IShares that Pay Monthly Distributions
www.investingforincome.com
As an income investor I prefer investments that pay monthly distributions. For those that like exchange traded funds that trade on the TSX I suggest iShares.
Cash distributions for the eleven iShares funds listed on the Toronto Stock Exchange which pay on a monthly basis. Unitholders of record on the second to last business day of the month will receive cash distributions payable on last business day of the month. Details of the "per unit" distribution amounts are as follows:
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Cash
Fund Distribution
Fund Name Ticker Per Unit ($)
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iShares DEX Universe Bond Index Fund XBB 0.09828
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iShares DEX All Corporate Bond Index Fund XCB 0.08879
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iShares Dow Jones Canada Select Dividend Index Fund XDV 0.09638
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iShares S&P/TSX Capped Financials Index Fund XFN 0.07515
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iShares DEX All Government Bond Index Fund XGB 0.06154
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iShares U.S. High Yield Bond Index Fund (CAD-Hedged) XHY 0.13200
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iShares U.S. IG Corporate Bond Index Fund XIG 0.07016
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iShares DEX Long Term Bond Index Fund XLB 0.07347
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iShares S&P/TSX Capped REIT Index Fund XRE 0.05900
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iShares DEX Short Term Bond Index Fund XSB 0.08410
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iShares S&P/TSX Income Trust Index Fund XTR 0.06625
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Showing posts with label Dividend Paying Stocks. Show all posts
Showing posts with label Dividend Paying Stocks. Show all posts
Saturday, July 31, 2010
Saturday, October 3, 2009
Cash Flow Generating Securities
One of my personal favorites is calculating the Net Present Value/Breakeven point for a stock that pays a stable dividend stream. This metric actually has relevance because the dividend is a cash payment that comes directly to the investor as a consequence of owning the shares. In the short-term, dividends are a known quantity. Obviously the metric only applies in the case where a dividend is paid. In the case where an investor is focusing on dividend investing for income purposes or simply for generating the maximum cash from their investing capital, these are important considerations.
An example is on order. Let’s say that an investor purchases 100 shares of a stock trading at $10/share that pays a $1/share annual dividend. The dividend yield on his investment is 10%. The P/Div ratio is 10. This means that the investor paid $10 for every dollar in dividends. Now the nice thing about dividends is that they are cash streams and we can use some common time value of money calculations to make determinations as to whether or not to invest. Let’s use the 100 shares as an example and do a net present value calculation with the following assumptions:
•Our time horizon is 25 years
•Dividends over the 25 years will average the current $1/year
•The Cost of Capital (COC or inflation) will be 6%/year for the duration of the exercise
Most popular spreadsheet programs contain the NPV function where you can set your COC and the value of the individual cash flows if you desire to perform this analysis for yourself.
The Net Present Value of this situation is $262.58, giving a positive indication or a ‘buy’ signal. This alone should not be used to make a buy determination, but should be used as a tool to validate or invalidate individual investment opportunities that arose from our analyses in parts I and II.
The Time to Cover or Breakeven point of this hypothetical investment is Year 15. What this means is that after 15 years, the dividends (after accounting for the deterioration in value due to inflation) will cover the cost of the initial investment. Whatever the investment itself is worth at that time is added value. So even if our stock is still at $10/share, it is paid for, we’re in the clear, making dividends for another 10 years before we need the funds, and can sell the stock at any time thereafter for a pure profit. And since inflation has already been figured in, we’re talking about real gains. We can easily modify the analysis to accommodate hypothetical taxation circumstances as well. Another important point may also be made from the above analysis. Considering that we’re getting $1/year in dividends, in nominal terms, the Time to Cover/Breakeven would be 10 years. Inflation at a rate of 6% per annum increased the breakeven point by 50% or 5 years. While 6% doesn’t seem like that much, this example illustrates exactly how much of a burden on wealth it represents. If anyone really wants to see why clipping bond coupons isn’t such a hot idea, run this analysis on the 30-year Treasury Bond and it will become immediately obvious.
Moving forward, when looking at dividend paying investments, we are looking for lower P/Div ratios (higher yields), and consequently lower Time to Cover/Breakeven points. While looking at the yield gives some good insight, using the NPV and breakeven analysis allows us to quantify the deleterious effects of inflation over time. The yield alone doesn’t give us that ability since it is a snapshot in time and changes as the price of the underlying security changes. It is important to note that in this study, we are NOT valuing the firm. We are valuing the cash streams that the firm pays to shareholders and discounting them to the present.
The risks to the above analysis are obviously many. 25 years is a long period of time, and things can change dramatically. Firms can go out of business or eliminate dividend payments thereby rendering the above effort worthless. Also, the major types of risk such as market, currency, political, and systemic cannot be accounted for over such a long period of time. This is one of the reasons why it is never a good idea to buy today and walk away. Successful investing is a journey, not a destination. As soon as you think you’ve got it all figured out, that is when you’ll get bitten. Vigilance is the name of the game. Another obvious takeaway here is that we’re dealing with long term investing, not trading. Such studies are a moot point for the short-term trader since their focus is on a different goal. Realize I am not trying to be impertinent towards traders, but simply pointing out the difference between their objectives and those of long-term investing.
An example is on order. Let’s say that an investor purchases 100 shares of a stock trading at $10/share that pays a $1/share annual dividend. The dividend yield on his investment is 10%. The P/Div ratio is 10. This means that the investor paid $10 for every dollar in dividends. Now the nice thing about dividends is that they are cash streams and we can use some common time value of money calculations to make determinations as to whether or not to invest. Let’s use the 100 shares as an example and do a net present value calculation with the following assumptions:
•Our time horizon is 25 years
•Dividends over the 25 years will average the current $1/year
•The Cost of Capital (COC or inflation) will be 6%/year for the duration of the exercise
Most popular spreadsheet programs contain the NPV function where you can set your COC and the value of the individual cash flows if you desire to perform this analysis for yourself.
The Net Present Value of this situation is $262.58, giving a positive indication or a ‘buy’ signal. This alone should not be used to make a buy determination, but should be used as a tool to validate or invalidate individual investment opportunities that arose from our analyses in parts I and II.
The Time to Cover or Breakeven point of this hypothetical investment is Year 15. What this means is that after 15 years, the dividends (after accounting for the deterioration in value due to inflation) will cover the cost of the initial investment. Whatever the investment itself is worth at that time is added value. So even if our stock is still at $10/share, it is paid for, we’re in the clear, making dividends for another 10 years before we need the funds, and can sell the stock at any time thereafter for a pure profit. And since inflation has already been figured in, we’re talking about real gains. We can easily modify the analysis to accommodate hypothetical taxation circumstances as well. Another important point may also be made from the above analysis. Considering that we’re getting $1/year in dividends, in nominal terms, the Time to Cover/Breakeven would be 10 years. Inflation at a rate of 6% per annum increased the breakeven point by 50% or 5 years. While 6% doesn’t seem like that much, this example illustrates exactly how much of a burden on wealth it represents. If anyone really wants to see why clipping bond coupons isn’t such a hot idea, run this analysis on the 30-year Treasury Bond and it will become immediately obvious.
Moving forward, when looking at dividend paying investments, we are looking for lower P/Div ratios (higher yields), and consequently lower Time to Cover/Breakeven points. While looking at the yield gives some good insight, using the NPV and breakeven analysis allows us to quantify the deleterious effects of inflation over time. The yield alone doesn’t give us that ability since it is a snapshot in time and changes as the price of the underlying security changes. It is important to note that in this study, we are NOT valuing the firm. We are valuing the cash streams that the firm pays to shareholders and discounting them to the present.
The risks to the above analysis are obviously many. 25 years is a long period of time, and things can change dramatically. Firms can go out of business or eliminate dividend payments thereby rendering the above effort worthless. Also, the major types of risk such as market, currency, political, and systemic cannot be accounted for over such a long period of time. This is one of the reasons why it is never a good idea to buy today and walk away. Successful investing is a journey, not a destination. As soon as you think you’ve got it all figured out, that is when you’ll get bitten. Vigilance is the name of the game. Another obvious takeaway here is that we’re dealing with long term investing, not trading. Such studies are a moot point for the short-term trader since their focus is on a different goal. Realize I am not trying to be impertinent towards traders, but simply pointing out the difference between their objectives and those of long-term investing.
Monday, February 16, 2009
Investing and the Use of Leverage
Investing and the Use of Leverage
Many investors see the current bear market and economic slowdown as a reason to sell stocks. We believe the opposite action should be taken and that investors may think about using leverage to increase their potential net worth. Here’s why:
The current situation for real estate, bonds and equities
In Canada, the real estate market has been buoyant these past several years and has begun to slow as prices have levelled off. People who wanted to purchase a home have done so and they are probably content to stay in that residence for the next 10-15 years. Therefore, the real estate market is not as appealing an investment as it once was. We think that future returns should continue to be decent but are unlikely to mirror those of the past decade.
We believe that the bond market, perceived to be a safe haven from a collapsing U.S. economy, is now overbought. That’s because real returns (after tax and inflation) are now negative.
Currently, the 10-year Government of Canada bond yield is 3.4%. After 50% tax (interest income) and inflation (2.25%), the real return is –0.55%. This means that investor spending power against tax and inflation is falling, not growing.
As a result, we believe there’s more risk inherent in the bond market and that risk could increase if the U.S. Federal Reserve Board quickly raises rates once the financial sector stabilizes – an increase in interest rates causes bond prices to fall.
Equities, meanwhile, have been in a bear market (down 20% or more from the market peak last October) as the economy has entered a contraction phase of slower or even negative growth. But this economic phase should not last forever. We think there’s a tremendous opportunity for growth in the equity market.
The opportunity in equities
While stock market corrections are unsettling, investors must understand that four things remain static, even in a bear market:
1) Stock prices will fall in a bear market but the capital is not lost unless it is sold. It’s more important for investors to remember that they are making an investment in a business with an expectation of a payback on that capital over time, usually through a combination of dividend payments and price appreciation.
2) If the financial health of the company is solid, dividends should continue to be paid, giving investors income to buy more shares at cheaper prices, waiting for the day when the stock market recovers.
3) As dividends rise, stock prices ultimately follow.
Consider a stock that trades at $20, pays a $1 dividend and yields 5% ($1 divided by $20). If the dividend subsequently rises $0.20 a year for five years to $2:
At $20, the yield will be 10%. Given such a high yield, investors would be attracted to buy that asset. For the stock to return to its previous 5% yield, the share price would have to rise to $40, eventually earning a positive capital return for the investor in addition to their growing income stream.
4) A “slingshot effect” usually occurs and the market rebounds before investors recognize it. Just before the U.S. invaded Iraq, the stock market reached its last low on March 11, 2003. Nobody wanted to own equities then because the fear of war tends to wreak havoc on economies, causing markets to tumble.
It wasn’t until 2005 that many investors felt comfortable enough to buy equities again. Unfortunately, this was a huge missed opportunity. The “slingshot effect” in this case was a 45% stock market decline from 2000 to 2002 followed by a 50% rally from 2003 to 2005.
Those investors who stayed in equities and used the market decline as an opportunity to buy more stocks, earned better-than-average returns when the market recovered.
We believe that opportunity has re-surfaced in the stock market.
1) Some dividend yields are as high now as they have been in 35 years.
2) If there is another 20% drop in the market, price-earnings ratios would be at their lowest since 1975, a period that signalled the beginning of the greatest bull market of the 1980s and 1990s.
3) Globalization has given corporations a chance to sell into greater and more diverse markets, especially in emerging markets where per capita incomes have risen much faster than in the more mature G7 countries.
There are generally three stages in a bear market:
• The first - when just a few prudent investors recognize that, despite the prevailing bullishness, things won’t always be rosy,
• The second - when most investors recognize things are deteriorating, and
• The third - when everyone is convinced things can only get worse.
Certainly we’re well into the second of these three stages. There’s been lots of bad news and many write-offs. More and more people recognize the dangers inherent in things like innovation, leverage, derivatives, counterparty risk and mark-to-market accounting. And increasingly the problems seem unsolvable.
One of these days, though, we’ll reach the third stage, and the herd will give up on a market turnaround. And unless the financial world really does end, we’re likely to encounter the investment opportunities of a lifetime.
What is leverage?
Leverage is the action of taking the value of an asset or the steady income stream of a salary and borrowing against it. For example, individuals can take out an investment loan based on a percentage of the equity in their house - the difference between the appraised value of the house and any mortgage outstanding.
Another way is to borrow against your annual income. If you have consistent earnings, the bank will lend you a percentage of your annual income based on your ability to pay, net of all other expenses.
The purpose of leverage is to have more capital available to earn a greater return over time than if you just had a small amount of cash savings to invest.
It’s even more attractive because the government allows you to deduct a portion of the interest paid on your income tax return.
For example, if you own a house worth $600,000 and the mortgage has just been paid off, the bank may lend you up to 80% of the appraised value of the house in the form of an investment loan, or $480,000.
With the loan, you now have over $1 million of total assets that can grow and compound over time.
Given that interest rates continue to trend lower, the low cost of capital is making it attractive to use leverage through an investment loan.
