Archive for the ‘Investment News’ Category
Thursday, July 24th, 2008 |
“If you pay it, they will come”
This is the motto of the yield chaser. The yield chaser comes in many forms and some readers have even suggested that I am a yield chaser. Are they correct? I am not sure, but I do like to find great stocks that pay a solid and increasing dividend over time.
Yield Chasers
There are others who define ”yield chasers” as those who buy the riskiest of dividend paying stocks. These riskier dividend plays typically will pay a dividend yield in the double digits! That sounds great so far, but these huge dividends usually don’t last. Some of these companies actually pay out more money in dividends than they have earnings!
Dividend Payout Ratio
While a payout ratio of greater than 100% is possible, it is not likely sustainable. Investing in such companies is akin to paying off your credit card with a home equity loan. The available cashflow simply helps to defer the inevitable loss. Either you have to earn more money to pay off both obligations or spend less somewhere to make ends meet.
In the case of these companies, it is most likely that the dividend to the investor will be reduced. Reducing or cutting the dividend is much easier than cutting other costs or figuring out how to earn more revenue. We have seen this scenario most recently with a good number of financial stocks.
There are, however, companies that offer above average yields with acceptable payout ratios. You may want to have a look at companies that come through a “high yield - medium payout ratio” screen.
Stock Screen Criteria:
Payout: Latest Fiscal Year <= 60%
Dividend Yield >= 7.0%
P/E Ratio: Current <= 15
Market Capitalization >= 100 million
As I mentioned earlier, these higher yield stocks require substantial due diligence, but a simple screen like this one can give you a great starting point. Note that you must calculate the current fiscal year’s payout ratio using the latest earnings…this may give you a completely different story!
If you happen to have some money set aside for aggressive yield investing, these criteria will help to reduce some of the risks of yield chasing while still searching for exceptional dividends.
Posted in Investment News | 5 Comments »
Wednesday, July 23rd, 2008 |
Shareholder Yield isn’t a new concept to the retail investor, but it has been spotted the news recently.
But what exactly is Shareholder Yield?
William W. Priest, of Epoch Investment Partners, defines shareholder yield as a combination of the following:
- Dividend Payouts
- Debt Reduction
- Stock Repurchase Programs
It has been documented that dividend payouts are at very low levels, some say as much as thirty years have gone by since dividend payouts were at such low levels. Some companies are letting cash reserves grow to cumbersome levels and are being pressured by shareholders to put that cash to work!
Companies that allow their cash to sit idle on their balance sheet are often targets of private equity buy out firms and in such circumstances, companies will face severe pressure to put that cash to shareholder-friendly use…
Enter the Shareholder Yield Strategy!
Mr. Priest suggests that focusing on picking stocks that will, or will be forced to, return cash to shareholders in one of the previously listed three ways is certain to make money for investors. This is what he refers to as an absolute return.
While quite similar in nature to most Free Cash Flow strategies, Priest’s firm has been hired to put together a Global Dividend Yield Strategy that has returned a stunning 9.5% yield in a market that typically offers between a 6-8% yield.
Learn more about Shareholder Yield and Epoch Investment Partners
Posted in Investment News | 15 Comments »
Monday, July 21st, 2008 |
This article really has little to do with dividend paying stocks, but it does have to do with risk management and how I guaranteed myself an 8% return risk-free.
The Nuts and Bolts
The real truth here is that there is no magical formula and I am not pitching a complex investment program that claims outlandish results that will have you bathing in money in no time flat. However, I am going to show you my my simple logic that lead to getting this guaranteed 8% return.
The “Secret”
The secret is that 8% was the rate of interest on my student loans. What does that have to do with investing? Well, by completely paying off my student loan debt, I effectively guaranteed myself and 8% return on my money without any risk, not accounting for any tax consequences.
How does this help you?
If you are wondering where to invest that little year-end bonus or that extra little bit of cash each month, consider paying down some of your higher interest debt. Other than your mortgage (USA), most other debt is not tax deductible.
If you have debt with an interest rate in excess of 8%, you should seriously consider that risk free 8% return very valuable. Not to mention the peace of mind that lowering your financial obligations to others brings.
Can you guarantee yourself an 8% return on investment?
Posted in Investment News | 4 Comments »
Thursday, July 17th, 2008 |
While I am convinced that some (read: very few) people in the world have the ability to time the market, you and I are not them. That is not meant to be an insult to you, but if you could successfully time the market then you certainly wouldn’t be reading this article.
