Tag Archives: Investment

Meme Stock Risks

Posted on by

“There’s a problem with the memes (a stock that has gone viral online, drawing the attention of retail investors) because the people who are investing will lose a very substantial amount of money.” Thomas Peterffy

Definition:  A meme stock is a stock that has seen an increase in volume not because of the company’s performance, but rather because of hype on social media and online forums like Reddit. For this reason, these stocks often become overvalued, seeing drastic price increases in just a short amount of time.

The big problem with the so-called “meme”stock, which are assets powered higher on social-media sentiment and not on fundamentals, is that inexperienced investors will be saddled with real losses when stocks like AMC Entertainment Holdings (AMC), and GameStop Corp. (GME), eventually come back down to Earth.

The escalation in the values of these companies, like AMC and GameStop, don’t align with their prospects for earnings or revenue in the near or midterm.“There’s a problem with the “memes” because the people who are investing will lose a very substantial amount of money,” Thomas Peterffy, founder and chairman of Interactive Brokers Group Inc., said.

Peterffy said that the good thing about the surge in memes is that it will likely bring more young investor into the fold, but they will likely learn a hard lesson in the process.

Selling Short and short squeeze

Selling short means investors are betting that the asset will fall in value. The investments in AMC and GameStop originally started out as organized short-squeezes by a cadre of individual investors who had identified that a number of companies were heavily shorted by hedge funds, according to MarketWatch. These individual investors surmised, correctly, that those stocks could be pressured higher if enough buyers collectively swooped in.

A short squeeze is when many investors looking to cover short positions start buying at the same time. The buying pushes the share price higher, making short investors accelerate their attempts to cover, which sends the shares spiraling higher in a frenzy.

Short sellers, who bet a stock will fall, provide potential fuel for stock rallies when they’re wrong. If the stock jumps, instead of falling, the short sellers are forced to buy the stock to stop their losses from growing.

Lesson learned

Trying to identify a fundamental narrative that can justify meme stocks’ price and market cap are admittedly difficult. Still, it is an exercise that might provide some insights for meme stock investors. Essentially, when the music stops for the meme stocks like AMC and GameStop, investors could be looking at big capital losses.

References:

  1. https://www.thebalance.com/what-is-a-meme-stock-5118074
  2. https://www.marketwatch.com/story/interactive-brokers-founder-says-problem-with-amc-entertainment-memes-peoplewill-lose-a-very-substantial-amount-of-money-11622836260
  3. https://www.investors.com/etfs-and-funds/sectors/amc-stock-rally-here-are-the-14-most-shorted-stocks-now-sp500/
  4. https://www.marketwatch.com/articles/buy-sell-amc-stock-51622844305

Dividends and Income

Posted on by

“Income and cash flow are the priority in retirement.”

A dividend is a payment made from a company to its shareholders – often quarterly, but sometimes monthly. Dividends are a way for shareholders to participate and share in the growth of the underlying business above and beyond the share price’s appreciation.

Dividends are cash payments made on a per-share basis to investors. For instance, if a company pays a dividend of 20 cents per share, an investor with 100 shares would receive $20 in cash. Stock dividends are a percentage increase in the number of shares owned. If an investor owns 100 shares and the company issues a 10% stock dividend, that investor will have 110 shares after the dividend.

When publicly traded companies have extra cash on hand, it gives the management team some flexibility and options. With some extra cash, they can:

  • Take that money and invest it back in the business – they might do that through expanding existing operations, building factories, possibly acquiring another company that can help them grow.
  • Take that money and buy back shares of its own company – this strategy reduces the number of ways ownership of the company is sliced up, increasing the ownership. or
  • They can pay out some of that money to people who own shares of the company as a way to “share the wealth” and reward them for owning the business (dividend)

Dividends vs. Bonds

Bonds are obligated to pay interest to bondholders on a regular basis, but there’s no obligation for a company to pay dividends. When income from dividend producing assets decline, retirees may realize they don’t have enough cash flow to pay all their expenses. In order to save cash, some non-essential expenses are often cut or eliminated.

Investors who rely on income, especially those in retirement, tend to gravitate to dividend stocks because bonds pay so little. They could be in for a big shock. Many steady dividends payers have said they will cut their dividends (AT&T) or eliminate them completely (Boeing). For people who live off of dividends, a severe cut would significantly affect the amount of money they have to live on.

Additionally, dividends are taxed at the more favorable capital gains tax rates. This can be an important benefit for retirees who likely don’t have a lot of write-offs,

Long-term investors should focus on total return (capital gains plus dividend income) when thinking about how to invest your retirement savings.

Dividends importance to total equity returns over the long term cannot be overstated. Ibbotson Associates data from 1927 to 2002 show that more than 40% of the compound annual growth of its large-cap equity index can be attributed to dividend payouts. That said, the contribution of dividends over shorter periods can exhibit a fair amount of disparity. Indeed, over the decades, it has ranged from a low of about 15% in the 1990s to a high of 71% in the 1970s.

Graphing the difference between ten-year compounded growth rates from dividends and capital appreciation for the years 1947 through 2002, a picture of alternating leadership begins to appear. Clearly, capital appreciation has been dominant in periods of lower inflation and stable interest rates due to the positive impact that it has on price-to-earnings (P/E) multiples. On the other hand, dividends have carried most of the burden of equity market returns in periods of higher inflation and volatile interest rates when P/E multiples were contracting.

Consider all streams of income — Social Security, pensions, IRAs, part-time work — when devising a broader strategy (and tax plan) for your retirement years. Given that “investors using dividend-paying stocks for income must have a strong constitution,” says Richard Steinberg, chief market strategist at The Colony Group.

Dividends are not guaranteed and are paid at the discretion of the board of directors. Unlike a bond, which must pay a contracted amount or be in default, the board of directors can decide to reduce the dividend or even eliminate it at any time.

