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Tips On Managing Your Portfolio

We previously talked about how to get higher returns by investing in a peer to peer platform (P2P) instead of a traditional saving product offered by the banks.
 

However P2P is now a very mature industry. Gone are the days when there were just two to three peer-to-peer lending platforms. What started from Zopa has evolved into a whole industry of alternative finance.
 

There are many options in P2P, each doing business in a slightly different way. Some platforms only offer loans for personal finance, while others deal exclusively in businesses loans and loans for real estate development. You have quite a choice when deciding what to invest in.
 

If you are a mature investor, the question facing you is not where and how to invest, but rather how to build and manage an effective portfolio.
 

  1.  Understand your risk profile

  2. Risk is an inherent part of any business. An effective portfolio is one that gives you the returns you need. And to understand what you need, you need to understand your risk profile. Are you risk averse or you are willing to take high risk for extremely high returns, or are you somewhere in between the two extremes?
     

    There are platforms which give out loans to people with low credit scores and bad histories. These are usually low quality loans, meaning unsecured loans. However you may get as much as 17% per annum from these loans. On the opposite end of the spectrum are platforms which will give you a guaranteed return, but percentages start from a bare minimum of 3%.
     

    To make your portfolio truly effective you will need to find a balance. Find out what you can afford to lose and the bare minimum return you need to achieve.
     

    Also if you research effectively you will find platforms that pay a good return while having security features like provision funds or secured loans in place (loans given against security).

     

  3.  Diversify

  4. No matter what you invest in, diversification is extremely essential. The age old saying, “Do not put all your eggs in one basket” holds very true when building an effective investment portfolio.
     

    Diversification works two ways when talking about investments in a peer to peer lending platform. First you should invest the bulk of your investment in one P2P platform. The second is a bit more complicated. Many P2P platforms automatically distribute your investment over a large number of loans, but in some platforms you yourself choose which loans to invest in.
     

    When you are manually selecting loans to invest in you have to take care of two things. Do not invest the bulk of your investment in one single loan and when spreading the investment over different loans, ensure that they are “different types of loans”. For example, some platforms like Landbay offer secured loans for buy-to-let mortgages. Others like Zopa are peer to peer lending platforms for personal loans. In times of recessions, the demand for personal loans may go down and there is a good chance people with funds may choose to invest in property.

     

  5.  Research

  6. The sage of Omaha is what he is because he does not trust his gut, instead he undertakes effective research.
     

    Let me give you an example of effective research. A few years back, Saving Stream was launched. Saving Stream is a pretty good platform giving a fixed return of 12% per annum. However back then a few investors online researched it so well they found out that its online banner ads had used a stock photo of a person and under that photo was a review by an investor singing praises of Saving Stream. It turned out the stock photo was a blunder but the review was real. Saving Stream finally got a good developer for their website and is doing great now. The point of the story is that those researchers went through everything before investing their money. That is how thorough you should be if you want good returns.

Posted by Martin May 17, 2016

Rolling in the money puts to repair a trade

Repair manYou know it. You sell a put option and the trade goes busted next day. If you have never experienced this, then you are still going to. That I can guarantee.

In the past, I tried to predict the market/stock direction so I could be on the right side of the trade.

Today, I laugh at such effort. It’s futile and you will never be right. At most, you may get 50% chance to be right. But that 50% is nothing to spend an effort for.

TD Ameritrade has on its website a tool called “Predict Wall Street”. If you decide to play it, you will find out that the community is 40% right (sometimes even 55%). My score of predicting stock movement is 50%.

I can flip the coin and get the same result.

So, don’t bother predicting stocks or the market.

Rather, learn techniques which help you when you are wrong.

When you sell a naked put and the trade heads south you have two ways how to react:
 

1) You are still bullish on the original trade and you consider the price drop just temporary.
2) You doubt your first assessment (you are probably no longer bullish) and want to improve your odds right away.
 

Next, I try to describe several situations which may happen and how I would react to them based on the above mentioned classifications.
 

Continue reading >>>

 

Posted by TwillyD April 20, 2016

Medical Device Companies are Thriving, But Steer Clear of This One

Many medical device companies are considered solid investments because they are in a space that has a broad reach. This is especially the case for those companies that offer advanced products.

Such is the case for Osiris Therapeutics (NASDAQ: OSIR). However, the regenerative medicine products that it develops, manufactures, markets and distributes may be stalled due to a slew of issues that are having a significant, negative effect on the company and its stock. This includes its Grafix products, cryopreserved placental membranes that are used to treat hard-to-treat acute and chronic wounds.

In this piece, I’ll go over Osiris’ issues as a warning that you should steer clear of this medical device company’s stock in the short-term.

In mid-July of last year, investors in were likely celebrating the company’s stock reaching an all-time high of $23.67 per share. However, today investors in the company, or at least those who continued to hold the stock, are likely not in such a good mood. This is due to the series of events that have occurred over the last year that have led to the stock now trading at all-time lows.