The Market Moves Mysteriously
Yesterday the American stock market had one of the best days in recent memory. The returns of the major indexes were as follows:
- Nasdaq - 3.12%
- Dow - 2.52%
- S&P 500 - 2.51%
Why do I tell you this today?
You see, yesterday was a great day to be invested in the stock market. However, you would not have known it if you had been listening to the so called “experts”.
Here are some of the morning headlines from major investment news sources:
(Heresy is a dislocation of some complete and self-supporting system of belief)
Fed Worried About Rising Inflation at June Meeting - CNBC
Unemployment rise at 16-year high - Financial Times
Dollar Declines Against Yen as US Banks May Report Losses - Bloomberg
Fed Chief Gives Gloomier Outlook On US Economy - CNBC
Inflation Data Tame Stock Futures - Investors Business Daily
Recession Under Way? - Morningstar
Seeing Bad Loans, Investors Flee From Bank Shares - New York Times
Is Your Cash Safe at the Bank? - TheStreet.com
What Does This Mean?
No, I am not saying that just because I said to stay the course and keep investing in equities yesterday that I am any better at predicting the future than the authors mentioned above. Heck, for all I know the market could lose yesterday’s gains and then some in today’s session!
What I do know, however, is that being a long-term investor is a better option for me than being a short-term trader.
What I am also suggesting is that we have to develop our own investment plans that work for us and stick with the plan. We can’t be bothered by the hype in raging bull markets, nor the doom and gloom sentiment in bear markets. I know as well as you that what I propose is easier said than done, but it is for our own financial well being that we develop an investment plan that makes sense to us and stick to it. Once we start straying from what we know, we are more likely to get burned.
Remember, the above authors get paid to sell papers not to invest your money! Those headlines make them money, but you don’t have to let them lose your money.
Just think about it.
Posted in Investment News | No Comments »
Wednesday, July 16th, 2008 |
How Long Will Economic Recovery Take?
As troubling as these times look, we all assume that eventually things will change and the economy will once again be robust, financial markets will stabilize, and commodity prices will revert to the mean.
In the mean time, however, many financial pundits are taking their best guess as to how long the recovery process will take. We are constantly barraged in the media with a mixed bag of opinions, all of which are given without request mind you, and all trying to influence government policy makers to either reign in pricing or make borrowing money easier.
Will We See Stagflation?
The puzzling duo of slow growth and high inflation is extremely troubling for policy makers because combating one ailment only serves to exacerbate the other. A true economic Catch-22 if you will. It is widely thought that the central banks will leave the overnight rate unchanged until year end as a tightened credit policy may send the economy into a severe downward spiral.
The current state of affairs has even the most seasoned economists scratching their heads:
“That’s the dilemma that rapidly rising high oil prices create for central banks everywhere. It boxes them in,” said Douglas Porter, deputy chief economist with BMO Capital Markets.
“It has the nasty side-effects of crimping growth and driving up inflation. This is like a mini-version of what central banks faced in the 1970s when oil prices spiked.”
The era that Porter speaks of was marked by what has since been termed stagflation - a persistent period of economic stagnation and high inflation.
The Numbers Tell The Story
In uncertain times like these, it is even more prudent to look at the hard data to provide the “real” truth behind the economy. The following are sets of numbers that help us to understand the effect that skyrocketing energy prices are having on consumers:
- Consumer Prices were ups 1.1% last month - The largest monthly increase in over 25 years!
- Energy prices are up 6.6% since last month.
- Inflation adjusted average weekly wages dropped 0.9% last month. This was the largest drop in wages since 1984.
- Consumer inflation is up 5% over the last year - The highest since 1991.
- Airline prices were up 4.5% in June - The biggest one-month jump since early 2000.
- Vegetable prices were up 6.1% in June - The largest monthly increase in three years.
What Can Investors Do?
In any inflationary environment the common practice says to keep existing outflows down, skip new large expenses, and increase your emergency savings. I would like to personally add that we should continue to invest in equity markets as long as we have time on our side (7-10 years).
Increase emergency funds and review life and health insurance.
The 3-6 months’ worth of expenses that advisors suggest we keep stashed away in liquid assets such as fixed deposits or a high interest savings account could be increased.
Life and health insurance should be reviewed and could be topped up with low-cost term insurance if necessary. Shop around for no-obligation insurance quotes. InsureMe.com offers quotes on all types of insurance and are very competitive.