References:

  1. https://money.usnews.com/investing/investing-101/articles/how-to-live-on-dividend-income
  2. https://money.usnews.com/investing/investing-101/articles/what-are-dividends-and-how-do-they-work

Cash Flow in Retirement | Fidelity Investments

Posted on by

Cash flow simply means the amount of cash you have coming in and going out each month.

Think about cash flow as mapping your income versus your expenses. If you anticipate risk factors that can often come with retirement (health care expense, a downturn in the market, or a family emergency) then consider increasing your position in cash (or cash equivalents like Treasury bills, CDs, and money market accounts).

How will you help maintain a steady flow of income in retirement?

You’ve spent years saving money in anticipation of retirement, and while accumulating retirement savings is indeed important, it’s only half the story. Once you stop working, your focus shifts away from saving money and toward using that money to live the retirement you want.

Generating your retirement income

Retirement is an exciting stage of life that many Americans eagerly anticipate, yet retirement as we’ve known it has changed. Different concepts of retirement are emerging — your personal vision of retirement likely differs from how your parents, neighbors, and friends expect to spend their retirement years. In addition, Americans today are living longer and are more responsible for funding their retirements than past generations.

As we navigate this continually evolving retirement landscape, it’s important that your retirement-planning process reflect your unique situation. And remember that retirement income (or cash flow) planning requires a different set of strategies, products, plans, and choices than saving for your retirement. Education and guidance can help you develop an income plan and a spending strategy that are right for you.

Understanding retirement income

While most people understand the importance of saving money for retirement, the concept of retirement income planning is less familiar. Some basic definitions are.

  • Retirement income is the money you use to cover your expenses when you stop working.
  • Potential retirement income sources include Social Security, pensions, annuities, retirement savings from a qualified employer sponsored plan (QRP) like 401(k), 403(b) and governmental 457(b) as well as IRAs.
  • Retirement income planning is the process of determining how much money you’ll need in retirement, and where your cash flow will come from each year. Retirement income planning involves four components:
    • Planning:  Write a plan that includes your expected retirement expenses to help provide a roadmap through retirement.
    • Retirement investing strategies: Determine your various retirement income sources and consider the best way to invest your assets to help meet your retirement income goals.
    • Managing your retirement money: Decide how to manage your money to help maintain a steady flow of income that will cover your expenses throughout your retirement years.
    • Ongoing monitoring: Revisit and adjust your retirement income plan whenever your circumstances change, but at least once a year.

Benefits of planning your retirement income

Developing a written income plan can help you retire with confidence by considering questions such as: What do I want to do in retirement? Where do I want to live? Do I have enough to retire when I’d like? How do I create a steady income stream to take the place of my paycheck? How can I plan for the unexpected, such as extreme market fluctuations, health care needs, and other financial needs? And, will my money last throughout my retirement years?

For illustrative purposes only.

Starting the retirement income planning process five to 10 years before you retire allows you time to develop a thoughtful, personalized plan that will help make the most of your hard-earned savings.

cash flow to help meet both your near-term liquidity needs and longer-term needs for both income and growth

One approach to consider is to bucket cash for different shorter- and longer-term needs, such as living expenses, short-term goals, and emergencies. Here are some ways to implement each:

Read Viewpoints on Fidelity.com: Budgeting for retirees

References:

  1. https://www.fidelity.com/viewpoints/retirement/managing-cash-flow

Road to Wealth | American Association of Individual Investors (AAII)

Posted on by

You can build wealth by saving for the future and investing over a long term. The earlier you start, the easier it is for your money to work for you through compounding. 

Building wealth is essential to accomplish a variety of goals, from sending your kids to college to retiring in style. Wealth is what you accumulate; not what you spend. Most Americans are not wealthy. and few have accumulated significant assets and wealth.

How long could the average household survive without a steady income.

Every successful saving and investing journey starts with a set of clear and concise goals, whether they’re as big as retirement or as small as wanting to save for new tires for your vehicle. It’s important to determine and write down what are your savings, investing and wealth building goals.

Rather than trying to guess what’s going to happen, focus on what you can control. Each financial goal calls for a positive step you can take no matter what the market or the economy is doing.

The Wealth-Building Process can help you keep many of these financial goals and investing process on track. It is designed to give you clarity on what you are investing for and what steps you need to take to reach and fulfill those goals.

The key is to stick to your financial plan and recalibrate the investing process throughout the year. One way to do so is to set up reminders that prompt you to go back and review your goals. Positive change often requires a willingness to put yourself back on track whenever you drift away from the plan.

With that in mind, here are financial and investing tactics for investors:

1. Only follow strategies you can stick with no matter how good or bad market conditions are.  All too often, investors misperceive the optimal strategy as being the one with the highest return (and often the one with the highest recent returns). This is a big mistake; if you can’t stick to the strategy, then it’s not optimal for you. Better long-term results come to those investors who can stick with a good long-term strategy in all market environments rather than chasing the hot strategy only to abandon it when market conditions change.

One way to tell if your strategy is optimal is to look at the portfolio actions you took this past year. Make sure that you are not taking on more risk than you can actually tolerate. Alternatively, you may need to develop more clearly defined rules about when you will make changes to your portfolio.

2. Focus on your process, not on your goals. Mr. Market couldn’t care less about how much you need to fund retirement, pay for a child’s college education or fulfill a different financial goal you may have. He does as he pleases. The only thing you can control is your process for allocating your portfolio, choosing investments to buy and determining when it’s time to sell. Focus on getting the process right for these three things and you will get the best possible return relative to the returns of the financial markets and your personal tolerance for risk.

3. Write down the reasons you are buying an investment. One of the most fundamental rules of investing is to sell a security when the reasons you bought it no longer apply. Review your current holdings and ask yourself the exact reasons you bought them. Recommend you maintain notes, so you don’t have to rely on your memory to cite the exact characteristics of a stock or a fund that attracted you to the investment.

4. Write down the reasons you would sell the investments you own. Just as you should write down the reasons you bought an investment, jot down the reasons you would sell an investment, ideally before you buy it. Economic conditions and business attributes change over time, so even long-term holdings may overstay their welcome. A preset list of criteria for selling a stock, bond or fund can be particularly helpful in identifying when a negative trend has emerged.

