Many market-players seek shelter from volatility in dividend-paying stocks, which offer investors a stream of steady income that can ease the pain of wild gyrations in the markets. And stocks that pay monthly dividends provide regular, consistent income to investors with usually less volatility than quarterly-paying dividend stocks.
The key to owning stocks that pay monthly dividends rather than quarterly or annual dividend stocks is that your invested capital comes back to you and your money compounds much more quickly.
Lots of investors are looking for monthly dividend payments to supplement their income during retirement. Other preretirement investors love to buy stocks that pay them cash on a monthly basis to help offset their high-risk investments. No matter what type of investor you are, dividend-paying stocks can go a long way toward creating wealth.
Dividend-paying stocks can also help an investor sleep better at night, because they're usually deemed to be safer investments than stocks that don't pay dividends, The number of stocks that now pay a monthly dividend tops over 250, including real estate investment trusts, oil income trusts, closed-end funds and other investment vehicles that own a portfolio of income-producing assets and distribute cash generated by these assets every month to investors.
Let's take a look at four monthly dividend-paying securities that look promising.
If you're bullish on the future for oil and natural gas, you might want to take a look at the Enerplus Resources Fund(ERF). This stock is an energy trust that controls operating subsidiaries to acquire, exploit and operate crude oil and natural gas assets. The company currently controls properties in red hot Marcellus Shale region in the northeastern U.S. Many industry insiders think the Marcellus Shale could be one of the most promising natural gas resources in the Appalachian Basin.
Enerplus Resources has the fifth-highest dividend yield of oil and gas production stocks, at 9.4%. The stock has near-term support around $20 a share and resistance at around $24.
If you think the real estate market is near a bottom, you should take a look at closed-end management investment company LMP Real Estate Income Fund(RIT), which invests in securities related to the real estate industry, tied to sectors such as office, health care, apartments, shopping centers and regional malls. Its current dividend yield is 8.7% This stock is trading near the 200-day moving average of $8.20 a share, which could offer a great entry point if you like the prospects of real estate here. If the 200-day doesn't hold, look for the next area of support to come in at around $7.75. The stock also has some overhead resistance at around $9 to $9.50.
Another name investors should take a look at is the MFS Multimarket Income Trust(MMT), a closed-end fund that maintains a portfolio of investments in high-yield and investment-grade corporate bonds, emerging market debt securities, U.S. government securities and international investment-grade debt securities. Considering how foreign debt markets have been rattled of late, this trust could offer a great opportunity to get in at depressed prices. The MFS Multimarket Income Trust has direct exposure to some of the PIIG nations, such as Ireland, Italy and Spain. The current dividend yield of the MFS Multimarket Income Trust is 8.2%. The stock is trading near the 50-day moving average of $6.46, and overhead resistance can be found at $6.60 to $6.70.
One last monthly-paying security to consider is the Calamos Convertible Opportunity & Income Fund(CHI), which is a diversified, closed-end management investment company. The fund seeks total returns through a combination of capital appreciation and current income by investing in a diversified portfolio of convertible securities and below-investment-grade high-yield fixed-income securities.
Calamos Convertible Opportunity & Income has offered a steady distribution since inception; it has a strong historical performance and is run by an experienced management team. Some of the securities it currently holds are common stock in Freeport McMoRan(FCX), corporate bonds in Vail Resorts(MTN) and convertible preferred stock in Bank of America(BAC). Corporate bonds make up 56% of the funds asset allocation, and energy is the heaviest-weighted sector. Its current dividend yield is 9.4%.
Disclosure NONE
Tuesday, July 6, 2010
When 'Cheap' ETFs Aren't Really Cheap
It seems like a no-brainer: All things being equal, you pick the exchange-traded fund with the cheapest fees. But, it turns out choosing an ETF based on the lowest annual expense could end up costing you more.
ETFs, of course, hold a basket of stocks or other investments and track an index. Many investors buy them assuming that all they’ll pay is the annual fee. But a growing number of pros are warning that some ETFs have hidden costs for trading them, which vary based on the ETF’s volume. In general, the more active the ETF, the cheaper it is to trade. “The bigger, the better,” says Jim Holtzman, a Pittsburgh-based adviser who has sought better ETF deals.
The iShares MSCI Emerging Markets Index fund (EEM: 37.75, +0.16, +0.42%) has $35 billion in assets and is nearly three times more expensive than its rival ETF, the $20.5 billion Vanguard Emerging Markets ETF (VWO: 38.30, +0.08, +0.20%). But traders flock to the older iShares product because it has almost six times the average daily trading volume. “EEM is essentially where the fast money is,” says Bradley Kay, associate director of European ETF research at Morningstar. A Vanguard spokesperson says its ETFs’ trading costs are the same as or very close to those of its rivals. A big difference in trading volume can also be seen in two ETFs tracking the same index of inflation-protected bonds, iShares Barclays TIPS Bond (TIP: 105.82, -0.20, -0.18%) and SPDR Barclays Capital TIPS (IPE: 52.27, -0.12, -0.22%). The expense ratio of the iShares product is slightly higher than that of its competitor. But experts say iShares trades 18 times more often in part because each trade is cheaper.
While trading costs are important, Kay says investors who plan to buy and hold an ETF should go with the one that has the lowest expense ratio.
Disclosure I am long VWO, and EEM.
Dow's Losing Streak Hits Seven
The Dow Jones Industrial Average ticked off a string of ignominious markers on Friday. Among them: the longest losing streak since the dark days of the financial crisis.
Worries about the economy fed into the currency markets, where the dollar slipped against the euro. The euro ended Friday afternoon at $1.2550, up from $1.2386 a week earlier.
The Dow slipped 46.05 points, or 0.5%, to 9686.48, its seventh straight decline and longest losing streak since the eight-day fall ended Oct. 10, 2008.
The benchmark tumbled 4.5% for the week, its worst weekly percentage drop since the week of the May 6 "flash crash."
The weekly percentage drop also represented the worst performance for any week leading up to the July 4th weekend since 1896. The S&P 500 and the Nasdaq put in similarly bleak performances.
