Archive for the ‘Investor Education’ Category
Saturday, July 19th, 2008 |
What is Return On Invested Capital?
Return on Invested Capital (ROIC) in basic terms is the amount of profit that a company earns for every $1.00 of capital invested into the business.
Analysts may substitute “growth rate” for ROIC in some instances.
How Do I calculate ROIC?
Return on invested capital is calculated by dividing the organization’s net income by the total of the shareholder’s equity and the outstanding debt.
Net Income/ Shareholder’s equity + Outstanding debt
How Do I Use Return on Invested Capital To Value A Stock?
In very simple terms, the ROIC should be compared against the company’s Price to Earnings ratio (P/E).
If the Return on Invested Capital is greater than the Price to Earnings Ratio, the stock would be considered to be undervalued and would be a value buy.
ROIC > P/E = Undervalued Stock
This is a very simplified version of the metric, but can be used with additional data in developing an investing strategy and stock screen that works for you.
Many of our favorite Dividend Growth Stocks such as Scotiabank (BNS) have ROIC figures nearing 20%.
Posted in Investor Education | 3 Comments »
Monday, July 7th, 2008 |
If one is a dividend growth investor, they are probably considered (or should be) the longest of the long-term investors. To the absolute amazement of other investors, once the stock is purchased, the dividend growth investor may not care what the price of that stock is as long as the dividends continue to grow.
The substantial gains that are reaped by re-investing the growing dividends from our favorite stocks lies in the exponential power of compounding - which often takes years to build into a noticeable contribution to a portfolio.
Because the re-investment process can seem unproductive and the dividend growth insignificant at first, it is easy for others to dismiss dividend growth investing as “too conservative” or even unprofitable. As much as we preach that slow and steady wins the race, even the most seasoned dividend growth investor can begin to question the effectiveness of the strategy from time to time.
A Real Life Example
Many times it takes a real life example of dividend growth investing to help to keep one motivated to continue the long , often boring, journey of building a portfolio of dividend growing common stocks.
The recent bid by InBev to take over Anheuser Busch (BUD) provided this motivating real-life example that what the essence of dividend growth investing is all about.
This is what the “end-game” of our dividend growth strategy should look like - it’s beautiful!
In 1980, Sean Gorham bought his first piece of a public company: a $500 investment in Anheuser-Busch, even though he had no connection to the brewer or its St. Louis roots. He’s reinvested the dividends, or the cash payout shareholders receive, over the years.
“I’ve always admired how well the company is run. They exude a very clean image and a very American image,” said Gorham, 48, an insurance agent who lives in York, Maine, about an hour northeast of Anheuser-Busch’s Merrimack, N.H., brewery. “It’s been one of the best investments I’ve had. … The dividend I get every year is more than what I originally paid for” the stock.
Anheuser-Busch stock began being traded in 1933 in the over-the-counter market, where brokers buy and sell among themselves rather than through a stock exchange. The company first was listed on the New York Stock Exchange on April 18, 1980, making it more widely accessible to individual investors.
In the past 28 years, Anheuser-Busch’s stock has split four times. So one share bought in 1980 is now 24 shares - how’s that for creating shareholder value.
It Takes Time And Commitment
Obviously this example is one that has taken nearly 30 years to develop, but the fruits of the labor are tremendous.
Given this example, an investor who today is 30 or even 40 years old could begin to build a portfolio of dividend growing common stocks and expect to receive an excellent income in retirement that grows each year - likely at a rate higher than inflation!
When one commits to the strategy of dividend growth investing, it requires an extreme amount of patience and discipline in the first few years. It may take as many as ten years of dividend growth before the re-invested dividends make significant contribution to the growth of the portfolio.
Reaching The Tipping Point
Many financial planners will dub a person’s working years as the “accumulation phase” of one’s life. This means that during these years (roughly from age 20-65) the purpose of investing is to accumulate assets that will allow the investor to hopefully maintain their current lifestyle in retirement.
During the first decade or two, accumulating assets is the most difficult as investors tend to have other “important” expenses such as purchasing a home, raising a family, retiring student loans and consumer debt etc.
