Archive for January 2013

Saudi Arabia in a Suit: Ambient Echo 001

Here is the first post in the “Ambient Echo” category.

First off, there was an interview with the CEO of GM. He said that both parties need to come together and solve our fiscal issues. This is more of the “both sides are to blame” nonsense. Rethuglicans never seem to have a problem with spending when we have a Rethuglican president. I wrote about this in Stop Saying Both Sides Need To Rise Above, The Prospect Agrees With Me and Powell, Founding Fathers, and The Real Problem.

Juanita Jean, who runs The World’s Most Dangerous Beauty Salon, Inc., pointed to an article with yet another glibertarian Rescumlican saying we need to stop taxing and “punishing” the “job creators”. I wrote about this in Dividends and Taxes. That post also points out that a lot of the economic predictions of conservatives never come true, which Paul Krugman wrote about here. That post also pointed out that investors in stocks that have been raising dividends for decades should not be too concerned with taxes rates going up, especially if they go up to the rates of the 1990s, which were pretty good. This post and this post also touch that point.

And the piece that inspired me to write the first post for this category: S.C. GOP Chair: Republicans ‘Aren’t Very Good At Our Message’. It is more of the “we just need to explain our message better” nonsense from Rethuglicans. I wrote about this on Thoughts On The Election. We got your message. It’s not opportunity. It’s not community. It’s not freedom. Especially not freedom of religion. It’s corporate fascism and feudal theocracy. It’s Saudi Arabia in a suit. It’s tax cuts for wealthy, repentant rapists, and scorn for everybody else.

Proof this guy doesn’t get it: “We didn’t reach our base. I’m from the evangelical community and I don’t think we did a good job of reaching out to the evangelical community at all.” Most people who call themselves evangelicals are not evangelicals. They are pathological fundamentalists. This country is getting more secular. But go ahead. Keep pressing the same button. See what good it will do you. If you reach out to fundamentalists, you can’t reach out to anybody else because fundamentalists hate everybody else.

But then again, that is how Rethuglicans think: If Plan A does not work, keep trying Plan A.

 

Dividend Journey 005: You can only sell once

So I was looking at articles around this time. As I said, I had been reading articles about the big bank I was working at. This led me to look at articles about other big companies as well.

A few years before this dividend taxes were cut. For a long time I could never understand what the big deal was. According to Yahoo Finance, a lot of stocks were yielding 2%. That was what bonds were yielding. What’s the big deal? Stock prices were going high back then. Not as high as during the 1990s, but still pretty high.

I have since come to know that dividends were a large part of the return of stocks, and there were periods in which not paying a dividend was not the norm. I think our perception was distorted by the capital gains/price model of stocks. Even when I was young, people would say the way to make money in the stock market was to buy low and sell high. Then the dot-com boom really changed people’s perceptions. Stocks were doubling in a year. Why bother with a 2-4% yield?

At some point I started reading about the Greater Fool Theory: You buy something with a sky-high value hoping to flip it to someone else. I think I first came across this term when the commodities, stock and real estate markets were doing well. Then in 2008 just about every market crashed at the same time.

So active investing was no good, and the indexes were tanking. Aside from hoping to live looooooooong enough to make it back, was there another way? Depends on how you actively invest.

As I said, I was reading articles about large companies. There was one on the Motley Fool called The Secrets of 9-Figure Fortunes. The article (and others that I read, some of them on The Motley Fool) talks about buying stocks that pay dividends and re-investing the dividends.

I knew about compound interest. I also knew about the Rule of 72. A stock paying 2-3% would take a long time to provide income from just the dividends without selling any shares.

But the articles I was looking at talked about stocks that not only paid dividends, but increased their dividends over time. Some of them increase their dividends every year. So think of it as better than compound interest: compound interest with an increasing interest rate. So the yield could stay at 2% if the stock price increased with the dividend payout. As the price goes up, the payout also goes up.

At some point I read about the S&P Dividend Aristocrats, and later the Dividend Achievers. The Aristocrats are stocks that have increased their dividends every year for at least 25 years.

Stocks hit their low in March, 2009. Some of them were down 50% from their highs, even some of the Dividend Aristocrats. If you were relying on price and hoping to sell shares to get by, you had a hard time. But the Dividend Aristocrats kept on paying out more money. So I started looking at the financial statements for these companies on Yahoo Finance and for the most part I liked what I saw. (A couple of the companies I did not buy shares in later cut or did not raise their dividends.) I figured if a company was raising dividends while the world was ending, it was probably a safe bet.

