Don’t invest based on negative news

Something I’ve discovered when I began researching stocks deeply back in 2012: there is ALWAYS bad news. Doesn’t matter what stock you investigate. You will find bad news lurking around every corner.

It can quickly scare you away from investing in really solid companies. One of the most solid stable companies I know about is Coca-Cola. I would own some myself, except I invested in other stocks before I became seriously aware of KO’s amazing profit growing ability. I basically didn’t have the cash to start and my spare cash currently is targeted at being applied to my real estate portfolio and my EIUL.

But what happens when you add KO to your iPhone’s Stocks app and check out the news articles linked every day via Yahoo? It seems just about every week, if not every other week, someone is writing an article bemoaning the decline of soft drink consumption. Sometimes they write it and sometimes they don’t, but you are supposed to infer that this might be the time to bail on holding soft drink companies. The world is getting wise to soda, and it won’t last forever. Sorry, but KO hasn’t stopped creating millionaires yet.

Some of the other companies I’ve invested showed various dips. One of favorite examples is the first stock I bought back then: General Dynamics (GD). I bought it at $72/share. My core reasons for purchase were that GD had a strong history of earning profits and making dividend payments. On top of that, I asked myself what the odds were that they would stop making aircraft? Very low! Well, almost immediately after purchase, their price dipped down to $66/share. That scared the heck out of me! But I stuck with my analysis and held on. Today it’s trading at $117/share. Further more, I originally bought 130 shares. Now I’ve picked up an extra 3.1 shares simply by clicking on the “reinvest” button. Total growth: 60% in two years.

To add to this, don’t forget that when companies do go under, they don’t simply go POOF! Companies are actually big entities with lots of holdings. As they adjust to any current fiscal climate, they can make changes, sell of assets, refashion plans and more. Since you own a piece of that company, you will be given pieces of sell offs, splits, etc. These other companies can sometimes do quite well on their own. It may be that these various components didn’t work well when they were under one roof of management. Your equity in the company doesn’t simply evaporate because the core company trends downward.

So don’t forget to do you in depth analysis and understand fundamentally what you’re investing in. Don’t let the highs and lows of daily news drive your investment plans.

The psychological stress of buying stocks

I remember buying one of my first stock holdings, General Dynamics. I had done hours of research. I can still remember the week I was in San Francisco, stomping around to restaurants, reading gobs of investment articles and reading fundamentals reports. In fact, it was all I could think of even as I ate fantastic sushi every night.

When I bought my first position in General Dynamics, the price was about $72/share. And like clockwork the price dropped to $66. Doesn’t it seem to alway do that?

Suffice it to say, I felt a strong, negative reaction. I understood why people panic and sell their holdings in a very real way. I had ready about that phenomenon, but not really experienced so directly.

But I didn’t sell. I knew General Dynamics was a solid company with strong business underpinnings. They are a leading manufacturer of aircraft and avionics among other things. Bottom line: nobody is going to stop buying aircraft, commercial or military, in the next fifty years.

Instead, I put my attention on other wealth building plans. Or should I say, I focused on other facets of my overall wealth building plan.

It took almost a year for the price of General Dynamics to get back to where I had started. But here’s the key: I wasn’t shopping for price. I was looking for dividends. And they were paid on time as expected. Today the price of General Dynamics is around $87.

Now when I buy stocks, I don’t feel the same concern when it goes negative the day after I buy a position. Instead, I count the days to my next dividend payment. I now almost crave dips in the prices. It’s an opportunity because my profit isn’t in price the dividend yield. That’s where a more reliable form of money can be made when you are buying stocks. My wealth building has been going great and cash flows are rock solid. I couldn’t be happier, and I know I made the right decision back then when I took the plunge.

Apple (AAPL) and General Dynamics (GD) declare dividends

Apple (AAPL)

Earlier this month, Apple made a dividend payment of $2.65 per share, generating a 1.7% or $10.60 annual dividend yield. This is a part of their plan to distribute $2.5 billion (that’s billion with a “B”) to shareholders every 3 months. If you didn’t catch that, they are paying out $2.5 billion EVERY QUARTER.

They have indicated they also plan to use some of their cash to initiate buying back stock. As with any company, this has historically caused stock prices to rise, with less shares being available. Companies in strong financial positions can do this to increase the price as well as increase the interest others have in the stock, both positive things to do when the company is strong. They also indicate they will have plenty of cash after all this to still continue product development and valuable acquisitions.

