at fair value or above. The ones that aren't (amongst those I wish to own) already occupy a full position in my portfolio. So, I am accumulating some cash. I continue to get stung on covered calls. One makes money, but if the stock appreciates above the strike price, you lose the difference and the stock is called, or you have to purchase the call back at a loss. I do better with cash covered puts; I either get premium payments or stocks at discount to strike price.
When I can't find stocks I want to own at current prices, purchasing cash-covered puts keeps the cash in motion, and keeps the over-valued stocks on the radar screen, so when they come into acceptable purchase range, then I can purchase or sell an in-the-money put so that the shares will be assigned at expiration of the put.
What has transpired over the last few years is that I have become comfortable with a strategy and knowledgable about how to moniter that strategy. It means I can spend less time worrying, more time studying how to find better performance. It's a nice place to be, compared with where I started
Sunday, February 17, 2013
Yield lessons;
So, I'm finally convinced. I can think of 3-4 holdings that were in the high-dividend category that have cut dividends and I've been burned...Otelco, Frontier Communications, CenturyTel Telecom of New Zealand. I got out of Annaly Capital, Windstream, a few others...
I think it's time to dump all the rest: I don't have many left with yields over 5%. Since I don't have an automated way to see the payout ratio and rate of change in payout ratio, I'm vulnerable to changes in company operating status that cause management to change their dividend policy. It's not the dividend cut that hurts: it's what the dividend cut does to the value of the position. After all, I'm buying earnings and dividends. If earnings drop and dividends are cut, then I have an investment of deteriorating value. The stock price may follow in lock-step, or suddenly and precipitously when the dividend is cut. Dividends are cut by policy, not by a daily vote on the company value by the market.
I need to change the way I monitor the portfolio; The very first thing I should look at is earnings per share. Then I should look at the percentage change in earnings per share over the preceding year, 3 years, 5 years and 10 years.
After that, I should look at the dividend yield. I should look at the change in dividend payment over the preceding 1, 3, 5 and 10 years.
I should look at the payout ratio; it should stay within a reasonable range. i should then look at what the company did with profits not paid out to shareholders; stock repurchase, capital investment, etc.
I'm in a state of conflict over the DRIP versus targeted re-investment issue; right now I'm DRIPing.
I like seeing each position gain shares on a steady basis. I'm not sure I'd like the pressure to make new investment decisions frequently with accumulated dividends. I'm also not excited about having chunks of cash sitting around that aren't "at work". However, I have been handling the issue of re-investment using cash covered puts for companies of which I'd be happy owning more shares. Out-of-the-money puts generally simply yield more cash. In-the-money puts can result in purchase with a little put-premium bonus. Selling the put means the cash is at work. That could be a good reason to turn off the DRIP, because the put premium is often larger than the next dividend. However, that means no participation in price appreciation if it occurs. Also, it requires constant attention to find, analyze the options.
I find that I don't like selling covered calls all that much. I don't like the long-duration calls. I'm selling calls, hoping the position WON'T get called. That puts me into the position of having to buy my way up-and-out if the stock price moves up above the strike price. It turns out that capping my gains and having to buy back into a position isn't what I like about investing. I can't track gains over time because they are broken up into little call premiums and short term gains, rather than a long term gains and share accumulation history.
Puts result in an occasional assignment, but more often the position stays intact and the cash builds a bit.
I guess the state of affairs will continue for a while...I'll continue DRIPing so as to see positions grow, avoid the demand of making larger, more frequent capital allocation decisions. I'll re-position as required when a holding exceeds my 3% (about) rule and then either use the cash to purchase cash-covered puts on positions I'd enjoy growing, or simply purchase new holdings if something looks good.
It's time to prune out the high-yield companies that are at risk for dividend cuts. I can't stomach the loss in value when those cuts occur. I just need to remember WB's rule number 1; never lose money.
I'm going to go back and re-examine my fast-graphs subscription; perhaps it can show me earnings per share, earnings per share growth, dividend growth, payout ratio for the portfolio.
So, I'm finally convinced. I can think of 3-4 holdings that were in the high-dividend category that have cut dividends and I've been burned...Otelco, Frontier Communications, CenturyTel Telecom of New Zealand. I got out of Annaly Capital, Windstream, a few others...
I think it's time to dump all the rest: I don't have many left with yields over 5%. Since I don't have an automated way to see the payout ratio and rate of change in payout ratio, I'm vulnerable to changes in company operating status that cause management to change their dividend policy. It's not the dividend cut that hurts: it's what the dividend cut does to the value of the position. After all, I'm buying earnings and dividends. If earnings drop and dividends are cut, then I have an investment of deteriorating value. The stock price may follow in lock-step, or suddenly and precipitously when the dividend is cut. Dividends are cut by policy, not by a daily vote on the company value by the market.
I need to change the way I monitor the portfolio; The very first thing I should look at is earnings per share. Then I should look at the percentage change in earnings per share over the preceding year, 3 years, 5 years and 10 years.
After that, I should look at the dividend yield. I should look at the change in dividend payment over the preceding 1, 3, 5 and 10 years.
I should look at the payout ratio; it should stay within a reasonable range. i should then look at what the company did with profits not paid out to shareholders; stock repurchase, capital investment, etc.
I'm in a state of conflict over the DRIP versus targeted re-investment issue; right now I'm DRIPing.
I like seeing each position gain shares on a steady basis. I'm not sure I'd like the pressure to make new investment decisions frequently with accumulated dividends. I'm also not excited about having chunks of cash sitting around that aren't "at work". However, I have been handling the issue of re-investment using cash covered puts for companies of which I'd be happy owning more shares. Out-of-the-money puts generally simply yield more cash. In-the-money puts can result in purchase with a little put-premium bonus. Selling the put means the cash is at work. That could be a good reason to turn off the DRIP, because the put premium is often larger than the next dividend. However, that means no participation in price appreciation if it occurs. Also, it requires constant attention to find, analyze the options.
I find that I don't like selling covered calls all that much. I don't like the long-duration calls. I'm selling calls, hoping the position WON'T get called. That puts me into the position of having to buy my way up-and-out if the stock price moves up above the strike price. It turns out that capping my gains and having to buy back into a position isn't what I like about investing. I can't track gains over time because they are broken up into little call premiums and short term gains, rather than a long term gains and share accumulation history.
Puts result in an occasional assignment, but more often the position stays intact and the cash builds a bit.
I guess the state of affairs will continue for a while...I'll continue DRIPing so as to see positions grow, avoid the demand of making larger, more frequent capital allocation decisions. I'll re-position as required when a holding exceeds my 3% (about) rule and then either use the cash to purchase cash-covered puts on positions I'd enjoy growing, or simply purchase new holdings if something looks good.
It's time to prune out the high-yield companies that are at risk for dividend cuts. I can't stomach the loss in value when those cuts occur. I just need to remember WB's rule number 1; never lose money.
I'm going to go back and re-examine my fast-graphs subscription; perhaps it can show me earnings per share, earnings per share growth, dividend growth, payout ratio for the portfolio.
Subscribe to:
Posts (Atom)