Time to Buy Energy?


IMG_0123There are two fundamental strategies to stock selection – growth and value.  With growth you try to find the stocks in companies that are expanding and will continue to do so for many years.  You profit when the company grows and their share price increases along with the growth.  Eventually they’ll also pay a dividend that will increase in value each year, providing income maybe ten to twenty years down the road.

The second type of investing, value investing, involves picking stocks that are beaten down in value, and therefore are cheap compared to where they should be in price.  Generally the best thing to do is to find industries that are out-of-favor and select stocks within that industry, rather than buying individual stocks that are having issues.  If a whole industry is declining, good and bad stocks will all decline in price.  When the industry recovers, so will most of the stocks within that industry.  In fact, the companies that emerge will do better than they were doing during the last boom time since the weaker companies will have vanished, leaving market share for the survivors to grab up.

If an individual stock is falling because of issues at the company, however, there may be systematic issues with the company.  Many of these companies will take years to recover, and may disappear entirely.  One example in my portfolio where this happened was with Pacific Sunwear, which I had bought at $20 per share, then again at $2 per share once the price had dropped, thinking that they were cheap enough to be worth taking the risk  and waiting for a recovery.  In that case they over-expanded and the taste for their products turned.  Since that point the whole company has filed for bankruptcy.  The company had systematic issues that didn’t disappear with a turn in the economy.

Right now an interesting place to be from a value investing standpoint is energy.  I held a few oil and gas companies just when the energy market peaked about a year ago, leading to some big losses.  I mistakenly decided that I wanted a hedge against inflation and energy seem like a good inflation hedge, so I bought in, right near the top.  The price of oil then dropped through the floor, taking many of my investments down 80% or more.

I sold many of the companies I had purchased, such as Oasis Petroleum and Ensco PLC, since I didn’t see them coming back for a long time.   Others, however, like Greenbriar and Cameco, still seemed like good places to be as a long-term investment.   Greenbriar makes rail cars and was doing well during the oil boom because of all the oil that is shipped by rail.  They also have business beyond oil, however, so they should do well in any booming economy where a lot of things are being shipped.  I therefore bought more shares after the fall and plan to sit on them for several years, waiting for the recovery.

Cameco is the world’s largest uranium producer.  They were hurt both by low oil prices and by the Japanese nuclear accident.  Nuclear power, however, is the only currently viable energy source that doesn’t produce carbon dioxide, and with many countries imposing carbon taxes and other measures to reduce CO2 production, nuclear may become much more popular.  I therefore bought more shares of Cameco after the fall.

These are not short-term position.   It takes time for industries to recover.  Over long periods of time, however, mixing in a few value positions with growth positions can pay off well.  We’ll see what happens for me with these two positions.

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Looking at Stock Dividends a Different Way


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When you look at the dividends that stocks pay, you at first might wonder why anyone would care.   Stocks considered good dividend payers might pay 1-2%, where you can get more than that easily in bonds, something on the order of 3-4%, without even heading into junk categories if you go into the longer term bonds.  You can also get a 10-15% return by investing in stock mutual funds long-term.  If you are a good stock picker and choose a few companies that grow rapidly, you can make returns in the range of 20% or more.  (Don’t count on this – stock picking is difficult and things don’t always work out.) So why would anyone care about dividends?

The answer is that the amount of the dividend isn’t what matters.  It is the growth rate.  You may be buying a stock that is paying a 1% dividend today, but if that company raises the dividend by 15% per year, the dividend will double in a little less than five years.  This means you’ll be making 2% on your original investment in about five years, 4% in about 9 years, and 8% in about 14 years.  The price of the stock will increase as well, so the absolute dividend rate may stay at about 1%, but you’ll still be getting a higher rate on your original investment.  You’ll just get more in return if you ever decide to sell the shares.

As an example, let’s look at Home Depot.  If you bought 1000 shares of Home Depot back in the year 2000,  you would have paid around $40,000 and collected a dividend of $160 for the year, or about 0.3%.  Since that point the dividend has grown to the point where today those same 1000 shares would be paying about $2,360, or about 5.9% of your original investment.  The price of Home Depot has also increased since that point, where your 1000 shares would be worth $136,000 today, so the dividend rate if you bought in today is about 2%.  As the company has matured, it has been paying out a higher percentage in dividends since the company needs less of its money for growth, but it is still paying less than a bond would because there is also the growth component involved.

With a bond, you’ll get the same payment amount for the life of the bond, then you’ll probably get the same payment amount if you reinvest the money after the first set of bonds mature.  In fact, a real issue with using only bonds in retirement is that the amount of income you’ll receive in numerical dollars will stay the same.  You may retire and have a bond portfolio that pays $60,000 at age 65, which may take care of your needs easily.  In 20 years at age 85, however, you’ll probably still be getting $60,000 from your bonds, but that amount of money will only buy half as much, so it will be like living on $30,000.