5. Have a set schedule for reviewing your portfolio holdings.  If you own individual securities, consider reviewing the headlines and other relevant criteria weekly. (Daily can work, if doing so won’t cause you to trade too frequently.) If you own mutual funds, exchange-traded funds (ETFs) or bonds, monitor them quarterly or monthly.

6. Rebalance your portfolio back to your allocation targets. Check your portfolio allocations and adjust them if they are off target. For example, if your strategy calls for holding 40% large-cap stocks, 30% small-cap stocks and 30% bonds, but your portfolio is now composed of 45% large-cap stocks, 35% small-cap stocks and 20% bonds, adjust it. Move 5% of your portfolio out of large-cap stocks, move 5% out of small-cap stocks and put the money into bonds to bring your allocation back to 40%/30%/30%. How often should you rebalance? Vanguard suggests rebalancing annually or semiannually when your allocations are off target by five percentage points or more.

7. Review your investment expenses. Every dollar you spend on fees is an extra dollar you need to earn in investment performance just to break even. Higher expenses can be justified if you receive enough value for them. An example would be a financial adviser who keeps you on track to reach your financial goals. Review your expenses annually.

8. Automate when possible. A good way to avoid unintentional and behavioral errors is to automate certain investment actions. Contributions to savings, retirement and brokerage accounts can be directly taken from your paycheck or from your checking account. (If the latter, have the money pulled on the same day you get paid or the following business day.) Most mutual funds will automatically invest the contributions for you. Required minimum distributions (RMDs) can be automated to avoid missing deadlines and provide a monthly stream of income. You can also have bills set up to be paid automatically to avoid incurring late fees.

9. Create and use a checklist. An easy way to ensure you are following all of your investing rules is to have a checklist. It will both take the emotions out of your decisions and ensure you’re not overlooking something important.

10. Write and maintain emergency instructions on how to manage your portfolio. Typically, one person in a household pays the bills and manages the portfolio. If that person is you and something suddenly happened to you, how easy would it be for your spouse or one of your children to step in and take care of your financial affairs? For many families, the answer is ‘not easily’ given the probable level of stress in addition to their lack of familiarity with your accounts. A written plan better equips them to manage your finances in the manner you would like them to. It’s also a good idea to contact all of your financial institutions and give them a trusted contact they can reach out to, if needed.

Even Warren Buffett sees the value of this resolution. In his 2013 Berkshire Hathaway shareholder letter, he wrote, “What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit … My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” Considering the probability of Mrs. Buffett having learned a thing or two about investing over the years, it speaks volumes that Warren Buffett still sees the importance of including simple and easy-to-follow instructions in his estate documents.

11. Share your insights about investing with your family.  If you’re reading this, you likely have some passion for, or at least interest in, investing. Share it with your family members by having a conversation with them. Talk about how you invest, what you’ve learned and even the mistakes you’ve made. It’s a great way to pass along a legacy to those younger than you and to maintain a strong bond with those older than you. You might even learn something new by doing so. Our Wealth-Building Process can provide a great framework for facilitating these types of conversations.

If a family member isn’t ready to talk, don’t push them. Rather, write down what you want to say, give the letter to them and tell them you’ll be ready to talk when they are. For those of you who are older and are seeking topics that your younger relatives (e.g., millennials) might be interested in, consider our discount broker guide, which includes a comparison of the traditional online brokers versus the newer micro-investing apps.

12. Check your beneficiary designations. It is critical that all of your beneficiary designations are current and correctly listed. Even if nothing has changed over the past year, ensure that the designations on all of your accounts are correct. Also, make sure your beneficiaries know the accounts and policies they are listed on. Finally, be certain that those you would depend on to take over your financial affairs have access to the documents they need in the event of an emergency. We think this step is so important that we included a checklist for it in our Wealth-Building Process toolkit.

While you are in the process of checking your beneficiaries, contact all of the financial institutions you have an account or policy with to ensure your contact information is correct.

13. Be disciplined, not dogmatic. When you come across information that contradicts your views, do not automatically assume it is wrong. The information may highlight risks you have not previously considered or that you have downplayed in the past. At the same time, don’t be quick to change your investing style just because you hear of a strategy or an approach that is different than yours. Part of investing success comes from being open to new ideas while maintaining the ability to stick with a rational strategy based on historical facts. When in doubt, remember resolution #1, only follow strategies you can stick with no matter how good or bad market conditions are.

14. Never panic. Whenever stocks incur a correction (a decline of 10%–20%) or fall into bear market territory (a drop of 20% or more), the temptation to sell becomes more intense. Our brains are programmed to disdain losses as well as to react first and think later.

This focus on the short term causes us to ignore the lessons of history. Market history shows a pattern of rewards for those who endure the bouts of short-term volatility. We saw this last year. The coronavirus bear market was sharp, and the drop was quick. Those who were steadfast—or used it as an opportunity to add to their equity positions—were rewarded with new record highs being set late in the year and so far this year.

Drops happen regularly and so do recoveries. If you sell in the midst of a correction or a bear market, you will lock in your losses. If you don’t immediately buy when the market rebounds—and people who panic during bad market conditions wait too long to get back in—you will also miss out on big gains, compounding the damage to your portfolio. Bluntly put, panicking results in a large and lasting forfeiture of wealth.

15. Don’t make a big mistake.  Things are going to go haywire. A stock you bought will suddenly plunge in value. A mutual fund strategy will hit the skids. A bond issuer will receive a big credit downgrade. The market will drop at the most inopportune time.

If you are properly diversified, don’t make big bets on uncertain outcomes (including how President-elect Biden’s administration and the Democrats’ control of Congress will impact the financial markets), avoid constantly chasing the hot investment or hot strategy and set up obstacles to prevent your emotions from driving your investment decisions, you will have better long-term results than a large number of investors.

