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Discover Risk Trading For Enormous Profits in Penny Stocks

May 18th, 2012 | Posted by Global Investors

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Bogle on Earning Dividend Income From Stocks

May 16th, 2012 | Posted by Global Investors

I was following an interesting discussion about living off of dividend income from stocks over at the Bogleheads forum, and member Beagler posted a link to a excerpt on income investing from the book Bogle on Mutual Funds.

You may know that John Bogle is the founder of Vanguard, now one of the largest fund organizations in the world and a pioneer in low-cost index funds. But what I really like about his books is his focus on common sense as the foundation for his advice. An example of this is his Gotrocks parable [pdf] adapted from Buffett. But back to this excerpt. He first points out how stock dividends have been a good way to create an income stream over the long run that grows faster than inflation.

Of course, by investing in common stocks you assume the risk that dividends will decline during periods of recession or depression [...] What is truly remarkable is that the record of dividend payments by U.S. corporations heavily favors rising dividends over declining dividends, almost irrespective of prevailing business conditions.

Here’s a chart of the historical S&P 500 annual dividend, inflation-adjusted. (Note this is absolute dividend, not dividend yield percentage.)

Image credit to Multpl.com, data from S&P and Shiller

Now, the problem is that you can also pay too much for dividends. He shares an example of how if you were comparing the dividend income from a diversified stock portfolio yielding 3% and growing at 6% annually or a long-term bond yielding 7% each year, it would take 26 years for the dividend income to total the bond income payments.

Unfortunately, defining what constitutes too high a price for dividends is a fallible exercise, one that must take into account not only the average historical valuations for stocks but the current valuations for other investment alternatives as well. History suggests that stocks are relatively expensive when the price paid for $1 of dividends is above $30 (i.e., a yield of 3.3%) and relatively cheap when the price paid is less than $20 (a yield of 5%). However, stocks may well be attractive at a yield of, say, 3.5% if there are compelling reasons to assume that their dividends will increase rapidly or if yields on other classes of financial assets are relatively unattractive.

In the example shown in Figure 2-5, buying a portfolio of stocks at a 3% yield rather than a bond at a 7% yield might not be a sensible investment, especially considering the incremental risk incurred in holding stocks. When stocks yield 4.5% and bonds yield 6%, that may be quite another story.

What would Bogle say right now, when the S&P 500 yield is ~2% and 30-year Treasury bonds are ~3%? The relative difference between the stock yield and the bond yield is less than 1%. I would argue that his last sentence would suggest stocks are actually preferred over other classes at this point.

Now, I’m not turning in a stock bull, and I still have about 70% stocks and 30% bonds in my portfolio, but this line of thinking makes me happier with my 70% in stocks. I’ve also been looking more at living off of dividend income in “early retirement”.

Bogle on Earning Dividend Income From Stocks from My Money Blog.

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Best 2012 Stocks Contest

January 3rd, 2012 | Posted by Global Investors

1-3 TFB Best Stock Picks For 2012 Contest Or The Best Demonstration That Investing Doesn’t Rhyme With Gambling!

We are at the beginning of the year and I hope you had a great Holiday Season! It’s time for me to get back to work and start the year with our traditional Best Stock Picks For 2012 Contest. So before we get to my stock picks for this year, let’s take a look back at what happened in 2011.

The Perfect Proof that Gambling is Not Investing

Since the goal of this friendly competition is to finish first and we only have 4 stocks to pick, some of us (including me!) took some important risks. These risks were not calculated as we are not investing real money into them and there is not much to lose (besides the fact that my ego hurts!).

So if you think that you can pick any stock for your portfolio based on what you read on a few blogs (besides what is written on The Dividend Guy Blog ) and what you see on TV, you are dead wrong. Investing is far from gambling and I have a great proof; take a look at my stock picks:

HUZ – 13.02%

RIM – 74.51%

POT – 19.66%

CVX + 20.28% (including dividends)

I actually took 3 guesses in 2011; 1 with a commodity (betting on the fact that silver will follow the price of gold), 1 with a techno stock (betting on the fact that RIM had gone through the worst and was ready to kick ass in 2011) and 1 on an eventual rumor of merger or acquisition (betting on the fact that the first hostile bid for Potash was only the beginning).

Well, I got it wrong 3 times out of 3 and this is why my stock picks sucked in 2011!