On the verge of losing its listing on the NASDAQ, company officials are reportedly in the midst of taking steps to not only get back in the good favor of NASDAQ officials, but also get back in the good graces of investors.
Osiris researches, develops, manufactures, markets and distributes regenerative medicine products in the U.S.

 

 · Loss of national sale’s head

 

The events that have bogged down the company, and wreaked havoc on its stock, relate to many issues that are uncommon to most publicly-traded company. They include employing as head of its national sales department who is now being prosecuted for federal crimes while working for his previous employer.
Federal prosecutors brought charges against Todd Clawson in March due to his role in a sales scheme. While at Advance Bio Healing, (ABH), Clawson allegedly provided kickbacks to doctors in order to induce them to use ABH’s products. The kickbacks allegedly included all sorts of luxuries, including “speaking fees,” and, in one case, Def Leppard tickets.

Federal prosecutors charged Clawson earlier this month with bribery, conspiracy to commit criminal conflicts of interest and health care fraud. He no longer works for Osiris.

After Clawson left ABH, he began work at Osiris as the head company’s national sales group. Osiris had seen its sales improve substantively to $60 million in 2014 from $24 million in 2013, when Clawson came aboard. While federal prosecutors work through their case against Clawson while he was with ABH, investors must deal with the loss of Clawson, a senior sales executive, which could be a distraction for the company and result in disruptive changes in Osiris’ salesforce and its practices.

 

 · When it rains it pours

 

To be clear, Clawson has not been charged with any wrongdoing while working at Osiris. Regardless, it appears that Osiris needs no help in hurting itself. Its own mishandling of its financials has led to many concerns that its books are very much out of whack.

The NASDAQ sent a letter to Osiris this month warning that the company faced being delisted over failing to file its 10K on a timely basis with the Securities and Exchange Commission.

The specific problems the company experienced dealt with accounting issues that seem to have led to it submitting unreliable financials for the first and second quarters of 2015. Still unable to sort all this out, in mid-March, the company notified NASDAQ of its failure to timely file its annual report. NASDAQ responded by threatening to delist it. The letter from NASDAQ, dated March 17, 2016, requires Osiris to submit a plan within 60 days to address being in compliance with NASDAQ’s filing requirements for continued listing. The company has stated that it intends to submit the plan of compliance as soon as practicable. Easy calculation places that deadline date in early May.

Osiris is completing an accounting review of contracts with distributors that were previously reported in its audited annual financial statements for the year ended Dec. 31, 2014, and its unaudited interim financial statements for quarterly periods in 2015. It is also completing amendments to certain periodic reports previously filed with SEC. It is also changing to an independent registered public accounting firm.

Next month will be key in determining whether you should consider investing in Osiris because that is when we’ll learn about the company’s fate with the NASDAQ.

Avoid Pure Plays in Banking For Now

This week, the bulk of the firms in the financial sector are wrapping up the reporting of their earnings for the first quarter. And whether it be to your dismay, surprise or pleasure, the numbers they are reporting are not as bad as what had been anticipated.

Most of the big banks reported last week, and for the most part, they beat analysts’ estimates. So far this week, other firms in the sector are also beating analysts’ estimates. Cheers over these beats are mitigated, however, because analysts’ estimates have been continuously lowered since the beginning of the year. The reason stems from analysts taking into account the myriad of pressures financial firms are enduring in the current business environment.

As the remaining firms in the sector report Q1 2016 earnings this week, investors are trying to make heads or tails of how to play the market moving forward. Considering what earnings are indicating so far, it may be best to avoid pure plays and instead focus on banks with diversified lines of business.

 

 · What’s nagging the financial sector

 

Firms in the financial sector have been plagued by a slew of factors that affect their top and bottom lines. These factors include lower interest rates and tighter banking regulations. The big banks’ situations have been aggravated by slumping oil prices that negatively affect the value of the loans they made to energy companies. This has especially been the case for banks that made loans to companies in the oil and gas sector. Many of these companies have been unable to make their loan payments because they took huge losses when oil prices declined.

To mitigate these loan losses, some banks have increased loss provisions on these loans. These banks include Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC).

I brought you a story last week about these particular big banks, among others, reporting their earnings, and noted that another challenge they have faced relates to federal regulations. Banks are still dealing with the effects of the new rules that went into governing derivatives. The rules went into effect in 2010 due to the Dodd-Frank Wall Street Reform and Consumer Protection Act. Specifically, the act requires banks to post billions of dollars of collateral for certain derivatives trades.

Another challenge coming out of Dodd-Frank relates to living wills. As JPMorgan rolled out its better than expected earnings last week, federal regulators announced it being one of five major banks that it still has concerns about when it comes to the plans.

Specifically, Dodd-Frank requires that bank holding companies with total consolidated assets of $50 billion or more periodically submit resolution plans to the Federal Reserve and the Federal Deposit Insurance Corporation. Each of these living will plans must describe the company’s strategy for “rapid and orderly resolution in the event of material financial distress or failure of the company, and include both public and confidential sections.” Certain nonbank financial companies designated for supervision by the Federal Reserve must also have living wills in place.

