Friday, October 17th, 2008
The market volatility of this week has continued to keep investors on the edge of their seats. This roller coaster ride leaves many repeating the same word heard in most news reports on the subject: Unprecedented.
Although this is the type of word that perpetuates the fear that has gripped the current market, to me it seemed more than fitting. That is until I took a look back in history and chatted with a few of my “investor” friends that have been around a lot longer than I have.
Is It The 1980’s Again?
The period I often hear cited is the early eighties. At the time, the prime lending rate was 20%. Around June of ‘82 markets had the worst one-year return on record at about -40%. Even the music was rough: Dire Straits was singing ‘Industrial Disease’ and lyrics to Bruce Springsteen’s hit said “…these jobs are going and they ain’t coming back”. It was a daily occurrence for investors to drop off the keys to the house they could no longer afford. Sound familiar (minus the lending rates)?
We are all familiar with that bear market ‘dip’ of the early eighties from referring back to the Andex Chart of market returns. But what’s missing from the Andex chart is what was so poignantly described as “…the sheer and utter fear we all felt at the time”… similar to how many investors have been feeling lately.
We must remind ourselves that time dulls the fear just as it smooths out the peaks and valleys of market returns on that well-known chart. For as bad as that time was, the investors who lived through it have commented, “I would give anything to go back and buy up some of those stocks people were running from, or a few of those houses that no one could give away at the time”.
Put Stocks In Perspective
The key message here is to help reinforce the importance of perspective. Since the early 1900s we have had many market crises and experienced the fear that accompanies them. And although the current culture of 24/7 news access may amplify those fears, we cannot say with certainty if the bottom is near or when the markets will turn the corner. We can only say that markets have proven their resilience through similar markets of the past and gone on to new heights.
That said, why should this time be any different than the “end of the world” scenarios of past market corrections?
Posted in Investment News | 4 Comments »
Thursday, August 21st, 2008
There’s really nothing like a poor economy and a tumbling stock market to send people’s financial plans into a tizzy! So, where can we look for guidance and assistance in these troubled financial times?
Some “experts” are now saying that this is the time to buckle down on spending with rising energy and food prices. Wow, I guess that “late breaking news” really caught us off guard - good thing there are financial experts out there to save us from this financial apocalypse.
Let’s see what the experts have to say:
The Canadian Government
Statistics Canada says gas and food prices are eating up a larger portion of our spending money, while CIBC reports household debt in Canada is rising faster than personal disposable income.
You don’t say? I guess nobody saw that one coming!
A “Smart” Canadian - The Usual Suspects
“It takes a rough patch in the economy like this for people to take a look and see where they can save money,” says Pat Foran, author of the Smart Canadian’s Guide to Building Wealth.
I’m pretty sure that this is what everyone should constantly be doing to build wealth. Always look for ways to cut spending and use that extra cash to increase your asset base.
- Foran recommends reviewing everything from your cable and cell phone bills to seeing where you can trim costs, going to the library instead of buying books, and renting movies instead of going to the theatre.
- Bringing your lunch to work a few times a week also saves money, as does cutting back on daily trips to the coffee shop for a java jolt.
- An economic slowdown is also a good excuse to cut expensive bad habits, such as smoking or overdrinking, Foran says.
- On big ticket items, he says consumers should consider used cars instead of new and putting off that vacation to Mexico when a trip closer to home might suffice.
For many families, Foran says budgets don’t work and instead recommends “forced savings,” which means setting aside a certain amount of money from each paycheque for investment.
Could Foran be any more vague? I guess we have to buy the book - good marketing strategy!
Go On A Money Diet
Patricia Lovett-Reid, author and senior vice-president at TD Waterhouse, recommends cutting back spending as if you were cutting back on calories for a diet.
Because we all know how easy it is to stick to a diet!
“There is some mindless spending going on,” she says.
“Look for ways to cut back so you don’t feel like you are on a budget.”
Hmmm…any ideas?
Another tip she has is to avoid shopping in bulk because the mass quantities that are purchased are sometimes not used and are discarded or wasted.
“If you look at what you throw out, you aren’t really further ahead … it might be better to purchase in smaller quantities.”
She also says that being an early adopter of technology is very expensive. I can concur with this as many folks purchase more computer than they need (you don’t need a $3000.00 computer to surf th enet and write e-mails) and don’t even know about half of the features of the new iPhone, for instance.