Here are the full results:

Dividend Growth Investor +15.36%

Million Dollar Journey +3.12%

Intelligent Speculator -4.90%

Money Smarts Blog -9.55%

Where Does All My Money Go -17.04%

My Traders Journal -19.00%

The Financial Blogger -21.73% (bravo!)

Wild Investor -33.34%

Beating The Index -44.08%

And we got beaten by 3 TFB commenters!

Yup, that’s right! Last year, I’ve asked you to participate in this contest and Steve Zussino (+17.83%), Robert @ The College Investor (+20.29%) and JT McGee (+34.50%) beat all of us! Here are the results from all the readers:

JTMcGee	34.50%
Robert @ The College Investor	20.29%
Steve Zussino	17.83%
Passive Income Earner	2.09%
Lionel	1.88%
Craig	-2.54%
101 Centavos	-9.25%
Kevin @ Thousandaire.com	-9.86%
Financial Cents	-15.16%
Jaymus (RealizedReturns)	-18.44%
SustainablePF	-29.77%
Sean	-37.67%
Financial Uproar	-43.07%
DanP	-45.78%
Moloko	-47.64%
Stock Glory	-52.77%
kildozer	-61.81%
Millionvester	-69.02%

Congratulation to JT McGee with a +34.50% Result! I’ll send him a $100 Amazon Gift Card!!

Now back to the Best Stock Picks for 2012

We all agreed to start the very same contest again this year with the very same rules:

4 stocks picked at the beginning of the year

Could be CAN or US

No trades allowed

Dividends count in the yield calculation

This year, I’ll use a different approach as I will pick stocks that I own or that I have analyzed carefully. I’m doing this for 2 reasons:

a) I’m not good at guessing (obviously!)

b) In a highly volatile environment, strong companies will perform better

My Top Stocks for 2012:

National Bank – TSE: NA

I know I can’t really go wrong with any Canadian bank but I think that NA will outperform its peers in 2012. One of the main reasons is that the company is almost done spending hundreds of millions in new software for its branches. We will start seeing productivity gains that will boost both commercial and individual banking results. Their recent acquisitions (Wellington West, the brokerage segment of Montrusco Bolton & HSBC) will also bring in additional income in 2012.

5N Plus – TSE:VNP

This Montreal based company is the leader in speciality metal and chemical products found in the manufacturing of solar panel, smartphones and tablets. They also produce rare earth metals such as tellurium, cadmium and zinc. In 2011, they posted record results after acquiring MCP a company way bigger than them. The stock price hasn’t followed the great results due to global economic uncertainties. Sooner or later, investors will realize that VNP should not be trading at a P/E ratio of 9!

INTEL – NASDAQ:INTC

Intel has proven its stability by showing strong financial results in 2011. With a dividend yield of 3.50% and a low P/E ratio, INTC will certainly do well in 2012. Intel is the leader in its industry and has the biggest R&D budget to make sure they stay ahead of the competition.

Chevron – NYSE: CVX

The price of oil is not slowing down in my opinion and this is why I’m coming back to the only stock that served me well in 2011! Chevron is highly stable and will continue to generate great profits in 2012. A little push on the oil barrel and we should see the stock up by another 10% this year .

Here are the other best stock pick contestants:

Wild Investor

Million Dollar Journey

Dividend Growth Investor

My Traders Journal

Intelligent Speculator

Dividend Mantra

Passive Income Earner

Where Does All My Money Go

Beating The Index

Do you want to join in?

We had to say good bye to Mike Holman from Money Smart Blog this year and we are welcoming 2 newcomers: Dividend Mantra and Passive Income Earner. I’d also like to do the same contest with TFB readers (regardless if you have a blog or not). So if you include your 4 stock picks in the comment, I will be following your picks and the best performer will win a prize in early 2013. How about that?

You don’t have enough yet?

If you are looking for more stocks to buy in 2012, I can tell you that you will find great ideas in The Dividend Growth Index, and my 29 Dividend Stock Picks for 2012 are 2 other projects I started with my Dividend Blog. Please make sure that you do additional research before trading any of these stocks. They are not recommendations.

Disclaimer: I hold NA, INTC, CVX & VNP in my RRSP portfolio.

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U.S. Savings Bonds Have Outperformed Stocks Since 1998?