I have moved from a capital gains/price model to a cash flow model. Granted, it takes a lot of cash to have a decent cash flow. I think relying solely on price is also a form of the Greater Fool Theory, a lighter version of someone who intends to flip. We had two crashes in a decade. Relying only on price is stupid. Someone described it as sawing off the tree branch you are sitting on. One issue with the price model is that you might not get the price you need when you need it. Plus by definition the only way you benefit from an asset with no cash flow is by selling. So you only benefit by owning something when you stop owning it.

And you can only sell once.

Dividend Aristocrats is a probably a trademark of S&P. Dividend Achievers is probably a trademark of Indxis. This site has a disclaimer.

Dividend Journey 004

Obviously I did not stay an indexer.

So I was let go from the big bank in 2009. They had billions of dollars in losses, and they got some of it from me and a few thousand other employees.

I was making 401(k) contributions until the end. I also contributed to my IRA and my taxable account. I did not start dividend investing for another year. I wound up making back some of the money I lost when stocks hit their low in March 2009. More because I was lucky than because I was good. Mostly because I misunderstood the 60-day rule. (Reminder: This site has a disclaimer.)

I thought the 60-day rule meant that I only had 60 days after leaving my job to roll over my 401(k) to a traditional IRA. If I did not do it by then, I would have to wait until retirement age.

You can do a direct rollover or an indirect rollover. In a direct rollover, you open an IRA account, and then your 401(k) provider sends the funds to your IRA account. In an indirect rollover, your 401(k) provider writes a check to you. From that point, you have 60 days to put it in an IRA account. If you do not do it within 60 days, you have to pay taxes and penalties. So I put my 401(k) money into a traditional IRA.

During this time I was doing more reading as well. The indexes were not doing too well. I wondered if there was an alternative to indexes. But active investing was a bad idea. What to do?

A List of Area Codes

I am looking for work. I am getting calls from recruiters from everywhere. They leave messages on my Skype account. I like to know which ones to ignore, since there are large parts of this country that I do not want to move to. I like to use area codes to get an idea of where the call is coming from. Granted, this does not always work since someone could use a cel phone with an area code for a prior residence. Still, I have decided to make a list of area codes on this site.

2013-01-13 Blog Title

New blog title: Methane Princess

There have been two liquified natural gas tankers named Methane Princess. But it sounds like a nickname you give to someone behind their back.

“She was smart, she was good-looking, but I just had to break things off with the Methane Princess.”

Dividend Journey 003

So I started putting my money into index funds. I opened up a Roth IRA, a taxable account and I put money into my 401(k).

Detractors of index funds say that you can never do better than the market average if you index (sometimes “index” is used as a verb to mean “invest in index funds”). Proponents say that is kind of the point. While some actively managed funds beat the index in a given year, few do so consistently. If a fund has done better than the overall market for X years, it will probably do worse than the market in year (X + 1). This probability will increase as X increases. You won’t beat the market with an index fund, but you probably won’t beat it outside of one either. In general, the markets tend to go higher over time.

Index funds have less turnover than active funds, so they have lower costs as well. Plus an index fund does not have to spend money on research. Granted, a fund tracking the S&P 500 has to buy 500 stocks. But I would imagine that they get some sort of discount not only since they buy in bulk, but because the composition of the order is predetermined. But I don’t run a fund so I am just guessing.

An interesting fact about an actively managed fund is that other investors in a fund could raise your tax burden. Funds pass on capital gains taxes and other taxes on to their investors. So if you are buying while a lot of other people are selling, you could foot part of their tax bill. That sounds like a raw deal. It could be a really bad deal if you buy into a fund in December, and you help pay the taxes for people who sold earlier in the year.

As I stated, there are investors who beat the market, sometimes over decades. People who argue against index funds will bring up their names: Peter Lynch, Bill Miller, Warren Buffett, George Soros, Steve Cohen. But there are a few caveats. First, the active proponents keep bringing up the same handful of names over and over again. Also, a lot of funds that beat the market are hedge funds, which are inaccessible to most people. (Some people think that is a good thing.) Some, like Lynch and Soros, have retired from managing money. You also need to get in at the beginning of a winning streak. If someone beats the market for 10 years, and you hear about it in year 5, then the big money has already been made. So how to find those funds that are just starting their streak? Good luck with that.