Prepay your mortgage.
As mortgage and interest rates may climb higher, prepaying your loans will give you a guaranteed return on your investment equal to the interest rate on the loan. Moreover, no single investment option is likely provide guaranteed returns greater than the rate of interest on your mortgage. In addition, the psychological satisfaction of reducing your overall debt can trump any financial return. This is especially true for the conservative investor.
If you are concerned about rates increasing, you might want to lock in the interest rate on your mortgage with a fixed rate loan. If you have a good credit score, banks will likely really want your business as lending regulations are tightening. This would be a good opportunity to have a service like LendingTree.com working for you to get the best rate.
Continue to invest in stocks.
The only opportunity that we have to combat inflation is to investing in equity. Carry on with your stock investment strategy and take advantage of buying opportunities in great dividend growth stocks. For the moderately conservative investor, seek out large cap stocks that are trading at least 30% off of their 52-week high and have stable earnings as they are likely to rebound first.
If you want to pick up stocks, invest in stages and go for value dividend growth buys. If your time horizon allows, a great buying opportunity may be upon us. Remember, history is on your side.
Diversify in precious metals.
While Gold and Silver are at high prices, some advisors still recommend that you invest 5-10 per cent of your portfolio in gold exchange-traded funds and gold mutual funds. Their reasoning for this suggestion is that, historically speaking, periods of high inflation result in a surge in gold prices.
What are your plans for this economy? Are you buying, selling, or staying the course?
Posted in Investment News | No Comments »
Saturday, July 12th, 2008 |
The Board of Directors of Colgate-Palmolive Company (NYSE: CL) declared quarterly cash dividends of $.40 per common share, payable on August 15, 2008, to shareholders of record on July 24, 2008.
For those of you looking for a dividend that is as close to certain as you can get, look no further as Colgate-Palmolive has paid uninterrupted dividends on its common stock since 1895.
Colgate on the Defense
With the turmoil that has been the stock markets in the past weeks and months, many investors (at least those who haven’t gone to 100% cash) are turning to defensive stocks to assist in preserving capital. With a Beta of just 0.31, Colgate (CL) is one of the least volatile dividend stocks on the market.
In addition to a healthy dividend and price stability (in relation to the market), Colgate also offers some excellent growth numbers for a company of such extreme size. Colgate boasts a Return on Assets (ROA) of 17.03 and a Return on Investment (ROI) of 29.07; both of which trump the industry numbers quite handily.
Colgate Dividend Data
With many dividend stocks struggling with earning this year, the management of the company’s dividend payout ratio is of particular importance. Colgate has a dividend payout ratio of just 43.4% of earnings, which will allow for some flexibility in earnings capacity without sacrificing the dividend rate in the short term. A dividend payout ratio of below 60% is a relatively conservative guideline for investing in dividend growth stocks.
When investing in a good dividend growth stock, one of the criteria that I use is to set a purchase price for a stock when its dividend yield is around 25-30% above the 5-year average dividend yield. Colgate’s 5-year average dividend yield is 1.88% and the current yield is 2.27% - a yield that is 20% higher than average.
Another criteria that I use is that the dividend growth rate must be greater than that of the S&P 500. Otherwise a dividend growth investor would be more prudent buying the entire index to mitigate risk. The dividend growth rate for the S&P 500 is currently at 11.0%, while Colgate features a dividend growth rate of over 14% - a healthy 3% points higher than the index.
Buy What You Know -Colgate
Unless you have been living under a rock for the past century, you will recognize Colgate-Palmolive as a leading global consumer products company. The company is very successful in its focused niche markets of Oral Care, Personal Care, Home Care and Pet Nutrition.
Colgate sells its products in over 200 countries and territories around the world under some of the world’s most recognized brand names as Colgate, Palmolive, Mennen, Softsoap, Irish Spring, Protex, Sorriso, Kolynos, Elmex, Tom’s of Maine, Ajax, Axion, Soupline, and Suavitel, as well as Hill’s Science Diet and Hill’s Prescription Diet.
Stock Summary
As investors looking at Colgate (CL), we have a stock that is quite a bit less volatile than the broader market with a beta of just 0.31, a greater than average dividend yield at 2.27% that is growing at a faster pace than the index. In addition, the company has features an excellent return on investment and wide array of well branded products that people still need to buy regardless of economic conditions.
