Well that was suitably dramatic. I made this video that walks through an analysis I did that compares investing through a 401k and investing through a taxable brokerage account. You always hear that you should max out your tax deferred accounts before doing anything else. But is that always true? Check out the spreadsheet for yourself: https://goo.gl/J8R6DP Basically, it comes down to the particulars.
Another day, another argument on reddit about investing and logical fallacies. I was pointing out to someone that the decision to hold a stock is the same as the decision to buy a stock because of opportunity cost. Some people didn’t believe me, so I ended up writing this rant: es, but here are some examples that might make it clearer. Let’s look at BP stock. http://finance.yahoo.com/quote/BP In March of 2010, the stock was trading at 57. Then the deepwater spill happened. In April of 2010, the stock was at 29. It was a huge drop. Holding BP in April 2010 is mathematically equivalent to buying BP in April 2010. Whatever you paid for the stock in the past is irrelevant (except for tax purposes). To think otherwise is to fall victim to the sunk cost fallacy. So if you were a holder/buyer in those dark days of horrendous press for BP, then you assumed either explicitly or implicitly that the then-current stock price did not reflect the long term value of holding the stock when factoring in dividends and capital gains. If, on the other hand, you believed that these events were going to permanently reduce the prospects for BP’s stock, then it would be wiser to sell and move the money into something with a brighter future. In this particular case we can see several years later that the person who held would have made about $13 in dividends (not reinvested) and about $5 in capital gains for a total return of 62%. If he had dumped the stock and bought the S&P 500, he would have doubled his money…. https://www.reddit.com/r/financialindependence/comments/5eg56h/my_life_after_fi_reached_at_42_years_old/dacx7zs/ And the point about dividends not being reinvested got me thinking. I’ve been reading my friend Matthew Paulson’s book on dividend growth investing. So what would happen if you were holding BP through the Deepwater Horizon spill, all the associated bad press, and kept reinvesting dividends? Let’s take a look at the chart: We can see that after the spill the stock crashed by about 50% and dividends were suspended for a few quarters. This is a disaster for any dividend buyer. So before we run the numbers on BP, let’s look at what has happened with the overall market since that time. So if your hypothetical BP holder had dumped everything and bought an S&P 500 index fund, a hypothetical $10,000 would have grown to $21,930. Now let’s run the numbers on BP and see what would have happened if instead of selling, our intrepid investor persevered and held the stock while reinvesting all dividends. If our investor friend had $10,000 worth of BP at the bottom of $28.88/share then he would own 347 shares. So here’s what happened… The $10,000 grew to $15,858. As it turns out with the price of oil crashing over the last few years in general, it would have been better to dump the stock and buy the index in terms of total return. But another way to look at […]
I came across a short article on the Washington Post today that maps out the net migration patterns between states in the US and shows us this map: And opportunity to talk about the importance of demographic trends when picking investments. If we look at the map, we see that some of the most attractive states in the country are Texas, Georgia and Florida. It’s worth going through the thought experiment to try to figure out why that is. All three of the states are in the South. That means that they have warmer weather, then places like the Northeast. But that’s not really a sufficient explanation as to why these places more attractive. California, New Mexico, and Arizona all have warm weather and they do not have the humidity that the American South does. So what else might be attractive about these places? For one, taxes. Both Texas and Florida do not have a state income tax. Georgia does have an income tax, but it’s middle-of-the-road as far as state taxes go. It’s about half the level of California, for example. Another factor that goes hand-in-hand with taxes is the overall business climate. These three states, Texas, Florida, and Georgia are all very business friendly. Texas and Georgia. For example, are the two most landlord friendly states in the country. In Georgia, you can have a nonpaying tenant out and evicted in four weeks and in Texas, you can do it in three. In this regard, Florida is not as business friendly as the other two. For whatever combination of reasons, people are moving towards Texas, Georgia, and Florida. So what the design mean for your business? There’s a saying out there that says demographics is destiny. If you do any kind of business or any kind of investing, you need other people to buy your products, services or your investment’s production. So it’s a matter of basic sense that you want to put your money into places where people are going towards rather than where people are leaving from. The great thing about a map like this is that it shows us the overall effect of attractiveness for state. It would be even more useful if it was broken down on the city or county level. But this is a good first approximation. So let’s say you want to start building your rental real estate empire. Where do you go? Fortune for me, I have home bases in both Georgia and Florida. So when I buy rental houses, that’s where I go. You might be interested more in Texas. Texas is an attractive state as receiver in the map, it’s got a great job situation overall. The oil refining business that is centered in Texas along the Gulf Coast is fairly robust even with the dramatic swings in the price of oil. So a stable and growing jobs base is always good for providing tenants for you. You might be interested in real estate or you might not. […]
