Tuesday, January 17, 2012
Retiring baby boomers need sustainable income that will keep up with inflation through 25 – 30 years or more of retirement. However, with interest rates on bonds and CDs at close to the lowest levels ever, people who are approaching retirement are wondering where in the world they can invest to accomplish this.
Recently, there’s been a growing interest in investing in stocks with high cash dividends. Dividends are the portion of corporate profits that companies pay out to shareholders. Not all companies pay dividends, and companies that do pay them can cut or eliminate them when times are bad. Many large companies, however, have a history of maintaining or raising dividends each year for several years.
Dividends have been an important component of the returns on U.S. stocks for decades, but for the last 20 years or so they’ve mostly been ignored. Very few people cared about stock dividends during the Internet market of the late 1990s or the real estate driven economy of the last decade. Now that yields on bonds and CDs are so low, and dividend-paying stocks are generally cheap, many investors are starting to look at the value of investing for dividend income.
What are the benefits of owning high quality dividend-paying stocks?
o Currently, dividends from large cap U.S. stocks have a higher yield than 10 year Treasury bonds. As of mid January, 2012, the dividend yield on the S&P 500 is about 2.2% which is slightly higher than the 2% you can get on 10 year Treasury bonds.1 Morningstar says that this differential hasn’t been as favorable for dividend-paying stocks since the 1950s.2
o Dividend-paying stocks offer the potential for both growth and rising income. According to Morningstar, “Since 1927, high-dividend-paying stocks have returned 11% a year, beating the 8% return on nonpayers…Better yet, they accomplished this feat while incurring less volatility”.3 Dividends have contributed 44% of S&P 500 returns during this period.4
o Historically, dividends have grown faster than the rate of inflation in the U.S. The rate of dividend increases is uneven year to year, and sometimes even declines, such as in 2009. On average, however, dividends rose 2.4% higher than the rate of inflation between 1947 and 2006.5
o Corporate profits are at record levels (even though the stock market isn’t), and many companies have the potential to increase their dividends. Right now, corporations are being cautious with their cash and paying out a lower than average percentage of their earnings in dividends.6 This provides the potential for future dividend growth.7
Next time: Ways to reduce some the risks of buying dividend-paying stocks.
Dividends are not guaranteed and are subject to change or elimination.
1Jeff Benjamin, “Dividend-Paying Stocks are Now Outperforming Bonds,” Investment News, 1-15-2012, http://www.investmentnews.com/article/20120115/REG/301159979
2Michael Rawson, “Our Favorite Dividend ETFs for 2012,” Morningstar, 1-11-2012, http://news.morningstar.com/articlenet/article.aspx?id=451284
4Lance Paddock, “The Power of Dividends and What They Say About Future Returns,” Advisor Perspectives, 9-20-2011.
5Josh Peters (Morningstar), The Ultimate Dividend Playbook (New York: John Wiley & Sons, Inc.: 2008), pp. 91, 92.
6“Bonds and Dividend Stocks,” Smart Money, October 2011.
7Peters, op cit., pp. 95, 96.
Saturday, April 23, 2011
-General George Washington1
I believe things are slowly getting better in the United States. I know that there’s a lot of doom and gloom around, but I see signs of improvement and hope for the future. The economy is growing—not nearly as fast as it usually does after recessions—but the trend is positive. Unemployment is unacceptably high, but this year about 200,000 net new jobs are being created each month on average. Housing prices are probably within a year of bottoming, in my opinion. Government spending and debt are still out of control, but voters are starting to demand that politicians come up with a plan to fix it. I’m cautiously optimistic that over the next two to three years Congress will agree on some new ideas that will result in some beneficial cuts in spending. I believe it’s also possible that Washington may adopt more pro-small business, pro-growth policies that will unleash the economy for strong expansion. If that happens, tax revenues will go up because of all the new economic activity. A combination of spending cuts and strong economic growth will reduce the annual budget deficit substantially. I think it’s likely to happen, because I believe that’s what we Americans want to happen.