For Canadian investors, the Bank of Canada is expected to keep pace with the Fed and reduce interest rates. This should lower the prime rate offered by the banks.
For example, if you take out a loan at 6%, the after-tax cost of capital would be roughly 3%. If that capital is invested in a stock that yields greater than 3% after-tax, the interest can be covered by the dividend income and the residual amount can grow through time and compounding to an amount greater than the loan.
What rules should be followed when using leverage?
While leverage helps capital grow over time, there is a downside. That occurs if the investment falls during the period of the loan. If the investment went to zero, there would be no capital growth but the debt would still have to be serviced.
That’s why it’s important to use some disciplined rules if you decide to use leverage:
1) Buy only dividend-paying stocks.
These companies should be more mature (large-cap, blue chip names) and have a proven track record of annually raising dividends.
Another benefit of dividend-paying stocks is that the yield should help set a floor as to how low the stock price may go, relative to current bond yields.
Non-dividend-paying stocks have no guarantees of growth. Unlike dividend payers, their share prices will be determined by their earnings. If the earnings disappear, the share prices will plummet.
2) The holding period should be 10-15 years.
Using leverage isn’t a get-rich-quick scheme. When buying stocks (with or without leverage), it’s important to let the companies grow through economic cycles.
This becomes clear if you leveraged at the worst possible time in the market, such as when the technology bubble burst in 2000. For anyone leveraging their portfolios in 2000-2001, a significant amount of time was needed for the investments to increase in value.
3) Borrow only what you can afford to pay monthly.
Do not extend yourself by borrowing too much. Decide first how much you can afford monthly to pay on the loan. The bank can then determine how much they will lend you.
4) If you currently have a mortgage, don’t leverage further.
Your mortgage is the highest after-tax cost you will face in your lifetime. It is more important to pay off this debt as soon as possible. Once the mortgage is paid, you can then decide if you wish to leverage the equity in the house in the form of an investment loan. A simple method is to borrow an amount that makes the monthly payments similar to your previous mortgage payments.
5) Retirees should not leverage.
During retirement, it is essential to be debt-free. Using leverage would be a dangerous strategy because there is no guaranteed income stream like a salary and bad investments could wipe out your retirement nest egg or worse, force you back to work.
6) The new Tax Free Savings Accounts – TFSAs may be an attractive use of leverage.
These accounts were introduced in the recent federal budget and should begin in 2009. The guidelines are that individuals may put $5,000 annually into this tax shelter. Because there is no tax liability and funds may be withdrawn without penalty, the after-tax cost of using leverage would be minimized.
For investors who can afford to leverage, who have the time-horizon to use it and who understand the inherent risks behind the strategy, we believe this may be an ideal time to do so.
Many investors see the current bear market and economic slowdown as a reason to sell stocks. We believe the opposite action should be taken and that investors may think about using leverage to increase their potential net worth. Here’s why:
The current situation for real estate, bonds and equities
In Canada, the real estate market has been buoyant these past several years and has begun to slow as prices have levelled off. People who wanted to purchase a home have done so and they are probably content to stay in that residence for the next 10-15 years. Therefore, the real estate market is not as appealing an investment as it once was. We think that future returns should continue to be decent but are unlikely to mirror those of the past decade.
We believe that the bond market, perceived to be a safe haven from a collapsing U.S. economy, is now overbought. That’s because real returns (after tax and inflation) are now negative.
Currently, the 10-year Government of Canada bond yield is 3.4%. After 50% tax (interest income) and inflation (2.25%), the real return is –0.55%. This means that investor spending power against tax and inflation is falling, not growing.
As a result, we believe there’s more risk inherent in the bond market and that risk could increase if the U.S. Federal Reserve Board quickly raises rates once the financial sector stabilizes – an increase in interest rates causes bond prices to fall.
Equities, meanwhile, have been in a bear market (down 20% or more from the market peak last October) as the economy has entered a contraction phase of slower or even negative growth. But this economic phase should not last forever. We think there’s a tremendous opportunity for growth in the equity market.
The opportunity in equities
While stock market corrections are unsettling, investors must understand that four things remain static, even in a bear market:
1) Stock prices will fall in a bear market but the capital is not lost unless it is sold. It’s more important for investors to remember that they are making an investment in a business with an expectation of a payback on that capital over time, usually through a combination of dividend payments and price appreciation.
2) If the financial health of the company is solid, dividends should continue to be paid, giving investors income to buy more shares at cheaper prices, waiting for the day when the stock market recovers.
3) As dividends rise, stock prices ultimately follow.
Consider a stock that trades at $20, pays a $1 dividend and yields 5% ($1 divided by $20). If the dividend subsequently rises $0.20 a year for five years to $2:
At $20, the yield will be 10%. Given such a high yield, investors would be attracted to buy that asset. For the stock to return to its previous 5% yield, the share price would have to rise to $40, eventually earning a positive capital return for the investor in addition to their growing income stream.
4) A “slingshot effect” usually occurs and the market rebounds before investors recognize it. Just before the U.S. invaded Iraq, the stock market reached its last low on March 11, 2003. Nobody wanted to own equities then because the fear of war tends to wreak havoc on economies, causing markets to tumble.
It wasn’t until 2005 that many investors felt comfortable enough to buy equities again. Unfortunately, this was a huge missed opportunity. The “slingshot effect” in this case was a 45% stock market decline from 2000 to 2002 followed by a 50% rally from 2003 to 2005.
Those investors who stayed in equities and used the market decline as an opportunity to buy more stocks, earned better-than-average returns when the market recovered.
We believe that opportunity has re-surfaced in the stock market.
1) Some dividend yields are as high now as they have been in 35 years.
2) If there is another 20% drop in the market, price-earnings ratios would be at their lowest since 1975, a period that signalled the beginning of the greatest bull market of the 1980s and 1990s.
3) Globalization has given corporations a chance to sell into greater and more diverse markets, especially in emerging markets where per capita incomes have risen much faster than in the more mature G7 countries.
There are generally three stages in a bear market:
• The first - when just a few prudent investors recognize that, despite the prevailing bullishness, things won’t always be rosy,
• The second - when most investors recognize things are deteriorating, and
• The third - when everyone is convinced things can only get worse.
Certainly we’re well into the second of these three stages. There’s been lots of bad news and many write-offs. More and more people recognize the dangers inherent in things like innovation, leverage, derivatives, counterparty risk and mark-to-market accounting. And increasingly the problems seem unsolvable.
One of these days, though, we’ll reach the third stage, and the herd will give up on a market turnaround. And unless the financial world really does end, we’re likely to encounter the investment opportunities of a lifetime.
What is leverage?
Leverage is the action of taking the value of an asset or the steady income stream of a salary and borrowing against it. For example, individuals can take out an investment loan based on a percentage of the equity in their house - the difference between the appraised value of the house and any mortgage outstanding.
Another way is to borrow against your annual income. If you have consistent earnings, the bank will lend you a percentage of your annual income based on your ability to pay, net of all other expenses.
The purpose of leverage is to have more capital available to earn a greater return over time than if you just had a small amount of cash savings to invest.
It’s even more attractive because the government allows you to deduct a portion of the interest paid on your income tax return.
For example, if you own a house worth $600,000 and the mortgage has just been paid off, the bank may lend you up to 80% of the appraised value of the house in the form of an investment loan, or $480,000.
With the loan, you now have over $1 million of total assets that can grow and compound over time.
Given that interest rates continue to trend lower, the low cost of capital is making it attractive to use leverage through an investment loan.
For Canadian investors, the Bank of Canada is expected to keep pace with the Fed and reduce interest rates. This should lower the prime rate offered by the banks.
For example, if you take out a loan at 6%, the after-tax cost of capital would be roughly 3%. If that capital is invested in a stock that yields greater than 3% after-tax, the interest can be covered by the dividend income and the residual amount can grow through time and compounding to an amount greater than the loan.
What rules should be followed when using leverage?
While leverage helps capital grow over time, there is a downside. That occurs if the investment falls during the period of the loan. If the investment went to zero, there would be no capital growth but the debt would still have to be serviced.
That’s why it’s important to use some disciplined rules if you decide to use leverage:
1) Buy only dividend-paying stocks.
These companies should be more mature (large-cap, blue chip names) and have a proven track record of annually raising dividends.
Another benefit of dividend-paying stocks is that the yield should help set a floor as to how low the stock price may go, relative to current bond yields.
Non-dividend-paying stocks have no guarantees of growth. Unlike dividend payers, their share prices will be determined by their earnings. If the earnings disappear, the share prices will plummet.
2) The holding period should be 10-15 years.
Using leverage isn’t a get-rich-quick scheme. When buying stocks (with or without leverage), it’s important to let the companies grow through economic cycles.
This becomes clear if you leveraged at the worst possible time in the market, such as when the technology bubble burst in 2000. For anyone leveraging their portfolios in 2000-2001, a significant amount of time was needed for the investments to increase in value.
3) Borrow only what you can afford to pay monthly.
Do not extend yourself by borrowing too much. Decide first how much you can afford monthly to pay on the loan. The bank can then determine how much they will lend you.
4) If you currently have a mortgage, don’t leverage further.
Your mortgage is the highest after-tax cost you will face in your lifetime. It is more important to pay off this debt as soon as possible. Once the mortgage is paid, you can then decide if you wish to leverage the equity in the house in the form of an investment loan. A simple method is to borrow an amount that makes the monthly payments similar to your previous mortgage payments.
5) Retirees should not leverage.
During retirement, it is essential to be debt-free. Using leverage would be a dangerous strategy because there is no guaranteed income stream like a salary and bad investments could wipe out your retirement nest egg or worse, force you back to work.
6) The new Tax Free Savings Accounts – TFSAs may be an attractive use of leverage.
These accounts were introduced in the recent federal budget and should begin in 2009. The guidelines are that individuals may put $5,000 annually into this tax shelter. Because there is no tax liability and funds may be withdrawn without penalty, the after-tax cost of using leverage would be minimized.
For investors who can afford to leverage, who have the time-horizon to use it and who understand the inherent risks behind the strategy, we believe this may be an ideal time to do so.
An Investor Receiving Dividends Can Choose What to do With the Money
Dividends - Asymmetric Information
January was a poor month for markets across the globe with most major indexes falling between 5 and 7 percent. The period from September to January has been one of the most volatile on record and the gloomy economic news continues unabated. However, during this period of gloom and turbulence no less than 15 of our holdings increased their dividends. Clearly some corporations are capable of coping with the current economic environment, and are optimistic about their long-term prospects. Dividend increases should not be taken lightly and are a powerful signal of management's view of the future.
Unless management is confident of a business's long-term prospects they would not commit to paying out cash. Based on the current news one could argue that conserving cash might be the way to go, but dividend increases speak to long-term prospects. This is a case of asymmetric information - management might know more about the business outlook than the market or investors. To quantify the impact of dividends on long-term returns consider that a full 2/3rds of long-term equity returns have come from dividends and dividend reinvestment. Look at this decade to date. Dividends paid to investors have added a full 10% to market returns since January 1, 2000 compared to simple price appreciation. Dividends may seem small, but over long periods they add up to a significant amount.
Dividends may seem quaint in this day and age. Any finance textbook demonstrates that an investor should be indifferent between receiving dividends and having a corporation buy back its own stock. Here is how this equivalency is supposed to work.
Companies buy back stock thereby reducing the number of shares outstanding. As a direct result, earnings per share increase, and all else equal (meaning the p/e ratio remains the same), the price of the stock goes up and presto, there is your dividend. If an investor actually wants cash, then they just sell a portion of their holdings.
But if the last few months have shown us anything it is that what is supposed to work in theory does not always work in practice. We have a couple of issues with this view of returning money to shareholders through stock buybacks. First, is one of control.
An investor receiving dividends can choose what to do with the money; save it, reinvest in other companies or buy more of the corporations stock. But make no mistake about it- the control is in the hands of the investor. In contrast share buybacks are controlled by the corporation. They are not scheduled to occur on a quarterly basis and can be terminated at any time.
In fact, most announced buybacks are never completed. Contrast the ease with which buybacks can be announced, delayed or terminated with cash dividends. To suspend a cash dividend is the last thing management will consider and can sometimes indicate a serious problem at the corporation.
Second, dividends impose a capital discipline on corporations. To maintain a dividend commitment a corporation must remain focused on cash generation. Moreover, it curtails the potential for cash to be put in marginal or risky ventures.
Dividends represent a commitment to long-term shareholders. Finally, dividends encourage and reward long-term ownership. The concept of owning a company is all but lost on many investors. Indeed as the average mutual fund portfolio turnover reaches 120% per year (average holding time of 10 months) portfolio managers are just speculating on the price rather than buying solid businesses as a long-term investment. It is not surprising that turnover is one of the best predictors of performance - the higher the turnover, the lower the performance.
Dividends are an important driver of investment performance and increasing dividends are a powerful signal about future prospects. Through your Toron portfolio you are an investor in businesses for the long term and not a speculator about where the next quarter's price will be. This discipline will help grow your portfolio over the long haul.