16. Take advantage of being an individual investor. Perhaps the greatest benefit of being an individual investor is the flexibility you are afforded. As AAII founder James Cloonan wrote: “The individual investor has a distinct advantage over the institution in terms of flexibility. They can move more quickly, have a wider range of opportunities and can tailor their program more effectively. They have only themselves to answer to.”

Not only are we as individual investors not restricted by market capitalization or investment style, but we also never have to report quarterly or annual performance. This means we can invest in a completely different manner than institutional investors can. Take advantage of this flexibility, because doing so gives you more opportunity to achieve your financial goals.

17. Treat investing as a business. The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation than you do. So be proactive. Do your research before buying a security or fund, ask questions of your adviser and be prepared to sell any investment at any given time if your reasons for selling so dictate.

18. Alter your passwords and use anti-virus software. There continues to be news stories about hacks. The best way you can protect yourself is to vary your passwords and use security software. A password manager is helpful for this. Anti-virus software and firewalls can keep viruses off of your computer and help thwart hackers.

19. Protect your identity. Identity theft can cause significant problems. Freezing your credit, monitoring your credit reports (Consumer Reports recommends AnnualCreditReport) and paying your taxes as early as possible can help prevent you from becoming a victim. Promptly challenge any suspicious charges on your credit card or telephone bills. If you get an unsolicited call asking for personal information, such as your Social Security number, or from someone claiming to be an IRS agent, hang up. (Better yet, don’t answer the phone unless you are certain you know who is calling.) It’s also a good idea to cover the keypad when typing your passcode into an ATM. Never click on a link in an email purporting to be from a financial institution (a bank, a brokerage firm, an insurance company, etc.). Instead, type the company’s website address directly into your browser.

The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 required credit bureaus to allow consumers to freeze their credit reports at no cost. The following links will go directly to the relevant pages on each credit bureau’s website:

  • Equifax: www.equifax.com/personal/credit-report-services
  • Experian: www.experian.com/freeze/center.html
  • TransUnion: www.transunion.com/credit-freeze

20. To help others, invest in yourself first. Investing based on your values, donating to charity, devoting your time to causes you are passionate about and giving to family and friends are all noble actions and goals. To do so now and in the future requires taking care of yourself. Keep yourself on a path to being financially sound through regular saving and controlled spending. Good sleep habits, exercise and following a healthy diet (eat your vegetables!) are also important—as are continuing to wear a face mask and practicing social distancing. The better shape you keep yourself in from a physical, mental and financial standpoint, the more you’ll be able to give back to society.

For those of you seeking to follow an ESG strategy, be it due to environmental, social or governance issues, make sure you stay on a path to achieve financial freedom. The same applies to other values-based investing, such as following religious beliefs. While it is possible to do well by doing good, every restriction you place on what you’ll invest in reduces the universe of potential investments you will have to choose from.

21. Be a mindful investor. Slow down and carefully consider each investment choice before making a decision. Ensure that the transaction you are about to enter makes sense given your investing time horizon, which may be 30 years or longer, and that it makes sense given your buy and sell rules. A common trap that investors fall into is to let short-term events impact decisions that should be long-term in nature. If you think through your decision process, you may well find yourself making fewer, but smarter, investment decisions.

22. Take a deep breath. Often, the best investing action is to simply take a deep breath and gather your composure. Short-term volatility can fray anyone’s nerves, but successful investors don’t let emotions drive their trading decisions. It’s okay to be scared; it’s not okay to make decisions that could impact your portfolio’s long-term performance based on short-term market moves. If you find yourself becoming nervous, tune out the investment media until you get back into a calm state of mind and then focus on resolutions #1, #2, #3 and #4 (found in last week’s Investor Update). Success comes from being disciplined enough to focus on your strategy and goals and not on what others think you should do.

“I found the road to wealth when I decided that part of all I earned was mine to keep. And so will you.”  The Richest Man in Babylon

Finally, remember that you have a life outside of the financial markets. Investing is merely a means to an end. Put the majority of your energy into activities you truly enjoy, including spending time with family and friends.

References:

  1. https://www.aaii.com/learnandplan/aboutiiwbp
  2. https://www.forbes.com/sites/jrose/2019/09/26/ways-to-build-wealth-fast-that-your-financial-advisor-wont-tell-you

Avoiding Investing Mistakes

Posted on by

“You have to learn how to value businesses and know the ones that are within your circle of competence and the ones that are outside.” Warren Buffett

Research shows that most active investors underperform the market over the long-term, according to CNBC. In reality, profitable day traders make up a very small proportion of all traders. Only 1.6% of all day traders are profitable in an average year, according to an Haas School of Business University of California, Berkeley, study. This means that’s roughly ninety-nine out of every one-hundred day traders fail and lose money. And, “overconfidence can explain high trading levels and the resulting poor performance of individual investors,” Brad M. Barber and Terrance Odean of the University of California, Berkeley concluded.

These facts makes it clear that the odds are stacked against the ordinary retail trader or investor. Thus, you have to tread carefully if you want to achieve success over the long term.

Building an investment framework

Multitudes of successful investors, including both Berkshire-Hathaway’s billionaires Warren Buffett and Charlie Munger, believe it is essential to avoid high-risk equity investments at all costs. This means avoiding investments and businesses that have a high chance of failure. It also means avoiding any companies that are difficult to understand or fall outside of your circle of competence.

Following a few basic guidelines can help any investor avoid significant losses from struggling and failing companies.

Another piece of investing advice is not to overpay for companies. If you don’t understand the value or how to value a business, then that is a pretty clear indication that it does not fall inside your circle of confidence, and thus, it might be better to avoid the investment. Buffett believes that the market will eventually favor quality stocks that were undervalued (margin of safety) for a certain time.

Finally, investors shouldn’t rush to get rich quick and they should follow an investment plan and rules. Investors who rush to get rich tend to take unnecessary risks such as borrowing money to purchase stocks, buying stocks they don’t understand or allocating capital to opportunities that seem too good to be true. Moreover, research continues to show that investors who stick with a comprehensive long-term investing plan tend to outperform those who collect stocks and constantly jump in and out of the market. All of these actions can lead to significant losses.