The declines came on relatively muted volume ahead of the July 4 holiday weekend. Just over 4 billion shares had traded hands in New York Stock Exchange Composite volume, well shy of the 2010 daily average of 5.4 billion shares.
All in all, it was not a great week for stocks. Worries have been mainly driven be renewed anxiety about the U.S. economy. Those fears were kept alive Friday by a report showing the first drop in U.S. nonfarm payrolls so far this year.
"The only thing that would have been surprising is if it had been a good number," said strategist Stephen Wood of Russell Investments in New York.
Consumer-discretionary companies led the market's decline as investors worried about how the drop in payrolls might hurt already weak consumer and business spending.
Worries about the economy fed into the currency markets, where the dollar slipped against the euro. The euro ended Friday afternoon at $1.2550, up from $1.2386 a week earlier.
Treasurys fell, but gained on the week as concerns percolated about a second half slowdown in the U.S. Crude-oil futures fell for a fifth consecutive day, capping their steepest weekly decline since early May.
Van Eck Plans First Ever Minor Metals ETF
One section of the ETF world that has seen rapid expansion over the past year has been commodity producing equity ETFs. As investors have embraced ETFs as a means of establishing exposure to natural resource prices, many are beginning to realize that a host of commodities are thinly-traded, and therefore not suitable for “pure play” futures-based or physically-backed ETFs. Due to this, investors have seen the introduction of several funds offering exposure to commodities through stocks of companies engaged in their production and extraction, including ETFs that target copper miners, platinum mining companies, and even timber producers.
One interesting new idea is being developed from Van Eck is to target companies that are engaged in the mining and production of so called ‘minor metals’ such as titanium and cobalt. While these metals are very thinly traded, they remain absolutely vital to a host of current and emerging technologies. In a filing with the SEC, Van Eck identifies several key technologies that utilize these commodities, including cellular phones, high performance batteries, flat screen televisions, and green energy technology such as wind, solar and geothermal. These metals are critical to the future of hybrid and electric cars, high-tech military applications including radar, missile guidance systems, navigation and night vision, and superconductors and fiber-optic communication systems.
As these technologies have grown in importance to every day life, demand for these metals has surged, sending some prices sharply higher. Additionally, political and environmental issues are likely to be front-and-center for many of the equities in this fund, especially due to recent mining tax proposals out of Australia as well as increasing government scrutiny over hazardous industries such as mining. Even more crucially for the equities in the proposed fund is a recent plan from China that seeks to ban exports of certain minerals–a development that could be devastating since China produces just over 90% of the world’s rare Earth metals. However, it could help to spur more investment in the industry and send prices higher.
The fund will track the Minor Metals Index and will hold 30 securities in total, and would be the thirtieth ETF from Van Eck. This new addition would also bring the total number of ETFs in the Commodity Producers Equities ETFdb Category up to 20 in total and offer investors exposure to a slice of the commodity market to which most do not currently have access. The expense ratio and symbol remain a mystery.
Disclosure: None
One interesting new idea is being developed from Van Eck is to target companies that are engaged in the mining and production of so called ‘minor metals’ such as titanium and cobalt. While these metals are very thinly traded, they remain absolutely vital to a host of current and emerging technologies. In a filing with the SEC, Van Eck identifies several key technologies that utilize these commodities, including cellular phones, high performance batteries, flat screen televisions, and green energy technology such as wind, solar and geothermal. These metals are critical to the future of hybrid and electric cars, high-tech military applications including radar, missile guidance systems, navigation and night vision, and superconductors and fiber-optic communication systems.
As these technologies have grown in importance to every day life, demand for these metals has surged, sending some prices sharply higher. Additionally, political and environmental issues are likely to be front-and-center for many of the equities in this fund, especially due to recent mining tax proposals out of Australia as well as increasing government scrutiny over hazardous industries such as mining. Even more crucially for the equities in the proposed fund is a recent plan from China that seeks to ban exports of certain minerals–a development that could be devastating since China produces just over 90% of the world’s rare Earth metals. However, it could help to spur more investment in the industry and send prices higher.
The fund will track the Minor Metals Index and will hold 30 securities in total, and would be the thirtieth ETF from Van Eck. This new addition would also bring the total number of ETFs in the Commodity Producers Equities ETFdb Category up to 20 in total and offer investors exposure to a slice of the commodity market to which most do not currently have access. The expense ratio and symbol remain a mystery.
Disclosure: None
The Second Quarter's Best and Worst Commodities
Quick! Name the best-performing single-commodity exchange-traded product (ETP) of the second quarter.
No, it's not a gold trust; the SPDR Gold Trust (NYSE Arca: GLD) came in third. It's actually the exchange-traded note tracking coffee's price, the iPath DJ-UBS Coffee Subindex Total Return ETN (NYSE Arca: JO).
Surprised?
Well, the second quarter was full of surprises for commodity investors. Unfortunately, most of them were unpleasant.
Of 17 single-commodity or narrowly focused products, only four turned a profit. The winners netted an average 12.1 percent gain, while the average loser gave up 9.9 percent.
We sought out the most liquid single-commodity ETPs to see how well they tracked the spot market over the last three months. When we couldn't find single-commodity ETPs to represent a sector of the futures market, we used the narrowest instruments; that is, two or three commodities wide.
Overall, ETPs—based upon their last sale prices—did a fair job of tracking spot market commodities. The average apparent return for the 17 ETPs was -4.7 percent, while the contemporaneous mean return for the underlying spot commodities was -2.7 percent.
But let's run the numbers asset by asset.
Precious Metals
In a normal futures market, carrying charges—financing costs, storage charges and insurance fees—build up along the futures term structure to make contracts for deferred delivery more expensive than futures for near-term delivery. This condition, often referred to as contango, is expected when there's ample supply of a storable commodity.
An inverted market, on the other hand, exists when deferred deliveries are priced below nearby ones. A dearth of storable supply is usually the culprit.
Normal markets are costly for holders of ETPs based upon long-only futures indexes. In order to maintain exposure to the commodity, futures positions must be rolled forward as contracts approach expiry. In a normal market, that means higher-priced contracts will be purchased with the proceeds from lower-priced futures sales. This incremental loss—or negative roll yield—eats into returns.