Despite living in tough economic times, each of us has a lot to be thankful for, including the fact that we live in this great country. I think about the blessing of being an American citizen almost every day. We could have been born in a part of the world where living conditions are harsh, where people don’t have the opportunity to pursue a better life, or even where human life is not valued. But instead, we live in a place where the people who came before us sacrificed greatly to build a country where we are safe to be free. I believe America is a special place, with an exceptional national character that will enable us to overcome current and future problems and build a better life for the generations that come after us.
We all know we’re living in an era of problems. The worst ever, if you listen to some of the pundits. In fact, some people think America is on the decline and that we are destined to be a “has been” country that was once great, but has become just another European style welfare state.
I don’t share that point of view. I believe that the American “can do” spirit is still beating in the hearts of most of our fellow citizens. We’ve had problems before, and we’ve overcome them. Remember the high inflation-low growth “stagflation” of the 1970s? That decade ended ugly, with 13% inflation, sky high interest rates, and a deep recession. Then, in the early 1980s, we changed our economic and tax policies to promote growth. As a result, we had an economic rebirth in the 1980s and 1990s. Further back, we survived and recovered stronger than ever from the 1930s depression and World War II. In our 223 year history as a nation, we’ve had many examples of severe problems that we’ve overcome. Most of those problems seemed almost insurmountable at the time, but we eventually figured out what to do. We argued, voted, overcame setbacks, sometimes changed course, worked hard, served and died in the military, started businesses, sacrificed, and built this great country stronger than it had been before. I believe that the willingness of Americans to work hard and overcome our current economic problems is still there.
I don’t know what all of the solutions to our current problems of a slow growth economy and overspending government will turn out to be. We’re having a national debate about what the role and size of government should be. It’s not over, but neither is our future. We’ll figure it out, and come out of these times with a vibrant economy and a feeling of national purpose to lead the world in the direction of freedom by setting the example. I’ve always believed in the strength and goodness of America. It’s why I decided when I was a ten year old boy to serve in the Marine Corps when I grew up, and it’s why I’m an entrepreneur now. It’s also why I’m optimistic about our future.
This isn’t a prediction of what the stock market will do, where interest rates will go, or who will win the next election. It’s my vote of confidence in America.
1 Quoted in David McCulloch, 1776 (New York: Simon & Schuster Paperbacks, 2005).
Friday, December 3, 2010
Here’s some great news that you may not be hearing on TV: The U.S. economy is no longer on life support. It’s growing. Growth definitely sagged over the summer, but it’s picking up now. Here are a few signs:
- New jobless claims are trending downward. Initial claims for unemployment insurance, reported weekly, are at less than two-thirds of the peak two years ago.1
- The private sector has been adding jobs every month this year. We need to add a lot more, of course. Despite fewer than expected being added in November, we are headed in the right direction.2
- Corporate profits are at or near a record high, and rising. Profits of nonfinancial companies are the highest since the end of 2006. As economist Ed Yardeni says, “Repeat after me: Profitable companies hire workers”.3
- The manufacturing sector is strengthening. The November Purchasing Managers Index of manufacturing showed strong growth – including strength in manufacturing employment, new orders, and exports. Economist Scott Grannis says this suggests the economy may be growing at a 4% rate in the 4th quarter, compared with 2.5% growth in the 3rd quarter and 1.7% in the 2nd quarter.4
- Consumer spending is also up. Economist Brian Wesbury says that consumer spending surged in October and has been very strong after Thanksgiving—especially in online purchases. He says consumers are spending more because they’re earning more—private sector incomes are up 4% and small business incomes are up 5.8% in the past year.5
“The ‘forces of recovery’ have been slowly building for the last 18 months, and in my opinion, will not be easily derailed. Left to its own devices, the U.S. economy has a strong propensity to grow, and has been growing despite the fierce headwinds of fiscal and monetary policy.”6What does this mean for you, as an investor? With company profits high and growing, and stocks at low valuations based on next year’s expected earnings7, there’s a lot of room for stocks to rise over the next year or two. And yet—many people are still too heavy in cash and bonds. The memory of the 2008 market crash is still fresh, and much of what they’ve been hearing on the news has been doom and gloom. Unfortunately many of them won’t start investing in stocks again until the Dow Jones Average is much higher. By then the potential for gains may be much less than it is now.