The key investment principle of not being in a rush helps ensure you’re not rushing into anything you don’t understand or taking on too much risk. In short, being patient and not rushing into investments is a very low-tech and straightforward way of trying to eliminate mistakes.

By following this advice, an investor may be able to improve their process and outcome.

In the words of arguably the world’s most successful long-term investor, Buffett states, “We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

References:

  1. https://faculty.haas.berkeley.edu/odean/papers/Day%20Traders/Day%20Trading%20and%20Learning%20110217.pdf
  2. https://www.cnbc.com/2020/11/20/attention-robinhood-power-users-most-day-traders-lose-money.html

Dividend Growth Stock Investing

Posted on by

Dividend growth stocks, known for steady dividend increases over time, can be valuable additions to your income portfolio.

Since 1926, dividends have accounted for more than 40% of the return realized by investing in large-cap U.S. domestic stocks, according to American Association of Individual Investors. The 9.9% historical annualized return for stocks is significantly impacted by the payment of dividends. Research shows that if dividends were taken out of the equation, the long-term annual return for stocks would fall to 5.5%.

Dividend stocks have long been a foundation for steady income to live on and a reliable pathway to accumulating wealth for retirement. Even in times of market stress, companies could be counted on to do everything possible to maintain their payouts. Most dividend-paying companies follow a regular calendar schedule for distributing the payments, typically on a quarterly basis. This gives investors a reliable source of income.

This stream of income helps to boost and protect returns. When stock prices move upward, dividends enhance shareholders’ returns. Shareholders get the benefit of a higher stock price and the flow of income; when combined, these elements create total return. Dividend payments provide a minimum rate of return that will be achieved, as long as the company does not alter its dividend policy. This helps cushion the blow of downward market moves.

Yet, dividend stocks typically don’t offer dramatic price appreciation, but they do provide investors with a steady stream of income.

“I do not own a single security anywhere that doesn’t pay a dividend, and I formed a mutual-fund company with that very simple philosophy.” Kevin O’Leary

Kevin O’Leary, known to many as “Mr. Wonderful”, is Chairman of O’Shares Investments and can be seen on the popular TV show Shark Tank, invests only in stocks that have steady “cash flow” and “pay dividends” to shareholders.  He looks for stocks that exhibit three main characteristics:

  1. First, they must be quality companies with strong financial performance and solid balance sheets.
  2. Second, he believes a portfolio should be diversified across different market sectors.
  3. Third, and perhaps most important, he demands income—he insists the stocks he invests in pay dividends to shareholders.

Kiplinger

Power of Dividend Investing

Dividends are a commitment by a company to distribute a portion of its earnings to shareholders on a regular basis. Once companies start paying a dividend, they are reluctant to cut or suspend periodic the payments.

Dividends are payments that companies make to shareholders at regular intervals, usually quarterly. Dividends and compounding may be a strong force in generating investor returns and growing income.

Dividend-paying stocks are not fancy, but they have a lot going for them. Dividends have played a significant role in the returns investors have received during the past 50 years. Going back to 1970, 78% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding.

“High” dividend yield stocks beat “Highest”

Investors seeking dividend-paying investments may make the mistake of simply choosing those that offer the highest yields possible. A study conducted by Wellington Management reveals the potential flaws in this thinking.

The highest-yielding stocks have not had the best historical total returns despite its ability to pay a generous dividend. The study found that stocks offering the highest level of dividend payouts have not always performed as well as those that pay high, but not the very highest, levels of dividends.

With the economy in recession, equity income investors may be at risk of dividend cuts or suspensions in their portfolios. Dividend quality matters more today than it has in a long time. Thus, it’s important to select high quality U.S. large-cap companies for their profitability, strong balance sheets and dividend quality, which increase the likelihood that they will be able to maintain and grow dividends paid to investors even during periods of economic uncertainty.

Income-producing dividend stocks

Dividends have historically played a significant role in total return, particularly when average annual equity returns have been lower than 10% during a decade. Seek dividend stocks that possess the following characteristics:

  • Currently pays a dividend;
  • Dividend yield above bench mark yields;
  • Higher dividend payments this year relative to last year, or a reasonable expectation that future dividend payments will be raised (in certain cases, a company that recently initiated a dividend will be considered if there is a reasonable expectation that it will increase its dividend in the future);
  • A free-cash-flow payout ratio below 100%(utility stocks are allowed to have a ratio above 100% if free cash flow is positive when calculated on a pre-dividend basis);
  • Improving trends in sales and earnings;
  • A strong balance sheet, as measured by the current ratio and the liabilities-to-assets ratio;
  • An attractive valuation, as measured by the price-earnings ratio;
  • Has no more than one class of shares; and
  • Dividends are paid as qualified dividends, not non- dividend distributions.

Dividend Growth Key to Outperformance

You should invest in corporations that consistently grow their dividends, have historically exhibited strong fundamentals, have solid business plans, and have a deep commitment to their shareholders. They also demonstrate a reasonable expectation of paying a dividend in the foreseeable future and a history of rising dividend payments.

You should also take into consideration the indicated yield (projected dividend payments for the next 12 months divided by the current share price) for all stocks, but place a greater emphasis on stocks with the potential to enhance the portfolio’s total return than those that merely pay a high dividend.

The market environment is also supportive of dividends. A pre-pandemic strong US economy has helped companies grow earnings and free cash flow, which resulted in record levels of cash on corporate balance sheets. This excess cash should allow businesses with existing dividends to maintain, if not grow, their dividends. And while interest rates have risen from historic levels, they’re expected to stay stable for another year or so. This means dividend- paying stocks should continue to offer attractive yields relative to many fixed-income asset classes.

Furthermore, dividend growers and initiators have historically provided greater total return with less volatility relative to companies that either maintained or cut their dividends. There is ample evidence that dividend growers outperform other stocks over time with much lower volatility. For instance, a Hartford Funds study of the past 50 years showed dividend growers outperforming other dividend payers by 37 basis points annually and non-dividend payers by 102 basis points.