That said, the slight disparity in the palladium trust's return vs. spot is a liquidity artifact. The last sale prices reported on the tape don't necessarily reflect the current markets for ETPs. The less actively an ETP trades, the greater the discrepancy between the last sale price and the current bid/offer spread.
This should be kept in mind when considering the apparent returns of light-volume exchange-traded notes.
Base Metals
Energy
Softs
Grains
The Final Tally
In the first quarter, 75 percent of single-commodity and narrowly focused ETPs were winners. The platinum and palladium products were the top performers, along with the livestock ETN. But in the second quarter, the situation reversed: Losers outnumbered winners by better than 3-to-1. Coffee led the way in the second quarter, followed by natural gas.
The worst performers in the year's second stanza were the industrial metals—lead, copper and nickel. In the first quarter, sugar, natural gas and grains brought up the rear.
While there's been jockeying for best and worst honors, gold and silver take the prize for consistency in the first half.
Disclosure I am Long GLD n SLV shares
No, it's not a gold trust; the SPDR Gold Trust (NYSE Arca: GLD) came in third. It's actually the exchange-traded note tracking coffee's price, the iPath DJ-UBS Coffee Subindex Total Return ETN (NYSE Arca: JO).
Surprised?
Well, the second quarter was full of surprises for commodity investors. Unfortunately, most of them were unpleasant.
Of 17 single-commodity or narrowly focused products, only four turned a profit. The winners netted an average 12.1 percent gain, while the average loser gave up 9.9 percent.
We sought out the most liquid single-commodity ETPs to see how well they tracked the spot market over the last three months. When we couldn't find single-commodity ETPs to represent a sector of the futures market, we used the narrowest instruments; that is, two or three commodities wide.
Overall, ETPs—based upon their last sale prices—did a fair job of tracking spot market commodities. The average apparent return for the 17 ETPs was -4.7 percent, while the contemporaneous mean return for the underlying spot commodities was -2.7 percent.
But let's run the numbers asset by asset.
Precious Metals
Commodity | Spot Gain/ (Loss) | Futures Term Structure | ETP Ticker | ETP Type | ETP Gain/ Loss | +/- 200-Day Average |
| CMX Gold | 11.7% | Normal | TST | 11.7% | 8.1% | |
| CMX Silver | 6.2% | Normal | TST | 6.2% | 5.5% | |
| NYMX Platinum | -8.0% | Normal | ETN | -7.2% | -4.6% | |
| NYMX Palladium | -8.0% | Normal | TST | -7.5% | -6.8% |
Key: TST = Grantor Trust; ETN = Exchange-Traded Note
Gold and silver grantor trusts topped the precious metals group in the second quarter, partly because the trusts hold metal and aren't based upon a futures index. Of course, the underlying commodities increased over the period, but the product didn't get in the way of the gain's realization.In a normal futures market, carrying charges—financing costs, storage charges and insurance fees—build up along the futures term structure to make contracts for deferred delivery more expensive than futures for near-term delivery. This condition, often referred to as contango, is expected when there's ample supply of a storable commodity.
An inverted market, on the other hand, exists when deferred deliveries are priced below nearby ones. A dearth of storable supply is usually the culprit.
Normal markets are costly for holders of ETPs based upon long-only futures indexes. In order to maintain exposure to the commodity, futures positions must be rolled forward as contracts approach expiry. In a normal market, that means higher-priced contracts will be purchased with the proceeds from lower-priced futures sales. This incremental loss—or negative roll yield—eats into returns.
That said, the slight disparity in the palladium trust's return vs. spot is a liquidity artifact. The last sale prices reported on the tape don't necessarily reflect the current markets for ETPs. The less actively an ETP trades, the greater the discrepancy between the last sale price and the current bid/offer spread.
This should be kept in mind when considering the apparent returns of light-volume exchange-traded notes.
Base Metals
Commodity | Spot Gain/ (Loss) | Futures Term Structure | ETP Ticker | ETP Type | ETP Gain/ Loss | +/- 200-Day Average |
| CMX Copper | -18.0% | Normal | ETN | -19.1% | -11.4% | |
| LME Lead | -18.6% | Normal | ETN | -18.9% | -18.5% | |
| LME Nickel | -19.1% | Normal | ETN | -23.5% | -8.2% |
Key: ETN = Exchange-Traded Note
The market for industrial metals was weak in the second quarter, reflecting the slackened demand for durable goods and housing. The apparent spread between the ETP returns and the spot market is, again, due to timing and contango.Energy
Commodity | Spot Gain/ (Loss) | Futures Term Structure | ETP Ticker | ETP Type | ETP Gain/ Loss | +/- 200-Day Average |
| NYMX Crude Oil | -9.6% | Normal | ETF | -9.8% | -9.8% | |
| NYMX Gasoline | -10.3% | Inverted/Normal | ETF | -5.8% | -5.8% | |
| NYMX Heating Oil | -2.9% | Normal | ETF | -6.0% | -6.0% | |
| NYMX Natural Gas | 19.8% | Normal | ETF | 12.2% | -8.7% |
Key: ETF = Exchange-Traded Fund
Natural gas turned in the standout performance in the energy category, though deep contango in the futures term structure ate up a lot of the spot market gain. Carrying charges seemed to have also reduced the returns for the heating oil and crude oil exchange-trade funds. The large disparity between the gasoline ETF's return and its spot market is due to gasoline's unstable term structure over the second quarter.Softs
Commodity | Spot Gain/ (Loss) | Futures Term Structure | ETP Ticker | ETP Type | ETP Gain/ Loss | +/- 200-Day Average |
| ICE Coffee | 21.5% | Normal/Inverted | ETN | -18.5% | 17.1% | |
| ICE Cocoa | -0.4% | Normal | ETN | -1.2% | -4.9% | |
| ICE Cotton | -5.1% | Inverted/Normal | ETN | -3.0% | -0.2% | |
| ICE Sugar | -3.3% | Inverted/Normal | ETN | -7.0% | -23.4% |
Key: ETN = Exchange-Traded Note
Among the softs, coffee was the clear winner. Still, soft ETNs are lightly traded, so the differences between the products' apparent returns and their underlying markets can seem large.Grains
Commodity | Spot Gain/ (Loss) | Futures Term Structure | ETP Ticker | ETP Type | ETP Gain/ Loss | +/- 200-Day Average |
| CBOT Corn, Wheat, Soybeans | 0.7%* | Normal/Inverted | ETN | -0.7% | -6.1% |
Key: ETN = Exchange-Traded Note
*Spot returns are composites weighted by the constituent commodities' ETP allocations
Grains—in particular, corn and wheat—jumped on the last day of the quarter following U.S. Department of Agriculture reports of lighter-than-expected plantings.