The other banks that were dinged over their living wills were Bank of America, Wells Fargo, Bank of New York Mellon Corp. and State Street Corp. All of these banks have until Oct. 1 to submit revised living wills. If their revisions don’t pass muster, the banks could be subject to higher capital requirements.

 

 · Diversity is key

 

One of the learning lessons to come from the performance of banks during the first quarter relates to which of them have the best chances to continue to improve their earnings. This brings me to my point about pure plays.

As you know, pure plays relate to companies that typically focus on particular products and services. This allows them to carve out most of the market share. On that same note, pure plays can present higher risks because they don’t offer or focus on offering diversified products and services. Examples of pure plays in the financial sector include Goldman Sachs and Morgan Stanley (NYSE: MS).

The weaknesses of being a pure play company versus being a diversified company were seen clearly in the Q1 2016 earnings of banks. JPMorgan and Bank of America, which offer more diversified products than do pure plays, saw their net incomes rise compared to the numbers posted a year ago for the same period.

For example, JPMorgan and Bank of America have large consumer divisions and neither of them relies solely on investment banking. Goldman Sachs and Morgan Stanley, on the other hand, saw their net incomes fall more significantly. Consider the revenues the banks derive from fixed income trading. This is the bread and butter for Goldman Sachs and Morgan Stanley. Revenues from this trading fell 47% and 50%, respectively. That compares to declines of 13% for JPMorgan and 17% for Bank of America.

 

 · Moving forward

 

I see banks reporting stronger numbers in each of the remaining quarters of the year. The living wills will present challenges, but banks have been crafting plans to meet federal rules since they took effect in 2010 when Dodd-Frank went into effect.

Steer clear of the pure plays as they continue to work in this interest rate environment. While trading activity picked up in the first quarter for some investment houses, I’d like to see that trend continue for the next few quarters.

Investors should continue to factor in interest rates and global economic activity and their effects on bank stocks. Also, remember that despite being so beat down, many firms in the financial sector are still attractive on a valuation basis.

Also consider that operating margins have been going up in banks, while they are falling in companies in other sectors in the S&P 500. That is a positive that observers note indicates that banks will be able to generate stronger sales and earnings in the long term.

 

Posted by Martin March 02, 2016

My Strategy update

Time to update my strategy. Again. I know it sounds weird but yes, I need to update my strategy, because the one I wanted to use showed up to be a dead end.

I was trading naked puts at some point against dividend stocks but later I turned into spreads. When analyzing why I found out that I started losing money as soon as I deviated from my strategy. The biggest issue was that I started trading stocks I didn’t want to own, so I started defending my trades, rolling them converting them, doing whatever I could to avoid assignment.

So I turned into spreads against SPX hoping that that would be the right strategy to make tons of money and not to worry about being assigned. Of course, SPX cannot be assigned, right?

I was losing money even faster and I couldn’t stop it.

It is time to go back to basics and start with what originally worked well, but this time stick to the plan.

I will be trading options against dividend stocks as of now only putting the SPX spreads aside for the time being.

 

 · Accounts

 

First, let’s review what I am doing and that I am not that crazy as you may think when reading about my gambling with options.
I use several account and my options trading was just a small part of the entire investing empire I have.

 
TD trading account
 

This account is reported on this blog This is my trading account I use primarily for trading options. I will not be buying and holding stocks in this account unless necessary as part of my trading strategy. This account’s purpose will be generating income to be invested in my other accounts and abridge my early retirement income before my 401k and ROTH kicks in.

 
401 k account
 

This account is not reported on this blog I invest in a 401k retirement account. As of today I contribute 7% of my income and every year when I receive an increase I increase my contribution by 1%. I also get 3% employer match. Choosing investment vehicles in this account is limited but I could choose funds which pay large distributions or dividends (as much as I could) which can be reinvested. I rebalance this account every 6 months.

 
ROTH IRA account
 

This account is reported on this blog This is my dividend growth investing account. I primarily invest into dividend growth stocks and reinvest dividends. I will also use options strategy but not as my primary goal.

 
Scottrade account
 

This account is not reported on this blog I opened this account because I loved the FRIP program. It is not my primary investing vehicle, but I really love to play with the FRIP. It is a play money account. I invest into dividend stocks and use FRIP to be buying new shares and new stocks. I am just curious how this account would build up overtime as I am not contributing any money to it. I just deposited $600 dollars starting money in it about two years ago and let’s see how this works out 20 years from now.

 
Motif investing account
 

This account is not reported on this blog This is yet another pet account to me. It is not a primary investing account but I loved the concept of creating my own mutual fund and let that fund play out on its own. It is an excellent idea utilizing fractional investing. There are many stocks I always wanted but couldn’t afford to buy them or didn’t want to spend $50 dollars only in a regular account (like ROTH) due to high commissions and fees. Motif allowed me to buy those stocks and now they are growing and generating income.

