Death of a dividend investing blog site

I was about to recommend someone checkout the glorious Dividend Mantra blog site, only to discover “something” had happened.

Reading a detailed blog article, I was shocked and amazed that the man who used to publish his ACTUAL DOLLARS and stock picks had seemingly sold out and the “new owners” are killing it faster than Socrates could down a glass of hemlock.

I agree with the author, that if offered a lump sum of perhaps $50K and a long term goal of financial independency by the age of forty, I might just as well. Sad, but apparently the case.

Dividend Mantra illustrated on a month-by-month basis that picking strong, stead, dividend yielding stocks CAN produce a consistent growth in monthly income. Large trading houses with billions of dollars spread across funds are “seeking alpha”, i.e. buy low/sell high gains, and we can never match them. Given they fail ANYWAY, there is no value pursuing them. But pursuing consistent, steady income DOES work.

If you’re looking for someone that has NOT sold out, check out http://www.dividendgrowthinvestor.com/. That is a nice site that also has good tips and tricks when it comes to dividend investing.

So here’s a big salute to someone that might have attained his financial goals!

VNR suspends cash distributions

newlogo7.9.10For those of you tracking my reentry into VNR may be interested to know that VNR has suspended cash distributions for both common and preferred units. If you’re not used to deal in MLPs, it means they have suspended the dividend.

panicSo, time to panic? Time to worry? Nope. I knew this was a risk when I bought my position at $3.17/unit. At time of writing, price is at $2.44/unit. That is 23% drop in value with no cash coming.

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. –Warren Buffett

panicInvesting in the stock market has to be long term. People that day trade have been proven over time to actually lose money. Instead, I am investing in the odds that natural gas and oil will eventually recover, VNR will resume paying distributions, and the price will rise again.

VNR has shown a strong history of making profitable decisions. Halting outgoing cash flow while waiting for commodities is a good decision.

dont-panicThe problem lies with emotional investors. People that either depended on VNR’s monthly cash flow (perhaps retirement income) or expected to make a quick buck, are more likely to panic and sell out now, locking in a solid loss.

I don’t need the money today. Instead, I prefer to wait for the recovery.

Good luck and don’t panic!

 

What you should and should NOT do when investing in stocks

newlogo7.9.10For those of you tracking my reinvestment in VNR, you may have seen it drop to a historic low of $1.47/unit. Given I reentered the market at $3.17/unit, this is a 54% drop from what is an astounding low!

Time to panic? No. It’s time to play the market long term. Remember this:

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. –Warren Buffett

I have invested in VNR under the assumption that I can make cash on a monthly basis. Driven by the lower prices, VNR has already reduced the distribution to match. In my humble opinion, the further drop in prices is more emotion and less facts.

This morning I saw an article citing how VNR is in a great position for people to score some arbitrage. That is when you make money by leveraging a change in value. This article has in depth analysis on how this is the time to buy since the author is predicting a quick recovery to a more stable price.

I don’t go for that. That is betting on appreciation, something I wouldn’t do short time. But I do use that analysis to back up my assertion that the current price isn’t based on fundamental risk in the company, but instead that the market is getting loaded up on emotion relevant to VNR.

panicDon’t invest in the market if you are riding on emotion, because it will get the best of you. Emotion is the reason mutual funds are a terrible failure. We are constantly pitched how they let us sidestep the risk of the market, but when things drop, people panic because it MUST mean something is wrong.

For those that don’t sell their mutual funds during losses, fund manager are forced to sell anyway to make pay outs. It doesn’t matter if we panic or not. Other people freaking out will drag us along. If you buy individual stocks and can keep your cool and stay objective, then you can make money in the long run.

DO: Invest in stocks if you have done extensive research, you understand how they make money, and understand dividend payouts, risk of making dividend payments, and have an exit plan.

DO NOT: Invest in stocks if you are looking for a quick buck, hoping to make your money on appreciation, or need a certain cash value at a certain time in the future.

Back in the game with VNR…with a twist!

newlogo7.9.10For those of you that have followed me for some time, you might remember that I held a big position in Vanguard Natural Resources (VNR)…and sold it a year ago. To recap, it went up about 10% from my purchase price. I pocketed that small profit and used all the cash to buy a discounted note, locking in a great yield.

So what’s happened since? That note has continued to yield solid cash. But I had another handful of cash that was going nowhere fast: my Roth IRA.