One reason dividend growers tend to outperform may be the expanding earnings and cash flow and shareholder-friendly management teams that often characterize these companies. In addition, consistent profitability, solid balance sheets and low payouts enable dividend growers to weather any economic storm.

Trends that bode well for dividend-paying stocks include historically high levels of corporate cash, historically low bond yields, and baby boomers’ demand for income that will last throughout retirement.

Traits of consistent dividend payers

Today’s historically low interest rates have caused investors to invest heavily in dividend- paying stocks and strategies, which has helped bolster their performance. This trend shows no sign of abating as long as interest rates continue to remain relatively low, and demand for these investments will only grow as investors continue to seek income and return.

Here are several financial traits investors should look for in consistent dividend payers:

  • Relatively low payout ratios. A payout ratio measures the percentage of earnings paid out as dividends. The median is 38% for S&P 500 companies, according to Goldman Sachs. In theory, the higher the ratio, the less financial flexibility a company has to boost its dividend
  • Reasonable debt levels. As with payout ratios, this isn’t a one-size-fits-all metric. But if a company has a big debt load, there’s less cash available for the dividend.
  • Strong free cash flow. This typically measures operating cash, minus capital expenditure. It’s important for a company to cover its dividend with its free cash flow.
  • Stable earnings growth. Put another way, dividend investors should be wary of companies with volatile earnings, which can pressure the ability to maintain, let alone raise, payouts.

It’s important to know that not all dividends are treated the same from a tax perspective.

There are 2 basic types of dividends issued to investors:

  • Qualified dividends: These are dividends designated as qualified, which means they qualify to be taxed at the capital gains rate, which depends on the investor’s modified adjusted gross income (MAGI) and taxable income (the rates are 0%, 15%, 18.8%, and 23.8%). These dividends are paid on stock held by the shareholder, which must own them for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. This means if you actively trade stocks and ETFs, you probably can’t meet this holding requirement.
  • Nonqualified dividends: These dividends are not designated by the ETF as qualified because they might have been payable on stocks held by the shareholder for 60 days or less. Consequently, they’re taxed at ordinary income rates. Basically, nonqualified dividends are the amount of total dividends minus any portion of the total dividends treated as qualified dividends. Note: While qualified dividends are taxed at the same rate at capital gains, they cannot be used to offset capital losses.

Dividend growth stocks, known for steady dividend increases over time, can be valuable additions to your income portfolio. A dividend grower typically has a cash-rich balance sheets, formidable cash flow and meager payouts allowing room for more dividend growth. Additionally, dividend growth stocks can provide an hedge against inflation by providing a bump in income every time the dividend is hiked.

References:

  1. https://www.aaiidividendinvesting.com/files/pdf/DI_UsersGuide_12.pdf
  2. https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP106.pdf
  3. https://www.kiplinger.com/investing/stocks/dividend-stocks/602692/dividend-increases-stocks-announcing-massive-hikes
  4. https://www.valdostadailytimes.com/news/business/kevin-o-leary-says-thanks-a-billion-as-aum-passes-1-0-billion-for-o/article_0c22d134-4004-5bc5-868b-c705e26194cc.html
  5. https://vgi.vg/37Gls7y

Past performance does not guarantee future results. Dividend-paying stocks are not guaranteed to outperform non-dividend-paying stocks in a declining, flat, or rising market.

Saving and Investing

Posted on by

“The easiest way to wealth are saving and investing in your mind and in appreciating assets.”

Save and invest today for the life and financial freedom you want later. Investing for the long-term is the only way to truly build wealth and achieve financial freedom.

Retirement doesn’t mean what it used to for a lot of Americans. It used to be something you could count on — and when it came, you were going to pursue the goals and lifestyle you dreamed about and love.

Today, many Americans don’t believe that they will retire, while others are not waiting until retirement and are doing what they love now.

Regardless of your unique circumstances or life’s priorities, it important to save and invest now so later the resulting financial freedom will allow you – in a tax advantaged way – to enjoy a better and happier life later.

A smart investor:

  • Plans for life’s unexpected challenges and investing in uncertain times
  • Conducts research on a product before investing
  • Assesses the impact of fees when choosing an investment
  • Understands that risk exists in all investments
  • Avoids “get rich quick” and “can’t lose” schemes
  • Recognizes the power of compound interest
  • Recognizes the importance of diversification
  • Plans for and invests according to his/her future needs and goals
  • Recognizes the benefit of long-term, regular and diversified investment
  • Verifies that an investment professional is licensed

Establish Emergency Savings

Unexpected emergencies often sabotage our financial goals, so getting in a savings mindset and building an emergency fund is crucial. Start small and think big by setting a goal of a $500 rainy day fund. Once you’ve reached that goal, it will be easy to continue!

Open Your Savings Account

If you don’t have a savings account, now’s the time! Ensure your savings account is federally insured with a reputable financial institution with no fees (or low fees).

Set up Automatic Savings

The easiest way to save is to save automatically!

Choose the amount you would like to automatically save each period. Even $10-50 of your paycheck, weekly or bi-weekly, can provide substantial savings over time.

Contact your employer to set up a direct deposit into your savings account each pay period or set up an automatic transfer from your checking account to your savings account at your financial institution.

Even small amounts, saved automatically each pay period, make a big difference.

Get Serious About Reducing Your Debt

Paying down debt is saving!

When you pay down debt, you save on interest, fees, late payments, etc. Not only that, by having savings you’re less likely to need credit for emergencies – allowing you to keep a lower credit usage percentage.

When you reduce your debt, you save on interest and fees while maintaining or improving your credit score! Create a debt reduction plan that works best for you. Utilize America Saves resources to see the different options to pay down debt.

Get Clear On Your Finances

Create a Spending and Savings Plan that allows you to easily see your income, expenses, and anything leftover. Once you have a clear view of your finances, you can determine where to make changes and what else you should be saving for based on your financial goals.