 

 · Put selling strategy

 

The strategy is very simple. I am selling naked puts against dividend paying stocks.

 
You must trade this strategy only against stocks you are willing to own.

1) Sell puts against dividend stocks as long as you get assigned.
2) If you get assigned, keep the stock and sell calls against the stock
3) Sell calls against the stock as long as you get assigned
4) While waiting for assignment collect dividends.

 
 
In my TD account when I get assigned to the dividend paying stock, that will be the only time I end up holding that stock in the trading account. I will only hold it as long as I get the stock called away from me when selling calls against that stock.

I will use this strategy in my ROTH IRA account. The only difference is that I will be selling calls only against shares acquired through the put selling strategy.

For example, if I hold 100 shares of an XYZ stock as my core holding and I sell a naked put against that stock and get assigned I will end up holding 200 shares of that stock.

All dividends from that stock will be automatically reinvested into my core holding (increasing my core holding) and I will be selling calls only against the acquired 100 shares, so if I get called away, I still keep my core holding (possibly increased by dividends reinvesting program).

 

 · Dividend Growth Strategy

 

I will search and invest into dividend growth stocks and reinvest dividends primarily in my ROTH IRA account. I will be buying these stocks and hold them forever (if possible).

To purchase new shares I will use an OTO strategy (contingency order or “one triggers other”) which trails the price of the stock. This technique allows me to buy the stock cheaper.

During my accumulation phase when my account is small and generating less than $1,000 dollars per month in dividends I will use DRIP program for reinvesting dividends.

After my account grows larger and I start earning more than $1,000 in dividends I will stop DRIP program and start using dividend for selective re-investing.

The reason for $1,000 limit is commissions and fees. Unless you can buy shares for free, it is better to buy with $1,000 or more. If you use less, it becomes expensive.

To choose a dividend stock I want to invest in I created a screener which selects the most undervalued stocks for me.

 

Of course, this screener is not necessarily a buy list I will be blindly investing into stocks which are listed as “buy”. I will use those stocks for further evaluation.

 

 · Money distribution

 

After I grow my accounts enough to start distributing money I will use the following rules for money withdrawal or reinvestment.

 
In my TD account:
 

For every $1,000 monthly income I withdraw $200 for my own use and spending (paying bills, debt, vacation, but also buying dividend stocks for example in Scottrade account, or saving to my ROTH IRA account). After I reach $10,000 monthly income, I will take out 50% for my own use. The rest will be left for taxes and account growth.
Still long way to go!

 
In my ROTH IRA:
 

After I reach $2,000 monthly income I invest 50% of that income into dividend growth stocks. The rest will be used to grow my options trading portion of the account.

 

 · Conclusion

 

I have a lot of work in front of me to reach my goals and I hope this strategy of put selling against dividend stocks will help me to reach those goals and I finally will use it right. If I will manage to make it right this time, I should soon recover my account, preserve my money, and grow them enough to reach a comfortable retirement.

Bear with me, follow me and see how good or bad I will be in my effort. If I am successful in this, you will have an example to follow.

 
 

Posted by Martin January 26, 2016

Dividend Investor: How to track a dividend growth portfolio

ROTH IRA
 

Finally, I was able to finish my DGI (dividend growth investment) portfolio tracker in Google spreadsheet.

There are many other fellow investors out there who use Excel or Google Spreadsheet to track their portfolios and when I browsed the internet to find inspiration and knowledge on how to automate my portfolio tracker so I can analyze my portfolio without having it updating manually I came across many great web sites and blogs.

I consider myself a spreadsheet geek who loves to create a plenty of spreadsheet to gain all sorts of possible point of views to see the portfolio from different angles. Of course, in the past I overdone that and since many of my tracking spreadsheets required manual update soon it became tedious and boring work.

So I scratched it all and decided to start over.

I found a great inspiration out there in the blogosphere. A great source of all sorts of spreadsheets to track and analyze your dividend portfolio comes from Scott and his Two Investing blog. He says that he got an inspiration from my calendar page but for sure, he uplifted those spreadsheets into perfection. Definitely, you must check his spreadsheets out.

I also found a good inspiration at No More Waffles and his spreadsheets, I liked the currency tracker since the investor is from Belgium and thus invest in different currencies. I liked his sector charts as they ended up really better indicating what sector goes over the roof in your portfolio and which sectors are underinvested. If you use a pie, you end up with a nice colored circle, but that won’t help much in my opinion.

And of course a good resource to creating my spreadsheet was The Dividend Meter with a pretty cool way of visualizing your dividend progress.

But what inspired me the most was a discussion with a dividend investing blogger about his model portfolio and how the stocks in that portfolio would do in the future. The discussion went on about to see what the entire portfolio would do.

And because I am an old man and I forget everything I now do not remember who that blogger was and what actually we were talking about in details. But one thing inspired me, and it was an idea of creating metrics so you can evaluate the entire portfolio and based on that you can predict the future size of that portfolio and what dividends you would probably receive.