What to do when you can’t invest anymore

I opened a Roth IRA a few years ago. Since then, I can’t contribute anymore, because I am making too much money! That fund was initially loaded up on mutual funds. As you can guess, I sold those positions.

Wanting to put the cash into more discounted notes, I called John Park at PGI Self Directed. His expertise is setting up self directed IRAs and also wrapping them inside LLCs. There is a lot involved with doing this correctly. He even helped me educate a bank associate when I opened a checking account. (First time she had ever dealt with an LLC that was NOT some local business.)

With all this completed, my Roth IRA changed homes, and I essentially have its cash in hand to do with as I please (within IRA limits).

What if you can’t afford a note?

For six months, I kept looking for a note I could afford. Notes tend to start at around $30,000. Anything below that is hard to find. There was one that was within $800 of my cash position, and the note sellers refused my offer. My cash was going nowhere.

John called me up and mentioned he had access to a better account for my money. We discussed it in detail, and I transferred from a pure checking account to TD Ameritrade, where I could buy anything: stocks, bonds, and discounted notes. I figured I could pick some dividend paying stocks, grow the cash value, and when it reached critical mass, sell it to buy some notes.

Know your target investment

If you have been the slightest bit curious, you might have peeked at VNR’s performance over the past year. It’s been TERRIBLE! The distribution rate was cut in half back in February, and again just a few weeks ago, all the way from $0.21/unit to the current $0.03/unit. That’s an 85% drop.

It’s price tumbled from the low $30s (when I last sold) down to $2.75/unit at the time of this writing. That is almost 90% drop in price. Why?

The whole energy sector is down. Oil, natural gas, the works. So why invest AGAIN?

Because the time is ripe for a recovery. The general market has been panicking and getting out of VNR. As Warren Buffett has said, “You pay a very high price in the stock market for a cheery consensus.” VNR has strong acquisitions that will yield more natural gas and oil, and I feel I’m getting it at a discount.

But you should never invest in pure appreciation. Too many have lost too much on that premise. I’m not. If you look closely at the numbers above, you may notice that the price drop is greater than the yield drop. That means dollar for dollar, I’m buying more yield than I had before.

1% distribution per month is pretty good, and if the commodities tick up at all, I see great upside potential (which is the reason I called my broker to DRIP my VNR distributions).

Also, when I previously owned VNR, it was aimed at paying down a HELOC. That has made me very happy to have sold the prior position before such a loss hit (a very fortuitous situation!) My Roth IRA has no obligations except to grow itself. So the risk to the rest of my portfolio is minimal and the opportunity is grand.

Another word of wisdom: I have been reading detailed reports on VNR for more than two years. You should understand risk, cash flow, debt obligations, and other factors when you invest in anything. VNR has reduced its distribution with intentions to pay down debt. Many MLPs use debt to finance new deals and new positions. VNR is making a smart move by cutting back the cash spigot and strengthening their balance sheet. Hopefully, things will start to grow again as their new acquisitions begin to yield cash.

Stay tuned and let’s see if VNR takes off!

Some of the best wealth building strategies are simple yet subtle

I took my kids to visit Disney World recently. Frequent readers of this blog already know I own a town home outside Orlando.

You might disagree with The Disney Company’s efforts to extend copyright law, but you cannot ignore the sheer brilliance of Walt Disney’s core idea to tap the public domain for stories.

That man has taken vintage stories from the past and breathed new life by writing music, creating cartoons and also attractions you can ride to enjoy these timeless classics.

Couple that with our constant rise in technology and Disney’s ability to re-release their movies in new formats with more bonus material, and you’ve got a recipe for success.

I was again reminded of how the parks and resorts appear to have suffered no recession whatsoever. You might disagree with the price if tickets, etc., but as a tentative investor, this company is rock solid.

Do I own any DIS stock? Nope. It’s not on my short list either. I find the dividend yield too low at around 1%. That and the fact that they only pay once a year simply moves it much lower than my other prospects.

But I would never fear the stock crashing or becoming worthless. People will be coming to the parks and the movie theaters for years to come.

To build wealth, you sometimes need to fight emotion with emotion

graph_up2It is highly documented in multiple studies that when people see their portfolios take a 30%, 40%, 50% (or higher) hit, they freak out and sell. This has been the emotional reaction of people for decades. It’s the reason the stock market and S&P 500 may average 7-9%, but people average less than 4% in mutual funds.

Essentially, research shows that immediate pain can quickly overcome prolonged success. We want to end the pain NOW. So we sell to prevent further loss. Hence, losses get locked in. A concept I learned about from Tim McAleenan Jr. is to combat this with positive emotions.