LivestockCommodity | Spot Gain/ (Loss) | Futures Term Structure | ETP Ticker | ETP Type | ETP Gain/ Loss | +/- 200-Day Average |
| CME Live Cattle, Lean Hogs | -0.3%* | Normal/Inverted | ETN | -3.4% | -0.8% |
Key: ETN = Exchange-Traded Note
*Spot returns are composites weighted by the constituent commodities' ETP allocations
While grain prices broke to the upside, livestock prices spent most of the quarter backing off from the parabolic run-ups of the previous year.The Final Tally
In the first quarter, 75 percent of single-commodity and narrowly focused ETPs were winners. The platinum and palladium products were the top performers, along with the livestock ETN. But in the second quarter, the situation reversed: Losers outnumbered winners by better than 3-to-1. Coffee led the way in the second quarter, followed by natural gas.
The worst performers in the year's second stanza were the industrial metals—lead, copper and nickel. In the first quarter, sugar, natural gas and grains brought up the rear.
While there's been jockeying for best and worst honors, gold and silver take the prize for consistency in the first half.
Disclosure I am Long GLD n SLV shares
Monday, June 21, 2010
New Record High For Gold, Silver Up, Time To Buy Or Sell?
With gold prices touching $1,260 last week and hitting a new all-time high, the difficult question is whether this is some type of short term top in the gold bull market or whether something has fundamentally changed in the currency markets that is going to send gold much higher from here.
For once with gold the charts do show a financial asset not in danger of a big breakdown. That is what you can see in most other major asset classes right now, including silver.
Longer-term
But thinking in terms of the next few weeks or months is more difficult. If financial markets sell down sharply into this summer and autumn then logically the gold price ought to weaken, and silver very much more so as an industrial commodity.
Of course, conversely a continuation of the modest upturn in stocks could take gold up to $1,300. But stock markets have been rising on weaker and weaker volumes. They need to be climbing on higher and higher volumes to make this a sustainable trend.
That would tend to suggest that gold has been riding this upwave and will follow the rest of the markets down. But gold is being bought both as a diversification play and currency now, and that should act as a powerful support in falling markets, even if it is not enough to keep the precious metal rising in value.
Gold has recently outperformed silver, and the gold:silver price ratio is now 66 compared with its long term average of 15. But the silver market is smaller and less liquid than gold so it has room to catch up with the percentage advance in the gold price if gold continues to go up.
Silver outlook
Investors can be encouraged by silver’s Friday close of $19.24 an ounce, and there is room for an advance to $21-22 unless global financial markets take an immediate turn for the worse.
In a big correction silver will then become the best asset to buy for a recovery, or bounce off the bottom, when financial markets become oversold. Less than two years ago silver sold at under $9 an ounce so the scope for trading this volatility is considerable.
That said it does not make silver the more attractive precious metal to own going into a downturn, and that remains gold. Given the uncertainties of global currency markets – and who knows what the Chinese mean about a ‘more flexible’ yuan – holding gold as a part of a currency basket makes more and more sense.
Disclosure I am long GLD and SLV Shares.
For once with gold the charts do show a financial asset not in danger of a big breakdown. That is what you can see in most other major asset classes right now, including silver.
Longer-term
But thinking in terms of the next few weeks or months is more difficult. If financial markets sell down sharply into this summer and autumn then logically the gold price ought to weaken, and silver very much more so as an industrial commodity.
Of course, conversely a continuation of the modest upturn in stocks could take gold up to $1,300. But stock markets have been rising on weaker and weaker volumes. They need to be climbing on higher and higher volumes to make this a sustainable trend.
That would tend to suggest that gold has been riding this upwave and will follow the rest of the markets down. But gold is being bought both as a diversification play and currency now, and that should act as a powerful support in falling markets, even if it is not enough to keep the precious metal rising in value.
Gold has recently outperformed silver, and the gold:silver price ratio is now 66 compared with its long term average of 15. But the silver market is smaller and less liquid than gold so it has room to catch up with the percentage advance in the gold price if gold continues to go up.
Silver outlook
Investors can be encouraged by silver’s Friday close of $19.24 an ounce, and there is room for an advance to $21-22 unless global financial markets take an immediate turn for the worse.
In a big correction silver will then become the best asset to buy for a recovery, or bounce off the bottom, when financial markets become oversold. Less than two years ago silver sold at under $9 an ounce so the scope for trading this volatility is considerable.
That said it does not make silver the more attractive precious metal to own going into a downturn, and that remains gold. Given the uncertainties of global currency markets – and who knows what the Chinese mean about a ‘more flexible’ yuan – holding gold as a part of a currency basket makes more and more sense.
Disclosure I am long GLD and SLV Shares.
Investing Insights Still Sticking With Dividends, But BP, BAC, C, GE Cost Dividend Investors $38 Billions
The speed of the Financial sector dividend decline, from 30% of the S&P 500 in 2007 to 9% now, appears slow compared to BP. The BP suspension (the largest decrease that I can find) has unnerved dividend investors who now need to more closely examine potential liability issues (call in the lawyers). In addition to environmental issues, medical and consumer products, plant and working conditions, as well as services need to be added to the list.
But dividends are having a great first half of the year, with 10 issues initiating a cash dividend. I am still looking for 5.6% 2010 payment increase over 2009, with another surge (dependant upon the economy) in announcements near year-end.