It’s always the right time to create a saving and spending plan (aka a budget). It’s also a good idea to revisit that plan annually or when a major shift occurs in your income or expenses.

Here are several tips to help ensure that your money is working smarter and harder for you.

Step 1. Determine your income.

To create an effective budget, you need to know exactly how much money you’re bringing in each month. Calculate your monthly income by adding your paychecks and any other source of income that you receive regularly. Be sure to use your net pay rather than your gross pay. Your net pay is the amount you receive after taxes and other allocations, like retirement savings, are deducted.

Step 2. Determine your net worth which is your assets minus your liabilities

Net worth is assets minus liabilities. Or, you can think of net worth as everything you own less all that you owe.

Calculating your net worth requires you to take an inventory of what you own, as well as your outstanding debt. And when we say own, we include assets that you may still be paying for, such as a car or a house.

For example, if you have a mortgage on a house with a market value of $200,000 and the balance on your loan is $150,000, you can add $50,000 to your net worth.

Basically, the formula is:

  • ASSETS – LIABILITIES = NET WORTH

And by the way, your income is not included in a net worth calculation. A person can bring home a big paycheck but have a low net worth if they spend most of their money. On the other hand, even people with modest incomes can accumulate significant wealth and a high net worth if they buy appreciating assets and are prudent savers.

Step 3. Track your cash flow which is both your expenses and your spending.

This step is essential. It’s not enough to write out your actual expenses, like rent or mortgage, food, and auto insurance, you must also track what you are spending.

If you’ve ever felt like your money “just disappears,” you’re not the only one. Tracking your spending is a great way to find out exactly where your money goes. Spending $10 a day on parking or $5 every morning for coffee doesn’t sound like much until you calculate the total cost per month.

Tracking your spending will help you pinpoint the areas you may be overspending and help you quickly identify where you can make cost-efficient cuts.  Once you’ve written out your expenses and tracked your spending habits, you’re ready for the next step.

Step 4. Set your financial goals.

Now you get to look at your present financial situation and habits and decide what you want your future to look like. Ask yourself what’s most important to you right now? What financial goals do you want to achieve?

Some common goals include building an emergency fund, paying down debt, purchasing a home or car, saving for education, and retirement.

Step 5. Decrease your spending or increase your income.

What if you set your financial goals and realize there’s not enough money left at the end of the month to save for the things you want?

You essentially have two choices. You can either change the way you manage your current income or add a new source of income. In today’s gig economy, it’s easier than ever to add a stream of income, but we know that everyone’s situation is different, and that’s not always an option.

Even if you can add income, you may have identified some spending habits you’d like to change by decreasing how much you spend.

Take a look back at your expense tracking. For the nonessential items, consider reducing your spending. For example, if you find that you are spending quite a bit on entertainment, like movies or dining out, reduce the number of times you go per month.

Then apply the money that’s been freed up to your savings goals.

For more ideas on how to increase your savings, read 54 Ways to Save.

Step 6. Stick to your plan.

Make sure you stick to your spending and savings plan. To make saving more efficient, set up automatic savings so that you can set it and forget it! Saving automatically is the easiest way to save.

Reassess and adjust your plan whenever you have life changes such as marriage, a new baby, a move, or a promotion.

Following your plan ensures that you’re financially stable, are ‘thinking like a saver,’ and better prepared for those unexpected emergencies.

References:

  1. http://www.worldinvestorweek.org/key-messages.html
  2. https://americasaves.org/media/yordmpza/7steps.pdf
  3. https://old.americasaves.org/blog/1754-creating-a-budget-for-your-family

Top 10 Investing Terms Google Search

Posted on by

Investing can feel intimidating when you’re just starting out, but it won’t feel that way forever. If you take things one step at a time, you’ll be a seasoned investor before you know it.

Every successful investing journey starts with a set of clear and concise goals, whether they’re as big as retirement or as small as wanting to save for new tires for your vehicle. It’s important to determine and write down what are your savings, investing and wealth building goals.

Additionally, before you start investing, it’s important that you’ve paid off your credit card and consumer debt, that you’re not investing money or capital that you will need within the next six months to three years, and that you have created emergency savings with six to twelve months of essential expenses in cash or cash equivalence.

Here are the top 10 investing terms people search on Google the most:

Search engine data is a great barometer for what’s really on people’s minds, according to Vanguard Investments —and if you’ve ever felt a little embarrassed about googling an investing term you think most people already know about, take comfort in the fact that there are millions of people out there who have exactly the same question.

References:

  1. https://investornews.vanguard/the-top-10-investing-terms-people-google-the-most/

Savings Goal: Emergency Fund | America Saves

Posted on by

Make a pledge to yourself and create a simple savings plan that works.

EMERGENCY FUND

Nearly a quarter of savers who take the America Saves pledge chose “emergency savings” as their first wealth-building goal. And they have the right idea. Research shows that low-income families with at least $500 in an emergency fund were better off financially than moderate-income families with less than this amount. Yet most Americans don’t have enough savings to cover an unexpected emergency.

WHAT IS AN EMERGENCY SAVINGS FUND?

An emergency savings fund consists of at least $500, usually in a savings account that you do not have easy access to. Saving for this fund starts with small, regularly scheduled automatic contributions that build up over time.

WHY SHOULD YOU START SAVING FOR EMERGENCIES?

Maintaining an emergency savings account may be the most important difference between those who manage to stay afloat and those who sink in debt. It also gives you peace of mind knowing that you can afford to pay unexpected expenses and ease anxieties over an uncertain future. That’s because keeping $500 to $1,000 of savings for emergencies can allow you to easily meet unexpected financial challenges such as repairing the brakes on your car or replacing a broken window in your house.

“Having cash or cash equivalents in your portfolio gives you peace of mind and the opportunity to capitalize when everyone else is losing their minds during a market correction,” said Henry Hoang, a certified financial planner with Bright Wealth Advisors in Irvine, California.