So in the 401(k), I put the money into 3 US stock index funds (large-cap, mid-cap and small-cap), and a bond fund and an international fund. The bond and international funds were not index funds, but I wanted to be diversified and had to take what was offered. In my IRA. I went into a large-cap fund (the S&P 500 fund), an index for US stocks not in the S&P 500 (I think they called it the “Extended Equity Index”), a US bond index fund and an international index fund. In my taxable account I put my money into an S&P 500 fund.

I mentioned that I had done some research, both via books and the web. (Keep in mind I am not offering any services or advice; this site has a disclaimer.)

The Motley Fool and CNN Money sites have been changed in the intervening years. They both had sections that guided you through the whole personal finance continuum: They started with how to get out of debt, how to pay off your credit cards, how to set a budget, how to look for a good savings account, how to invest, etc, etc, all the steps on one page. Now they seem to have things scattered. CNN Money has a retirement guide.

The Motley Fool seems to have split things as well. They have pages on general personal finance and another on how to start investing, with a page that mentions index funds.

I read a few books by Jack Bogle, The Great Mutual Fund Trap, and A Random Walk Down Wall Street. A Random Walk Down Wall Street gets updated almost every year. He never uses the term “index fund”. Instead he uses a phrase like “a diversified basket of stocks”. I probably read a few others, but I cannot remember them right now.

You can also find a few good posts about index funds at Skeptic Money: What Is An Index Fund?, Investing – Where Do I Start?, Financial Flimflam and How Does Turnover Ratio Affect My Mutual Fund Return?

 

Dividend Journey 002

So I went back to college a couple of times (it took me a while to figure out what to do with my life). I went into a LOT of debt, about $40K of loans. During my last semester I got a letter from the government telling me that I had maxed out.

I got a few jobs in software development. At one of the jobs (while I was still in school) I started putting money into a 401(k) plan. I made one contribution, and then there were layoffs. They lost one of their large customers because that customer was acquired. This was around the time of the dot com crash. So the money in that account really did go to zero.

I eventually got one at one of the big banks. When they made the offer and told me the salary, I nearly fell out of my chair. About six months after I joined, the group that hired me left to start their own company. I decided to stay, since I lived in the city, and they were all out in the suburbs. I had no desire to go out there. I was put into a new group that did something totally different with technologies that I was not familiar with.

Then a few months later 9/11 happened. The economy was already slowing down. Now we were all worried there would be layoffs. All of my friends and family had left Chicago. I was living in a new neighborhood. I was in a new group in the bank. I had a lot of debt and not much savings. I realized I was in a very precarious position. So I stayed in a lot and started up a savings account.

I can remember sitting on the floor of my apartment looking at my savings account register when it only had about $2000 in it. I thought to myself that if I got laid off, that $2000 was all that was standing in between me and homelessness. It would not last very long.

My mom told me to start contributing to my 401(k) and to open an IRA. I put it off because I needed money now: I had been unemployed and still had debt. I did not see the point in putting away money that I would not be able to touch for decades when I had financial needs now.

Finally after four years I paid off all my loans and became completely debt-free. I made a LOT of extra payments.

Six months before I paid off my loans completely I did start contributing to a 401(k) and opened a Roth IRA. Before I did, I had done some reading about where to put my money. I did not want to put anything into the company stock since Enron was still fresh in people’s minds. A lot of people at Enron put everything into Enron stock and wound up with nothing.

When I started working at the bank, I would go to Yahoo Finance and go to the page about the company, and I would read articles about it. I would also look at CNN Money and other news sites. CNN Money and Motley Fool both had sections about getting your financial life in order. The steps were pretty much the same: pay off debt, build up some savings, and invest.

For investing, both advocated index funds.

 

Second 2012-12 Dividend Income Report

Here is the second dividend income report for December, 2012. A few companies moved their dividends forward from January (and one from February).

The accelerated dividends came out to $94.12. That brought the monthly income for December to $686.10, and the yearly income for 2012 was $3585.01. The yearly income for 2011 was $3091.99, and for 2010 it was $1336.62.

It is looking like I will only get dividends from five stocks in January.

Here are the stocks:

  • Family Dollar Stores Inc: $5.61
  • ABM Industries Inc: $7.94
  • RPM International Inc.: $12.00
  • Valspar Corp: $13.02
  • Caterpillar: $10.85
  • Illinois Tool Works: $19.60
  • MDU Resources Group Inc.: $9.17
  • Piedmont Natural Gas Inc: $15.93

Image from Wikimedia