While a full blown discussion on the time value of money is not necessary in this article, one must recognize that buying assets such as dividend growth stocks during the early years of the accumulation phase will allow for the advantages of compound growth to kick in and the tipping point will be reached faster.
The tipping point is the point where the return from investments begins to grow at a greater rate than expenses. You will notice that one does not say that investment income meets expenses because, it is known that expenses increase with inflation and (mortgage excluded) may actually have increased in retirement depending on medical needs etc.
Motivation To Follow A Proven Path
During the accumulation phase, success stories like the one above can prevent investors from straying from the proven path of investing in solid dividend growth stocks to fund a prosperous retirement.
Where do you get the motivation to stay committed to your investment strategy?
Resources: St. Louis Today
Posted in Investor Education | 5 Comments »
Saturday, June 28th, 2008 |
With the recent markets heading lower, I thought it would be a good time to run an article on why investors act the way they do in a downward trending market.
The Psychology Of A Loss
In a downward trend it is easy to get caught up in the short term emotions of the correction and lose sight of our long term goals. If our goal is to build a portfolio of high quality dividend paying stocks that frequently raise their dividends, we must not allow ourselves to be influenced by the market behavior over a short period of weeks or months.
Investors are often influenced by short term downward movements in the market, not wanting to see their hard-earned cash lose value as the markets tumble. This theory has been studied by scientific researchers Bernatzi and Thaler, who named the phenomenon “Myopic Loss Aversion”. You can read a great article about the development of Myopic Loss Aversion in the Quarterly Journal of Economics from February 1995. the theory makes logical sense and is, in my opinion, very relevant today.
We’re Naturally More Sensitive To Losses Than Gains
The tendency for investors to be about twice as sensitive to losses as we are to gains has been extensively studied by behavioral finance pioneers, Amos Tversky and Dainiel Kahneman and is called “Prospect Theory”. This theory also makes intuitive sense, especially for me. Human behavior is a funny thing; we always want more, but we don’t want to lose what we already have.
In essence, we are naturally risk averse and are pre-conditioned not to understand the basic relationship between risk and reward. Does this theory hold true for you?
Lets ask ourselves a couple of questions and see!
- What was your general feeling about your investments over the past few years?
- What has been your general feeling over your investments over the past few weeks?
- What has changed with regard to the fundamentals of your stocks over the past few weeks?
- What has changed about your overall investment goals over the past few weeks?
After answering these questions honestly, take a look at them and see if the answers are congruent. If your emotions have taken over and have gotten the best of you, as mine sometimes do you will notice that your answers to these questions will not align with your long term investment goals.
Will you let your emotions get the best of you? I hope not…I don’t want to see you hurtling toward the earth from your office window.
As a friend of mine has said:
The eggs are on sale…let’s look for buying opportunities!
Posted in Investor Education | 2 Comments »
Sunday, June 1st, 2008 |
Welcome to readers from The Street.com and the Kirk Report. Please take a moment to visit our About Page to see why we love dividend stocks and subscribe to our blog using the Subscribe Form on the right side of the page.
I am a huge proponent of buying the best dividend paying stocks when they are value priced. However, if you aren’t sure about picking an individual stock and you still want to reap the rewards of Dividends, check out this list of some different Dividend Exchange Traded Funds (ETF’s).
The Vanguard Dividend Appreciation Fund (AMEX: VIG) is a one of the cheapest dividend ETFs, with an expense ratio of 0.26%. Some rivals charge as much as 0.60%. But fees aren’t everything here. VIG’s current yield — slightly less than 1.77% — is on the low side, as is its total return of roughly 7% since its inception in late April 2006.
VIG is benchmarked to the Mergent Dividend Achievers Select Index, a subset of the Mergent Dividend Achievers Index — a market-cap-weighted index of stocks with a consistent history of increasing dividends. Its holdings are highly concentrated in three sectors: consumer staples at 23%, financials at 20%, and industrials at 17% of assets. The top five stock holdings include Johnson & Johnson, GE, ExxonMobil, AIG, and IBM, each representing roughly 4% of assets.