Review Your Debt
Many experts recommend refinancing your mortgage and consolidating high-interest debt through a line of credit where possible.
This makes sense if you have credit card or other high interest consumer debt.
“If you refinance and get a new mortgage you pay principle and interest on the entire amount from day one … . However, if the purpose of your refinance is to consolidate but not use all of the money at once, then set up a line of credit. You only pay interest on the amount you borrow at the time you use it,” says mortgage expert Peter Kinch.
However, he says be wary of how you used that line of credit.
“We want to make sure people don’t get into the habit of using their house as an ATM machine,” Kinch says.
Very thoughtful for a guy who just “sold” you a line of credit. Too bad this advice comes a little too late for some. For the sake of disclosure, I have a home equity line of credit that I use for investment opportunities.
What I Don’t Get
There are two major things that stick out to me in all of these expert articles and financial media mumbo jumbo.
Nobody suggests paying down debt. Everyone talks about consolidating debt and lowering interest rates, but nobody actually says (or writes) that you should pay that debt down. This is absolute craziness. In an economy like we are facing today, it should make absolute sense that people should be reducing their total debt. I recently outlined how reducing debt provides a guaranteed return on investment that is virtually unmatched.
What about the stock market? When the stock market is high all of the experts are telling us to buy stocks and that stocks are a great investment, but when the stock prices of those “great companies” are 20% lower, all of a sudden investing in the stock market is “risky” and not at all a good idea. This is absolutely counterintuitive to the basic investing tenet of buy low - sell high! In fact, one could argue that investing in the stock market now is less risky because prices are lower.
I am not claiming to be a financial expert, but the more I read the news media, the more disappointed I become. Basic financial advice changes from day to day and even the simple tenets of investing and finance are twisted or even discarded for the sake of selling a few magazines or newspapers.
At the risk of making it too simple, here are some ideas for building wealth:
- Live within your means
- Reduce personal debt
- Buy assets (Stocks, Bonds, Real Estate, Precious Metals)
Of course each of these points can be fleshed out and much more detail can be added to each point. However, I find that when the articles from the “experts” start getting in my head and causing doubt, I look back to these guiding principles for direction.
Do you ever get distracted by the media? If so, what are your strategies for dealing with the constant barrage of information?
Posted in Investment News | 4 Comments »
Friday, July 25th, 2008
I’m sure that many of you have experienced the torture of the dreaded yearly performance review at work in the past little while.
I happened to be fortunate enough to receive the full raise that I was eligible for this year. While I’m not quite as excited about this as I am about getting a raise without doing anything, a raise in income means increased contributions to my investments and the prospect of an early retirement.
Expect The Unexpected
Because I work in the financial industry, this year has been slightly tough on the company. This means that the annual bonuses that I have been used to in recent years will not be granted this year. Not only will the company not be issuing the familiar 10-12% bonuses, we are actually expecting nothing – 0%!
Of course, the lack of bonus pay-outs is traumatic for employees. However, people underestimate the effects of the 3% raise in salary.
The Glass Is Still Half Full
Even though it appears that I will not have my bonus money to top-up my retirement savings account, I will receive significant benefits from the small 3% raise that I did get.
1.Life Insurance – My company provides me with life insurance to the tune of 3X my gross salary. This 3% raise equates to a 9% increase in the life insurance available to my family if something should happen to me in the next year.
2.Company Pension – My company provides me with a managed pension plan for which they match 7% of my salary. This raise provides 6% more money being contributed to my pension plan for 2008.
3.Investment Account – I contribute 25% of my net salary to an account dedicated to my dividend growth investments. Obviously, this means an increase to that contribution.
It is interesting how we forget those benefits that don’t necessarily show up in our checking account when our paychecks are deposited. The power of compounding takes effect not only with our dividend stocks or in our high-interest savings account, but with our workplace benefits as well.
Understand and Use Your Company Benefits!
Of course it is our hope that we can retire early if we choose great dividend growth stocks, but we have to take advantage of all of the programs and benefits that are offered along the way. I certainly believe that investing in my company matched pension plan will speed up my retirement process.
So, the next time you hear complaints around your workplace about the lack of bonuses or a cheap 3% raise…just remind yourself of this article and make sure that you are fully utilizing all of the benefits available to you.