Over the next three years, their combination of dividend payouts and stock buybacks is estimated to total $45 billion in cash.

It’s important to note that when I purchased Apple stock, I had not planned on buying it as a dividend performing stock, but instead hoping it would continue it’s long path of growth. If I was seeking dividends, I wouldn’t have bought such an expensive stock that had such a low yield. I say this because I don’t want anyone to think I am endorsing Apple as a strong dividend paying stock.

I admit it’s a bit of a gamble, but I run on the assumption that people will want to keep buying their products. Things like the iPod, the iPhone, and the iPad have been incredibly successful and altered the market of consumer devices. In the software development circles that I run, the Apple Macintosh laptop and desktop computers are very popular, at least amongst software developers. I started watching Apple stock months ago, and only wish I would have started sooner. Given all that and their historical growth, I believe their stock price will continue to grow surely and steadily. The fact that they passed Exxon last year as the biggest company ever ($607 billion market value) helps out as well.

General Dynamics (GD)

On August 9th, General Dynamics paid out a regular quarterly dividend of $0.51 per share, resulting in a $2.04 or 3.2% dividend yield. This is good news, because they are keeping up with their previous dividend payouts. I happen to have already received a payout relatively soon after I bought my first position and I first posted about GD, so it was nice to receive more cash to eventually invest in more shares. I am planning to accumulate more dividend holdings before deciding which of my current stocks to invest it in.

To buy or not to buy…

As dividend payouts build up in my account, I have a decision to face: invest immediately to get more of the action, or wait a few quarters and do this once-a-year. If I invested every dividend payout as they occurred, that might put the money back into action faster, but I would be forced to possibly pay more broker fees. For now, it seems better to save up all the dividends and consider doing that once a year, and definitely when prices are at their best levels.

This is another benefit of long term dividend stock investing: there is no rush so I’m not forced into buying at a bad price. I can wait a year, two years, or even more, until I’m comfortable with the price and yield to continue my position. Though I do hope it won’t be two years before I see one of my holdings showing a good position to increase.

Finally, if you plan to purchase any stocks of your own, don’t just buy what I’m buying. Perform your own analysis, understand the company and its products, and make an informed choice.

Disclosure: Long AAPL, Long GD

Rebalancing my portfolio – part 2

I already mentioned the first step in rebalancing my portfolio: replacing my 401k with an EIUL. My second step is investing in some dividend aristocrats and holding onto them FOREVER, pulling in dividends and reinvesting them for the long term.

What’ll you take – dividends or appreciation?

There are a few stocks that have been paying dividends for over 20 years. And not only that, they have increased their dividend payments each year. It’s not that hard to find them. Better than that, some go back over 50 years in paying increasing dividends, each and every year. These are sometimes referred to as blue chip stocks.

There are a couple of ways to make money off of stocks. Either you buy low and sell high (we call that appreciation), or you buy and hold, waiting for dividends payments to come in. By taking the dividend route, you can buy more shares with the dividends and grow your capital, further increasing dividends payments. The longer you stretch this out, the less you are worried about the appreciation of your stock.

People have made a living out of predicting the rise and fall of stocks. They are called fund managers, and they consistently underperform the market indices. They try to guess (yes, I said guess) when the stock will be low and buy it, and try to predict the high to sell. Do you know what happens when they are wrong? Nothing! In 2008 a LOT of mutual funds increased their fees because so many people were pulling out of mutual funds.

When you pick some blue chip stocks that have stood the test of time, you aren’t gambling on appreciation. Instead, you are investing in the power of the company.

Only buy companies you know

Notice how I said investing in the power of the company? That is because you shouldn’t buy stock in companies you don’t know a thing about. Just because a whole gaggle of people are diving into something (Facebook’s IPO anyone?), doesn’t mean you are catching the low. Often when you follow the news, you are late to the game.

Did I mention dividends? Yes, that is the main thrust of this part of my plan, but there is someone out there who HAS stood the test of time in picking stocks: Warren Buffet. That’s why when I got my first dividend payout, I bought one share of Berkshire Hathaway B (BRKB). He has averaged double the market for the past 40 years. No one else has come close. His stock doesn’t pay dividends, but he definitely knows how to grow stock value.