So I created my spreadsheet as shown above this post.

What’s exciting here is that all data which are in yellowish cells are automatically updated. Only the blue cells are those I have to insert manually and I am fine with that. It is only the number of line (also showing how many individual stocks I hold), stock symbol, quantity and trade price. These numbers need to be uploaded from my broker’s account manually and I am OK with that as of now. Everything else uses formulas from either Google finance or Yahoo.

 
You can see the entire document with live data here.
 

What I consider great with this spreadsheet is that now I can see what my entire portfolio does as far as dividend income and dividend growth!

As you can see, my entire portfolio yield on cost (YOC) is 7.23% and my entire portfolio dividend growth is 7.73%.

Of course, all this will change since for example my KMI dividend yield hasn’t been updated yet to the new cut dividend, same goes with LGCY distribution suspension, but that is OK as I have enough data to calculate my portfolio future.

I can now use the existing data and once the new data come in (once Yahoo updates them) I will be able to recalculate the new portfolio future.

And what is my portfolio future?

Here is my future YOC and Income if I reinvest dividends (with no further contributions):

 

Year Income Yield on Cost Holdings Value
1 $1,271.93 7.23% $18,864.31
2 $1,469.32 8.35% $20,333.63
3 $1,706.19 9.70% $22,039.81
4 $1,992.31 11.32% $24,032.12
5 $2,340.33 13.30% $26,372.45
6 $2,766.76 15.73% $29,139.21
7 $3,293.34 18.72% $32,432.55
8 $3,948.90 22.45% $36,381.45
9 $4,772.12 27.13% $41,153.57
10 $5,815.35 33.06% $46,968.92
11 $7,150.16 40.64% $54,119.08
12 $8,875.48 50.45% $62,994.56
13 $11,129.64 63.26% $74,124.20
14 $14,108.31 80.20% $88,232.51
15 $18,091.73 102.84% $106,324.24
16 $23,486.62 133.50% $129,810.86
17 $30,891.28 175.59% $160,702.13
18 $41,198.67 234.18% $201,900.80
19 $55,761.73 316.97% $257,662.53
20 $76,663.05 435.77% $334,325.58

As you can see, if you start investing as early as you can, even small money, your account will grow into a big money making machine and you will be literally able to retire in 20 years.

It is not the value of your portfolio but income it can generate. My portfolio, unless something disastrous happens, will be able to grow my yield to the original cost to a whopping 435.77% in 20 years!

Today, I started with $17,592.38 portfolio and I will end up with $334,325.58 for a total gain of a whopping 1,800.40%. Over 20 years of my portfolio life that will make my average annual gain 90.02%.

Of course, this doesn’t take into account any future contributions which will increase all numbers faster. Let’s see how this portfolio will do over time. At least, today I have created a baseline to my portfolio.
 
 

Posted by Martin January 24, 2016

Dividend Investor: DRIP or selective dividend reinvestment?

Dividend Meter

If you are new to dividend investing you are probably asking yourself a question: “Should I use DRIP (Dividend Reinvestment Program) to reinvest dividends or should I reinvest selectively into different stocks?”

This question is actually quite easy to answer, but first lets take a quick look at what each strategy means:

 

 · DRIP

 

DRIP is a program you can set with your broker up and automatically reinvest all your dividends back to the stock which generated that dividend. It is free (no commissions and fees), you can be buying fractional shares of the stock, easy to set up, and it is totally on autopilot. As soon as you receive a dividend, it is automatically reinvested without your intervention.

I didn’t use DRIP in the past, but at the end of the last year (2015), I decided to set it up. Later in this post I will explain why you should do it too; when and why.

 

 · Selective dividend reinvestment

 

You can choose reinvesting dividends selectively into different stock(s) or a stock which generated the dividend. They are not automatically reinvested. When you receive a dividend you keep it in your account as long as you accumulate enough to buy new shares of any stock you choose.

Unfortunately, with the selective dividend reinvestment you will pay a commission as it will be recognized by your broker as a regular trade. For this reason you need to accumulate enough cash to make it a meaningful trade so commission won’t “eat you up”. I, myself, have a limit $1,000 per trade. Buying with less money will cost you more on commissions.

For example, if you are trading with TD Ameritrade and they charge you $9.95 per trade, buying shares for $100 would cost you almost 10%. And to make 10% loss, your stock will have to go up almost 20% to break even.

With $1,000 amount your commission loss will be a bit less than 1% and that is acceptable.

I used to use this strategy, but no longer do it. But at some point in the future I will get back to this strategy. Find out below why and when you should do this too.

 

 · Selective dividend reinvestment or DRIP?

 

The answer to this question is easy.

You should use DRIP every time your portfolio generates less than your limit per month. Once you start making your limit amount per month, you can switch to the selective reinvestment strategy to boost your dividend income.

For example, if my limit is $1,000 per trade and my dividend portfolio generates less than that per month, I will use DRIP. Why?