Full Disclosure: The author does not own shares of Colgate-Palmolive at the time of writing.
Posted in Investment News | 3 Comments »
Thursday, July 3rd, 2008 |
Progressive Corporation of Auto Insurance fame has changed the landscape of dividend payment to shareholders. And they did so in dramatic fashion. Progressive introduced a new dividend policy for 2007 and I have been waiting to see if any other companies would follow suit. So far, it looks like everyone is watching how this policy is playing out in a bear market to see if investors “jump ship”.
A Variable Dividend
Progressive introduced the idea of a once-per-year variable dividend that will be based solely on the performance of the company. This type of dividend will award shareholders for their belief in the company and appears to actually treat shareholders like owners by offering up a piece of the profits in good years and leaving them high and dry in bad years.
Here is what Progressive CEO Glenn Renwick has to say about the dividend policy that he championed:
“If the business has a good year, the owners should share in the profit, and if the business has a bad year, why should the owners get anything?”
An excellent observation–one that’s so obvious, it makes one wonder why everyone’s not thinking that way.
My contention is that investors, including myself, are fickle. As investors we really have no control over the operations of the company and when our cash flow (dividend) is not paid, the only recourse that a dividend investor has is to sell the stock.
Conversely, when there is a big dividend to be had, I would want as many shares as possible. One may think that this will lead to erratic cycles in the stock price of Progressive as “yield hunters” trade the stock over the course of time.
How The Variable Dividend Works?
Progressive’s board has opted to pay a variable dividend based on the firm’s after-tax underwriting profit. That means the premiums Progressive takes in, less claims paid out and expenses of running the business. Shareholders will get 40 percent of those profits in a great year, 20 percent in an average year, zero in a bad year.
So, what consitutes a Great Year, Average Year, and Bad Year?
It’s not entirely carved in stone , but It helps, of course, that Progressive is solidly profitable and generates far more capital from its operations than it can profitably deploy in its business. But should things turn bad, which has happened to many once fine companies, Progressive won’t be stuck trying to defend an unaffordable cash dividend that shareholders have come to expect. In these volatile days, locking yourself into a significant fixed dividend can be a bad idea.
Could This Dividend Policy Work For Other Companies?
If other companies could stomach what seems to be the inevitable swings in stock price, then this policy may work for them because they would pay out what dividend they could afford and no more.
While this would produce stronger companies in that sense, investors who are seeking regular income (who, as our population ages are more and more), may steer clear from companies offering an unpredictable payout. This lack of investor confidence could ultimately result in a lack of capitalization that would ultimately harm the operations of the organization.
Because the strength of a company and the performance of management is ultimately gaged on the price of the company’s stock, this dividend policy seems risky for those managers, investors and companies that are more conservative.
I guess we will have to wait a couple of years to see how this policy plays out for Progressive. While it seems very good in theory, it certainly bucks the trend of traditional dividend theory.
Posted in Investment News | 1 Comment »
Wednesday, July 2nd, 2008 |
I have regularly touted that income in the form of increasing stock dividends, from companies with a track record of increasing their dividends, is a great way to build inflation protected passive income.
Investing For Yourself
A new article from Morningstar Columnist, Josh Peters CFA, indicates the same sentiment. In the article he makes a strong case for those of us who are engaged in the Dividend Investing strategy to invest ourselves and cut out the middleman (Broker, Advisor, or Fund Manager). If we develop a clear and focused strategy to invest in dividend paying common stocks that we are committed to understand, then the choice is clear.
Cut out the middleman!
Are Fund Fees Worth The Cost?
He suggests, as I do, that the role of the mutual fund is to prevent the amateur investor from making large mistakes. However, in return, the manager is compensated through fees and fund expenses that diminish the returns of the retail investor…you and me.
I do advocate professional management for sectors that I do not understand such as certain small caps and international offerings that I either can’t cover due to lack of time or because there is a lack of information available to me.
Diversify What You Don’t Understand
You might want to consider, as I have, the inclusion of an International Dividend ETF in order to add some global allocation to your asset mix.
There is no shame in admitting when you don’t have the expertise, information, or smarts to understand a stock or a market. Heck, people who invest professionally (as in for a living) can’t absorb enough information to master every market, so how can we amateur investors be expected to do so? The answer is…we can’t!
You should check out the remainder of the morningstar article, it does present some great points.
Here’s to money!
Posted in Investment News | 2 Comments »