Not having emergency savings is one of the reasons many individuals borrow too much money, resort to high-cost loans, or increase their credit card balances to high levels.

HOW SHOULD YOU BUILD YOUR EMERGENCY SAVINGS?

The easiest and most effective way to save is automatically. This is how millions of Americans save. Your bank or credit union can help you set up automatic savings by transferring a fixed amount from your checking account to a savings account. Learn more about saving automatically. 

WHERE SHOULD YOU KEEP YOUR EMERGENCY SAVINGS?

It’s usually best to keep emergency savings in a bank or credit union savings account. These types of accounts offer easier access to your money than certificates of deposit, U.S. Savings Bonds, or mutual funds. Though these are useful tools for long-term saving, they are not ideal for an emergency fund that you may need access to more quickly. But not too quickly! Keeping your money in a savings account makes it much less likely that you will use these savings to pay for everyday, non-emergency expenses. Out of sight, out of mind. That’s why it is usually a mistake to keep your emergency fund in a checking account.

Your local America Saves campaign can help you find a participating financial institution that offers low- or no-minimum balance savings accounts.

HOW CAN YOU GET STARTED?

Those with a savings plan are twice as likely to save successfully. This includes setting a goal to build an emergency fund and deciding how much you want to save each month. This is where we come in. If you’re ready to make a commitment to yourself to save, take the America Saves pledge to save money, build wealth, and reduce debt. We’ll keep you motivated with information, advice, tips, and reminders to help you reach your goal to build an emergency fund.

References:

  1. https://americasaves.org/what-to-save-for/?goal=emergency-fund
  2. https://money.yahoo.com/warren-buffett-advice-is-more-relevant-than-ever-155730298.html

5 Simple Rules for Investing Success

Posted on by

“Definiteness of purpose or single-mindedness combined with PMA (positive mental attitude) is the starting point of all worthwhile achievement. It means that you should have one high, desirable, outstanding goal and keep it ever before you.” W. Clement Stone

Investing is a mental game.  And to be successful at the mental game, you must adjust your mindset and retrain your thinking that as a long-term investor, you need to be able to buy stocks and open new positions when the market is crashing or correcting.  You’re genetically programmed to be a lousy investor.  You must set up systems and rules to fight our normal urges and invest at what appears to be the absolute worst time and when everyone else is fearful and selling.

It is important to accept the fact that you will absolutely enter a position at the wrong time and make a bad buy in the short term.  It happens to every investor at sometime in their life.

Investing doesn’t have to be intimidating or challenging. To get started investing in stocks and bonds, you should follow with deliberate purpose and action five simple rules for building a long-term portfolio, according to TD Ameritrade:

  1. Contribute early and often – The single most important thing you can do in investing is to invest early and save often. Thanks to the magic of compounding, money invested early has more time to grow. Delaying investing can have a significant effect on your portfolio. In fact, for every 10 years you wait before starting to investing, you’ll need to save roughly three times as much every month in order to catch up.
  2. Minimize fees and taxes – Charges and taxes will have an impact on your overall returns, so it’s important to take these into consideration when choosing your investments.
  3. Diversify your portfolio – We all know the saying ‘don’t put all your eggs in one basket’, but it’s particularly important to apply this rule when investing. Spreading your money across a range of different types of assets and geographical areas means you won’t be depending too heavily on one kind of investment or region. That means if one of them performs badly, some of your other investments might make up for these losses, although there are no guarantees.
  4. Consider how much time you have – Investing should never be considered a ‘get rich quick’ scheme. You need to remain invested for at least ten years, but preferably much longer to give your investments the best chance of providing the returns you’re hoping for. Even then you must be comfortable accepting the risk that you could get less than you put in. If your investment goals are short-term, for example, two or three years away, investing won’t be right for you, as you’ll need to keep your money readily accessible, usually in a savings account.
  5. Have a financial plan and focus on long-term goals – A financial plan creates a roadmap for your money and helps you achieve your goals. It is a comprehensive picture of your current finances, your financial goals and any strategies you’ve set to achieve those goals. Good financial planning should include details about your cash flow, savings, debt, investments, insurance and any other elements of your financial life. Knowing what your financial goals are and what sort of timeframe you are investing over may help you stick to your plan and strategy. For example, if you have long-terms goals, perhaps saving for retirement which may be several decades away, you may be less tempted to dip into your investments before you stop work.

https://youtu.be/NxEcO7ITtMo

And, never forget the top two and oldest rules for investors, according to Warren Buffet:

  • Rule #1 of investing is “Don’t Lose Money.”
  • Rule #2 is “Don’t forget rule #1.”

What Buffett is referring to is a state of mind and philosophy for investing. Simply, it means that there’s no such thing as “play money.” You don’t go out and speculate on a stock. You remain patient and disciplined, whether your tax deferred or brokerage accounts are up or down for the month or year.

Investing is not gambling and the stock market is not a casino. There’s no such thing as the house’s money in investing. It’s all your money, and it has to be protected.

So, don’t become anchored to the price of stocks, instead focus on buying good businesses at fair prices.  Only thing that truly matters in investing is the long-term future prospects (innovation, moat, management acumen) and growth opportunities of businesses. Don’t let the loss in the price of a stock get in your head and don’t let a short-term paper loss sway your emotions, behaviors or actions.

Better to be a regular investor rather than be perfect or optimize to price of the stock.  And remember, celebrate good stock buys, and recognize and learn from bad buys.

References:

  1. https://www.barclays.co.uk/smart-investor/news-and-research/investing-for-beginners/10-golden-rules-for-investors
  2. https://www.fool.com/retirement/2007/08/06/invest-early-and-often.aspx
  3. https://www.investopedia.com/articles/financial-theory/11/6-lessons-top-6-investors.asp
  4. https://www.investopedia.com/articles/fundamental-analysis/09/market-investor-axioms.asp
  5. https://cabotwealth.com/daily/how-to-invest/10-basic-rules-of-investing-according-to-the-legends