August 31st, 2011 | Posted by Global Investors

A reader recently told me that he was no longer investing in the stock market after seeing the chart below from the Savings Bond Advisor. It shows the total portfolio value after investing equal monthly amounts in either the S&P 500 stock market index or Series I US Savings Bonds. The time period is from September 1998 (when “I Bonds” started being sold) through August 1, 2011. My comments follow.

The past returns of savings bonds are indeed pretty good, but not likely to be repeated. Series I Savings Bonds (I Bonds) were the new thing in 1998, and the government offered some really enticing interest rates on them. I Bonds have a fixed component that lasts for the duration of that specific bond and an variable component that adjusts with inflation every 6 months. From 1998 to May 2001, the fixed component was always between 3% to 3.60% above inflation (source). However, since May 2008, the fixed rate has been between 0% and 0.7%. For the past year, the fixed rate has been a big fat zero. I would love to have a savings bond paying 3% plus inflation (currently 2.30%), as some current bondholders have, but I don’t expect that to ever happen again.

Now, that doesn’t mean that they aren’t still a competitive investment, especially for the short term. Since interest rates are so low, I still buy savings bonds even at a 0% fixed rate as part of my emergency fund cash reserves.

Savings Bonds are being slowly killed by the government. Even though savings bonds have historically encouraged people of all income levels to save, it appears that the US Treasury is slowly killing the savings bond. As recently as 2008, you could buy $30,000 worth of each type of savings bonds a year, per person. For a while, we were able to even use credit cards to buy them without a fee. Today, you can only buy $5,000 of paper I-bonds and $5,000 of electronic I-bonds a year, and even paper savings bonds are being phased out in 2012. (You can still overpay your taxes and buy paper bonds with a tax refund in 2012.) There was even a NY Times article last week entitled Save the Savings Bond. Basically, even if you wanted to create your retirement portfolio with savings bonds, you can’t.

Investing solely in inflation-linked bonds is actually recommended by some financial authors. The thing is, the government has so much debt that it greatly prefers US Treasury bonds which can be sold by the billions. Printing a $50 savings bonds is not even a drop in the bucket, it’s closer to a H₂O molecule in the bucket. What you can invest in is Treasury Inflation Protected Securities (TIPS), which like I Bonds are backed by the government and pay an interest rate linked to inflation. Economics professor Kolitkoff in the book Spend ‘Til The End recommends your entire portfolio to be TIPS. The problem? You’re gonna have to save a lot. TIPS yields are very low, currently offering yields of negative 0.7% above inflation (!) for a 5-year bond to a meager 1.1% above inflation for a 30-year bond. If you’re okay with saving 50% of your income every year for 30 years, then this plan might work for you.

There is no easy answer as to the best place to invest right now. I am sticking with a diversified low-cost portfolio with both stocks and bonds (including a nice chunk of TIPS inside, which has done quite well recently), and you can see with this chart that it has also done pretty well the last decade.

U.S. Savings Bonds Have Outperformed Stocks Since 1998? from My Money Blog.

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Loyal3: Easily Invest In Brand Name Company Stocks

June 4th, 2011 | Posted by Global Investors

Ready for the next new investing start-up idea? It’s “customer stock ownership plans” from Loyal3. Basically, companies encourage consumers to buy shares of their stock with only three clicks of the mouse, in the hopes that this will ownership will garner loyalty (get it?) and thus higher sales. Think Apple, where shareholders of AAPL are more likely to buy MacBooks. [Via Bits]

You’ll be able to buy in increments of as little as $10 via fractional shares, all with no transaction fees at all (they’re covered by the company). Loyal3 hasn’t actually announced the stocks available, but one would guess they’d be brand name makers of consumer goods like clothing, electronics, or food.

My initial impression is lukewarm. Sounds like an easier version of DRIPs. But the stocks will be likely limited to visible brand names, so it won’t really provide investors with actual diversification. Otherwise, I can’t think of any brand I like that much. I have a hard time being emotionally attached to a corporation. The one thing I do like is that they promote individual shareholder activism, which can keep management on their toes.

The other thing that caught my eye was the fact that they accepted credit cards for the stock purchases. Given their “no fees whatsoever” mantra, without fees this means you can get cash back/points/miles from your stocks purchases, kind of like getting a commission instead of paying it . (The most you can invest per company is $2,500 a month.) Stocks are likely too volatile to easily profit from this, but perhaps someone can figure out a way to take advantage of this feature.