Are you underinvested in stocks for your investment goals? Tampa Asset Management can help you figure it out.
Contact us for a free consultation.
1Doug Short, Weekly Unemployment Claims: Lowest Since July 2008 , Seeking Alpha, 11-24-10
2WashingtonMonthly.com, “Private-Sector Job Growth,” 11-5-10.
3Ed Yardeni, quoted in Hays Advisory’s “Market Comment”, 11-29-10
4Scott Grannis blog, Manufacturing Sector Continues to Improve , 12-1-10; Institute of Supply Management, “November 2010 Manufacturing ISM Report on Business, 12-1-10.
5Brian S. Wesbury and Robert Stein, It's a Self-Sustaining Recovery, Forbes.com, 11-29-10.
6Grannis, op cit.
7Robert Huebscher, interview, Jeremy Siegel on the Upside for Equities and the Virtues of QE2 , Advisor Perspectives, 11-16-10.
Friday, November 12, 2010
Women control 33% of the investment assets in America, but when it comes to getting good financial advice, many feel like second class citizens. Women investors often feel that financial advisors and planners pay more attention to men, value and respect men more, and give men better advice and more investment options.1
Many advisors seem to relate to their male clients on an almost primal level, where investing “is conveyed as an aggressive, even belligerent sport, with terms such as ‘winning,’ ‘losing,’ ‘beating the market,’ ‘running of the bulls,’ ‘swimming with the sharks.’” While these images may appeal to the competitive nature of men, they turn most women off.2
Women tend to approach investing differently. They’re more likely than men to set long term goals, often because of (or in preparation for) “major life changes, such as marriage or divorce, the birth of a child, or death of a spouse”3 or eventual retirement. They want their investment decisions to be in pursuit of those goals and their overall financial security, rather than chase short term performance objectives like beating the S&P 500 in the current quarter.
Women investors want their advisors to understand and be empathetic to what’s going on in their lives, and what they’re trying to achieve by investing. They want clear and meaningful explanations and advice, and sometimes want to be educated, but not talked down to. Most important of all, they want to be able to trust their advisors. Of course, trust has to be built—on respect, empathy, and a true effort to by the advisor to understand them, and of course, honesty.
Unfortunately, far too many financial advisors see women investors through the lens of their own gender biases and stereotypes. Worth.com describes a few4:
- Advisors “may be uncomfortable talking to women about personal matters”;
- Advisors “may believe that women have limited financial knowledge, so they provide fewer investment options and reduced reporting”;
- And the most annoying of all: “assuming husbands are the decision makers, they ignore wives.”
So, what should women investors look for when selecting an advisor? Don’t place too much value on establishing immediate rapport with an advisor. Some of the worst are great salesmen with winning personalities. I think the following qualities are very important, although this isn’t a comprehensive list:
- First, make sure that the advisor has a fiduciary responsibility to act in your best interest. Registered investment advisors (and their representatives) have that obligation. Brokers and insurance agents do not.
- The advisor should strive to gain an understanding of your life and financial goals, and what’s important to you. This includes learning about your family dynamics and the important people in your life, your worries and concerns about money, the objective financial needs and risks in your life, and anything else that’s relevant.
- The advisor’s recommendations should all be related to your investment goals. Be wary of investments that are touted because they “beat the market” over some recent period. This is a sales tactic designed to impress you so you’ll buy the product. As you’ve heard many times, past performance is no guarantee of future success.
- The advisor should put all of his or her recommendations to you in a written investment plan that ties everything to your goals. The plan shouldn’t be boilerplate. It should be tailored for your needs, logical, and written in English without unexplained jargon.
- The advisor should be able to explain everything he or she is recommending in a way that you, as an intelligent person (but not a financial expert), can understand.
- Before you hire an advisor, find out who you are going to be working with after you initially invest. Will you have access to the advisor for reviews and to answer important questions, or will you be assigned to a staff member or junior advisor?