Posted in Investor Education | 6 Comments »
Friday, July 4th, 2008
Growing Dividend
As a spin-off of the successful Duke Energy, Spectra Energy Corp (NYSE:SE) has had a rather successful first 16 months in business and has recently declared an 8.7 percent increase in its quarterly cash dividend
on its common stock, from $0.23 to $0.25 per share. The dividend is payable September 15, 2008, to shareholders of record at the close of business August 15, 2008.
Spectra has what appears to be a very assertive, yet stable, long term growth plan that is focused on organic growth and project development. This includes a very lucrative joint venture with Conaco Phillips and already transports some 12% of the natural gas consumed in the United States.
With these facts in mind, let’s take a look at what the Chief Financial Officer (Soon to be CEO at the end of 2008) of Spectra Energy, Greg Ebel has to say to investors looking to purchase stock in the company:
I think the key reasons are, first and foremost, a home grown stable of expansion projects that give visibility on earnings growth to the better-than-the-pack earnings growth and opportunities they see. Also, solid dividend growth opportunity, sound financial management and overall a relatively safe harbor in what is a somewhat dodgy financial market situation and economic situation we see out there today.
A Closer Look At Spectra Energy
Spectra Energy is one of North America’s premier natural gas infrastructure companies serving three key links in the natural gas value chain: gathering and processing, transmission and storage, and distribution. With very solid transportation contracts into the foreseeable future, there is little concern for profitability and optimism for increasing shareholder value. However, any lagging demand for natural gas would certainly be a concern for the company moving forward.
Spectra Energy owns and operates critically important pipelines and related infrastructure connecting natural gas supply sources to premium markets. Based in Houston, Texas, the company operates in the United States and Canada approximately 18,000 miles of transmission pipeline, 265 billion cubic feet of storage, natural gas gathering and processing, natural gas liquids operations and local distribution assets.
Spectra Energy Corp also has a 50 percent ownership in DCP Midstream, the largest natural gas gatherer and processor in the United States.
Why Pipeline Stocks?
It has been said before, but pipeline stocks are like railroads for natural gas. Simply put, the demand for natural gas is up and correlates somewhat with oil prices, but the upside with pipelines is that they do not have the competition from other forms of transportation. In order to move and significant volume of natural gas a pipeline must be used.
Pipelines are traditionally managed very conservatively, as is Spectra Energy, and make their money through cost-of-service contracts and other required services. This means that cash flow is relatively stable and predictable when compared to the market as a whole. This can be referenced by viewing the Beta coefficients of pipeline stocks which show significantly less volatility than the broader markets.
I have stated before, and I will state again that pipelines are great recession proof stocks.
On top of preserving and likely growing capital, investors can collect a healthy (and growing) dividend yield.
Spectra’s current yield is 3.28%.
Spectra also boasts Return on Equity and Return on Investment numbers that are markedly abov ethe industry average at 17.1% and 5.76 % respectively.
For those of you looking to preserve capital during these rough market times and collect a solid dividend, I highly recommend pipeline stocks. Along, with Spectra Energy I suggest looking at Trans Canada Pipeline (TRP).
Full Disclosure: The Author does not own shares of Spectra Energy, but does own some Trans Canada Pipeline.
Posted in Dividend Hikes | 2 Comments »
Monday, June 9th, 2008
A recent article in The Globe and Mail has me slightly concerned about the financial well-being of our baby boomer generation. It appears that there has been a trend of late (from 2001-2006) according to census data that shows baby boomers assuming more debt.
Why This Concerns Me
At a time when many folks should be enjoying life and harvesting the fruits of their labor, they have assumed more debt. Why are taking on more debt?
It appears that many are completing renovations to their homes, and that is not all bad. If the repairs are needed to sustain the home for the rest of their days, like new windows, shingles, furnace etc. then so be it. However, taking out a second mortgage to add a sunroom or additional living space does not make sense for the majority of empty-nesters.
Even worse, some are taking out a second mortgage to buy depreciating assets like vehicles and may find themselves on the car loan treadmill for the rest of their lives if they are not careful.
Why This Is Smart
Taking out a second mortgage is smart if you are not planning on retiring until the mortgage is paid off because mortgages are the cheapest source of capital (next to student loans). There is no sense paying more interest that you have to, which is why I have a large line of credit on my home. The line of credit on my home is currently at 4.75% and is interest only. This works great for acting fast on “no-brainer” investing opportunities.