If you just started and generate for example $100 per month in dividends, you will be waiting a whole year to be able to do your next purchase. It means, your cash will be sitting in your account doing nothing for the entire year! Not acceptable for me.

Of course, this is a simplified view as you can take into account your monthly contributions and adjust your limit and dividends accordingly. That means, if you can afford contributing for example $200 dollars per month, then you need $800 dollars per month in dividends to switch from DRIP to selective reinvestment strategy.

For example, I invest into dividend growth stocks (DGS) primarily in my ROTH IRA account. With annual contributions limit of $5,500 dollars I can contribute $458 dollars monthly not to exceed this limit. The remaining $542 dollars must come from dividends per month in order to switch into selective dividend reinvestment. Having such cash sitting in an account for a month or two before I can invest is not acceptable to me. Those monies could work for those two months instead.

 
 

Posted by Martin January 21, 2016

Dividend investor: buying stocks in falling market

Lately, when the market was tanking I had a few of my friends who invest into stocks asking me how to invest when markets are falling. When would be a good time to buy?

You probably experienced situations in the past when you bought a stock and then the stock went higher, and later higher, and higher again. It was probably a great feeling and happy investing.

But when the markets or stocks go down you buy a stock and the stock immediately falls down and you end up sitting on a loss. How many times this happened to you?

It happened to me a countless times.
 

Although, for dividend investor, the value of the stock or entire portfolio is not as important as income it generates, it is not much comforting seeing your holdings in red, right?

There is a way how you can avoid this effect when buying stocks in declining market or at least minimize the negative impact of falling stock prices. You can achieve it by timing your entry.

You might have heard a dozen times that it is impossible to time the market, however I will teach you a method how to bottom fishing and attempt to buy a stock of your interest at the lowest possible level. And works perfectly in a falling market!

The method can save you significant amount of dollars when buying stocks and help you to get the most bang for your money.

I have been using this method for about 5 years right now and it helped me to buy my stocks for a lot less than I originally anticipated.

So let’s dive in the rules I use when buying stocks in a falling market:

 

 · Rule #1: Don’t use all your cash at once

 

When you have more than $1,000 to invest, split it into smaller amounts. Never buy your desired stock using the entire amount at once. For example, if you have $3,000 available for your purchase, split it into three $1,000 purchases or two $1,500 purchases.

Do not go however, under $1,000 dollars amount to avoid high commissions and fees unless you can buy cheap or even for free.

Why you want to split the purchase amount? In falling market the stock may continue falling after your initial purchase so you want to buy next time at a lower price and average your cost.

 

 · Rule #2: Place your purchase above the previous market high

 

When buying stocks in a falling market I created a strategy where I calculate my entry based on the previous day trading. The new price is higher than the previous price (previous day high) and I buy the stock only if that price is reached. If it is not reach I trace the price down with the stock.

Here is the calculation I use to determine my entry:

 
(( 1/2 * ( Day Price High – Day Price Low )) + Last Price ) * 1.01
 

I calculate the day trading range of the stock between a day low price and a day high price. The divide this intraday range in half. Add the result to the closing price and multiply everything by 1%.

That will be your purchase price.

Let’s look at Caterpillar (CAT) example:

Let’s say, today, I decide to purchase shares of Caterpillar and I have $3,000 dollars available.

Previous rule tells me not to use the entire amount, so I split it into (3) $1,000 dollars purchases. My initial purchase amount will be $1,000 dollars and I keep remaining $2,000 dollars in reserve for the next purchase.

 
Today CAT closed at $59.69 a share.
The intraday high was $60.42
The intraday low was $58.25
 

Here is the equation again:

((1/2 * (60.42 – 58.25 )) + 59.69 ) * 1.01 = 61.38

My next purchase will be 61.38
 

I created a spreadsheet which calculates this price for me. I just enter a symbol and amount I wish to invest and it calculates the entry price and how many shares I can buy.

Stock calcs
(Click to enlarge)

You can download this spreadsheet here.

 

 · Rule #3: Use contingency order or “one triggers other” (OTO)

 

Here comes the fun part. Now that we know our entry price, we can place a contingency order or one triggers the other order (OTO). Most brokers have this type of the order available in their platform.

What this does it that you place your buy order above the previous intraday high price and then trace your purchase limit order down with the stock. When the stock is falling, the order is sitting there and doesn’t execute. You trace the stock lower and lower, and your buy order executes only when the stock reverses.

 
What the OTO does? It is made of two orders. One order is a trigger order and when the condition is met, the buy order is triggered. Our OTO order would look like this:

 
TRIGGER:  If CAT last price is equal or higher than 61.38 then
LIMIT BUY ORDER:  buy 16 CAT at 61.38 LIMIT.

 
If the stock continues falling the trigger order is not hit and thus your buy order is inactive. You trace the stock down until the stock stops falling and reverses. When the stock reverses and hits the target the trigger order activates your limit buy order.

But your buy order executes only if the price stays below the trigger price. This feature protects you against buying at big gaps up. When the stock gaps up, the buy limit order will be activated, but it will not execute.