Arthur Heinmaa, CFA Managing Partner
January was a poor month for markets across the globe with most major indexes falling between 5 and 7 percent. The period from September to January has been one of the most volatile on record and the gloomy economic news continues unabated. However, during this period of gloom and turbulence no less than 15 of our holdings increased their dividends. Clearly some corporations are capable of coping with the current economic environment, and are optimistic about their long-term prospects. Dividend increases should not be taken lightly and are a powerful signal of management's view of the future.
Unless management is confident of a business's long-term prospects they would not commit to paying out cash. Based on the current news one could argue that conserving cash might be the way to go, but dividend increases speak to long-term prospects. This is a case of asymmetric information - management might know more about the business outlook than the market or investors. To quantify the impact of dividends on long-term returns consider that a full 2/3rds of long-term equity returns have come from dividends and dividend reinvestment. Look at this decade to date. Dividends paid to investors have added a full 10% to market returns since January 1, 2000 compared to simple price appreciation. Dividends may seem small, but over long periods they add up to a significant amount.
Dividends may seem quaint in this day and age. Any finance textbook demonstrates that an investor should be indifferent between receiving dividends and having a corporation buy back its own stock. Here is how this equivalency is supposed to work.
Companies buy back stock thereby reducing the number of shares outstanding. As a direct result, earnings per share increase, and all else equal (meaning the p/e ratio remains the same), the price of the stock goes up and presto, there is your dividend. If an investor actually wants cash, then they just sell a portion of their holdings.
But if the last few months have shown us anything it is that what is supposed to work in theory does not always work in practice. We have a couple of issues with this view of returning money to shareholders through stock buybacks. First, is one of control.
An investor receiving dividends can choose what to do with the money; save it, reinvest in other companies or buy more of the corporations stock. But make no mistake about it- the control is in the hands of the investor. In contrast share buybacks are controlled by the corporation. They are not scheduled to occur on a quarterly basis and can be terminated at any time.
In fact, most announced buybacks are never completed. Contrast the ease with which buybacks can be announced, delayed or terminated with cash dividends. To suspend a cash dividend is the last thing management will consider and can sometimes indicate a serious problem at the corporation.
Second, dividends impose a capital discipline on corporations. To maintain a dividend commitment a corporation must remain focused on cash generation. Moreover, it curtails the potential for cash to be put in marginal or risky ventures.
Dividends represent a commitment to long-term shareholders. Finally, dividends encourage and reward long-term ownership. The concept of owning a company is all but lost on many investors. Indeed as the average mutual fund portfolio turnover reaches 120% per year (average holding time of 10 months) portfolio managers are just speculating on the price rather than buying solid businesses as a long-term investment. It is not surprising that turnover is one of the best predictors of performance - the higher the turnover, the lower the performance.
Dividends are an important driver of investment performance and increasing dividends are a powerful signal about future prospects. Through your Toron portfolio you are an investor in businesses for the long term and not a speculator about where the next quarter's price will be. This discipline will help grow your portfolio over the long haul.
Arthur Heinmaa, CFA Managing Partner
Sunday, July 13, 2008
Oil & Gas Trusts are a Good Defense Against Naked Short Selling
I just listened to Jim Puplava's interview with Bud Burrell on naked short selling. It is a scary interview and quite frankly is quite worrisome. There are companies with more shares on brokers books then shares issued by the companies. This is basicly fraud.
My portfolio is mostly oil and gas trusts which pay healthy monthly distributions. A naked shorter would avoid these stocks because the stockholders would expect a monthly cheque which the naked shorters would have to cover.
I hope I am right.
My portfolio is mostly oil and gas trusts which pay healthy monthly distributions. A naked shorter would avoid these stocks because the stockholders would expect a monthly cheque which the naked shorters would have to cover.
I hope I am right.
Monday, March 10, 2008
Neglecting Dividend-Paying Companies Hurts Investor Returns
Many people who began investing during the tech craze of the 1990s were taught to ignore dividends. The logic was that company managers who couldn’t adequately reinvest in their own business for growth were probably a bad risk for any investment dollars.
Warren Buffett famously has never paid a dividend at Berkshire Hathaway because he wants to reinvest every dollar of free cash flow himself.
But neglecting dividend-paying companies hurts investor returns.
At the turn of the century, and with the change of tax treatment on dividends, money began pouring back into firms that paid dividends. (A prominent feature of the much-maligned Bush tax cuts included tax-code changes that dropped the rate for dividends from high ordinary income levels – 35% in the top bracket – to a maximum of 15%.)
Bernstein Global Wealth Management prepared the amazing chart below, which demonstrates the power of dividends over the long term.
The Bernstein study concluded, “It should therefore come as no surprise that dividends have been a major component of growth in an investor’s return over time.
Remember, calculations of a stock’s performance in a portfolio are based on total return, i.e., the annual price appreciation (or loss) plus dividends.”
One dollar in 1926 (when market data first became reliable) invested in large-cap U.S. stocks would have grown to nearly $2,300 by 2004. But the Bernstein report shows that if you remove dividends – and the magical effect of compounding those dividends – then that same dollar would be worth a meager $87.66.
A similar study by Standard & Poor’s showed the same results over a different time horizon. The study of total returns (price appreciation plus dividend income) shows that payers of dividends outdistanced non-payers by 1.9% annually from 1980 through 2003.
Warren Buffett famously has never paid a dividend at Berkshire Hathaway because he wants to reinvest every dollar of free cash flow himself.
But neglecting dividend-paying companies hurts investor returns.
At the turn of the century, and with the change of tax treatment on dividends, money began pouring back into firms that paid dividends. (A prominent feature of the much-maligned Bush tax cuts included tax-code changes that dropped the rate for dividends from high ordinary income levels – 35% in the top bracket – to a maximum of 15%.)
Bernstein Global Wealth Management prepared the amazing chart below, which demonstrates the power of dividends over the long term.
The Bernstein study concluded, “It should therefore come as no surprise that dividends have been a major component of growth in an investor’s return over time.
Remember, calculations of a stock’s performance in a portfolio are based on total return, i.e., the annual price appreciation (or loss) plus dividends.”
One dollar in 1926 (when market data first became reliable) invested in large-cap U.S. stocks would have grown to nearly $2,300 by 2004. But the Bernstein report shows that if you remove dividends – and the magical effect of compounding those dividends – then that same dollar would be worth a meager $87.66.
A similar study by Standard & Poor’s showed the same results over a different time horizon. The study of total returns (price appreciation plus dividend income) shows that payers of dividends outdistanced non-payers by 1.9% annually from 1980 through 2003.
Friday, January 18, 2008
Finacial Sense Newshour Transcript on Investing for Income
Investing for Income
Partial Transcript of Finacial Sense Newshour with Jim Puplava and John Loeffler on January 12, 2008
JOHN: Maybe the hallmark of the next few years is actually going to be the word “uncertainty” like we've been using here on the program today. A lot of people, baby boomers, a huge block of population moving into retirement, and if they are moving into retirement in a time of uncertainty, especially given the fact that the Social Security trust fund is bust, there is nothing in it, nor can it be sustained at these levels except by devaluating the currency (which means everybody will get their Social Security check, but it's not going to be worth very much), what does that mean for people who are trying to plan economically in these times?
JIM: Well, you know, we used to have these standard formulas. I started out as a certified financial planner –and you know, you retire, you put 50, 60% of your portfolio in fixed income because now you need income to live on because you no longer have a paycheck or money coming in from a business. But, John, that assumes that you're in a period where you have low inflation as we did throughout much of the 80s and 90s.
But what do you do in a period where you have high inflation? You know, it's very tempting, right now, to say, “okay, I'm going to retire, I'm going to turn my portfolio into fixed income, I'll get 4 or 5% income.” The problem that investors have today is if you look at where the yields are, you've got less than 2.6% on a two year Treasury note, a 10 year treasury note is less than 4% (it's actually less than 3.8) and it's probably going lower here in the short term. I sure in heck would not want to be investing long term given the levels of inflation that we see today. And so, you know, that's why we've always stressed about, you know, about blue chip dividend-paying stocks.
And over the long run, the rate of return is going to be much, much higher to an investor or somebody that is retiring today than, let's say, somebody who is going to be in a fixed income. I mean if I go out and buy a 10 year Treasury note today, let's say I invest $10,000. I can get right now 3.8%.
And every six months I'm going to get my check. I'll make $380 dollars a year every single year. The question is what is going to be the cost of living in the year 2018or 10 years from now, you know, because 10 years from now, I will get my $10,000 back, and I will have gotten $380 dollars a year. But that $380 dollars a year that I'm getting from that Treasury note is not going to buy the same goods and services 10 years from now that it will buy today.
And for that matter, the $10,000 that will mature 10 years from now is not going to have the same purchasing power. And if you just think about anything you're buying today, what does it cost to buy a house today compared to 10 years ago? My kids can only afford to buy a condo for the price that I bought a large house 10 years ago. And that's what's happened. I mean think of what a car costs today compared to 10 years ago.
Think of what it costs to send your kid to a four year college to get a degree compared to 10 years ago. Compare that to what you're paying to visit your doctor, compare that to what you're paying to just go out and take a vacation. It's just absolutely remarkable in terms of what we've seen and the cost of living in basic goods.
JOHN: Well, does that mean, then, that some people aren't going to retire? The day of Sun City Arizona and retirement places like that may be over, per se. People are going to have to work.
JIM: Yeah. I think that is probably more in the retirement formula today for a lot of boomers, which is going to be that you're going to retire, but during retirement, you'll be doing some sort of part-time work. And actually, you can look at it quite positively, John. They find people that keep themselves active in retirement, actually live longer, their minds are more alert.
And, you know, maybe you don't do what you did for a living during your working career. Maybe you do something that you enjoy doing. I had a client that retired many years ago who was in the publishing industry and he ended up being a tour guide at the Hearst Castle. Just absolutely loved it. I have another client that retired six, seven years ago and because he was a history professor he serves as a tour guide for one of the travel companies.
So let's say you're, I don't know, you're taking a trip to Europe, Italy or something like that, he's sort of a tour guide. So I mean he's having the time of his life. And actually, he gets to go free. So working during retirement is going to be part of the retirement picture for a lot of boomers, but I think more importantly investors or retirees are going to have to think differently about their portfolio in an age of low interest rates and higher rates of inflation.
I mean if you take a look at the yield on a two year Treasury note or one year Treasury bill or 10 year Treasury note, the yield on a 10 year Treasury note is less than the headline inflation number, and even though we know that headline inflation number is actually basically a sort of a fictitious number.
JOHN: Okay. Every year you put together, usually around this time of the year, a portfolio of 10 stocks. And say you had bought these stocks, what, 10 years ago?
JIM: Yeah.
JOHN: What would your income have been?
JIM: Well, what we do, and I use this as an exercise and I don't -- anybody listening to this, this is not an endorsement or recommendation. It is done for illustration purposes.
But mainly we take a look at the Dow 30 stocks. And we pick sort of a wide variety of stocks, some financial stocks, consumer stocks, industrial stocks, medical stocks, energy stocks. And we've been using this formula for these stocks mainly over the last couple of years to illustrate this point. But what we assume is you had a portfolio.
You had $100,000 and you put $10,000 into each one of these stocks and then you just held on to them for 10 years. And just once again, I'm going to mention the companies and this is not an endorsement. This is done strictly for illustration. But we had a financial stock, an insurance company AIG, a consumer retail McDonalds, Disney Entertainment, Johnson & Johnson (on the medical side), Honeywell, Exxon, American Express (financial company), 3M (manufacturing), GE (manufacturing) and Coca Cola (consumer products company). And so in 1998, had you invested in these stocks – remember, we were going through a stock market boom during that period of time, and stocks were expensive –but let's say you put $10,000 into each one of these stocks, you would have received in dividends at the end of 1998 holding them for a whole year roughly about $1700 in dividends.
Five years later in 2003, the 1700 in dividends grew to 2400 in dividends. So basically, we saw a 700 dollar increase in the value of those dividends. And finally 10 years later in the year 2007, dividends would have grown to a little over $4100. But what's really remarkable about this, assuming that you spent all of the dividend income, your $100,000 would have grown – and remember, that would have meant buying stock in 1998, and remember the terrible bear market that we went through for three years in 2000, 2001 and 2002 – during that period of time, you would have gotten over $81,000 of capital appreciation; you would have gotten almost $33,000 in income.
And so basically, without dividends, your return was 181,000. Final investment with dividends was 214,000. If you want to take a look at that, it was a simple return of 81% or 8.1% a year. If you want to look at total return, which was income –the dividends – plus capital appreciation, it was 114% return, or an annualized return of 11.4%, easily increasing what you would have gotten in fixed income.
What was even more remarkable, the top performing stocks, Exxon, McDonalds, 3M and J&J had the highest total dividend payments. So companies that had good business models, that had good cash flow and consistent earnings are able to increase their dividends at a much higher rate than companies that don't.
So the top performing of the 10 stocks were the stocks that had the highest total dividends payment. The worse performing stocks, AIG and Disney had the lowest dividend payments. And here's something that's even more remarkable. The average total return for the top two dividend players was 219%, an annualized return of 21.9% a year, while the total return for the two lowest paying dividend stocks was only 33.5%, or a return of a little over 3%.