Try this on for size. If you buy shares of Coke (KO), follow up by buying a 2-liter, a six pack, and perhaps some other knick knacks of Coke. Take these things and set them up on a visible shelf, perhaps in your office. Then when you get your first dividend check (if you can secure a printed one, if not print out a statement from your broker), frame it and add it to your collection. Then, everyday you will have a visual reminder how your holdings in KO are earning you money every single day for simply waking up and joining life.

When the next crash comes (and it certainly will), you will have a bit of solid, positive emotional energy built up. And you’ll soon discover that your holdings in KO continue to yield dividends despite the drop in market price. The big key is that someday, if you hold steady, you’ll collect enough shares, that the market loss you feel will actually be less than the total value you have accrued.

Crazy things can begin to happen. Crazy GOOD things. When you weather a few drops in the market and see KO holding its own, you begin to see these price dips not as tragedies, but instead, opportunities. When KO takes a significant beating in share price because some newbie investors are freaking out and dropping shares that have been paying increasing dividends for 50+ years, it may be YOUR chance to get more. (Which incidentally requires that you have some amount of cash on hand.)

Now don’t assume this article is all about buying Coke. Instead, it’s about recognition that you WILL feel negative emotional reactions when the stock market plunges in the future. To handle things, we need not only objective financial analyses to properly handle them, but emotional mitigators as well.

Good luck!

Buying heavily discounted positions in BP…for my kids

bpAfter recently getting a hefty tax refund, I decided I had enough cash to buy my kids a starting position in BP, aka British Petroleum. Why?

  • They are paying about a 5.8% dividend.
  • They’re balance sheet of assets and earnings in dollars is about the same as when they were trading at $60+/share.
  • They have already doled out much in payments regarding the Deep Horizon oil spill from 2010.

Essentially, they are still at risk of having to pay out more damages, but the odds are shrinking as time progresses. It might take more years to wrap this up, but that hasn’t stopped them from continuing to produce. When other investors get more emotionally comfortable, the price will in all likelihood rise back to that $60/share range.

I own a small piece of BP in my IRA. The place where I wanted to apply more cash was moving pieces of that refund into my children’s trustee accounts I set up a year ago. Essentially I can buy them a block of BP stock, set it on DRIP to auto-buy more shares as the payouts come, and let it auto-grow over the years.

Does this sound suspicious given that I am not myself buying more BP? I understand your position. If it was so glorious, why don’t I buy some myself? The truth is that I’m working on another investment that simply takes time to become available. So I have to sit on that cash until the time is right. As to buying for my kids what I buy for myself, already done. VNR, BP, and CVX are stocks I own and that I have also bought for my kids. The other thing I’m looking to investing in isn’t an option for them without setting up more complicated structures. So in the meantime, I am happy to buy chunks of stock in companies that have performed well for years.

I believe BP is suffering an emotional roller coaster not tied to the their actual value. When they return to the $60s, then the equity position I have just bought for my kids will rise 50%. Awesome!

Stay tuned!

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.

Why you shouldn’t fear bankruptcies the way the press does

If you make investing decisions based on the news, you will suffer debilitating setbacks in your portfolio time and again.

What comes to mind when you think about Sears & Roebuck today, compared to what you remember as a kid, and what you may have heard about this company decades ago? Sears was historically THE company to buy general merchandise.

I remember reading The Great Brain books as a kid. It’s a collection of stories told from a younger brother about his big brother, aka The Brain, who is quite smart, but governed by a money loving heart. Anyway, these books set back in the days when silver dollars were common currency, the character mentions having the rare and golden opportunity to order from the Sears catalog. As a kid, I remember that Sears was the place to get all sorts of stuff. But what do you think of it today? Do you flock to that store to buy things? Or do go elsewhere.

So would you consider investing in that company by purchasing its stock? Perhaps not. Take a step back. If you had the chance to buy stock in Sears thirty years ago, would you take it? Perhaps. But what if you knew everything you know now about how its gone down hill over the past years? Would you buy it then? Read this article for details on exactly how might fare.

Based on bad new stories over the years, you might say “no!” But if you actually looked at the balance sheets over that time frame, you would actually do quite well. Sears grew big and accumulated many various assets. As it crumbled, it sold off pieces into separate businesses. As a stock holder, you would hold lots of different companies, all generating profits. In fact, you would do quite well.