Among other ETFs focusing on high-yielding equities, the iShares Dow Jones Select Dividend (NYSE: DVY), the first dividend ETF, has gathered more than $7 billion in assets. It invests in 100 of the highest dividend-yielding securities (excluding real estate investment trusts) in the Dow Jones U.S. Total Market Index.
First Trust Morningstar Dividend Leaders (AMEX: FDL) invests in the top 100 stocks of the Morningstar Dividend Leaders Index. These are the index’s highest-yielding stocks, ranked by the consistency with which they pay dividends and the ability to sustain those dividends going forward. Three securities — Citigroup, Bank of America, and Altria — together make up more than one-fourth of the fund.
State Street SPDR Dividend (AMEX: SDY) invests in the 50 highest dividend-yielding S&P Composite 1500 constituents. This index tracks equities that have consistently increased dividends every year for at least 25 years. Investing in these long-term dividend-paying stocks reduces the risk that the fund’s holdings will cut their dividends.
For Dividend Daredevils
More adventurous investors might consider the Claymore/Zacks Yield Hog ETF (AMEX: CVY), which aims to double the yield of other dividend-paying ETFs. The fund invests in high-yield securities such as preferred shares, master limited partnerships, closed-end funds, American Depository Receipts, and Real Estate Investment Trusts. It’s a riskier play, since the holdings don’t all have a long history of regular, stable dividends.
Paying the piper
Tax law changes in 2003 lowered the tax on most dividends to 15%, making dividend-paying stocks more appealing. This law is set to expire at the end of 2008, and if it does, dividend-paying stocks may become less desirable.
Courtesy of Motley Fool
Posted in Investor Education, Stock Studies | 2 Comments »
Wednesday, May 28th, 2008 |
It seems like there is a never ending stream of “get rich” books and can’t miss investing courses out there and to be honest, some of them might actually work.
I’m not sure about you, but I have always believed that in order to actually profit from a strategy, you have to feel comfortable with it. I know there are stock traders out there that make a lot of money moving in and out of stocks, but that was never really my style. I have learned a lot about stock charts and technical analysis from some of these traders and have applied some of their techniques to my own investing. But that’s just it, you have to develop a style that is right for you.
Developing Your Investing Style
I have always believed that no matter what your thoughts are about a particular investing strategy, it is never a bad idea to learn about it. Most publicized techniques combine several data points and have been successful at one time or another. I personally like to learn about various techniques and utilize certain pieces that I feel may help me to make better decisions when buying stocks.
I have combined information from techniques that focus on value investing, momentum investing, swing trading, yield chasing, and growth investing to assist me in purchasing stocks and ETF’s for my portfolio.
Use Investing Elements That Make Sense To You
While understanding all there is to know about an investing strategy from reading a book or two is usually out of the question for me, I can always find a nugget of information that makes complete sense and add it to my stock screening routine.
For instance, reading How To Make Money In Stocks by William O’Neil is about trend trading and momentum trading. However, I have used some of the techniques in that book to understand the relationship between price and volume. I have used this information to develop my own strategies on when to buy stocks that are on my watch list. I have found that O’Neil’s strategies work especially well in up-trending markets where traditional value investing leaves us with few stocks trading at a deep discount.
Combining Data Points For Increased Accuracy
In statistical theory, the more pieces of information (points of reference) that you have on a particular item, the more accurate your results should be. The same holds true with investing in stocks - unless you hold out for more and more points of reference and never pull the trigger on a buy.
The general idea is to combine several different points of reference when analyzing a stock in order to minimize your risk. Use those investment strategies that make sense to you and look for common results from different points of reference. For example: if the chart is showing significant volume buying (showing institutional investors buying large amounts of stock) and both the earnings per share and revenue are growing rapidly, there is a good chance that this stock is going to trend higher.
Your Personality Can Make You Money
If you are a laid back and patient person, you can make money investing.
If you are hyperactive and bordering on attention deficit disorder, you can make money investing.