The highest dividend paying stock out of the group was Exxon Mobil that had a total return of 282%; and even if Exxon stock price went nowhere, the dividend alone would have given you a return of 76%, an annualized return of 7.6% just on the dividends. And Jeremy Siegel in his book The Future For Investors did a comparison. I'm not going to repeat it here because we talked about it last year on the show where he took, from 1950 to the year, I think -- I think it was 2004, he took two stocks: and if one would have thought of the ideal growth stock in the year 1950, it would have been IBM (the computer industry was coming into itself and changing the way we work today with computers); and then Exxon, which is basically an oil stock. And the total returns from Exxon versus IBM were far superior. And here, John, is just the study that we do each year confirms this very same thing because the best performing out of those 10 stocks were the stocks that produced a consistent higher stream of dividends.
JOHN: And that would seem, you know, in this environment we're in right now of really high inflation, which threatens to stay that way for some time to have things in your portfolio that are going up which offset that, so you're keeping pace with it.
JIM: Absolutely. I mean if you look at Exxon in the last five years, Exxon has increased its dividends at an annual rate of 8.3% a year. Imagine getting an 8.3% pay raise every single year. If you look at Johnson & Johnson, another one of the top four performing dividend stocks, Johnson & Johnson has increased its dividends 15.3% a year over the last five years. Here's one that will blow your mind: McDonald’s. I mean we're talking about basically hamburgers here. McDonald’s has increased its dividend roughly 45% a year.
Think of that number. 45% a year over the last five years. How many of us would love to get a 45% pay increase every single year with the kind of inflation rates. And even 3M, a manufacturing company has increased its dividend roughly about 9.2% a year over the last five years. And this is why, John, I think that as you get into retirement, having blue chip companies, and that's why I like to look at the Dow stocks. They are the biggest, the most stable, sound financially. And you don't get to be a blue chip in the Dow without having a successful business model and being a very stable company. I mean Johnson & Johnson (medical), 3M (manufacturing), Exxon (oil), McDonald’s (food franchises and now they are getting into adding coffee bars to compete with Starbucks).
And whether you're looking at a book written by three authors Dimson and Marsh wrote a book called Triumph of the Optimists. They talked about dividend studies going back over the last 100 years. Not only just in the US but 16 other markets. Study after study after study, it's confirmed dividend investing is a far superior approach and a more stable approach. And especially for somebody entering into retirement that wants to be a little bit more conservative in thinking about what they are going to be doing when they retire: maybe they have 401(k) program or a pension that they are going to have to rely on. That's why I think in an age of inflation, you've got to think about the dividend approach for income with high stable companies because that's what's going to keep you even with inflation. A Treasury bond today, yes, it may allow you to sleep at night the first six months of the first year.
But with the levels of inflation that we're seeing today, it's not going to keep you even with inflation five years from now and you're going to be struggling 10 years from now if you're on a fixed income because what are you going to have that's going to increase and compensate you and allow you to buy the same goods and services that you buy today. It's absolutely amazing, but year after year, the study continue to improve itself.
Partial Transcript of Finacial Sense Newshour with Jim Puplava and John Loeffler on January 12, 2008
JOHN: Maybe the hallmark of the next few years is actually going to be the word “uncertainty” like we've been using here on the program today. A lot of people, baby boomers, a huge block of population moving into retirement, and if they are moving into retirement in a time of uncertainty, especially given the fact that the Social Security trust fund is bust, there is nothing in it, nor can it be sustained at these levels except by devaluating the currency (which means everybody will get their Social Security check, but it's not going to be worth very much), what does that mean for people who are trying to plan economically in these times?
JIM: Well, you know, we used to have these standard formulas. I started out as a certified financial planner –and you know, you retire, you put 50, 60% of your portfolio in fixed income because now you need income to live on because you no longer have a paycheck or money coming in from a business. But, John, that assumes that you're in a period where you have low inflation as we did throughout much of the 80s and 90s.
But what do you do in a period where you have high inflation? You know, it's very tempting, right now, to say, “okay, I'm going to retire, I'm going to turn my portfolio into fixed income, I'll get 4 or 5% income.” The problem that investors have today is if you look at where the yields are, you've got less than 2.6% on a two year Treasury note, a 10 year treasury note is less than 4% (it's actually less than 3.8) and it's probably going lower here in the short term. I sure in heck would not want to be investing long term given the levels of inflation that we see today. And so, you know, that's why we've always stressed about, you know, about blue chip dividend-paying stocks.
And over the long run, the rate of return is going to be much, much higher to an investor or somebody that is retiring today than, let's say, somebody who is going to be in a fixed income. I mean if I go out and buy a 10 year Treasury note today, let's say I invest $10,000. I can get right now 3.8%.
And every six months I'm going to get my check. I'll make $380 dollars a year every single year. The question is what is going to be the cost of living in the year 2018or 10 years from now, you know, because 10 years from now, I will get my $10,000 back, and I will have gotten $380 dollars a year. But that $380 dollars a year that I'm getting from that Treasury note is not going to buy the same goods and services 10 years from now that it will buy today.
And for that matter, the $10,000 that will mature 10 years from now is not going to have the same purchasing power. And if you just think about anything you're buying today, what does it cost to buy a house today compared to 10 years ago? My kids can only afford to buy a condo for the price that I bought a large house 10 years ago. And that's what's happened. I mean think of what a car costs today compared to 10 years ago.
Think of what it costs to send your kid to a four year college to get a degree compared to 10 years ago. Compare that to what you're paying to visit your doctor, compare that to what you're paying to just go out and take a vacation. It's just absolutely remarkable in terms of what we've seen and the cost of living in basic goods.
JOHN: Well, does that mean, then, that some people aren't going to retire? The day of Sun City Arizona and retirement places like that may be over, per se. People are going to have to work.
JIM: Yeah. I think that is probably more in the retirement formula today for a lot of boomers, which is going to be that you're going to retire, but during retirement, you'll be doing some sort of part-time work. And actually, you can look at it quite positively, John. They find people that keep themselves active in retirement, actually live longer, their minds are more alert.
And, you know, maybe you don't do what you did for a living during your working career. Maybe you do something that you enjoy doing. I had a client that retired many years ago who was in the publishing industry and he ended up being a tour guide at the Hearst Castle. Just absolutely loved it. I have another client that retired six, seven years ago and because he was a history professor he serves as a tour guide for one of the travel companies.
So let's say you're, I don't know, you're taking a trip to Europe, Italy or something like that, he's sort of a tour guide. So I mean he's having the time of his life. And actually, he gets to go free. So working during retirement is going to be part of the retirement picture for a lot of boomers, but I think more importantly investors or retirees are going to have to think differently about their portfolio in an age of low interest rates and higher rates of inflation.
I mean if you take a look at the yield on a two year Treasury note or one year Treasury bill or 10 year Treasury note, the yield on a 10 year Treasury note is less than the headline inflation number, and even though we know that headline inflation number is actually basically a sort of a fictitious number.
JOHN: Okay. Every year you put together, usually around this time of the year, a portfolio of 10 stocks. And say you had bought these stocks, what, 10 years ago?
JIM: Yeah.
JOHN: What would your income have been?
JIM: Well, what we do, and I use this as an exercise and I don't -- anybody listening to this, this is not an endorsement or recommendation. It is done for illustration purposes.
But mainly we take a look at the Dow 30 stocks. And we pick sort of a wide variety of stocks, some financial stocks, consumer stocks, industrial stocks, medical stocks, energy stocks. And we've been using this formula for these stocks mainly over the last couple of years to illustrate this point. But what we assume is you had a portfolio.
You had $100,000 and you put $10,000 into each one of these stocks and then you just held on to them for 10 years. And just once again, I'm going to mention the companies and this is not an endorsement. This is done strictly for illustration. But we had a financial stock, an insurance company AIG, a consumer retail McDonalds, Disney Entertainment, Johnson & Johnson (on the medical side), Honeywell, Exxon, American Express (financial company), 3M (manufacturing), GE (manufacturing) and Coca Cola (consumer products company). And so in 1998, had you invested in these stocks – remember, we were going through a stock market boom during that period of time, and stocks were expensive –but let's say you put $10,000 into each one of these stocks, you would have received in dividends at the end of 1998 holding them for a whole year roughly about $1700 in dividends.
Five years later in 2003, the 1700 in dividends grew to 2400 in dividends. So basically, we saw a 700 dollar increase in the value of those dividends. And finally 10 years later in the year 2007, dividends would have grown to a little over $4100. But what's really remarkable about this, assuming that you spent all of the dividend income, your $100,000 would have grown – and remember, that would have meant buying stock in 1998, and remember the terrible bear market that we went through for three years in 2000, 2001 and 2002 – during that period of time, you would have gotten over $81,000 of capital appreciation; you would have gotten almost $33,000 in income.
And so basically, without dividends, your return was 181,000. Final investment with dividends was 214,000. If you want to take a look at that, it was a simple return of 81% or 8.1% a year. If you want to look at total return, which was income –the dividends – plus capital appreciation, it was 114% return, or an annualized return of 11.4%, easily increasing what you would have gotten in fixed income.
What was even more remarkable, the top performing stocks, Exxon, McDonalds, 3M and J&J had the highest total dividend payments. So companies that had good business models, that had good cash flow and consistent earnings are able to increase their dividends at a much higher rate than companies that don't.
So the top performing of the 10 stocks were the stocks that had the highest total dividends payment. The worse performing stocks, AIG and Disney had the lowest dividend payments. And here's something that's even more remarkable. The average total return for the top two dividend players was 219%, an annualized return of 21.9% a year, while the total return for the two lowest paying dividend stocks was only 33.5%, or a return of a little over 3%.
The highest dividend paying stock out of the group was Exxon Mobil that had a total return of 282%; and even if Exxon stock price went nowhere, the dividend alone would have given you a return of 76%, an annualized return of 7.6% just on the dividends. And Jeremy Siegel in his book The Future For Investors did a comparison. I'm not going to repeat it here because we talked about it last year on the show where he took, from 1950 to the year, I think -- I think it was 2004, he took two stocks: and if one would have thought of the ideal growth stock in the year 1950, it would have been IBM (the computer industry was coming into itself and changing the way we work today with computers); and then Exxon, which is basically an oil stock. And the total returns from Exxon versus IBM were far superior. And here, John, is just the study that we do each year confirms this very same thing because the best performing out of those 10 stocks were the stocks that produced a consistent higher stream of dividends.
JOHN: And that would seem, you know, in this environment we're in right now of really high inflation, which threatens to stay that way for some time to have things in your portfolio that are going up which offset that, so you're keeping pace with it.
JIM: Absolutely. I mean if you look at Exxon in the last five years, Exxon has increased its dividends at an annual rate of 8.3% a year. Imagine getting an 8.3% pay raise every single year. If you look at Johnson & Johnson, another one of the top four performing dividend stocks, Johnson & Johnson has increased its dividends 15.3% a year over the last five years. Here's one that will blow your mind: McDonald’s. I mean we're talking about basically hamburgers here. McDonald’s has increased its dividend roughly 45% a year.
Think of that number. 45% a year over the last five years. How many of us would love to get a 45% pay increase every single year with the kind of inflation rates. And even 3M, a manufacturing company has increased its dividend roughly about 9.2% a year over the last five years. And this is why, John, I think that as you get into retirement, having blue chip companies, and that's why I like to look at the Dow stocks. They are the biggest, the most stable, sound financially. And you don't get to be a blue chip in the Dow without having a successful business model and being a very stable company. I mean Johnson & Johnson (medical), 3M (manufacturing), Exxon (oil), McDonald’s (food franchises and now they are getting into adding coffee bars to compete with Starbucks).
And whether you're looking at a book written by three authors Dimson and Marsh wrote a book called Triumph of the Optimists. They talked about dividend studies going back over the last 100 years. Not only just in the US but 16 other markets. Study after study after study, it's confirmed dividend investing is a far superior approach and a more stable approach. And especially for somebody entering into retirement that wants to be a little bit more conservative in thinking about what they are going to be doing when they retire: maybe they have 401(k) program or a pension that they are going to have to rely on. That's why I think in an age of inflation, you've got to think about the dividend approach for income with high stable companies because that's what's going to keep you even with inflation. A Treasury bond today, yes, it may allow you to sleep at night the first six months of the first year.
But with the levels of inflation that we're seeing today, it's not going to keep you even with inflation five years from now and you're going to be struggling 10 years from now if you're on a fixed income because what are you going to have that's going to increase and compensate you and allow you to buy the same goods and services that you buy today. It's absolutely amazing, but year after year, the study continue to improve itself.
Tuesday, December 4, 2007
Income Generating Securities Do Well In An Interest Rate Cutting Environment
Tha Bank of Canada reduced interest rates by 25 basis points today and the US Federal Reserve is expected to do the same next week.
The US Federal Reserve and the Bank of Canada are expected to continue to lower interest rates in an effort to prevent a recession.
When that happens, investors generally turn to dividend-paying stocks to boost their return.
If history is any guide than stocks in the utilities sector, dividend paying stocks and income trusts will trend higher over the coming months.
The US Federal Reserve and the Bank of Canada are expected to continue to lower interest rates in an effort to prevent a recession.
When that happens, investors generally turn to dividend-paying stocks to boost their return.