- How much will it cost you? Investment advice isn’t free, but costs should be low. Avoid advisors who charge or receive commissions. When you think about it, commissions give the advisor financial rewards for selling products to you, and create a direct conflict of interest with giving you objective advice that’s designed for your best interest. A fee-only investment advisor who charges by the hour or as a percentage of your investment assets avoids the conflict of interest of commissions.
My experience has been that women make great investors. In general, they know very well the importance of money and becoming financially secure, and are usually very serious about investment decisions. No woman (or man) should hire or keep a financial advisor (or a CPA, attorney, or doctor, for that matter) who doesn’t take her seriously or work for her best interest. Demand excellence from the people who work for you.
1 The Boston Consulting Group, "Leveling the Playing Field: Upgrading the Wealth Management Experience for Women", July, 2010.
2 Eleanor Blayney, "Empowering, Educating, and Engaging Women Clients", Journal of Financial Planning, October 2010.
3 The Boston Consulting Group, op cit.
4 Worth.com, "What Women Want", http://www.worth.com/index.php/component/content/article/3-grow/1566-what-womenwant
Thursday, May 27, 2010
While the risks are real, I believe there are six reasons to be positive about the outlook for stocks over the next 6 – 12 months, even if the market decides to go somewhat lower first:
1. Valuations are low. Based on the consensus earnings estimate for the S&P 500 for 20101, the PE (price to earnings) ratio of the index is about 13, well below the average over the last 20 years. And prices are still 10% lower than just one month ago.
2. Corporate profits are continuing to grow. Earnings for the S&P 500 companies were up substantially in the last two quarters. Consensus estimates are that they will continue to increase at a good clip at least through the end of 2011.
3. Although still weak, hiring has resumed. The monthly trend in non-farm payroll employment stopped getting worse a year ago. Monthly job losses started to diminish in the fall. Since the beginning of 2010 the economy has actually been adding jobs, with an increasing amount each month. It’s not enough yet to start to absorb the millions of jobs that have been lost, but it’s a beginning. If the positive trend continues, as I believe it will, it will help discretionary spending as well as the housing market.
4. The Fed (Federal Reserve Board) will, in my opinion, keep targeted interest rates low for an extended time. The problems in Greece, along with high unemployment in the U.S., low inflation, and the strengthening dollar should keep the Fed from raising interest rates until at least late this year, if not longer.
5. Investor psychology has turned pessimistic since the end of April—which is actually good. There are many ways to take a reading of this—statistics about market trading behavior (put-call ratios, Arms index, etc.), surveys, listening to guests on the business programs, and so on. Put it all together (or just ask your friends), and we find that pessimism is close to an extreme—which has been a very good contrary indicator for the stock market in the past. (Investors tend to feel the most negative near market lows, and the happiest near peaks.)
6. Political changes are in the wind. Many people are very concerned about the expansion of government power, entitlement programs, and spending over the last 15 months, and feel that Congress is out of control. The $13 trillion debt and the annual $1 trillion+ deficit are scaring people. If the trend in recent elections and primaries continues, many incumbents are likely to be voted out of office in November, and the next Congress will be decidedly more conservative. If so, the ability of the current majority party to pass new spending programs will be reigned in somewhat, which could be the start (but no more than a start) of returning to fiscal prudence. If it happens, I believe it will be beneficial for the stock market.
Of course, no matter what the outlook, you should never have more invested in stocks, or take more risk, than what is appropriate for your needs, as spelled out in your investment plan. Your investments in stocks should be widely diversified to avoid taking unexpected big losses in individual stocks. Buying and holding forever, as is often promoted by the big brokerages and mutual funds, is not the right approach—but neither is active short term trading that plays into your emotions (also often promoted by stockbrokers who need commissions). You should have a good plan, based on your future needs for a secure retirement, and you should be able to go to sleep at night.