I got another question about dividend paying stocks on quora: https://www.quora.com/Why-wouldnt-I-buy-dividend-paying-stocks-Are-there-risks Why wouldn’t I buy dividend paying stocks? Are there risks? So I took a minute this morning and recorded a video showing what kind of risks, you need to look out for. There are many steps that have to occur in order for you to receive a steady dividend. First, the company has to make a sale. Then that sale has to convert into actual earnings for the corporation. After that, the company has to decide to pay out the dividend. And finally, the company has to elect to pay the dividend. After all that you receive money in your account. Each one of these steps presents risk. Risk #1: Sales Growth Are the sales for this companies business growing? Are the following question mark on a steady? How reliable is a sales forecast into the future? These are questions you need to have answers to. Any projection about the future is going to have uncertainty, but you want to gain as much certainty and clarity as possible. Risk #2: Earnings Earnings are a much debated topic in the stock market world. Over the past few years, we’ve seen the rise of non-GAAP accounting as a major practice. What this means is that the company will report earnings excluding what they call one-time charges and other accounting gimmicks. The issue is that if company has one-time charges are year, then they are not really one-time charges. You have to know how much money the company is really clearing out of the sales. Some people look to Free Cash Flow as a better measurement of this than earnings. So you have to do your due diligence in order to make sure that the earnings of the company are steady, growing, or falling. Hopefully, the earnings are growing over time because this is where your dividends come from. If a company decides to pay dividends in excess of real earnings, that means that that they are eating into their balance sheet. They are disturbing cash that they cannot afford to lose. If the company does that long enough it will go bankrupt. See you have to make sure on your end that the earnings will support the dividend payout. Some types of companies like real estate investment trusts (REITs) are required to distribute at least 90% of their earnings, but other than that, most companies will distribute a much smaller percentage of their earnings. Risk #3: Dividend Payouts When a company chooses to pay dividend, it creates a set of problems for itself from a public relations perspective. Any company wants to have the highest price possible in order to attract investment over time so that current shareholders can sell into the market at a profit. Paying a dividend is one way to attract investors because a lot of investors view dividends as more rewarding and safer than playing capital speculation. And those investors are correct. The issue comes in when […]
So I was browsing reddit and come across this thread: https://www.reddit.com/r/investing/comments/3ot2yl/i_know_dividend_investing_isnt_all_that_popular/ and it got me thinking. The poster says this: 2) Where are the problems with investing money in moderate-paying low-expense dividend ETFs? I’m having a tough time finding much information on income investing in general, and dividend ETFs seem to be a bit of a rare breed. Most folks doing income investing seem to like picking individual stocks but I feel quite unsafe doing that. (I understand my money will grow faster in Vanguard funds, but for me the psychological safety of taking safe gains on a continual basis helps me to sleep better at night.) Any time people start assuming things about financials, I want to look at the details. So I did. There’s the first question, are dividend paying stocks really going to under-perform in terms of capital returns? It seems to me that it’s at least possible that companies can grow in stock price and throw out dividends. I took the Dividend Aristocrats as my benchmark since we are going to be comparing to an index like the S&P 500 anyways. The Dividend Aristocrats are the S&P 500 companies that have a history of raising dividends for decades. So I compiled the list, looked at the beta (volatility compared to their index) of the individual stocks and came up with this chart: The horizontal bar at the beta = 1 level is the average volatility of the index. The vertical line near the yield = 2%mark is the average yield of the index. So stocks to the right of the vertical line are yielding more than the average S&P 500 member. Stocks above the horizontal beta=1 line are more volatile than average, and those below are less volatile than average. So, are dividend aristocrats going to underperform in capital gains? Taking all the Aristocrats together, yes. The distribution of beta is skew right because of that peak around beta = 0.5. So, the next question is: does that matter? Do the dividends compensate for the lower volatility? To answer that, I looked up the historical returns of the Dividend Aristocrats. I got the performance from 1990 to 2011 from this seekingalpha article: http://seekingalpha.com/article/578321-dividend-aristocrat-investing (even though mean return is the wrong way to look at it) and then I calculated the returns from 2012-2014. Over the period from 1990 to 2014, the S&P 500 had a compound annual growth rate (CAGR) is 9.64% which is slightly higher than the long term historical average of around 8.8%. Standard deviation for the series was 17.91%. Over the same period, the Dividend Aristocrats had a CAGR of 11.77% and a standard deviation of 14.32%. So the Dividend Aristocrats paid more money even with lower volatility. What I’d be very interested in doing is expanding upon the Aristocrats and determining which are really worthwhile. You can see in the scatter plot that there are 11 stocks that either have exceptional yields and/or exceptional beta. I’d like to model a portfolio focusing […]
So the Fed decided to leave rates unchanged, which did not surprise me at all. See my last post about it in early September where I said they wouldn’t. The fundamental problem that The Fed faces now is that the markets, especially foreign markets are going to front-run any expected rate hike. So markets will go down, and that gives The Fed the excuse it needs to not raise rates. They can always just say, “Oh, it’s not our fault, but foreign markets are weighing on the US economy.” It’s the perfect scapegoat! So in short, I was right.