As for companies not being able to pay or increase dividends, Q1 has set a new record for S&P 500 Industrial cash and equivalent levels at US $837, a 25.9% increase over the US $665 billion of Q1 2009. It is the sixth consecutive quarter of increasing cash, and speaks to not just the improvement in cash-flow, but the unwillingness of companies to commit large amounts of capital for projects. The value is sufficient to fund corporate growth, buybacks, dividends and M&A, if companies choose to spend it.
But dividends are having a great first half of the year, with 10 issues initiating a cash dividend. I am still looking for 5.6% 2010 payment increase over 2009, with another surge (dependant upon the economy) in announcements near year-end.
As for companies not being able to pay or increase dividends, Q1 has set a new record for S&P 500 Industrial cash and equivalent levels at US $837, a 25.9% increase over the US $665 billion of Q1 2009. It is the sixth consecutive quarter of increasing cash, and speaks to not just the improvement in cash-flow, but the unwillingness of companies to commit large amounts of capital for projects. The value is sufficient to fund corporate growth, buybacks, dividends and M&A, if companies choose to spend it.
Dividends Like BP’s Look Safe, Until They’re Not
If you own BP shares and rely on the dividends for your retirement income, you now matter less than shrimp boat owners and tourism workers in the Gulf of Mexico, Ron Lieber writes in The New York Times.
That’s the net result of the announcement on Wednesday that BP will suspend its dividend and set aside money for cleanup costs and the compensation of workers who have lost income because of the oil spill.
Whether the federal government was right to pressure BP to make this move (and whether BP should have buckled) is a question for the ages. But if you’re an investor in BP and rely on dividend income to pay your daily expenses, this should serve as another reminder that relying on one stock or even a handful of stocks is incredibly risky.
We’ve seen this movie before. Wachovia disappeared, hobbling many investors who counted on its dividends. Other big banks reduced their payouts drastically in the depths of the financial crisis. General Electric slashed its dividend as well.
This should have been a warning for anyone making big retirement bets on a single stock or a handful of stocks. Things that seem stable can wobble and collapse before our very eyes. And now it’s happening again.
It’s not supposed to work this way, at least in the minds of the many investors of the old school. To them, a stock that pays a dividend is a stock that is safe. “It told them that a company was still around and operating, it was in good health,” said Milo M. Benningfield, a San Francisco financial planner.
Just because a company pays a dividend now is no guarantee that it will forever, or that the company will even continue to exist. Nor is it any guarantee that the underlying stock is stable. Steven Podnos, a financial planner in Merritt Island, Fla., notes that the iShares Dow Jones Select Dividend Index exchange-traded fund, which contains stocks that offer high annual yields through dividends, underperformed the Standard & Poor’s 500-stock index over the last five years.
Still, plenty of people strap on the blinders and maintain their faith in the stocks they think they know well. A frightening article in the trade newspaper Pensions & Investments on Monday estimated that BP employees and others in the company’s 401(k) plan had lost more than $1 billion from the stock’s decline in the wake of the spill.
How can the loss be so high? Well, 29 percent of the plan’s assets were invested in BP stock as of last September. This, sadly, is yet another violation of the too-many-eggs-in-one-basket rule that company plan sponsors should have had inscribed in stone for employees — even before the Enron collapse and the resulting devastation in employee retirement accounts there.
Employees or retired employees are not alone. Devotees of white-hot companies (Apple comes to mind) simply refuse to believe that anything bad could befall the stock. Retirees reliant on dividend income may be averse to change if a stock has paid out regularly for decades. Others may have inherited a big slug of stock and may simply not know any better. Then there are those who are so tax-averse that they won’t diversify their holdings because they don’t want to give up some of their winnings to capital gains taxes.
If you know people who might fall into these categories, please do them a favor and send them to a financial planner post-haste if you can’t talk some sense into them yourself.
Or you could simply try to scare them. Very few people saw a spill of this magnitude coming, just as only a small number could have predicted a few years back that financial stocks would go from contributing 29 percent of the dividend payments of S.& P. 500 payments in 2007 to just 9 percent in 2009.
Today, consumer staples stocks contribute more than any other sector, according to Howard Silverblatt of S.& P. How might that sector or parts of it deteriorate? A prolonged terrorist campaign against large American retailers could begin, or a blight could emerge that wipes out a large percentage of the nation’s crops.
These things are unlikely but entirely possible, and they wouldn’t be a total surprise. Tempted by utilities? Mr. Benningfield suggested contemplating the remote possibility of solar flares frying the power grid.
As of Wednesday, there is now political risk to consider, too. Now that there is a recent precedent, legislators could again try to bully a company into suspending its dividends.
And if that weren’t worry enough for dividend fans, we must also rely on those same legislators to sort out our tax policy. Currently, no one pays more than a 15 percent federal tax on dividend income. If Congress does not act before the end of the year, however, investors will start paying much higher ordinary income tax rates on dividends come 2011. “Where it will wind up, no one knows,” said Kenneth L. Powell, a tax partner at the accounting firm Berdon L.L.P. in New York. Wealthier investors, meanwhile, may pay even more once a 3.8 percent Medicare tax on unearned income begins in 2013.
Everyone needs income in retirement, and dividends aren’t a bad way to get it as long as they don’t come from a single company. Again and again, we’ve seen out-of-nowhere scandals and crises and accidents bring big companies to their knees. Why, given the overwhelming evidence that these things do happen once in a while, would you not extract your dividend income from a low-cost, broadly diversified mutual fund that specializes in dividends?
The moral of the story, as always, is to diversify within each asset class you own, whether it’s dividend-paying stocks or municipal bonds or the emerging-market countries where you’re rolling the dice for big gains. Then, diversify your retirement income, too. The more sources the better, whether it’s dividend income, interest income, annuity income, rental income or periodic (and tax-savvy) outright sales of stocks or other assets.
Even this sort of diversification might not have protected you from the pain in 2008. But it can shield you from the ruin of betting too heavily on a single security like BP.
Disclosure I am long BP shares.