1 Garzarelli Capital, Inc., Sector Analysis Monthly Monitor, 5-14-2010
Monday, April 19, 2010
Carrying debt is very stressful, yet Americans have a lot of it. Many middle and upper income families never get free of consumer debt, student loans, and car payments. They just keep paying and paying (very profitable for the banks and finance companies), and then adding on new debt. Reminds me of that old coal mining song: “St. Peter don’t you call me, ‘cause I can’t go—I owe my soul to the company store.” Even investors can have unnecessary debt. They get caught up in the trap of thinking that if they can make more in risky stock market returns than the interest they are paying on their loans and cards, they’re beating the system.
In my experience in counseling families over the years, I’ve found that there are four important reasons for reducing and eliminating debt:
1. You’ll be more likely to survive financially if something bad happens in your life—loss of a job or a forced early retirement, a serious illness of a family member, or something else.
2. Most interest charges are not tax deductible. Suppose you are in a 25% tax bracket. In order to pay $100 in interest charges, you have to earn $133.33 and then pay $33.33 of it in taxes to get the $100 to send to the credit card company.
3. You’ll have more money to invest, and you’ll be able to retire earlier (if you want to). In my opinion, you’ll be wealthier when you retire, too.
4. You’ll be happier, and you won’t worry about money nearly as much—maybe not at all.
So, how do you go about it? Here are some guidelines that I recommend:
- Start by buying a copy of Dave Ramsey’s book, The Total Money Makeover. It has some very good advice, and many inspiring examples of people who have gotten free of heavy debt loads.
- Make a written monthly budget, and include everything in it. Don’t forget to divide quarterly or annual bills (such as insurance payments, birthday and Christmas gifts, vacations, etc.) into monthly portions that you will set aside. Dave Ramsey’s budget worksheet is a good place to start.
- Use the budget to uncover things you can spend less on. (Don’t be scared. You can do it.)
- Don’t buy anything new on credit.
- Save up a small emergency fund first, if you don’t already have one. Better yet, have at least three to six months of expenses in a cash savings account if you aren’t in crisis mode in trying to pay all your bills. Don’t use this money except for an emergency.
- Next, start paying extra money each month on the principal of your debt with the smallest balance. When you get that paid off something great will happen to you—you’ll feel so good that you’ll be anxious to get the next one paid off. So, get started paying extra on the next bill with the smallest balance. One by one, get them all paid off—including your student loans and cars.
- Then you can start saving and investing for your children’s college educations, as well as in your 401(k) and Roth IRAs, and to build your wealth.
- Make your cars go as long as they can, save up as much as you can (hopefully the whole price) to put on each car purchase, and buy “pre-owned” instead of new cars.
- After all of your other debt is paid off, and you are saving adequately for college and retirement, begin paying a moderate amount extra on the principal of your home mortgage each month.
Of course, these guidelines can’t cover everyone’s situation. Some people have very complex problems or severe amounts of debt and will need professional legal advice on how to address it. If you believe you are in this predicament, don’t put off getting that advice. Face it head on. Do it for yourself and your family.
For most people, the great news is that you can have freedom from the burden of debt. You can be working for yourself instead of the bank. If you commit to it, you’ll probably be surprised at how quickly you can do it. You’ll be happier, feel lighter and less burdened.
Getting out of debt should be an important part of your investment plan. You owe it to yourself.
Thursday, March 25, 2010
Investing in bonds and CDs. People buy bonds and CDs primarily for safety and income. If you own high quality bonds and FDIC insured CDs, and hold them to maturity (or to when they are redeemed or “called” early), you should get your money back and steady interest income along the way. These are valuable qualities when the stock market is in a swoon like it was in 2008 and early 2009, as well as when you are retired and need steady income.
In fact, if you buy them right, bonds and CDs can be an effective counterbalance to the part of your portfolio that’s invested in stocks. That’s because many of the conditions that make the stock market go down can cause bond prices to be stable or even go up. Most of the time, the higher the percentage of your portfolio that you have in bonds, CDs, and cash, the lower the up and down volatility you experience, which means you’ll have less risk of loss in a given year than investors with a heavy weighting in stocks. Of course, over long periods of time stocks tend to give higher returns than bonds, so investors with a greater need for growth often have to have more invested in stocks and less in bonds.So, how should you buy bonds and CDs for your portfolio? Is there a good strategy for buying them? Are there any risks? What about the growing amount of government debt, inflation, and the economy—don’t those things have an effect on bonds? Are bond funds better than individual bonds? Let’s address these questions one by one.