If history is any guide than stocks in the utilities sector, dividend paying stocks and income trusts will trend higher over the coming months.
Tuesday, October 9, 2007
Hedging Our Bets on Investing for Income Between Credit and Inflation Risk
Condensed Version of
HEDGING OUR BETS
by Roger Conrad
Editor, Utility & Income
October 9, 2007
Income investments come in all shapes and sizes. But all have one thing in common as far as we’re concerned: We’ve got to buy and hold ‘em to get the most out of them.
Part of that is axiomatic. You can’t collect the distributions unless you stick around for them to be paid. Individual bonds are the exception because they accrue interest as long as you hold them. But as far as stocks, Canadian trusts, limited partnerships, income-paying funds, preferred stocks or anything else goes, you’ve got be in there on the ex-dividend dates or you won’t get paid.
Ironically, the most important reason income investors need to buy and hold is capital appreciation. A healthy, growing company will increase its dividend over time, and its share price will follow. If you’re trading, you won’t get that gain unless you’re very, very lucky.
Buying and holding, of course, isn’t without risks. For income investors, there are basically two: credit risk and inflation risk.
The former has been on investors’ minds this year. And virtually anything perceived as having too much debt—or too unorthodox a capital structure—has taken hits.
There are two ways to protect your portfolio against credit risk. One is by sticking only to high-quality, growing companies and shedding anything where the business fundamentals are weakening. The other is to diversify broadly, both in terms of individual stocks you hold and across market sectors.
When the markets are universally panicked about recession or a credit crunch, big institutional money will pretty much sell off anything that doesn’t have the word “Treasury” in it. And that’s exactly what happened on the worst days over the summer.
The key in a market like that is to avoid the real blowups, i.e., the companies that are really in trouble. This time around, that was basically financial companies that had gotten in really deep in the mortgage market and/or collateralized debt obligations. As JP MORGAN CHASE’S $5.5 billion writeoff announced today illustrates, there are still some landmines in this area, though that stock is actually up today.
In contrast, damage to most other income investments in recent months was largely because of guilt by association. Limited partnerships (LPs), for example, were walloped by concerns about their debt structures and whether or not they’d be able to access capital markets. Both fears have proven largely groundless, at least for the best quality LPs. As a result, money is starting to flow back in and shares are recovering.
The lesson: If you avoid the blowups in an environment of elevated credit risk, your losses will be short-lived. In fact, such times are golden opportunities to buy high-quality income stocks cheaply.
THE GREATER RISK NOW IS INFLATION - ESPECIALLY IN THE USA
The bottom line is, if you pick your stocks carefully, diversify well, shed holdings that weaken business-wise and are willing to be patient in downturns, you can make your income portfolio pretty much foolproof against credit risk.
Guarding against inflation risk, however, is a whole other matter. Income-oriented investments are especially vulnerable to inflation because they’re valued to a large extent on the basis of yield. Rising inflation pushes market interest rates higher, which makes those yields worth relatively less. As a result, income-oriented investments sell off to a point where yields are again attractive.
During the 1970s, Treasury bonds were among the absolute worst investments to own. Credit risk was zero.
But every incremental increase in inflation made investors demand a higher yield to compensate for the erosion of principal. And by the time inflation peaked in the late ’70s and early ’80s, bonds issued at the lower rates of the ’60s had lost most of their real value.
We haven’t had a real inflation problem in the US since those bad old days. We have, however, had occasional flare-ups that have wreaked havoc on everything from REITs to utilities.
In each of the past five years, we’ve had a spring or summer spike in interest rates, as investors have anticipated faster growth and higher inflation. The benchmark 10-year Treasury note yield spiked, and income investments across the board sold off. Each time—including this year—rising rates sowed the seeds of their own reversal, sparking worries about the economy and ultimately sending them lower.
As we move into the fourth quarter, rates are down and credit worries are receding. As a result, income investments are starting to recover their summer losses. That rally should continue throughout the fourth quarter. Utility stocks, for example, have had a positive fourth quarter in 35 of the last 40 years.
After that, however, the future gets considerably cloudier. With the Federal Reserve apparently willing to do whatever it takes to avoid recession, credit risk is no longer the primary concern. Rather, it’s inflation. And the more money the Fed and other world central banks pour into the system now to bail out the likes of JP Morgan, the greater the risk.
One way income investors can protect themselves against inflation is healthy growth. Not even companies that can grow dividends reliably and robustly have historically been able to hold their share value in the face of rapid inflation. But they do a credible job with moderate inflation, if for no other reason than investors need to get their income from somewhere.
How bad can inflation get this time is the $1 million question. And as is always the case with market economics, that’s impossible to forecast.
What we do know, however, is there are investments that pay moderate income and actually do very well in inflationary environments. By adding them to already diversified portfolios, we can cut the inflation risk to our overall portfolios.
What I’m talking about are metals and other vital resources. Over the past five years or so, many of the raw commodities—from copper to zinc—have doubled and tripled in value. The primary reason is global growth.
Not since the ’70s has the world seen such robust, synchronized economic growth. And unlike then, the US isn’t the only driver of growth this time around.
We’re still the most important economy. But China, Japan, Europe, India and the Middle East are also driving things. That makes this growth wave a lot more durable than the last one. In other words, a US recession would no doubt slow things down, but it wouldn’t derail global growth as it did in the early ’80s.
Metals and other raw commodities are the essential fuel for global growth. And the faster and more universal growth is, the greater the strain on supplies. Already, we’ve seen Russia plant its flag on the North Pole, while China and Europe are snuggling up to African dictators and the regime in Iran. And that’s only the beginning, as competition for scarce resources grows.
Eventually, every commodity cycle ends. Ever-rising prices induce consumers to change their habits and develop alternatives, even as they incentivize new discoveries. The process, however, can take years and even decades before the supply/demand balance shifts back in favor of consumers, and it’s never entirely painless.
One of the hallmarks of a top in a commodity cycle is breathless speculation that supplies are truly running out. I’m not hearing any of that now in the financial media.
In fact, the buzz is largely about how the commodity bull has reached unsustainable levels and that its days are numbered. This is in stark contrast to what’s happening in the market place, and the disconnect likely points to a lot more ahead.
Commodities and vital resources are good inflation hedges for one major reason: They represent hard value. Gold, for example, has been a global store of value for millennia. When US inflation undermines the value of paper money, gold holds its own—mainly by surging in US dollar terms.
The best way to play a boom in commodities and vital resources is to buy stocks of the companies that produce them. For one thing, gains are leveraged. For example, a company producing copper at a total cost of $1 a pound will see its earnings double if the metal moves from $2 a pound to $3 a pound—a 50 percent gain in the metal itself. And good companies are always growing, providing a rising base of earnings.
I’ve already been talking about high-yielding energy bets like Canadian trusts, Super Oils and combination utility/producers for some time. We’ve seen some staggering profits in these over the past five years or so. And until we see the factors that ended the ’70s energy bull market in abundance—greater conservation, switching to alternatives (not biofuels), new conventional reserve discoveries (not from oil sands or extreme deepwater drilling) and a global recession—we’re going to see a lot more gains.
The takeover offer for Canadian trust PRIMEWEST ENERGY TRUST by the ABU DHABI NATIONAL ENERGY CO—which was at nearly a 40 percent premium to the pre-deal price—is a pretty clear value alert for that sector. And whether it means takeover for the likes of other strong trusts like Enerplus Resources or Penn West Energy Trust or not, it does add up to big gains ahead for the best trusts, in addition to their high distributions.
Energy is only one resource that offers income investors an inflation hedge.
HEDGING OUR BETS
by Roger Conrad
Editor, Utility & Income
October 9, 2007
Income investments come in all shapes and sizes. But all have one thing in common as far as we’re concerned: We’ve got to buy and hold ‘em to get the most out of them.
Part of that is axiomatic. You can’t collect the distributions unless you stick around for them to be paid. Individual bonds are the exception because they accrue interest as long as you hold them. But as far as stocks, Canadian trusts, limited partnerships, income-paying funds, preferred stocks or anything else goes, you’ve got be in there on the ex-dividend dates or you won’t get paid.
Ironically, the most important reason income investors need to buy and hold is capital appreciation. A healthy, growing company will increase its dividend over time, and its share price will follow. If you’re trading, you won’t get that gain unless you’re very, very lucky.
Buying and holding, of course, isn’t without risks. For income investors, there are basically two: credit risk and inflation risk.
The former has been on investors’ minds this year. And virtually anything perceived as having too much debt—or too unorthodox a capital structure—has taken hits.
There are two ways to protect your portfolio against credit risk. One is by sticking only to high-quality, growing companies and shedding anything where the business fundamentals are weakening. The other is to diversify broadly, both in terms of individual stocks you hold and across market sectors.
When the markets are universally panicked about recession or a credit crunch, big institutional money will pretty much sell off anything that doesn’t have the word “Treasury” in it. And that’s exactly what happened on the worst days over the summer.
The key in a market like that is to avoid the real blowups, i.e., the companies that are really in trouble. This time around, that was basically financial companies that had gotten in really deep in the mortgage market and/or collateralized debt obligations. As JP MORGAN CHASE’S $5.5 billion writeoff announced today illustrates, there are still some landmines in this area, though that stock is actually up today.
In contrast, damage to most other income investments in recent months was largely because of guilt by association. Limited partnerships (LPs), for example, were walloped by concerns about their debt structures and whether or not they’d be able to access capital markets. Both fears have proven largely groundless, at least for the best quality LPs. As a result, money is starting to flow back in and shares are recovering.
The lesson: If you avoid the blowups in an environment of elevated credit risk, your losses will be short-lived. In fact, such times are golden opportunities to buy high-quality income stocks cheaply.
THE GREATER RISK NOW IS INFLATION - ESPECIALLY IN THE USA
The bottom line is, if you pick your stocks carefully, diversify well, shed holdings that weaken business-wise and are willing to be patient in downturns, you can make your income portfolio pretty much foolproof against credit risk.
Guarding against inflation risk, however, is a whole other matter. Income-oriented investments are especially vulnerable to inflation because they’re valued to a large extent on the basis of yield. Rising inflation pushes market interest rates higher, which makes those yields worth relatively less. As a result, income-oriented investments sell off to a point where yields are again attractive.
During the 1970s, Treasury bonds were among the absolute worst investments to own. Credit risk was zero.
But every incremental increase in inflation made investors demand a higher yield to compensate for the erosion of principal. And by the time inflation peaked in the late ’70s and early ’80s, bonds issued at the lower rates of the ’60s had lost most of their real value.
We haven’t had a real inflation problem in the US since those bad old days. We have, however, had occasional flare-ups that have wreaked havoc on everything from REITs to utilities.
In each of the past five years, we’ve had a spring or summer spike in interest rates, as investors have anticipated faster growth and higher inflation. The benchmark 10-year Treasury note yield spiked, and income investments across the board sold off. Each time—including this year—rising rates sowed the seeds of their own reversal, sparking worries about the economy and ultimately sending them lower.
As we move into the fourth quarter, rates are down and credit worries are receding. As a result, income investments are starting to recover their summer losses. That rally should continue throughout the fourth quarter. Utility stocks, for example, have had a positive fourth quarter in 35 of the last 40 years.
After that, however, the future gets considerably cloudier. With the Federal Reserve apparently willing to do whatever it takes to avoid recession, credit risk is no longer the primary concern. Rather, it’s inflation. And the more money the Fed and other world central banks pour into the system now to bail out the likes of JP Morgan, the greater the risk.
One way income investors can protect themselves against inflation is healthy growth. Not even companies that can grow dividends reliably and robustly have historically been able to hold their share value in the face of rapid inflation. But they do a credible job with moderate inflation, if for no other reason than investors need to get their income from somewhere.
How bad can inflation get this time is the $1 million question. And as is always the case with market economics, that’s impossible to forecast.
What we do know, however, is there are investments that pay moderate income and actually do very well in inflationary environments. By adding them to already diversified portfolios, we can cut the inflation risk to our overall portfolios.
What I’m talking about are metals and other vital resources. Over the past five years or so, many of the raw commodities—from copper to zinc—have doubled and tripled in value. The primary reason is global growth.
Not since the ’70s has the world seen such robust, synchronized economic growth. And unlike then, the US isn’t the only driver of growth this time around.
We’re still the most important economy. But China, Japan, Europe, India and the Middle East are also driving things. That makes this growth wave a lot more durable than the last one. In other words, a US recession would no doubt slow things down, but it wouldn’t derail global growth as it did in the early ’80s.
Metals and other raw commodities are the essential fuel for global growth. And the faster and more universal growth is, the greater the strain on supplies. Already, we’ve seen Russia plant its flag on the North Pole, while China and Europe are snuggling up to African dictators and the regime in Iran. And that’s only the beginning, as competition for scarce resources grows.
Eventually, every commodity cycle ends. Ever-rising prices induce consumers to change their habits and develop alternatives, even as they incentivize new discoveries. The process, however, can take years and even decades before the supply/demand balance shifts back in favor of consumers, and it’s never entirely painless.
One of the hallmarks of a top in a commodity cycle is breathless speculation that supplies are truly running out. I’m not hearing any of that now in the financial media.