The key to making any investment strategy work for you is to understand your personality. I personally do not have the motivation (or the patience) to follow stock tickers on a daily basis, let alone minute by minute, as some day traders do. And guess what - that’s okay! I still make money in the stock market and so can you.
If you dread the fact of holding stocks over long periods of time and seeing a stock in your portfolio over a week or even overnight scares you to death - that’s okay! You can still make money in the stock market.
If we can understand ourselves, we then have the ability to tailor an investing program that fits our differing lifestyles and personalities.
In Summary
- Understand if your personality and risk tolerance are more appropriate for long-term investing or shorter term trading.
- Use only investing strategies that make sense to you. (If you don’t really understand them, then you’re not going to make money)
- Develop many points of reference and pieces of data to ensure you feel comfortable with your investment decision
- Combine the strategies that you understand into your own system.
Once you have a profitable system that you feel comfortable with, continue to review strategies that may allow you to add another point of reference to your toolbox. However, I always abide by the rule “if it’s not broke, don’t fix it!”
I hope this helps you in developing your own investment strategy and I’d love to hear how you have developed your current investing process. Feel free to contact me or drop a comment below!
-Tyler
Posted in Investor Education | 5 Comments »
Saturday, May 10th, 2008 |
I recently had a conversation with a gentleman who really “gets” dividend investing and he provided me with a synopsis of what is going on on a macroscopic scale in the world today. He came up with a “fictitious” conversation that will hopefully make sense to you all. Maybe it will even assist you in determining that you should buy dividend stocks now?
A General Overview
The central banks around the world are dealing with a liquidity crisis by lowering interest rates or injecting money into the financial system.
The Fed has been the most aggressive in cutting rates and injecting dollars into the system, causing the U.S. dollar to fall.
To the U.S., this means that its exports become cheaper and imports become more expensive.
While the world is fighting a credit crunch, inflation is creeping higher. Over time, as the cost of goods and services increase, the value of the dollar is going to fall because people won’t be able to purchase as much with their dollars as they did previously.
The Conversation
(PS - I live in Canada,so the gas price is in liters or litres :))
“Wait a minute,” Bob said. “I recently read that both Canada’s and the U.S. CPI (consumer price index) is roughly two per cent.”
“You’re partially right,” I replied. “Core inflation is roughly two per cent, but it excludes certain items that are considered too volatile, including food and energy.”
“How can that be?” Bob asked. “Eve (Bob’s wife) told me eggs have jumped 62 per cent in price over the last two years and our food bill has increased more than four per cent over the last year.
“If memory serves me correctly, it cost 94 cents a litre to fill up my car last year.
“Now I am paying $1.18 per litre. If my math is correct, that’s roughly a 25 percent increase,” Bob said.
“Including food and energy, inflation in North America is running closer to four per cent,” I said.
“If oil and food commodities keep rising, then higher inflation and eventually rising interest rates will eventually follow. This is one reason why European countries are reluctant to cut their bank rates.”
A recent report from Bloomberg indicated that CPI in Ukraine was running at 19.4 per cent, in Vietnam it stood at 14.1 per cent, Russia was 12.6 per cent. Inflation in India is at 5.1 per cent and in China currently stands at 6.5 per cent.
These numbers are rising, not declining and there has been social unrest throughout the world because of rising food costs, even in some of the oil exporting nations.
“So what your are saying is that this sub-prime mess is temporarily forcing the central banks to reduce interest rates to help the economy get through this slowdown and credit crisis,” Bob said.
“But eventually, if food and oil costs remain high or continue to rise, interest rates will eventually follow suit.”
What this Means For Investors
(Hint: Buy Dividend Stocks)
As a result, the biggest dilemma savers face today is that at four per cent guaranteed investment rates on products, like GICs, they are only breaking even.
When you include income tax, these savers are likely losing money.
But an equity investor can invest in companies providing a four-per-cent dividend that also have growth potential at, or greater than, the rate of inflation.
So if inflation does rear its ugly head, ultra-conservative savers will be hurt, while with increasing dividends, equity investors will, at least, keep pace with inflation.