Strategy for buying bonds and CDs. Most of the time, the best practice is to “ladder” (or spread out) the maturities of the bonds and CDs you are buying. The reason for owning some short and intermediate maturities is so that every year or two you’ll have a CD or bond maturing. Every time one matures, you can reinvest in a new long term bond. That way, you’ll constantly be walking your bond portfolio forward, and be somewhat insulated from the effects of changing interest rates.
The reason for having some bonds with longer maturities is that they generally pay higher interest rates than bonds and CDs with shorter maturities. Also, if interest rates go down for a few years (as has been the case recently), the longer maturity bonds you bought earlier will continue paying the higher interest rates they had when you purchased them.Risks of buying bonds. There are two main risks to consider. The first is that you buy a bond from a corporation, municipality, or state that goes bankrupt. This is called credit risk, which is really the risk of defaulting (not paying interest and principal) at some point in the future. Lower credit quality bonds (also called “junk bonds” or “high yield bonds”) usually pay higher interest rates, but the risk to the safety of your principal is rarely worth it (unless you have a small amount in a junk bond mutual fund). It’s much better to get a lower interest rate from a high quality company or municipality than a higher interest rate from a questionable or struggling company. If you invest in quality, and diversify among various issuers, your portfolio’s overall risk of losing money from a default should be very low.
The second risk is that interest rates will rise in the future, causing the resale value of the bonds you’ve already bought to go down. This can be caused by a pickup in inflation or by a massive increase in government debt, among other things. If you’ve laddered the maturities in the bonds you’ve already bought, you’ve done most of what you can do to protect your portfolio. However, during periods of extraordinarily low interest rates, like now, it’s best to invest new money in very short maturity (up to two years) bonds and CDs. At some point the current appetite of the world for more and more bonds (particularly the large supply of new U.S. treasury bonds being issued each year to fund the deficit) will probably diminish, and interest rates will likely have to move higher to continue attracting buyers. This will, in my opinion, push yields up (and prices down) in all types of bonds, with the biggest effect on the longest maturity bonds. So, for now, I recommend keeping your maturities short for new bond and CD purchases.Which to buy: bond mutual funds or individual bonds? Each one has its benefits and drawbacks. A bond fund is invested in many different bonds, so if one bond goes bad (defaults) it shouldn’t have a major impact on the fund. Also, it’s the responsibility of the fund’s manager to monitor the bonds in the fund and sell any whose risk of default is increasing. This diversification and professional management is valuable when you are investing in complicated bonds (like convertibles), or in riskier bonds (such as junk bonds or bonds from emerging markets), or in your 401(k) where CDs and individual bonds aren’t available. It’s not as valuable, and may not be worth the cost, when you are investing in high quality bonds like treasuries, or investment grade corporate or municipal bonds, where the risk of default is very low.
Bond funds have one major disadvantage, in my opinion. Unlike individual bonds, funds do not have a maturity date with a promise that you’ll get your principal back at that time. If interest rates rise after you invest in a bond fund, the price of the fund’s shares will go down and may or may not come back up to the full value of your original investment when you eventually sell the fund. Individual bonds, on the other hand, do mature at full face value on a certain date (or on a predetermined “call” date). If you’ve bought high quality bonds with a low risk of default, you can be confident of getting the full face value of your bonds if you hold them to the call or maturity date. Therefore, in general, I recommend owning individual CDs and high quality bonds with laddered maturities. Of course, each investor’s situation is unique, and for some people bond funds are more comfortable and appropriate.As you work hard and invest to rebuild your wealth, make sure you are on solid ground. In the last four blogs, we’ve outlined the most important steps:
- Part 1. Start with a good investment plan based on your personal needs.
- Part 2. Have the right mix of stocks vs. bonds and cash – for you.
- Part 3. When you invest for growth in stocks – diversify and keep your costs low.
- Part 4. When you invest in bonds and CDs – ladder maturities (but stay short term for now) and buy quality.