In fact, the buzz is largely about how the commodity bull has reached unsustainable levels and that its days are numbered. This is in stark contrast to what’s happening in the market place, and the disconnect likely points to a lot more ahead.
Commodities and vital resources are good inflation hedges for one major reason: They represent hard value. Gold, for example, has been a global store of value for millennia. When US inflation undermines the value of paper money, gold holds its own—mainly by surging in US dollar terms.
The best way to play a boom in commodities and vital resources is to buy stocks of the companies that produce them. For one thing, gains are leveraged. For example, a company producing copper at a total cost of $1 a pound will see its earnings double if the metal moves from $2 a pound to $3 a pound—a 50 percent gain in the metal itself. And good companies are always growing, providing a rising base of earnings.
I’ve already been talking about high-yielding energy bets like Canadian trusts, Super Oils and combination utility/producers for some time. We’ve seen some staggering profits in these over the past five years or so. And until we see the factors that ended the ’70s energy bull market in abundance—greater conservation, switching to alternatives (not biofuels), new conventional reserve discoveries (not from oil sands or extreme deepwater drilling) and a global recession—we’re going to see a lot more gains.
The takeover offer for Canadian trust PRIMEWEST ENERGY TRUST by the ABU DHABI NATIONAL ENERGY CO—which was at nearly a 40 percent premium to the pre-deal price—is a pretty clear value alert for that sector. And whether it means takeover for the likes of other strong trusts like Enerplus Resources or Penn West Energy Trust or not, it does add up to big gains ahead for the best trusts, in addition to their high distributions.
Energy is only one resource that offers income investors an inflation hedge.
Sunday, October 7, 2007
Why Baytex Energy Trust is One of My Top Picks
While Baytex’s Q2 financial results were impacted by higher costs and lower realized heavily oil prices, we were encouraged by the solid production numbers. In particular, development of its Seal heavy oil asset is progressing well.
Unlike some other operators in the area that are having inconsistent results from new wells, all of Baytex’s Seal wells continue to meet expectations. The lack of infrastructure is constraining major development at the property due to high transportation costs, but infrastructure investment by other operators appears to be ramping up.
I believe that as development of Seal progresses, further value will be attributed to the asset and reflected in the trust’s unit price. Furthermore, the Seal heavy oil reserves could he worth over $40 a share to a major Oil company like Shell.
In the meantime Baytex is paying out $0.18 per month ($2.16 per year) for a yield of just under 12% while you wait for the big buyout offer.
Now that's investing for income at its best!
Unlike some other operators in the area that are having inconsistent results from new wells, all of Baytex’s Seal wells continue to meet expectations. The lack of infrastructure is constraining major development at the property due to high transportation costs, but infrastructure investment by other operators appears to be ramping up.
I believe that as development of Seal progresses, further value will be attributed to the asset and reflected in the trust’s unit price. Furthermore, the Seal heavy oil reserves could he worth over $40 a share to a major Oil company like Shell.
In the meantime Baytex is paying out $0.18 per month ($2.16 per year) for a yield of just under 12% while you wait for the big buyout offer.
Now that's investing for income at its best!
Friday, September 21, 2007
Dividend Investing
Why dividends are important.
Dividends set a floor price – Dividend stocks tend to trade within their yield range, and rarely do they yield much higher than Treasury bill.
Dividends account for over half of the long-term real return – If you own 100 shares of BMO and receive 4% of dividends, you can DRIP your dividends to buy another 4 more shares. If you keep up the DRIP for 20 years, you’ll have a handsome 219 BMO shares in your portfolio. Even better, some Canadian corporations offer 5% discounts through DRIP.
Companies with long-term track records of stable and raising dividends show quality of the managements – Managements show commitment to shareholders by improving fundamentals and sharing profits.
Dividends cannot be manipulated like earnings – Dividends are real hard cash in your lap. Earnings can be faked by creative accounting.
A stable stream of dividends reward investors even during market down turn – Management pays you to wait even during market setbacks.
Dividends are more tax efficient than regular incomes and capital gains – In British Columbia, if you can make $66,000 in dividends, you pay $0 tax. In regular incomes, you pay $16,880 in taxes. In capital gains, you pay $5,097.
You can safely spend your dividends without harming your portfolio – If you think in terms of income streams instead of portfolio size, you can consume 100% of your dividends without hurting your portfolio. If instead you go for capital gains, consuming your capital during a depressed market will harm your portfolio immensely.
Receiving dividends are passive – Dividends and increases are given to you each quarter automatically without any action on your part. On the other hand, to receive capital gains, you must monitor the share prices continuously.
High dividend paying stocks have historically out-performed low-yield stocks – In David Dreman’s Forbes column (April 2004), he cited that between 1970 and 2003, the top fifth highest yield stocks returned 14.5%, while the lowest fifth returned only 8.8%.
Dividends are more predictable than capital gains – Suppose BMO averages 10% over the long term with 4% in dividends and 6% in capital gains. In a given year, you can count on seeing the 4% in your brokerage account, but the 6% capital gain is less dependable.
Your investment return depends on the company’s fundamentals, not the market’s temperament- You may think a business is wonderful and its stock is outrageously undervalued, but if market doesn’t share your excitement, your effort won’t bring you fruition, and you’re needlessly squandering away precious time. On the other hand, if dividends and dividend increases are your investment objectives, you don’t need the market’s blessing to celebrate. This is one fundamental advantage of dividend investing. When you buy dividend-paying stocks, there’s a strong linkage between your analysis and your reward, and this linkage isn’t compromised by market psychology.
Dividend investing forces you to think in a healthy frame of mind in terms of buying low - I bought Harvest Energy Trust last year. I bought it again this year. I will buy it next year, and possibly for the next 20 years. Why would I want my initial purchase to rise at the expense of penalizing my next 20 purchases? The next time you see dividend-paying stocks tumbling down, please come and give me a high-five.
Dividends set a floor price – Dividend stocks tend to trade within their yield range, and rarely do they yield much higher than Treasury bill.
Dividends account for over half of the long-term real return – If you own 100 shares of BMO and receive 4% of dividends, you can DRIP your dividends to buy another 4 more shares. If you keep up the DRIP for 20 years, you’ll have a handsome 219 BMO shares in your portfolio. Even better, some Canadian corporations offer 5% discounts through DRIP.
Companies with long-term track records of stable and raising dividends show quality of the managements – Managements show commitment to shareholders by improving fundamentals and sharing profits.
Dividends cannot be manipulated like earnings – Dividends are real hard cash in your lap. Earnings can be faked by creative accounting.
A stable stream of dividends reward investors even during market down turn – Management pays you to wait even during market setbacks.
Dividends are more tax efficient than regular incomes and capital gains – In British Columbia, if you can make $66,000 in dividends, you pay $0 tax. In regular incomes, you pay $16,880 in taxes. In capital gains, you pay $5,097.
You can safely spend your dividends without harming your portfolio – If you think in terms of income streams instead of portfolio size, you can consume 100% of your dividends without hurting your portfolio. If instead you go for capital gains, consuming your capital during a depressed market will harm your portfolio immensely.
Receiving dividends are passive – Dividends and increases are given to you each quarter automatically without any action on your part. On the other hand, to receive capital gains, you must monitor the share prices continuously.
High dividend paying stocks have historically out-performed low-yield stocks – In David Dreman’s Forbes column (April 2004), he cited that between 1970 and 2003, the top fifth highest yield stocks returned 14.5%, while the lowest fifth returned only 8.8%.
Dividends are more predictable than capital gains – Suppose BMO averages 10% over the long term with 4% in dividends and 6% in capital gains. In a given year, you can count on seeing the 4% in your brokerage account, but the 6% capital gain is less dependable.
Your investment return depends on the company’s fundamentals, not the market’s temperament- You may think a business is wonderful and its stock is outrageously undervalued, but if market doesn’t share your excitement, your effort won’t bring you fruition, and you’re needlessly squandering away precious time. On the other hand, if dividends and dividend increases are your investment objectives, you don’t need the market’s blessing to celebrate. This is one fundamental advantage of dividend investing. When you buy dividend-paying stocks, there’s a strong linkage between your analysis and your reward, and this linkage isn’t compromised by market psychology.
Dividend investing forces you to think in a healthy frame of mind in terms of buying low - I bought Harvest Energy Trust last year. I bought it again this year. I will buy it next year, and possibly for the next 20 years. Why would I want my initial purchase to rise at the expense of penalizing my next 20 purchases? The next time you see dividend-paying stocks tumbling down, please come and give me a high-five.
Saturday, April 7, 2007
Picked up 1,000 EIT.UN on Thursday April 5, 2007
I picked up another 1,000 units of EIT.UN last Thursday before the market closed. I could not resist the 13.5% yield and a 14.5% discount to net asset value plus I get a diversified portfolio of over 60 income producing assets.
I am surprised how weak these trusts are but I am still hanging in there.
I am surprised how weak these trusts are but I am still hanging in there.
Saturday, March 10, 2007
Investing in Dividend Paying Stocks
I was recently interviewed for a press release through a financial question and answer format. One of the questions asked of me in the interview was:
Where do you think the stock market is headed over the next five years?
My Answer!
Charles M. O’Melia: No one knows! There is an old Chinese proverb that goes something like this: “He, who could foresee events 3 days in advance, would be rich for thousands of years.” On a long-term basis I have only witnessed expansion and progress. I believe that to be the nature of our American economy and our American way of life. And as our economy goes, so goes the stock market and I see no reason to change that belief.
Who would have thought the expansion in China would generate 5 billion dollars of business for GE? The US companies listed on the New York stock exchange have the ability to profit throughout the global expansion of business around the world. And, an investor can profit without the necessity of having to own an overseas fund or companies to profit.
Up until that question, the thought of what the market was going to do tomorrow (or for that matter, 5 years from now) have never concerned me. I never gave it a thought (Well, maybe a little!). There just isn’t enough concern on my part whether we are heading for a bear market or a bull market, or if the markets are heading sideways.
When you own a portfolio filled with companies that have a history of raising their dividend every year, and a systematic approach of adding more shares to the portfolio through the dividend reinvestments every quarter, plus having a simple savings plan with an opportunistic buying approach of adding even more shares to the portfolio every quarter, it really doesn’t matter. I am always buying more shares.
Sometimes I pay too much for one of my companies; sometimes I receive a great bargain. But no matter which, bargain or expensive, my income from those companies always continues to grow and grow and grow and grow and grow.
Sometimes, the dividend yield of one stock may be 5.15%, and the following year or two (even with two dividend increases during those two years) the dividend yield would drop to less than 3%. This, for example, may mean the stock price would have risen from the 30 dollar range to the 60 dollar range. I have found that when that 5.15% dividend yield drops to around 1%, the company’s stock in question becomes so high that the company usually has a stock split, as well as a dividend increase.
Right now, the DOW seems to be having trouble breaking that 11,000 barrier. And, right now, I can’t help thinking back, way, way, back.
For those of you who don’t remember the late 1960’s, early 70’s, the DOW barrier was 1,000.
Oh, what a tough time that DOW 1,000 barrier was! I remember thinking – it’s going to break it this time. Back in 1966 was the first attempt (rose to 985) and it kept on trying to break 1,000 for the next 6 years. When it finally broke 1,000 (it reached 1,050 or so in 1972), it immediately fell back. It took another 10 years before the DOW broke the 1,100 barrier. Six years for the DOW at 985 to break 1,000. Another 10 years to break 1,100. A total of 16 years to add a mere 115 points on the DOW.
So, is the 11,000 barrier in the DOW today similar to the 1100 barrier of times-gone-by? Will 11,000 on the DOW become a 16 year barrier? Could be! Then again, maybe not! I don’t know! “He, who could foresee events etc.”
In the meantime, I will continue watching my dividend income continue to grow and grow and grow and grow and grow!
To find the LINK for the complete financial interview visit:
http://www.thestockopolyplan.com
About the Author:
Charles M. O’Melia is an individual investor with almost 40 years of experience and passion for the stock market. The author of the book ‘The Stockopoly Plan – Investing for Retirement;’ published by American-Book Publishing. The book can be purchased at: http://www.pdbookstore.com/comfiles/pages/CharlesMOMelia.shtml
Read more articles by: Charles O'Melia
Article Source: www.iSnare.com
Where do you think the stock market is headed over the next five years?
My Answer!
Charles M. O’Melia: No one knows! There is an old Chinese proverb that goes something like this: “He, who could foresee events 3 days in advance, would be rich for thousands of years.” On a long-term basis I have only witnessed expansion and progress. I believe that to be the nature of our American economy and our American way of life. And as our economy goes, so goes the stock market and I see no reason to change that belief.
Who would have thought the expansion in China would generate 5 billion dollars of business for GE? The US companies listed on the New York stock exchange have the ability to profit throughout the global expansion of business around the world. And, an investor can profit without the necessity of having to own an overseas fund or companies to profit.
Up until that question, the thought of what the market was going to do tomorrow (or for that matter, 5 years from now) have never concerned me. I never gave it a thought (Well, maybe a little!). There just isn’t enough concern on my part whether we are heading for a bear market or a bull market, or if the markets are heading sideways.
