Educational

If someone puts their money in an index fund or similarly, a target retirement date fund, they are passive investors. If someone purchases stocks and bonds directly, they’re considered active investors. But people can buy and sell stocks willy-nilly. Maybe because Jim Cramer is hyping a stock. Maybe because they like the product made by a certain company. Perhaps they have FOMO on some new fad. That’s not real investing. That’s more speculative in nature or just trading.

Someone might argue “Hey, Warren Buffett owns Coca-Cola [K], why is it investing if he does it, and speculating if I do it.” Comparing yourself to Buffett huh? Listen, I suppose it isn’t about the stock, but the person. If you bought K because Warren Buffett has it, then you just might be a speculator. Stock ideas come to us from all over and honestly, I’m not judging. Speculation has its place, as does options trading, etc. I enjoy both. There are many approaches to making money in the stock markets, but in every case, one must be a risk manager and exercise some discipline, or the approach will falter over the long haul. Discipline and risk management are a topic for another day. Back to investing: if you really want to be an active investor and feel engaged, you should do at least two things.

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What is Active Investing?Read More »

On April 7, 2003, the Syracuse Orangemen defeated the favored Kansas Jayhawks 81-78 to claim the Division I Men’s College Basketball championship. Certainly, future NBA Hall of Famer Carmelo Anthony, did his part putting up 20 points and collecting 10 rebounds, but it was the freshman Gerry McNamara that made the difference for SU that day. He hit 6 of 8 three pointers in the first half putting Syracuse up 53-42 at the break. Kansas played catch-up the rest of the game and couldn’t quite get there. Of course, making only 12 of 30 free throws is a surefire way to lose most ball games, let alone a championship against a talented team.

How unlikely was G-Mac’s first half performance? Well, it stands as the record for threes made in a half of a championship game. G-Mac was able to hit 6 or more threes in a game a total of 9 times in 135 games. I do not believe he ever hit 6 in a single half before or after the game against Kansas. So that’s once in 270 halves. In fact, the odds of making exactly 6 of 8 threes for a player whose ultimate success rate turned out to be 400 of 1,131 (35.4%) is 2.3%. That means if you turned G-Mac loose into 135 games and he took exactly 8 threes in every half, you’d expect him to hit 6 in a half a total of 6 times.

That first half was unlikely.

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Reversion to the MeanRead More »

Probably not. I mean let’s settle down here and assume that no dividend streak could go on forever. Even if a company were to perpetually stay in business, some adverse event out of their control, is sure to happen. Something that throws their profitability so off-kilter that it is in their best interest to freeze, reduce or even suspend the dividend. There are companies that have been around in one form or another for over a hundred years. Even a few hundred years. Suppose for a moment, there is a publicly traded company who has increased their dividend every year for 50 years. What would be a realistic expectation of how many more years they could keep the streak alive? If you knew nothing about the company’s past and absolutely zero insight into the future, what would your best guess be? Might it be another 50 years?

That seems as good a guess as any. After all, if a company just raised their dividend for the 50th year in a row, it says they’re capable of a 50-year streak. Who better to go another 50 years? It would seem a bit ridiculous to make that same guess if they were just coming off a 5-year streak. It might even seem equally ludicrous to suggest that they’re only good for another 5 years. Have I convinced you that, barring any other information, going another 50 years is the best, most realistic estimate one could make?

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Could a Company Increase Dividends Forever?Read More »

What exactly is Dividend Yield? According to Investopedia, the dividend yield, expressed as a percentage, is a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its stock price. That’s as good a definition as any, but it leaves a few details out. It makes no mention of why we calculate it in the first place. Yield helps us put every stock on an even playing field, by relating their dividend to the magnitude of their price. A company with a $10 dividend trading at $100 per share will have the same yield as a company with a $1 dividend trading at $10. The dividend yield is 10% in each case. But the devil is always in the details. Most sites use either the last day’s closing price or even the real-time, current stock price as the denominator, and that makes perfect sense. However, it’s typically the choice for the numerator that creates the greater difference in published yields for a given stock. Some will use the trailing twelve month’s paid dividend and others will annualize the last paid dividend.

My formula for Dividend Yield annualizes the most recent declared, regular dividend and divides it by the last closing price. This is the best calculation because it is both prospective and conservative. It answers the question of what a purchaser of the stock today can conservatively expect to receive over the next year. Let’s look at the same example for Lowe’s Companies, Inc [LOW] using one of my favorite locales for accurate dividend information, Nasdaq’s own website.

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Explaining Dividends (Part 3 of 3)Read More »

We’re going to look at a very simple and common example of a company paying a dividend. This will lead to a more practical way of using dividends to assess risk.

A few Dividend Kings find themselves listed on the NASDAQ exchange. But what you may not have known is that the NASDAQ has its own website. It is very useful for obtaining accurate information about a company’s dividend, and NOT just for companies listed on their exchange. Below is an excerpt from the dividend history page for Lowe’s Companies, Inc [LOW].

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Explaining Dividends (Part 2 of 3)Read More »

I will keep this very simple. When a business wishes to raise money beyond what it can do from selling a product or performing a service, it will either issue common stock, preferred stock, or bonds. Though there are undoubtedly Dividend Kings with outstanding bonds and preferred stock, this portfolio will be built from the purchase of common stock or shares.

Common stock is an asset that represents ownership in a business. Shareholders can vote to elect the board of directors or to enact corporate policies. However, they are low on the totem pole. In the event a business decides to give up the ghost and liquidate its assets, bondholders, creditors, and preferred shareholders will be paid in full before common shareholders get a dime.

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Explaining Dividends (Part 1 of 3)Read More »