How can this be? As stated by the economic Nobel laureate Milton Friedman, “when companies go bankrupt, their factories don’t go poof.” Assets are sold off. New management is hired. Things are repurposed. New businesses plans laid out. Mid and senior level managers may get rolled and some employees may suffer, but in general, the core underpinnings of the company get refreshed, not burned to the ground.

This point seems to be lost on the press in general. Any shutdown of a company seems to draw reporters to find the saddest stories and turn them into headlines. They never bother to find these people a year later, and see how they are doing. On rare occasion, I saw a journalist actually find one such employee, only to discover that they were doing WAY better than before. They used to putter along with a poorly performing company. But getting tossed forced them to find something else, and they actually found something better.

Ups and downs of trading stocks

graph_up2I recently finished up executing the last shares of my big stock option. It is nice to wrap it up and be done with it. It represents a very nice part of my compensation package, and yet the whole experience was somewhat distressing!

I want to chronicle what it has been like to give you a taste of the emotional roller coaster that comes with trading stocks and options.

In the beginning

I was hired in 2010. My stock option grant was designed to be paid out on the following four years, with the first 25% vesting on the first anniversary of my hire date. My grant had two parts. One part would pay out the rest in 25% chunks annually. The other half would start vesting the rest in monthly periods. February 2014 is when I receive my last full vesting.

My company’s market price was about $44/share when I was hired in 2010. I didn’t pay a whole lot of attention to the price until 2011 started to approach. On my first anniversary, the price had risen to $97/share. Essentially, my stock option had doubled in value and I was super excited.

I got a big chunk of money when I cashed out the bits that I could. At a similar time, my wife had overheard someone else mention about trying to sell their town home in Orlando. When I heard the price, we started shopping online. After several months, we had figured out that with the stock option money so far, we could easily put down enough to buy one. Mortgage rates were around 4.5%. I had also worked out that my bonus check could fund the monthly payments, mortgage, utilities, and all. We signed the papers in November of 2011.

The Wealth Building Society is born

booksIt was March of 2012 that I started writing this blog. I had learned something new in the world of building wealth a year earlier, and it took me almost a year to shake loose the old ways and embrace this new concept. I reached a point where I couldn’t keep it to myself. Thankfully, this happened before I got my first chunk of stock option money. I had originally intended to use it to nuke my home mortgage. That was off the table and other things were being considered. Rental property, dividend paying stocks, and an EIUL were in the pipeline.

In the middle of 2012, the stock price had risen to over $113/share. I figured things were just going up and up and up. The sad part was, I had already exercise 2012’s quarterly grant. It was really hard being forced to sit on my hands and wait for another vesting of stock options.

Some varying news shocks were felt and the price dipped briefly down to the mid-80s. That hurt. I was worried. But it quickly rose back to $100/share. Frankly, $100 feeling like a mystical edge that was hard to cross. It seemed that running up to $100 was a struggle, but once crossed, it felt magnificent. And I hoped it would stay there.

Danger Will Robinson! Danger!

panic_buttonIn the first quarter earnings report of 2013, my company missed their earnings estimate. It wasn’t a huge miss. But in less than a month, the price fell from $99 to $72.38. It recovered the following month into the mid-80s. And then dropped even further in July to $66.51. While a 33% drop is pretty bad, this stock option had a strike price of $44. The value is in the difference. It went from a delta of $60/share to $20/share. That is a 66% drop in exercisable value. I knew what those people felt that had scraped together 401K funds with mutual funds totaling $1 million and watching the market take away $300,000+. It would drive me to get out too to avoid a total collapse.

But I was in a different situation now. I had already acquired cash flowing rental properties in the fall of 2012. I had started funding my EIUL and had seen it grow steadily for over a year. And in March of 2013, I took the cash proceeds from the sale of my previous home and used it to buy a big position in VNR. Cash was flowing in on a monthly basis that was close to the amount of money I earned at my day time job.

This provided me quite a bit of emotional relief. It also helped me collect my thoughts. The stock option has an expiration date after which its worthless, but that wouldn’t happen for a few more years. I told my wife that we would have to wait on getting that new car, and she was okay with it.

The best things come to those who wait

rodin_thinkeFrom there on, I decided to bite the bullet and wait it out. In my mind, I had set the day of the last vesting of stock option as my target date to shoot for. Before then, I would simply ride things out (unless the stock did something like jump to $200/share). My company beat its earnings estimate in the last quarter of 2013 and began to steadily recover its price. It climbed into the $80s followed by a slight dip into the upper-70s. I was waiting for each earnings report with glistening eyes. I had already seen what it meant to miss one. Now I awaited them to beat their estimate. In mid-January 2014, I watched the price rise back to $98. The tension was unbearable. If they didn’t make it this time around and the price tumbled, I would have missed a keen opportunity due to the timing of my vestige. On the big day, my company beat the earnings estimate again.