When you own a portfolio filled with companies that have a history of raising their dividend every year, and a systematic approach of adding more shares to the portfolio through the dividend reinvestments every quarter, plus having a simple savings plan with an opportunistic buying approach of adding even more shares to the portfolio every quarter, it really doesn’t matter. I am always buying more shares.
Sometimes I pay too much for one of my companies; sometimes I receive a great bargain. But no matter which, bargain or expensive, my income from those companies always continues to grow and grow and grow and grow and grow.
Sometimes, the dividend yield of one stock may be 5.15%, and the following year or two (even with two dividend increases during those two years) the dividend yield would drop to less than 3%. This, for example, may mean the stock price would have risen from the 30 dollar range to the 60 dollar range. I have found that when that 5.15% dividend yield drops to around 1%, the company’s stock in question becomes so high that the company usually has a stock split, as well as a dividend increase.
Right now, the DOW seems to be having trouble breaking that 11,000 barrier. And, right now, I can’t help thinking back, way, way, back.
For those of you who don’t remember the late 1960’s, early 70’s, the DOW barrier was 1,000.
Oh, what a tough time that DOW 1,000 barrier was! I remember thinking – it’s going to break it this time. Back in 1966 was the first attempt (rose to 985) and it kept on trying to break 1,000 for the next 6 years. When it finally broke 1,000 (it reached 1,050 or so in 1972), it immediately fell back. It took another 10 years before the DOW broke the 1,100 barrier. Six years for the DOW at 985 to break 1,000. Another 10 years to break 1,100. A total of 16 years to add a mere 115 points on the DOW.
So, is the 11,000 barrier in the DOW today similar to the 1100 barrier of times-gone-by? Will 11,000 on the DOW become a 16 year barrier? Could be! Then again, maybe not! I don’t know! “He, who could foresee events etc.”
In the meantime, I will continue watching my dividend income continue to grow and grow and grow and grow and grow!
To find the LINK for the complete financial interview visit:
http://www.thestockopolyplan.com
About the Author:
Charles M. O’Melia is an individual investor with almost 40 years of experience and passion for the stock market. The author of the book ‘The Stockopoly Plan – Investing for Retirement;’ published by American-Book Publishing. The book can be purchased at: http://www.pdbookstore.com/comfiles/pages/CharlesMOMelia.shtml
Read more articles by: Charles O'Melia
Article Source: www.iSnare.com
Tuesday, February 13, 2007
Cash Distributions Force a High Level of Corporate Governance
Today the Parliamentary hearings resume on the taxation of Canadian Income Trusts and other flow through entities. One area where we believe that trusts probably have excelled (and nobody seems to talk about), relative to most of their corporate cousins, is in the area of “governing” over cash distributions and the impact this has on the behaviour of management.
Governing over cash distributions is far more difficult than just approving a cash distribution. It requires the Board and Management to consider the financial impact to the organization, both short term and long term, of making that cash distribution. Cash distributions require Board approval, which means, for most trusts; they must meet at least monthly.
We believe that by paying distributions on such a frequent (monthly) basis, Managers and Directors must maintain a very good understanding of the underlying business and its current and potential future financial condition.
We believe that when both management and the directors focus their attention on the cash flow being generated by the business, and then consider on a regular basis the financial impact of making a cash distribution to its equity investors, a high level of financial corporate governance is forced on the organization. Imagine you are sitting on a board of trustees being asked to approve a monthly cash distribution to unitholders. What steps would you take in order to gain sufficient comfort that indeed the trust could afford to make the distribution this month? Now think ahead to next month, and the following months? And what about an increase to the current level of cash distributions? Do not forget the potential personal liability attached to the role of a Director. One thing is likely for sure; you would soon be very focused on many of the aspects of the business. It is a big responsibility.
Now imagine that the trust of whose board you are a member, is considering an acquisition. And to complete this acquisition, the trust will require debt and equity funding. And, after the acquisition and financing is completed, cash distributions are expected, on schedule, from an even larger constituent of investors. Trusts leave little room for error or omissions, because the expectation of cash distributions to equity investors is constant. And you can be sure the lenders have done their homework.
When it comes to monitoring the lifeblood of a business, its cash flows, and everything that can impact that cash flow, trustees are forced to have their fingers on the pulse of that business, each and every month. And that, we believe, is a high standard on the corporate governance scale.
In conclusion, we feel that the cash distributions impose better corporate goverenance on companies. Most earnings that are retained on the balance sheet seem to disappear in transactions that are not accretive to the shareholder. In the the long run the capital efficiency of our companies would improve under a regime of "forced" distributions to shareholders.
There is no better example than BCE (Bell Canada) who have a track record of squandering shareholders capital.
It is my belief that todays crisis over Corporate governance has its root cause with taxation. Our tax systems encourage company's to retain earnings rather then distribute them to shareholders. This is why today's corporations have such low yields.
Furthermore, retained earnings bloat the balance sheets and theoretically drive share prices higher which in turn make corporate stock options more valuable. This is better for option holders than for shareholders.
I wonder if this is why BCE phoned the finance minister back in 2006 begging to "level the playing field".
I hope somebody addresses this issue at the parliamentary hearing today.
P.S. Excerpts of this BLOG were derived from an RBC Capital Markets report published April 19, 2005.
Governing over cash distributions is far more difficult than just approving a cash distribution. It requires the Board and Management to consider the financial impact to the organization, both short term and long term, of making that cash distribution. Cash distributions require Board approval, which means, for most trusts; they must meet at least monthly.
We believe that by paying distributions on such a frequent (monthly) basis, Managers and Directors must maintain a very good understanding of the underlying business and its current and potential future financial condition.
We believe that when both management and the directors focus their attention on the cash flow being generated by the business, and then consider on a regular basis the financial impact of making a cash distribution to its equity investors, a high level of financial corporate governance is forced on the organization. Imagine you are sitting on a board of trustees being asked to approve a monthly cash distribution to unitholders. What steps would you take in order to gain sufficient comfort that indeed the trust could afford to make the distribution this month? Now think ahead to next month, and the following months? And what about an increase to the current level of cash distributions? Do not forget the potential personal liability attached to the role of a Director. One thing is likely for sure; you would soon be very focused on many of the aspects of the business. It is a big responsibility.
Now imagine that the trust of whose board you are a member, is considering an acquisition. And to complete this acquisition, the trust will require debt and equity funding. And, after the acquisition and financing is completed, cash distributions are expected, on schedule, from an even larger constituent of investors. Trusts leave little room for error or omissions, because the expectation of cash distributions to equity investors is constant. And you can be sure the lenders have done their homework.
When it comes to monitoring the lifeblood of a business, its cash flows, and everything that can impact that cash flow, trustees are forced to have their fingers on the pulse of that business, each and every month. And that, we believe, is a high standard on the corporate governance scale.
In conclusion, we feel that the cash distributions impose better corporate goverenance on companies. Most earnings that are retained on the balance sheet seem to disappear in transactions that are not accretive to the shareholder. In the the long run the capital efficiency of our companies would improve under a regime of "forced" distributions to shareholders.
There is no better example than BCE (Bell Canada) who have a track record of squandering shareholders capital.
It is my belief that todays crisis over Corporate governance has its root cause with taxation. Our tax systems encourage company's to retain earnings rather then distribute them to shareholders. This is why today's corporations have such low yields.
Furthermore, retained earnings bloat the balance sheets and theoretically drive share prices higher which in turn make corporate stock options more valuable. This is better for option holders than for shareholders.
I wonder if this is why BCE phoned the finance minister back in 2006 begging to "level the playing field".
I hope somebody addresses this issue at the parliamentary hearing today.
P.S. Excerpts of this BLOG were derived from an RBC Capital Markets report published April 19, 2005.
Tuesday, February 6, 2007
Passive Income
I want you to take a step back and just think about this question; Why do you invest for retirement?
The answer that you have been bombarded with is something like this;
One must invest and have there money grow so that once they retire they can live off the income from no risk interest paying investments. Your planner probably came up with a fancy work sheet and questionnaire and at the end they tell you based on X% interest you will need $Y when you retire so that you can have an income of $Z per month when you retire. This income is called passive income. If you think about it, that is what we are all in the end trying to achieve.
Passive income is when you work once but continue to get paid over and over again from work you're no longer doing. Passive income, in most cases is income earned from real estate investments or true businesses owned and operated independent of your personal involvement. Investing in or creating true assets that provide passive income for you is your ticket to wealth. To gain financial freedom you need this cash flow from Passive Income. So far so good.
This is the thought pattern I went through back in early 2001. However, this seemed impossible. The market had crashed. I had no Idea how I could save enough from my earned income to eventually build up a nest egg. So, like everyone else we keep chasing the big score on a real estate deals, stock market or even a lottery.
There is no such thing as something for nothing. That is why most of will fail at achieving the big score.
The problem is that Wall Street has it backwards. Instead of focusing on investing for capital gains, you should focus on income invest immediately. That's right forget about capital gains-no matter how old you are. I decided that when I retire I need so much a month to live on. So at 45 years old I sold all my stocks and mutual funds in my RRSP (IRA) and focused on income producing securities. This is when I discovered Canadian Income Trusts. I had less than $70,000 in the RRSP at the time and today that account alone is producing over $1,000 per month income. Because of compounding this account will probably be producing about $14,000 per month income when I turn 65 years old. Now that's passive income! This does not include my other portfolios.
To put it simply, passive income is income that continues to generate money for you even when you have stopped working. Passive Income is financial freedom with real financial security.
For example, your rental income is a good source of passive income. Rental income includes payments made by an occupant for the use of property, payments to cancel a lease, advance rent, and any security deposit used as a final payment of rent. If you own a house and you rent it out, you will continue to receive your rental income for as long as you have a tenant, regardless of whether you work or not. Similarly, if you invest in unit trusts and it generates dividends for you, the dividends are your passive income. There are many ways to create passive income.
Financial freedom is not having to rely on a paycheck for your standard of living. If you are sick, or want to take a vacation, you will still have money coming to you from your investments. This is Passive Income. Passive Income is Freedom. Passive Income is Security.
The earlier you start planning and building your passive income, the earlier you can achieve being financially free. It takes time and effort, especially in the beginning, just like building anything worthwhile does. You build a foundation and gradually build up your passive income from there.
There are many types of passive income such as
· Private business income
· Real estate income
· Residuals on mutual fund sales (This is what financial planners, brokers and the entire financial industry runs on)
· Welfare Income
· Unemployment Insurance Income
· Workers Compensation Income
· Disability Income
· Government Pension Income
· Employer Pension Income
· Registered retirement plan income
· Interest Income
· Royalty Income
· Dividend Income
· Income Trust Income (Our favorite)
When you look at the list above you can see why government social programs are so popular. By the way if you plan your future around passive income from Government you will become bitter and disappointed. By the time you figured out that you have been fleeced it will be too late. Why? Because the passive income they give you will be less in real purchasing power than you think. The problem is that it is so gradual that the unsuspecting public does not see it happen.
As a matter of fact the real reason Mutual Funds are so popular is because they generate billions of dollars of passive income for the financial industry. Not for investors (suckers?) like you. This is why they advertise so much. This is why they tell you to buy and hold. Do not fall for the line that your planner gives you that he invests in the same thing because he is not relying on his investments for his passive income. He is relying on yours.
How can you build your Passive Income?
The cornerstone of all wealth is understanding the difference between assets and liabilities. The difference is this: Assets put money IN your pocket. Liabilities take money OUT of your pocket.
A liability is something that takes money out of your pocket." (Monthly and continuously) Most people think their home, car, and other possessions are assets. But, the truth is that in most cases those things take money out of your pocket. They cost you money. They don't make you money. Those things are liabilities. They take money OUT of your pocket each month.
Here comes a shocker----Equity in your home is dead capital. You must convert that equity into passive income.
An asset is something that puts money in your pocket monthly and continuously. When you have more money coming IN from real assets than you have going OUT to pay for liabilities, you will be financially free. This is really all you need to know. If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities. It's not knowing the difference that causes most of the financial struggle in the real world.
Our liabilities are someone else's (usually the bank's) assets. Most people mistakenly think of their home as their biggest asset. It is an asset - the bank's asset. Our home is usually our biggest liability in that it takes money out of our pocket month after month.
The rich buy assets. The poor only have expenses. The middle class buy liabilities they think are assets.
Real assets fall into several different categories:
1) Businesses that do not require your presence;
2) Dividend paying stocks;
3) Bonds;
4) Income Trusts;
5) Income-generating real estate; 6) Notes (IOUs); and 7) Royalties from intellectual property (books, music, patents?).
Most people use their money to buy liabilities whereas the rich use their money to buy assets that pay for their liabilities.
Start to plant seeds inside your asset column. Start small and plant seeds. Some grow; some don't.
There are three different types of income: Earned Income; Passive Income; and Portfolio Income. You must know what kind of income to work hard for, how to keep it and how to protect it from loss. This is the key to great wealth.
Earned income is income derived from your job. It is linear in nature. You work for an hour and get paid only one time for that one-hour's work, and that's it. Your income stops when you stop working.
The rich don't work for money; they have their money work for them. This is achieved through portfolio income and passive income.