If instead you were to have a portfolio of dividend paying stocks that paid $60,000 when you first retired, if the companies raised their dividends by an average of 7% per year, they would be paying about $120,000 when you reach 75 and $240,000 when you reach 85.  If things cost twice as much when you were 85, you would still be able to buy as much with $240,000 as you could have with $120,000 when you retired.  The only issue is that since dividend paying stocks in growing companies – those that would be increasing their dividends regularly – might pay 1-2%, where bonds might pay 4-5%, so you would need to have two to three times as much money in a dividend-stock portfolio as you would have in a bond portfolio to produce the same income level.

If you are several years from retirement, you can buy stocks that are growing quickly and therefore pay no dividends now, but that will mature to the point where they may start paying dividends and growing those dividends in the future.  For example, a few years ago, Apple paid no dividend at all (in fact, someone told me in a comment to a post I’d written about how future dividend potential causes a stock price to rise that they would never pay a dividend, about a week before they announced that they would start).  Today, Apple pays a dividend of $2,28, or about 2%.  If you get into one of these stocks early and hold it into retirement, they will automatically become dividend stocks to provide income for you through retirement.

So remember, when buying stocks for dividends, the potential future dividend is more important than the rate paid today.  So pay attention to things like dividend growth rate and  how much room the company has to expand.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Year-End Financial Forget-Me-Nots


BikeThe new year is of course a time of resolutions and soul-searching.  People see the coming of a new year as a time to change and make themselves better.  People resolve to lose weight, pay off debt, or maybe spend more time with friends.  If you haven’t been doing so already, hopefully one of your resolutions will be to start and keep a budget.  In our house we didn’t do so well in that department this year – only getting a yearly budget together and then a couple of monthly budgets along the way.  After years of saving and investing our finances can take a little abuse, but still I don’t like the feeling of not having control over how we’re spending our money.  I want to know if we buy this doodad, or go on this trip or that, that we’ll still have the money to put away for college and retirement during the year.  I also don’t want to see our account balances declining because we’re spending more than we’re making, so getting back on course with a good budget will be one of my resolutions this year.

 There are a lot of things to do before the new year, however, that you don’t want to forget during all of the holiday madness.  Probably the thing to do is to get these things out-of-the-way in October before the holiday madness really begins, but if you haven’t done these things already, maybe take a little time between Christmas and New Years to get them done and start the next year out right.

1.  Take some losses.  If you have sold some stocks at a profit and had a lot of capital gains in the stock market this year, now is the time to sell some of the losers remaining in your portfolio to offset those gains and reduce your taxes.  You can also deduct up to $3,000 in losses against regular income. (Always check on things like this.  I’m not a tax guy, plus tax rules change all of the time.)   Note that you can’t buy back a stock you sold at a loss for thirty days after the sale, and you can’t buy the same stock less than 30 days before you sell at a loss or the transaction will be called a wash sale and will not be deductible.  The IRS doesn’t want you to take a loss when you really stay in the same position.

Also, note that your investment strategy is a lot more important than saving on taxes, so only sell stocks you were planning to unload anyway.  Don’t sell some stocks you really like but that have just dropped a bit since you bought them just to take the loss, because chances are you’ll never buy them back even though you think you will.  A small move in the price of a stock will make up for a lot of taxes that you pay.  If you would buy the stock again today, don’t sell.  Again, back earlier in the year you could also have bought more shares, waited 30 days, and then sold the shares on which you had the loss, but you might then have a large position than you want.  You could also sell now and hold onto  the cash for thirty days so that you could buy the shares back later, but you run the risk of missing a big move up in the mean time.  Really, it’s best to sell because you no longer want the shares, but think about the timing to take advantage of tax rules rather  than to let tax rules drive your investing.

2.  Pull together a yearly budget for 2017.  Get together with your spouse and talk about the new year.   Talk about how much you want to spend on vacations and luxuries during the year.  If your car is ready for a trade, talk about where the money will come from for that.  Also, talk about the things you want to start putting money away for like home repairs and the next car, then put it in the budget so it actually happens.

3. Start an IRA.     OK, you really don’t need to do this before January 1st because you can make contributions for 2016 through April 15th, but if you go ahead and get the account open, maybe you can contribute some year-end bonus money and get the account funded rather than waiting until April when you may be low on cash.  You can also then save up quickly and make a 2017 contribution early rather than waiting until April 15th of 2018.  The longer you have the money invested,  the more time it has to grow, so it is better to invest early in the year than to wait until the last-minute to make next year’s contribution.  Also, use this time when you are home from work for a few days to actually get an IRA open and choose your investments so that you don’t miss another year.

4. Start an educational IRA.  If you have kids at home, you should start up an educational IRA and start putting money away for college yesterday.  They will be heading out the door to campus before you know it.  As with an IRA, you actually have until April 15th to make a contribution for 2016 (see rules here), but with college such a short time away, any extra time you can give your investments to grow is really golden.  If you start putting away money early and often, you can let the markets help pay some of the costs.

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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