That’s the net result of the announcement on Wednesday that BP will suspend its dividend and set aside money for cleanup costs and the compensation of workers who have lost income because of the oil spill.
Whether the federal government was right to pressure BP to make this move (and whether BP should have buckled) is a question for the ages. But if you’re an investor in BP and rely on dividend income to pay your daily expenses, this should serve as another reminder that relying on one stock or even a handful of stocks is incredibly risky.
We’ve seen this movie before. Wachovia disappeared, hobbling many investors who counted on its dividends. Other big banks reduced their payouts drastically in the depths of the financial crisis. General Electric slashed its dividend as well.
This should have been a warning for anyone making big retirement bets on a single stock or a handful of stocks. Things that seem stable can wobble and collapse before our very eyes. And now it’s happening again.
It’s not supposed to work this way, at least in the minds of the many investors of the old school. To them, a stock that pays a dividend is a stock that is safe. “It told them that a company was still around and operating, it was in good health,” said Milo M. Benningfield, a San Francisco financial planner.
Just because a company pays a dividend now is no guarantee that it will forever, or that the company will even continue to exist. Nor is it any guarantee that the underlying stock is stable. Steven Podnos, a financial planner in Merritt Island, Fla., notes that the iShares Dow Jones Select Dividend Index exchange-traded fund, which contains stocks that offer high annual yields through dividends, underperformed the Standard & Poor’s 500-stock index over the last five years.
Still, plenty of people strap on the blinders and maintain their faith in the stocks they think they know well. A frightening article in the trade newspaper Pensions & Investments on Monday estimated that BP employees and others in the company’s 401(k) plan had lost more than $1 billion from the stock’s decline in the wake of the spill.
How can the loss be so high? Well, 29 percent of the plan’s assets were invested in BP stock as of last September. This, sadly, is yet another violation of the too-many-eggs-in-one-basket rule that company plan sponsors should have had inscribed in stone for employees — even before the Enron collapse and the resulting devastation in employee retirement accounts there.
Employees or retired employees are not alone. Devotees of white-hot companies (Apple comes to mind) simply refuse to believe that anything bad could befall the stock. Retirees reliant on dividend income may be averse to change if a stock has paid out regularly for decades. Others may have inherited a big slug of stock and may simply not know any better. Then there are those who are so tax-averse that they won’t diversify their holdings because they don’t want to give up some of their winnings to capital gains taxes.
If you know people who might fall into these categories, please do them a favor and send them to a financial planner post-haste if you can’t talk some sense into them yourself.
Or you could simply try to scare them. Very few people saw a spill of this magnitude coming, just as only a small number could have predicted a few years back that financial stocks would go from contributing 29 percent of the dividend payments of S.& P. 500 payments in 2007 to just 9 percent in 2009.
Today, consumer staples stocks contribute more than any other sector, according to Howard Silverblatt of S.& P. How might that sector or parts of it deteriorate? A prolonged terrorist campaign against large American retailers could begin, or a blight could emerge that wipes out a large percentage of the nation’s crops.
These things are unlikely but entirely possible, and they wouldn’t be a total surprise. Tempted by utilities? Mr. Benningfield suggested contemplating the remote possibility of solar flares frying the power grid.
As of Wednesday, there is now political risk to consider, too. Now that there is a recent precedent, legislators could again try to bully a company into suspending its dividends.
And if that weren’t worry enough for dividend fans, we must also rely on those same legislators to sort out our tax policy. Currently, no one pays more than a 15 percent federal tax on dividend income. If Congress does not act before the end of the year, however, investors will start paying much higher ordinary income tax rates on dividends come 2011. “Where it will wind up, no one knows,” said Kenneth L. Powell, a tax partner at the accounting firm Berdon L.L.P. in New York. Wealthier investors, meanwhile, may pay even more once a 3.8 percent Medicare tax on unearned income begins in 2013.
Everyone needs income in retirement, and dividends aren’t a bad way to get it as long as they don’t come from a single company. Again and again, we’ve seen out-of-nowhere scandals and crises and accidents bring big companies to their knees. Why, given the overwhelming evidence that these things do happen once in a while, would you not extract your dividend income from a low-cost, broadly diversified mutual fund that specializes in dividends?
The moral of the story, as always, is to diversify within each asset class you own, whether it’s dividend-paying stocks or municipal bonds or the emerging-market countries where you’re rolling the dice for big gains. Then, diversify your retirement income, too. The more sources the better, whether it’s dividend income, interest income, annuity income, rental income or periodic (and tax-savvy) outright sales of stocks or other assets.
Even this sort of diversification might not have protected you from the pain in 2008. But it can shield you from the ruin of betting too heavily on a single security like BP.
Disclosure I am long BP shares.
Sunday, June 20, 2010
Fee disclosure is coming to your 401(k)
Investors lost a battle this week, but the war isn't over. Lawmakers in the Senate decided to drop a measure that would have forced the 401(k) industry to disclose fees to participants. But that's OK, because the numbers still favor retirement savers.
There are 50 million 401(k) participants who deserve to know how much they are paying for their retirement account. By contrast, there are just a few dozen lawmakers and few dozen lobbying groups that don't want 401(k) investors to know just how much things cost.Wowzers Were did da time go.............
I stumbled across my password the other day finally can do some updated. The wife had a heart attack I had to sell all that had at folio investing and recover the family. I now have a roth ira through sharebuilder.com Get ya own Account here. I am still using the same investing style as before. I put in 50.00 every payday and invest $5.00 for each day that I work (Kinda like a reward for having to go to work and deal with all the drama everyday that goes with work). With that being said my first deposit was on 4-16-2010. My account today stands at $346.21. I am a subscriber to the plan so I pay a flat $12.00 per month for 12 trades per month. I am long 52 different holdings in what I think is a pretty diversified portfolio. My current Holdings ranked by the amount held in the account 1 being my biggest holding and 52 being my smallest.