The tax man cometh

No investment strategy can be complete without considering taxes. Since the government has a huge appetite, you need to figure out how you are going to make as much as possible while being strategic in how much you get to keep (like how I couched, ehh?).

One option is to buy in an open account. That means you are buying with after-tax money, and any gains are subject to the tax laws of the day. They will tax you on any gains when you sell as well as any dividends you are paid. Over time, this can eat up your returns.

In my previous article, I mentioned that using a Roth IRA shouldn’t be your primary vehicle for retirement savings. I mean that. Roth IRAs limit you to putting away $5000 a year, and that just isn’t enough for a comfortable retirement. But it doesn’t mean you shouldn’t take advantage of what you CAN put in there. That is why this is just a part of my long term plan (you’ll have to wait for part 3).

There is an old adage: would you pay taxes on a bag of a seeds or on the yield of the field where you planted? In many forums, I have seen people comment that if your tax brackets are identical at the beginning and the end, then it doesn’t matter whether you pay now or later. That is absolutely true. And…very unlikely.

When someone suggests that when I retire I shouldn’t worry about tax rates because I will have less needs, then that smells like someone is setting me up for a rough landing. I would prefer to work towards having MORE when I retire than I have now. Then, deciding what to do with the extra money will become a nice problem to have. That is better than deciding which shift to work at Walmart because I didn’t save enough!

So, if I set things up to pay taxes as I approach retirement, I could either pay less taxes or pay more, based on what direction the government takes. That sounds REALLY risky. I would rather take my knocks now, and then be tax free at retirement.

Think about it: does the government want the taxes from your $100,000 today, or would they prefer to tax your $250,000 that you built up as you enter retirement? As Dave Shafer says, you don’t think the government invented IRAs and 401Ks to reduce their revenue stream do you?

Of course, I have heard the argument made that you should take every tax discount you can now. Waiting until retirement to find that they have changed the tax code and plan to tax you on both ends is a risk of its own. I can appreciate that, because how many times has the government changed it’s mind when it comes to tax codes? This is what you might call caught in their cross hairs. My crystal all is as cracked as yours, but I’m going to gamble that taxing on both ends of a Roth is much LESS likely than tax rates being HIGHER when I retire.

What I bought

So after pouring over historical reports, spreadsheet data, and a little self speculation, here is what I have bought.

  • General Dynamics (GD) – they have a history of paying increasing dividends over 20 years, while currently sporting a 2.88% dividend yield. On April 11th, they announced a $0.51/share dividend. I believe that the need for military aircraft isn’t going to diminish anytime soon.
  • Chevron (CVX) – they have been paying increasing dividends for over 24 years, while showing a dividend yield of 3.34%. They are one of the Big Oil companies. Because this planet is going to be running primarily on oil for the next century, I believe this is not only a good investment, but a good hedge against inflation.
  • Apple (AAPL) – they don’t have a consistent history on paying dividends, but have a long history of consistent growth. This is one of those I-think-people-will-keep-buying-their-stuff feelings. They actually reached a point where they have too much cash and not a clear idea on what to do next. Sounds like a nice problem to me.
  • Berkshire Hathaway B (BRKB) – this is another non-dividend payer, but there is a 40-year history of growing bigger than the market. Heck, they hardly ever do a stock split. The only reason this one split recently had to do with a particular company they had acquired. Other than that, I expect this one to keep growing.
Beyond these four, I don’t feel compelled to buy any other companies at this point in time. That may sound crazy, but did you know that the theory of diversification asserted that owning more than 30 companies produced a diminishing set of returns? When you own some mutual fund that has dozens of stocks, if not hundreds, there is no way for you to analyze it. You are totally in the hands of the fund manager, and their track record isn’t good.
I originally started with General Dynamics, Chevron, and Apple, but just received my first dividend payment. I thought owning a piece of Warren Buffet would probably be good for me, so I got underway. From here on, you can see how things perform as I continue blogging. Please show me where the TV personalities are blogging about which mutual funds they own.
Please don’t just buy what I buy. Do your own research and decide for yourself what you’re comfortable with.

Disclosure: Long on GD, CVX, AAPL, and BRKB.

Cross posted from http://blog.greglturnquist.com/2012/05/rebalancing-my-portfolio-part-2.html.

I am not a licensed financial advisor nor an insurance agent, and cannot give out financial advice. This is strictly wealth building opinion and should be treated as such.