Another reason that this data might not represent a clear picture of a trend is that it is not indexed to life expectancy rates. You see, people of a certain age, even 10 years ago, had a much lower life expectancy that baby boomers do today. Not only that, their health and quality of life is much better than previous generations. What this means is that they may be working later in life and they expect to live a healthier and longer life being more active. All in all, today’s baby boomers may not be in as much trouble as this data may lead us to believe.
My Take
While I certainly don’t plan on having to use the equity in my home when I am in my 60’s (at least for anything other than investing), I suppose we never know what circumstances might present themselves in the future.
I am a relatively conservative individual by nature and I don’t really like to own “stuff” just for the sake of having something, so I can’t see myself wanting to increase my standard of living if I don’t have the additional income stream to provide it.
Have the baby boomers finally fallen victim to the consumer driven marketing ploys that have been so effective at convincing those of us in our twenties and thirties that we must keep up with the Jonses?
What do you think?
Posted in Investment News | 1 Comment »
Saturday, June 7th, 2008
Lately I have been reviewing my investment portfolio in light of the new addition to may family and have discovered a few minor things that needed tweaking.
I mentioned in an earlier post that my wife and I have purchased additional life insurance through my employer’s group plan. This plan offers a heckuva great deal on life insurance if you are a younger, non-smoking employee or spouse.
The Cost of Life Insurance
My wife’s additional life insurance of $200,000 costs us $4.10/month.
My additional life insurance of $200,000 costs us $7.90/month.
For those of you unfamiliar with Life Insurance, females are proven to be less of an insurance risk with their typically longer life spans and lower frequency of accidental death. Therefore, it is usually very inexpensive to purchase term life insurance for a female in her twenties.
I really couldn’t believe how cheap a good life insurance policy can be. If you’d like to check it out for yourself you can click here to get a free life insurance quote.
Employer Sponsored Life Insurance Benefits
Like many employers, both my wife’s employer and mine offer life insurance as part of a paid employee benefit package. Our employer paid plans are quite different and it is fairly typical that not all plans are created equal.
My wife’s employer sponsored life insurance plan offers her a flat benefit (as of her union’s last contract) of $177,000. This equates to approximately 3X her annual gross salary at this time. However, her life insurance benefit is not indexed to inflation (except when a new bargaining agreement is reached) and is not derived as a function of her salary. As such, when her salary increases as it does annually, her life insurance benefit remains at $177,000.
My employer sponsored life insurance plan, on the other hand, is derived as a function of my salary. It is in fact 3X my gross earnings (not including commissions and bonuses). My employer sponsored life insurance is now $186,000.
How Much Life Insurance Should I Have?
There are many, many schools of thought on life insurance and I am certainly not an expert in the field. However, I do feel that my wife and I are adequately insured.
Because our only debt is our mortgage at about $175,000, my $386,000 in coverage will more than cover that debt allowing my wife to focus her income solely on the day to day living expenses of the household which would obviously decrease if I am not around to eat 90% of the groceries, take long hot showers, and leave the TV on all night!
This would also leave my wife with $211,000 tax free dollars to invest for my daughter’s future and take care of any unexpected expenditures that may arise in the future.
If the life insurance proceeds invested in a basket of dividend growing common stocks, this lump sum should provide her with approximately $8,000/year in additional income that is likely to grow at a higher rate than inflation over time.
Do I Really Have Enough?
As mentioned earlier, there are many different schools of thought on the calculations that should be used to determine the “proper” amount of life insurance. Some people would say that I need at least 10X my income; I think that is over-insuring.
I don’t want my wife and daughter to struggle financially, but at the same time I don’t want to spend a lot of money banking on my own demise that I could invest in other assets with current cash flow- like stocks (which would be left to my wife as well) !
There has to be a happy medium and I believe that I am very close to that with my current insurance situation.
Your Take on Life Insurance
Am I missing anything?
How do you calculate your life insurance needs? There are several calculators out there, most online insurance companies have them on their websites. Click here and go to InsureMe.com to use their calculator for your life insurance needs.
I’d love to hear your thoughts in the comments.
Posted in Investment News | 5 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, 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 »