I cheered. And then something awkward happened. In after-hours trading, I watch the price fall five points. Huh? I was chatting with a colleague over Skype and he asked me what that meant. I couldn’t answer. To tell you the truth, Warren Buffett couldn’t answer. He avoids this type of daily chatter and points out how important it is to invest in strong businesses with long time frames.

Someone posted a similar question on Seeking Alpha regarding the drop in price. For the next 2-3 days, the price wobbled around $90/share. Then I heard a news report indicating that the DOW had dropped 300 points. Professional analysts referred to this as “consolidation”. I think they were spinning the news to make it sound less harmful. Several of the stocks I monitor had all slumped 3-5% in price. This had something to do with emerging markets, a facet of investing I’m not really familiar with (yet). Dr. Dave posted an article a potential market correction coming in the next 1-2 years.

Let’s wrap this thing up and put a bow on it

habit-saving-moneyI was getting a first hand taste of how tough it can be to depend solely on appreciation of the stock price. My option didn’t have any dividends to hedge the risk of price fluctuations. But then after this correction passed, things began to inch back up. I noticed for three days in a row, the price climbed 1.3-1.6 points each day. I quickly calculated in the head that ten more days, and the price would hit a golden price to sell and which I would be quite happy: $110/share. I told myself that if I could sell what would effectively be half of my entire option a hair away from the peak price of the last four years, I would be quite happy with the outcome.

Then the growth rate began to slow. I watched one day where it went up 0.6, only to see it fall the same amount the next day. I pondered selling immediately. Or putting a limit order to sell if it hit $100. Or a limit order if it hit $110. Or. Or. Or. It drove me crazy!

Finally one night when the price had closed just below $97/share, I put in a 60-day limit order of $110. If it was going to jump to that price, why not line things up to make it happen automatically. I knew it would be good.

At the end of February, I watched it go up almost 2.5 points. The next day it fell 1.7 points. This is really tough to sit by. It always feels like the next day will mimic the current one but you just don’t know what will happen.

On the first Monday of March, I see it drop 1.4 points and then start to recover. By the end of the day, it has dropped around 0.4 points.

On Tuesday, the price jumps 3.5 points in first ten minutes of trading. I’m shocked. What is different between today and yesterday and last Friday? Throughout the day, stock keeps going up. Right now, it’s up 5.6 points around $101.30/share. This is friendly territory. It isn’t the golden price of $110, but a price I would be very comfortable selling.

While running an errand after lunch, I hear a news report that says Wall Street is rallying due to news of an eminent easing of tensions regarding Russia’s invasion of Ukraine. I immediately recognize that this type of news has almost nothing to do with the company and it’s stock.

Since this could crash the next day, I decide to move. One block executes at $101.13, the other at $101.03. Whew! I’m out. No more panic. I got a good deal. I see the price rise maybe 1 point over the next couple days, and then drop again. I made the right decision.

Lessons learned

talkingI was never, ever, EVER happy with the price when I exercised some shares. If I made a move and then saw it rise after that, I felt like I had missed an opportunity. Sometimes the price fell after a trade, but I would ponder what if I held it until later. I had to condition myself to accept the trade and instead focus on where to move my freshly acquired cash. I can replenish my rental property cash reserves. I also plan to open a custodial account for my 2-month-old son. And I can finally snatch up some new positions from my short list of stocks. Stay tuned for more on that.

It was often a joke reading the opinion pieces and the buy/sell/hold recommendations were frankly worthless. It almost feels like everyone is trying to coach everyone else.

Forming macro opinions or listening to the macro or market predictions of others is a waste of time and even dangerous, because it may blur your vision of the facts that are truly important. –Warren Buffett

I have been able to reflect on many aspects of my wealth building plan, and there is no denying that my stock option has empowered me in many ways. I also can’t wait until I get my next chunk of ESPP payoff in five months. I also have one last small stock option so I might yet be able to exercise some shares at $110 if not higher.

What’s fun about this? My division was spun out into a separate private company. We were issued another stock option grant several months ago. At some point in the future, I get to go through this entire “exercise” again. It’s VERY nice to get an equity position. But it isn’t stress free.

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