Let’s take a look at this process graphically (if you are a visual person like me, this may be helpful):

 
Stock calcs
 
Stock calcs
 
Stock calcs
 
Stock calcs
 
Stock calcs
 
Stock calcs
 
Stock calcs
 
Stock calcs
 

You repeat this process every day until you buy all your shares you originally planned to buy. This method is not 100% foolproof but will help you to be buying as low as possible at stock’s reversal and not at high price.

If the stock is falling, you most likely do not buy immediately and then sit on a loss. Your buy price order will be going down with the stock and you buy at reversal. The calculation above will ensure that the reversal will most likely be a meaningful one and not just a small bounce.

 
After 5 years of using this method it helped me buying new stocks a lot cheaper then what I originally thought or expected or what I would have bought if I bought outright when I decided to buy.

Many times I could buy more shares then what the original calculation assessed. For example, I was going to buy 16 shares of a stock which started falling and when I finally bought after tracing the stock down, I could buy 19 shares.

With dividend paying stocks, you are able to get more dividends for your money when buying more shares and that’s what matters the most in dividend investing.
 
 

Posted by Martin January 07, 2016

Here is why I consider this market bearish

Look at the chart. I use regression channel. It is a study provided for free in TOS. So the lines of the regression channel shown on the chart are drawn automatically by the study based on the price action of the underlying. It is as automatic as Bollinger Bands. It is expected that the price of the underlying stays within the channel. If it moves out of the channel, the longer it stays out of the channel the the most likely the trend reverses.

This happened in August 2015. The channel was trending up, but after the huge drop it started trending down as seen on the chart. So, just to clarify, those line are not drawn by me manually based on my feeling, but strictly by the study based on the price action and time frame (9 months in this case).

 

 

The idea of the Linear Regression Channel 50% is close to the Linear Regression Channel but the upper and lower lines are drawn at the distance of one, not of two, standard deviation from the Linear Regression line. By drawing two parallel lines over and under the Linear Regression line, we obtain a Linear Regression Channel 100%.
At the distance of two standard deviations over and under the Linear Regression line Parallel and equidistant lines are traced. The channel lines are located much farther from the Regression line than any of the closing prices. As far as the Regression channel is a channel for price fluctuations, the top borderline shows resistance whether the bottom channel line shows support. Price values can fall out of the channel for a while, but if the price stays out of the channel for a prolonged period of time, the trend may reverse.
Unlike Linear Regression trend line whose purpose is to show the equilibrium price Linear Regression Channels are the indicators of possible price fluctuations from the trend line.

 

(source: Online Trading Concepts)
 

The trend is clearly down and until the price reaches the upper regression band and stays them longer we are doomed to continue going down.
What is important now is that we moved to the lower band of the regression band and we may expect a bounce back to the mean price (also shown automatically). But, when this reversal happens I do not know as of now. We need to wait for it. There still may be more selling. But once the signal comes and the prices start going up, we will be ready to start selling put spreads.

Some say, we still may re-test August lows. So cautiousness is needed. We may have bottomed already and tomorrow we may see the reversal. Or next week. But even if we see a reversal, it still will be a bounce to the mean or even the upper regression band, but still staying inside the down-trending channel. That’s why I am bearish until the channel changes up again. Before that happens we will play the game of this channel.

 

Posted by Martin October 21, 2015

Great dividend yield misconception

Since I started investing into dividend growth stocks in my IRA account some time ago I thought people know how dividend stocks work. To my surprise many people are unbelievably lost in understanding how dividends work.

Recently, I read a post at Yahoo! The 401(k) crisis is getting worse about a man who started working at 14 and now at his 56 he has nothing saved.

Besides a liberal propaganda in the article trying to convince us to be sorry for the guy and how the system is wrong, which actually it is not, it is people who are wrong, because who prevented him from opening an individual IRA account and saving even $50 dollars a month since he started working when he was 14? I bet no one forbid him to open an individual retirement account but his poor choices.

If Tim (as his was name) started investing $50 dollars a month into his IRA and bought 1 share of (JNJ), Realty Income (O), or Coca Cola (KO), and reinvested all dividends, then after 20 years, his account would be worth little over $100,000 dollars and his dividend income would be $3,000 per quarter. If you add benefits from social security to this number, you would be receiving approx. $2,200 monthly which is enough to retire in some cheaper states of the US (commissions and taxes are not included, so for sake of this example you may want to wait 5 more years and retire 25 years later and not 20).

The shocking part of this article was the discussion below it. When I mentioned my numbers in the discussion (and of course, these are very rough numbers of calculating how DRIP would look like after 20 years) a few people asked me where anyone could pay me 12% in dividends per year and thus my numbers are totally unrealistic and off because there is no company out there who would pay you such yield and if so, it is too good to be true.

When I was reading those responses I was surprised realizing that the author of the comment had no idea how dividend growth stock investing works. If so, you would know right away that good dividend growth stocks would actually pay you a lot more than 12%. Of course, not today nor tomorrow.