Posted in Investor Education | 3 Comments »
Friday, April 11th, 2008 |
What We Have Learned
It is very important when investing to not only evaluate a company against others in its sector or industry, but also against itself.
In previous articles, we have discussed the dividend payout ratio, free cash flow, Z-Score and Return on Invested Capital (ROIC). All of these metrics are used as a way to evaluate stocks against their peer group, but also against themselves at different points in time.
When we have narrowed a company down against its peers, it is then time to evaluate the stock against itself at different points in time. Doing this can help us to determine if a stock is selling at a reasonable price.
How To Use Average Dividend Yield
One of the greatest ways to evaluate a dividend stock against itself is to determine the average dividend yield that that stock has paid over the past number of years. If the stock has a higher than average yield, compared to its historical average, then it may indicate that it is a better time to purchase shares (all other factors being equal).
There is an excellent tutorial on calculating average dividend yield at DividendsMatter.com. I will highlight some of the main points here, but I highly suggest that you read the full tutorial.
First of all, I like to gather 10 years worth of data for the stock. This is easy to do because the stocks that I analyze have very long histories of paying dividends. The information we need is the high and the low stock price, and the dividend paid out for each of the last 10 years.
This data can be gathered from many sources, including the company website. However, I prefer to use Yahoo Finance because the dividend information can be filtered out from the stock price using this option.
This is all the historical information we need. Now, from this information, we can calculate the high yield and the low yield for each year. The high yield is calculated by taking the annual dividend and dividing by the low price. Similarly,the low yield is calculated by taking the annual dividend and dividing by the high price.
High Dividend Yield = Annual Dividend / Low Stock Price
Well Worth The Effort
The mathematics of the process is very elementary, but it does take some time to gather the information. This is certainly time well spent and I suggest that you practice on a couple of your favorite stocks.
You will find that buying high quality, dividend growth stocks at prices above their average dividend yield will give you a margin of safety and confidence to hold the stock through thick and thin.
Posted in Investor Education | 3 Comments »
Wednesday, April 9th, 2008 |
As investors, we can spend a lot of time managing various risks within our portfolio.
There is inflation risk, political risk, systematic and non-systematic risk the list goes on. However, the average investor may not pay a lot of attention to the effects of currency risk.
Currency Risk Example
If you are a U.S. investor and you have stocks in Canada, the return that you will realize is affected by both the change in the price of the stocks and the change of the Canadian dollar against the U.S. dollar. Suppose that you realized a return in the stocks of 15% but if the Canadian dollar depreciated 15% against the U.S. dollar, you would realize no gain.
The Kicker
In most cases, bearing more risk gives the investor and opportunity for a higher return. However, this is not the case with currency risk. Actually, several academic studies (without 100% certainty mind you) have determined that a portfolio with no hedge against currency is at no particular advantage to gain superior returns than the same portfolio for which currency risk is hedged.
What does this mean?
Essentially, this means that if you are carrying currency risk, meaning your portfolio is not hedged against currency fluctuations, you are carrying a needless risk.
As you can see, currency risk can have a dramatic effect on your portfolio’s “real return”. It is for that reason that you should not only pay attention to the stock markets, but also take a glimpse at the currency markets from time to time.
How Currency Risk Affects Your Retirement Plan
Yes, currency risk does have a place in retirement planning. For example, if you are a Canadian who is nearing retirement and you have a steady (and growing) stream of dividends coming in from Canadian companies you are set. Or are you? If you are like many retired Canadians, you will travel during your retirement to different countries. Currency risk may not affect the casual traveler too much during retirement if most of their expenses are in Canadian dollars.
On the other hand, many retired Canadians travel for extended periods of time, particuarly in the southern United States. Therefore, they bear a lot of expenses that are in United States Dollars. In this case it would be prudent to hold some investments in high quality, dividend growth stocks that pay their dividends in United States Currency.
If your retirement plan is one in which you expect to travel extensively and/or have many expenses in another currency, you might want to remember this little article. It just might save you some headaches in the future.
Here’s to retirement!
Posted in Investor Education | 3 Comments »