My current holdings include the following, AOD, IGD, MRK, WMT, TNH, FRO, DO, GE, XOM, INTC, PHK, EOS, PTY, DPD, IID, PHT, GDX, NLY, BMY, CTL, VNQ, CFP, CAH, KMB, O, PEP, SYY, CAT, PG, TPZ, ESD, LQD, EOI, ABT, PGX, JNK, PFF, VWO, GGN, MMM, IGI, BDX, XLF, BAX, FSC, SPY, PFE, ED, KMP, BPT, IBM, AND BP.Those are all my holdings that i plan to stick with for now and the ones I talk about on my blog. In my challenge to beat the company sponsored 401k.
I try to invest with a huge focus on dividends and reinvesting of the dividends you can not beat having your money working for you. Most of the time if a holding cuts its dividend I will sell it the next chance I get (however different in the case of bp). As this stock i am not sure what to do with so I will just hold it for the time being.
Dividends Paid this month include, INTC, PFE, WMT, DO on 6-1-2010, LQD, PFF on 6-7-2010, JNK on 6-9-2010, IBM on 6-9-2010, XOM, MMM on 6-14-2010, ED, IGD, IID, and O on 6-15-2010 and CTL on 6-21-2010. All dividends are automatically reinvested back into the same stock they come from.
I purchased DO, IGI, FRO, GDX and PHT on the 6-01-2010 value $5.00 each. On 6-8-210 I purchased AOD 2.05 shares for $13.00 and 1.1321 shares of IGD for $12.00. On 6-15-210 I purchased 0.3422 shares of MRK for $12.00 and 0.2525 shares of WMT for $13.00. And next week I plan to purchase on Tuesday $12.00 worth of IBM and $13.00 worth of ED.
It seems like it is taken for ever to get this going all over again, but I know Rome wasn't built in a day. So I be using this blog to share my thoughts and current investments. Feel free to follow along with me as I try to once again build a nest egg of money working for me.
My current holdings include the following, AOD, IGD, MRK, WMT, TNH, FRO, DO, GE, XOM, INTC, PHK, EOS, PTY, DPD, IID, PHT, GDX, NLY, BMY, CTL, VNQ, CFP, CAH, KMB, O, PEP, SYY, CAT, PG, TPZ, ESD, LQD, EOI, ABT, PGX, JNK, PFF, VWO, GGN, MMM, IGI, BDX, XLF, BAX, FSC, SPY, PFE, ED, KMP, BPT, IBM, AND BP.Those are all my holdings that i plan to stick with for now and the ones I talk about on my blog. In my challenge to beat the company sponsored 401k.
I try to invest with a huge focus on dividends and reinvesting of the dividends you can not beat having your money working for you. Most of the time if a holding cuts its dividend I will sell it the next chance I get (however different in the case of bp). As this stock i am not sure what to do with so I will just hold it for the time being.
Dividends Paid this month include, INTC, PFE, WMT, DO on 6-1-2010, LQD, PFF on 6-7-2010, JNK on 6-9-2010, IBM on 6-9-2010, XOM, MMM on 6-14-2010, ED, IGD, IID, and O on 6-15-2010 and CTL on 6-21-2010. All dividends are automatically reinvested back into the same stock they come from.
I purchased DO, IGI, FRO, GDX and PHT on the 6-01-2010 value $5.00 each. On 6-8-210 I purchased AOD 2.05 shares for $13.00 and 1.1321 shares of IGD for $12.00. On 6-15-210 I purchased 0.3422 shares of MRK for $12.00 and 0.2525 shares of WMT for $13.00. And next week I plan to purchase on Tuesday $12.00 worth of IBM and $13.00 worth of ED.
It seems like it is taken for ever to get this going all over again, but I know Rome wasn't built in a day. So I be using this blog to share my thoughts and current investments. Feel free to follow along with me as I try to once again build a nest egg of money working for me.
Friday, June 18, 2010
Fifth Street Finance Raises New Equity
Fifth Street Finance Corp (FSC) announced just after the Tuesday close that it has commenced a public offering of 8,000,000 shares of its common stock. According to the company's press release:
Fifth Street plans to grant the underwriters for the offering an option to purchase up to an additional 1,200,000 shares of common stock to cover over-allotments, if any. All shares will be offered by Fifth Street. Wells Fargo Securities, Morgan Stanley, UBS Investment Bank and RBC Capital Markets will act as joint book-running managers for the offering.
Fifth Street intends to use substantially all of the net proceeds from the offering to make investments in small and mid-sized companies in accordance with its investment objectives and strategies described in the prospectus supplement and accompanying prospectus and for general corporate purposes, including working capital requirements. Fifth Street may also use a portion of the net proceeds from the offering to repay its outstanding borrowings under its three-year credit facility with Wells Fargo Bank, N.A.
We're not surprised that Fifth Street Finance is raising more capital. The watchword in the BDC industry is raise money while/when the going is good. FSC has been having a good run of late, booking myriad new deals, (see our post of May 24, 2010) increasing its Revolver limit and reducing the pricing paid to its lenders (see our post of May 27, 2010).
This is a major offering, with the total stock being sold equal to 20% of the existing shares outstanding. FSC should raise $110mn at today's closing price. That's more than enough to pay off any borrowings under the Wells Fargo line (all of which has occurred since month end). The stock price is at a decent premium to the latest NAV : 13%, which is good for existing shareholders. The most obvious downside might be a delay in further dividend increases (most recently the quarterly distribution was up to 32 cents), but that's not for sure. FSC has been willing in the past to get the distribution up ahead of its Distributable Earnings Per Share and Net Investment Income Per Share.
Certainly, the balance sheet of the company seems recession proof. When we recently about the pro-forma impact of a double dip recession (see post of June 1, 2010) and wrote that half of the BDCs we track had virtually no debt, FSC was already on that blue chip list. This additional fillip of equity will only enhance a balance sheet which has only begun to grow. Total equity should be around $600mn after this equity offering closes, and with debt at less than zero, Fifth Street is sitting pretty from that standpoint.
The BDC Reporter, true to our name, seeks to avoid opining on whether or not a stock is a good value or a Buy or Sell. We leave that to the investment banks. However, we can say that the company's $1.28 annual dividend represents a 10.6% yield on today's closing price, and that the stock is trading just 11% below its 52 week high (using Yahoo Finance), which is also its all-time high. The analysts consensus for next fiscal year's earnings are $1.33 a share, which means FSC is trading a multiple of 9.1x.