And that is the greatest misconception about dividend investing. People take a look at the dividend yield today and think that 3.05% yield is nothing (although in zero interest rate environment, it is a great unbeatable yield), or yield of 1.45% is nothing to cheer about.

People make the mistake at looking at the yield today and not what the yield will be 20 years later.

If you look at the yield future, you will see a lot different story. Here are some examples what your dividend would look like if you bought 1 share of a stock 20 years ago and reinvested dividends:

 

Stock Total annual dividend Yield on Cost (YOC)
(JNJ) 20 yrs ago $1.81 3.12%
(JNJ) today $22.30 38.46%
     
(O) 20 yrs ago $1.86 4.89%
(O) today $28.24 74.31%
     
(KO) 20 yrs ago $1.37 3.24%
(KO) today $28.48 67.35%

 

In the table above I used today’s prices and yields as if it was 20 years ago, eliminate adding new shares, and no capital appreciation was included. The results are only to show how powerful dividend growth investing is over time and not to provide exact numbers.

Yet the example shows that after 20 years of diligent and patient investing your dividend yield will be a lot higher than it is today. Over time those great numbers will be smoothed a bit due to investing new money, but as you can clearly see, your yield can easily exceed 12% and be somewhere in the 20 – 30% range.

Yet people look at today’s yield and consider it not worth the effort.

I read claims that they can get better yield investing into bonds and be better off and safer.

It is no longer true that bonds are safer than stocks. They are exactly same volatile these days as stocks, you can lose money, but the biggest difference between a bond and dividend growth stock is the growth.

From the example above you can see, that your 1 share of Coca Cola would yield 67.35% 20 years from now, while the bond will still yield the original 4% (for example) yield. There is no growth in it. And you bought your bond at par, you actually lose money.

Investing into dividend stocks is not about yield today, but yield in the future.

As soon as I explained this concept, I got slammed with an argument, that it is impossible to get a safe stock and predict the future knowing what the stock will do 20 years from now.

While the argument of predicting future is valid, it is not so when reviewing dividend growth stocks.

Of course, in the market, everything can happen, yet history can be a good guidance to us when evaluating stocks. Therefore jumping directly at yield may be a suicide. Looking at the dividend history can tell you, what the future may look like.

Let’s compare two companies again:

 


Johnson & Johnson (JNJ)
The company pays dividends since 1944 (71 years)
The company increased the dividend for 52 consecutive years!


 

What is the probability that this company will continue perform so well? Although it is not 100% the stake is quite high.
 


Atlas Resource Partners, L.P. (ARP)
The company pays dividends since 2012 (3 years)
The company increased the dividend for 2 consecutive years!


 

What is the probability that this company would continue paying its dividend in the future and keep increasing it?

See the difference?

Although I am not saying that ARP is a bad investment, if I was to choose which stock to buy, it would be a JNJ. There is a higher chance that they will pay dividends in the next 20 years and continue increasing it.

To add more stress on the power of dividend investing here are one more powerful and interesting numbers. If you start investing and reinvesting dividends via DRIP, you will literally double your dividend income every 5 years for the first 20 years. If you wait longer, it then spikes into unbelievable levels.

To illustrate my point I used data from my ROTH IRA account, normalized them and here are the dividend results at different years:

 

Year dividend income YOC holdings value
Year 1 $699.68 4.66% $15,699.68
Year 5 $1,042.98 6.95% $19,303.34
Year 10 $1,828.86 12.19% $26,657.49
Year 15 $3,500.04 23.33% $40,284.33
Year 20 $7,489.10 49.93% $68,290.71
Year 25 $18,472.96 123.15% $134,014.93
Year 30 $54,599.50 364.00% $316,782.35

As you can see, once you go over 20 years, your dividend income more than doubles every 5 years from $7,489.10 annual dividend at the end of the year 20 to $18,472.96 at the end of the year 25 and to $54,599.50 at the end of the year 30.

Also your account value almost doubles every 5 year once you get over 20 years!

And this doesn’t take into account capital appreciation of your stocks and the fact that over the course of that 20 years (if not more) you will be saving and adding more money to your account growing your dividends faster.

The numbers speak for themselves. Give your investment time to grow, reinvest all dividends, invest into good dividend companies even if you can afford only very little every month, and start very early. Start as soon as you learn counting numbers. I teach my kids investing, I started an account for them and every time they get an allowance, they invest it and reinvest dividends. They are 10 and 13 and I hope one day, when they see their little accounts growing, they will appreciate this strategy even more.

And everybody has this same opportunity even Tim from the article at Yahoo! the only thing you have to do is to be willing to do something for yourself, learn and avoid the liberal propaganda of dependency. That will always keep you in the poor house.

Do you have any questions about dividend investing? I am always open and free to help or provide my experience. Do not hesitate to ask. Even $50 dollars monthly savings can make a huge difference in your life. I can see it myself and the only thing I regret is that I haven’t started early.