Portfolio income is the income you receive from interest, dividends, royalties and gains you get from investments in paper assets.
Passive income is when you work once but continue to get paid over and over again from work you're no longer doing. Passive income, in most cases is income earned from real estate investments or true businesses owned and operated independent of your personal involvement. Investing in or creating true assets that provide passive income for you is your ticket to wealth. To gain financial freedom you need this cash flow from Passive Income.
But note the definition of a business!
Owning a business that provides passive income means the business works without you having to be there. You have a business if you can leave it for a year or more and then return to find it more profitable and running better than when you left. But if your business would falter without you then it's more like a 'job' than a business.
So you can think of earned income as coming from something you do. Passive income comes from businesses or real estate that work for you. And portfolio income comes from paper assets that work for you.
Everyone has income, but not everyone maximizes the use of that income. Of the four income patterns, the one to shoot for is that of the rich. And one myth you can dispose of is "It takes money to make money." Regardless of your income you can begin to acquire assets that return an income every year -- passive income that comes in, rain or shine, whether you work or not. This is money working for you, not you working for money.
Unlike passive income, earned income or linear income requires that you work for your money. You are basically exchanging your time and effort for money. You get paid when you work. The moment you stop working, you don't get paid.
The key to becoming wealthy is the ability to convert earned income into passive income and/or portfolio income as quickly as possible. The taxes are highest on earned income. The least taxed income is passive income. That is another reason why you want your money working hard for you. The government taxes the income you work hard for more than the income your money works hard for.
The rich incorporate their assets and are able to: Earn, Spend and Pay Taxes on what is left.
The poor and middle class work at a job and must: Earn, Pay Taxes and then Spend what is left.
This is so powerful that we predict that if our governments do not make some attempt to reduce corporate taxes and prevent the double taxation of dividends; that the market capitalization of income trusts in Canada will exceed the market capitalization of the TSX/S&P 300 index.
Wealth and freedom can, and should, be yours. You have the right to acquire it. The family that is jet setting around the world, teaching their children about art in Paris and about science on the Amazon, eating out whenever they want to, cruising on yachts, hot-air ballooning over wine country, relaxing on tropical beaches, has no more right to all of that than you. We believe you can have, should have, and will have all your dreams. All of them.
Only 4% will actually achieve freedom of choice or financial freedom, and a mere one per cent actually achieve his dream for true wealth. This means that only 5% of people are able to provide for themselves when they retire. Are you currently positioned to become one of the 5%?
Statistic further shows that of this one per cent, 74% made their money from running their own business, 10% are professionals, 10% are CEOs of large companies, and the rest achieve wealth from other sources.
The main reason people struggle financially is because they have spent years in school but learned nothing about money. The result is that people learn to work for money but never learn to have money work for them. The rich don't work for money; they have their money work for them.
This can be achieved through passive income.
We at investingforincome.com are focusing on passive income using Canadian Income Trusts. We think it's the easiest way to achieve passive income. One can start with as little as $1,000. We can all be little Warren Buffets.
You see before World War II investors invested in stocks for income. But after the war this started to change slowly. By the end of the millennium the stock market became a huge capital gains generating machine with little or no income.
We speculate that the trend to capital gains was due to favorable taxation of capital gains over dividends. However, we believe we are on a long term secular trend where we will see the stock market convert from a capital gains machine to an income generating machine. This has all ready started with the BUSH tax plan that tried to make dividends tax-free. This is only the beginning. The USA will lead the way for all nations. I bet you that in 20 years from now most stock market returns will be from dividends/income and not capital gains. Buy the time the experts figure this out and tell you they will have deprived you of billions of dollars of income.
We strongly recommend that on a long-term perspective you get out of stocks and mutual funds that do not pay income.
We have given you a lot to think about. Remember, we have nothing to sell you here. Instead of listening to the media and all the experts just think about this on your own. Your gut will tell you that we are right.
Remember, as Warren Buffet said if you are a poker game and you cannot figure out who is the patsy then guess what...your the patsy.
The answer that you have been bombarded with is something like this;
One must invest and have there money grow so that once they retire they can live off the income from no risk interest paying investments. Your planner probably came up with a fancy work sheet and questionnaire and at the end they tell you based on X% interest you will need $Y when you retire so that you can have an income of $Z per month when you retire. This income is called passive income. If you think about it, that is what we are all in the end trying to achieve.
Passive income is when you work once but continue to get paid over and over again from work you're no longer doing. Passive income, in most cases is income earned from real estate investments or true businesses owned and operated independent of your personal involvement. Investing in or creating true assets that provide passive income for you is your ticket to wealth. To gain financial freedom you need this cash flow from Passive Income. So far so good.
This is the thought pattern I went through back in early 2001. However, this seemed impossible. The market had crashed. I had no Idea how I could save enough from my earned income to eventually build up a nest egg. So, like everyone else we keep chasing the big score on a real estate deals, stock market or even a lottery.
There is no such thing as something for nothing. That is why most of will fail at achieving the big score.
The problem is that Wall Street has it backwards. Instead of focusing on investing for capital gains, you should focus on income invest immediately. That's right forget about capital gains-no matter how old you are. I decided that when I retire I need so much a month to live on. So at 45 years old I sold all my stocks and mutual funds in my RRSP (IRA) and focused on income producing securities. This is when I discovered Canadian Income Trusts. I had less than $70,000 in the RRSP at the time and today that account alone is producing over $1,000 per month income. Because of compounding this account will probably be producing about $14,000 per month income when I turn 65 years old. Now that's passive income! This does not include my other portfolios.
To put it simply, passive income is income that continues to generate money for you even when you have stopped working. Passive Income is financial freedom with real financial security.
For example, your rental income is a good source of passive income. Rental income includes payments made by an occupant for the use of property, payments to cancel a lease, advance rent, and any security deposit used as a final payment of rent. If you own a house and you rent it out, you will continue to receive your rental income for as long as you have a tenant, regardless of whether you work or not. Similarly, if you invest in unit trusts and it generates dividends for you, the dividends are your passive income. There are many ways to create passive income.
Financial freedom is not having to rely on a paycheck for your standard of living. If you are sick, or want to take a vacation, you will still have money coming to you from your investments. This is Passive Income. Passive Income is Freedom. Passive Income is Security.
The earlier you start planning and building your passive income, the earlier you can achieve being financially free. It takes time and effort, especially in the beginning, just like building anything worthwhile does. You build a foundation and gradually build up your passive income from there.
There are many types of passive income such as
· Private business income
· Real estate income
· Residuals on mutual fund sales (This is what financial planners, brokers and the entire financial industry runs on)
· Welfare Income
· Unemployment Insurance Income
· Workers Compensation Income
· Disability Income
· Government Pension Income
· Employer Pension Income
· Registered retirement plan income
· Interest Income
· Royalty Income
· Dividend Income
· Income Trust Income (Our favorite)
When you look at the list above you can see why government social programs are so popular. By the way if you plan your future around passive income from Government you will become bitter and disappointed. By the time you figured out that you have been fleeced it will be too late. Why? Because the passive income they give you will be less in real purchasing power than you think. The problem is that it is so gradual that the unsuspecting public does not see it happen.
As a matter of fact the real reason Mutual Funds are so popular is because they generate billions of dollars of passive income for the financial industry. Not for investors (suckers?) like you. This is why they advertise so much. This is why they tell you to buy and hold. Do not fall for the line that your planner gives you that he invests in the same thing because he is not relying on his investments for his passive income. He is relying on yours.
How can you build your Passive Income?
The cornerstone of all wealth is understanding the difference between assets and liabilities. The difference is this: Assets put money IN your pocket. Liabilities take money OUT of your pocket.
A liability is something that takes money out of your pocket." (Monthly and continuously) Most people think their home, car, and other possessions are assets. But, the truth is that in most cases those things take money out of your pocket. They cost you money. They don't make you money. Those things are liabilities. They take money OUT of your pocket each month.
Here comes a shocker----Equity in your home is dead capital. You must convert that equity into passive income.
An asset is something that puts money in your pocket monthly and continuously. When you have more money coming IN from real assets than you have going OUT to pay for liabilities, you will be financially free. This is really all you need to know. If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities. It's not knowing the difference that causes most of the financial struggle in the real world.
Our liabilities are someone else's (usually the bank's) assets. Most people mistakenly think of their home as their biggest asset. It is an asset - the bank's asset. Our home is usually our biggest liability in that it takes money out of our pocket month after month.
The rich buy assets. The poor only have expenses. The middle class buy liabilities they think are assets.
Real assets fall into several different categories:
1) Businesses that do not require your presence;
2) Dividend paying stocks;
3) Bonds;
4) Income Trusts;
5) Income-generating real estate; 6) Notes (IOUs); and 7) Royalties from intellectual property (books, music, patents?).
Most people use their money to buy liabilities whereas the rich use their money to buy assets that pay for their liabilities.
Start to plant seeds inside your asset column. Start small and plant seeds. Some grow; some don't.
There are three different types of income: Earned Income; Passive Income; and Portfolio Income. You must know what kind of income to work hard for, how to keep it and how to protect it from loss. This is the key to great wealth.
Earned income is income derived from your job. It is linear in nature. You work for an hour and get paid only one time for that one-hour's work, and that's it. Your income stops when you stop working.
The rich don't work for money; they have their money work for them. This is achieved through portfolio income and passive income.
Portfolio income is the income you receive from interest, dividends, royalties and gains you get from investments in paper assets.
Passive income is when you work once but continue to get paid over and over again from work you're no longer doing. Passive income, in most cases is income earned from real estate investments or true businesses owned and operated independent of your personal involvement. Investing in or creating true assets that provide passive income for you is your ticket to wealth. To gain financial freedom you need this cash flow from Passive Income.
But note the definition of a business!
Owning a business that provides passive income means the business works without you having to be there. You have a business if you can leave it for a year or more and then return to find it more profitable and running better than when you left. But if your business would falter without you then it's more like a 'job' than a business.
So you can think of earned income as coming from something you do. Passive income comes from businesses or real estate that work for you. And portfolio income comes from paper assets that work for you.
Everyone has income, but not everyone maximizes the use of that income. Of the four income patterns, the one to shoot for is that of the rich. And one myth you can dispose of is "It takes money to make money." Regardless of your income you can begin to acquire assets that return an income every year -- passive income that comes in, rain or shine, whether you work or not. This is money working for you, not you working for money.
Unlike passive income, earned income or linear income requires that you work for your money. You are basically exchanging your time and effort for money. You get paid when you work. The moment you stop working, you don't get paid.
The key to becoming wealthy is the ability to convert earned income into passive income and/or portfolio income as quickly as possible. The taxes are highest on earned income. The least taxed income is passive income. That is another reason why you want your money working hard for you. The government taxes the income you work hard for more than the income your money works hard for.
The rich incorporate their assets and are able to: Earn, Spend and Pay Taxes on what is left.
The poor and middle class work at a job and must: Earn, Pay Taxes and then Spend what is left.
This is so powerful that we predict that if our governments do not make some attempt to reduce corporate taxes and prevent the double taxation of dividends; that the market capitalization of income trusts in Canada will exceed the market capitalization of the TSX/S&P 300 index.
Wealth and freedom can, and should, be yours. You have the right to acquire it. The family that is jet setting around the world, teaching their children about art in Paris and about science on the Amazon, eating out whenever they want to, cruising on yachts, hot-air ballooning over wine country, relaxing on tropical beaches, has no more right to all of that than you. We believe you can have, should have, and will have all your dreams. All of them.
Only 4% will actually achieve freedom of choice or financial freedom, and a mere one per cent actually achieve his dream for true wealth. This means that only 5% of people are able to provide for themselves when they retire. Are you currently positioned to become one of the 5%?
Statistic further shows that of this one per cent, 74% made their money from running their own business, 10% are professionals, 10% are CEOs of large companies, and the rest achieve wealth from other sources.
The main reason people struggle financially is because they have spent years in school but learned nothing about money. The result is that people learn to work for money but never learn to have money work for them. The rich don't work for money; they have their money work for them.
This can be achieved through passive income.
We at investingforincome.com are focusing on passive income using Canadian Income Trusts. We think it's the easiest way to achieve passive income. One can start with as little as $1,000. We can all be little Warren Buffets.
You see before World War II investors invested in stocks for income. But after the war this started to change slowly. By the end of the millennium the stock market became a huge capital gains generating machine with little or no income.
We speculate that the trend to capital gains was due to favorable taxation of capital gains over dividends. However, we believe we are on a long term secular trend where we will see the stock market convert from a capital gains machine to an income generating machine. This has all ready started with the BUSH tax plan that tried to make dividends tax-free. This is only the beginning. The USA will lead the way for all nations. I bet you that in 20 years from now most stock market returns will be from dividends/income and not capital gains. Buy the time the experts figure this out and tell you they will have deprived you of billions of dollars of income.
We strongly recommend that on a long-term perspective you get out of stocks and mutual funds that do not pay income.
We have given you a lot to think about. Remember, we have nothing to sell you here. Instead of listening to the media and all the experts just think about this on your own. Your gut will tell you that we are right.
Remember, as Warren Buffet said if you are a poker game and you cannot figure out who is the patsy then guess what...your the patsy.
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