Disclousre I am long FSC shares.
Fifth Street plans to grant the underwriters for the offering an option to purchase up to an additional 1,200,000 shares of common stock to cover over-allotments, if any. All shares will be offered by Fifth Street. Wells Fargo Securities, Morgan Stanley, UBS Investment Bank and RBC Capital Markets will act as joint book-running managers for the offering.
Fifth Street intends to use substantially all of the net proceeds from the offering to make investments in small and mid-sized companies in accordance with its investment objectives and strategies described in the prospectus supplement and accompanying prospectus and for general corporate purposes, including working capital requirements. Fifth Street may also use a portion of the net proceeds from the offering to repay its outstanding borrowings under its three-year credit facility with Wells Fargo Bank, N.A.
We're not surprised that Fifth Street Finance is raising more capital. The watchword in the BDC industry is raise money while/when the going is good. FSC has been having a good run of late, booking myriad new deals, (see our post of May 24, 2010) increasing its Revolver limit and reducing the pricing paid to its lenders (see our post of May 27, 2010).
This is a major offering, with the total stock being sold equal to 20% of the existing shares outstanding. FSC should raise $110mn at today's closing price. That's more than enough to pay off any borrowings under the Wells Fargo line (all of which has occurred since month end). The stock price is at a decent premium to the latest NAV : 13%, which is good for existing shareholders. The most obvious downside might be a delay in further dividend increases (most recently the quarterly distribution was up to 32 cents), but that's not for sure. FSC has been willing in the past to get the distribution up ahead of its Distributable Earnings Per Share and Net Investment Income Per Share.
Certainly, the balance sheet of the company seems recession proof. When we recently about the pro-forma impact of a double dip recession (see post of June 1, 2010) and wrote that half of the BDCs we track had virtually no debt, FSC was already on that blue chip list. This additional fillip of equity will only enhance a balance sheet which has only begun to grow. Total equity should be around $600mn after this equity offering closes, and with debt at less than zero, Fifth Street is sitting pretty from that standpoint.
The BDC Reporter, true to our name, seeks to avoid opining on whether or not a stock is a good value or a Buy or Sell. We leave that to the investment banks. However, we can say that the company's $1.28 annual dividend represents a 10.6% yield on today's closing price, and that the stock is trading just 11% below its 52 week high (using Yahoo Finance), which is also its all-time high. The analysts consensus for next fiscal year's earnings are $1.33 a share, which means FSC is trading a multiple of 9.1x.
Disclousre I am long FSC shares.
Wednesday, June 16, 2010
Why Wal-Mart Is Still a Growth Company
Wal-Mart Stores Inc. (WMT) has perhaps the largest “army” in the world when it comes down to people in uniform. With 2.1 million employees, 700,000 of which are employed internationally, Wal-Mart no doubt represents a centerpiece of the global economy. However, this giant is still growing and to no surprise, quite successfully.
The discount retail business only allotted Wal-Mart a 3.5% profit margin for the fiscal year ended Jan 31, 2010; however, the company returned 21% to shareowners’ equity. This indicates that Wal-Mart effectively leverages its cost-efficient structure and distribution capability to achieve very high asset and inventory turnovers. In fact, management even measures its performance by Wal-Mart’s cost structure, as the most recent Form 10-K states,
We believe growing operating income at a faster rate than net sales growth is a meaningful measure because it indicates how effectively we manage costs and leverage operating expenses. Our objective is to grow operating expenses at a slower rate than net sales.
From 2001 to 2010, net sales increased an average of approximately 11% annually while operating income grew an average of 15% annually. From this metric alone, it seems that Wal-Mart’s management is meeting its operational goals.
Moreover, the Wal-Mart growth story has yet begun. Currently, Wal-Mart is harnessing growth by expanding its geographic reach through its Asda discount chain subsidiary in the United Kingdom. In addition, Wal-Mart continues to move into grocery retail. The company derives 51% of all net sales from grocery already, while continuing to convert more discount stores to supercenters in order to widen its grocery reach. Wal-Mart’s Neighborhood Market, which began in 1998, also already has 158 stores and only a few closures in the twelve year period.
Wal-Mart is one of the world’s most powerful and largest retailers. However, there is more room to grow as they only operate 434 stores in Brazil and 279 in China. Perhaps India, where Wal-Mart operates just one store, will be the next focus for even more expansive growth.
Disclosure I am long WMT shares.
The discount retail business only allotted Wal-Mart a 3.5% profit margin for the fiscal year ended Jan 31, 2010; however, the company returned 21% to shareowners’ equity. This indicates that Wal-Mart effectively leverages its cost-efficient structure and distribution capability to achieve very high asset and inventory turnovers. In fact, management even measures its performance by Wal-Mart’s cost structure, as the most recent Form 10-K states,
We believe growing operating income at a faster rate than net sales growth is a meaningful measure because it indicates how effectively we manage costs and leverage operating expenses. Our objective is to grow operating expenses at a slower rate than net sales.
From 2001 to 2010, net sales increased an average of approximately 11% annually while operating income grew an average of 15% annually. From this metric alone, it seems that Wal-Mart’s management is meeting its operational goals.
Moreover, the Wal-Mart growth story has yet begun. Currently, Wal-Mart is harnessing growth by expanding its geographic reach through its Asda discount chain subsidiary in the United Kingdom. In addition, Wal-Mart continues to move into grocery retail. The company derives 51% of all net sales from grocery already, while continuing to convert more discount stores to supercenters in order to widen its grocery reach. Wal-Mart’s Neighborhood Market, which began in 1998, also already has 158 stores and only a few closures in the twelve year period.
Wal-Mart is one of the world’s most powerful and largest retailers. However, there is more room to grow as they only operate 434 stores in Brazil and 279 in China. Perhaps India, where Wal-Mart operates just one store, will be the next focus for even more expansive growth.
Disclosure I am long WMT shares.
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