John Heinzl of the Globe and Mail and I agree that dividend investing is something everyone should be doing. It is easy and grows your money with limited risks. In an recent article, Mr. Heinzl wrote about 10 reasons why it is one the simplest and most effective ways for small investors to build wealth. Once you have the wealth, there are many options including keeping most of your money in dividend stocks.

1. It is Easy to Understand – A company makes a profit. Part of the profit goes into the company to be reinvested, the other part goes to shareholders. The trick is to have enough to do both, if it does then the reinvested profits can lead to capital gains.
2. Dividend investing has Produced Superior Returns – Dividend investing can beat the indexes, otherwise you should buy index funds. The returns are even better when dividends are reinvested, but you can do with the dividends what you wish.
3. Dividends Help You Stay out of Trouble – in general, dividend companies tend to be the large well managed companies. Large well managed companies tend to execute their business plans and generate cash to be profitable. If you think of the typical dividend companies – the utilities, power producers, banks and telecoms all of them have people paying bills on a monthly basis and some are regulated by the government.
4. Dividends are Stable – Stock prices go up and down, dividends payments are more stable and predictable. With dividend payments, you can do an cash flow analysis of when to expect your dividends and then check your accounts to see the money has flowed in. In addition, because of the dividends, stock prices tend to fluctuate less than non paying dividend companies.
5. Dividends Reinforce Buy and Hold – stock brokerage companies make their money from buying and selling stocks. You make your money from buying a profitable company that can pay dividends and because it is profitable trades at a higher multiple than non profitable stocks. When the market goes down, it is okay as long as the company can still pay a dividend – you wait, received the money and you can either reinvest in that company or buy something on your list which has gone down.

Linking to dividend paying stocks all the above are great reasons to own dividend companies. Lower the risk, increase the reward and try not to lose money.

There are more questions than answers, till the next time – to raising questions.

 

 

 

 

 

In every industry there seems to be people who understand or at participating in the business more than others. In the Fintech space, one of the people who understand what people are trying to do and is Alex Rampell a partner with the venture firm of Andressen Horowitz. You are encouraged to both check out the venture fund’s website and his talks on You Tube.

The first aspect of Fintech is you may reflect to how manufacturing works – the first product costs the most money, then every other product costs less because the costs go down. In Fintech, the important elements are cost of capital and distribution – how do you acquire the customer? This is when you hear about the use of big data, reflection points and algorithms. The advantage the big companies have are a low cost of capital and large distribution or customer base. How they use the customer base is the key.

If you are a saver, you likely are getting a little more than 1% on your money. If you distributed credit cards, the average rate would be in the 18%. If you are JP Morgan Chase  who is the second largest distributor of credit cards, you are making 17% spread on your money. When that type of spread they can do many things and are profitable.

The trick for fintechs is to start with one of the big categories of debt – consumer, student, auto loan and mortgage. In each of the areas, similar to bell curves, there are wonderful customers, average customers and some who the loan will be written off and sold to collection agencies. The idea of fintech companies is to go after the wonderful customers and learn to pick the customers who repay their loans who feel they are unserved.

In the US, the most expensive words on Google search are insurance words. For example Geico spends about $1 billion a year to Google. However in the eyes of the insurer, people feel they are better than average and looking for lower rates – whether they drive their vehicles in a normal fashion (accident free); they try to keep themselves healthy – good genes when they were born; whatever the case they are looking for lower rates. The big insurance companies have distribution, but they also have customers looking, who are willing to change, which is different from older customers who tend to be more loyal to their original purchase. This is an opportunity in the market, if people are looking to change.

In one of Mr. Rampell’s talks he says when you look at new entries in the marketplace and there are many, the start up has innovation, but how do they do distribution – how much does it cost to find and turn a customer? the existing companies (typically the big ones) have distribution, how are they innovating?

For example, companies have identified HENRY or High earning not rich yet; people who may make lots of money but they are recent graduates. One company targeted student loans payments and now that they have distribution are adding other features such as making loans and mortgages at zero costs.

What Andressen Horowitz likes – inflection point – low or very low cost for customer acquisitions; companies which operate the operating systems or back office of the apps; companies which own the end user – the people come for information, and are willing to switch users; in payments business company like Stripe; Back End Payments such as Square and offer mortgages such as Blend.  In addition, if insurance companies are spending billions to Google, you can buy Google.

Linking to dividend paying stocks, in every company which you invest in you need to know how it operates to make a profit. In every company that makes a profit has people looking and trying to find ways to pick up the best customers of the company. Understanding the business allows you to see how sustainable it is or how well it is protected. If protected by government regulations, until they change the business can be profitable for many years to come.

There are more questions than answers, till the next time – to raising questions.

Before companies go public or have an IPO or Initial Public Offering, the company has needed money to grow. Private investors take either shares or debt to covert to shares or preferred shares to convert to shares after the IPO, whatever the combination, private investors take a piece of the company. This piece generally comes from the President and CEO and they have less. To compensate, many tech companies management is keeping the super voting shares or 20 votes per one that an non management investor can have. In one hand, the super voting shares keep management in place and they feel and actually do have control over the company’s directions without having 50% plus one of the shares. In an recent article Matt Lundy wrote about the issue.

For Lyft IPO prospectus discusses risk, the dual class structure of our common stock has the effect of concentrating voting power with our co-founders, which will limit the average shareholder’s ability to influence the outcome of important transactions including a change in control.

In 2018, 13 of 38 tech IPOs or 34% had dual class structures, according to Jay Ritter of the University of Florida. In 2017 the number was 13 of 30 or 43%.

The people who favor dual class share structures argue it allows key executives to focus on long-term strategy without the concern of quarterly results.

The reality is shareholders of Lyft were not buying Lyft for profits, but for growth. If the company has both, there will be few complaints. If the company has growth, but continues to lose money, then people will wonder when it will lose less money.

Linking to dividend paying stocks, when an investor buys a stock as long as their goals are met, then whether the company has dual class of shareholders or not, matters less. If an investor bought shares for the dividend, then as long as the dividend is paid, the investor might be a long term holder. It is when the company loses money and growth is slowed that shareholders will want new management to reverse the changes.

There are more questions than answers, till the next time – to raising questions.

When markets are volatile or when they look like they are becoming bearish, you need to place your money into stocks that do well no matter the economy. The stocks of utilities and telecommunications come to the forefront. If you wish there are SPDR indexes of the companies or you can pick individual ones to put on your radar and possibly buy.

In late March, Noor Hussain an analyst for Inovestor Inc examined some companies in the utilities and telecommunications sector and came up with the following. He first started narrowing the field with the following criteria:

Market capitalization greater than $10 billion

Positive 12 month change in economic value (EVA) metric. A positive number means the company’s profits are increasing at a faster and greater pace than the costs of capital. To determine the EVA = net operating profit after tax – capital expenses

Positive 12 month change in the economic performance index (EPI) and a current EPI greater than one. The ratio is the return on capital to cost of capital.

Future growth value to market value ratio (FGV/MV) is between 40% and minus 70%. The ratio represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk.

Company                          Mkt Cap     EPI    EPI 12M  FGV/    EVA 12M   1 Yr           Div

$ bill                       Chg %      MV %   Chg %     Reurn %   Yield

Verizon Comm                246.930     2.85     130.2        -53.5       422.1         19.2           4.2

NextEra Energy                 92.698     2.09       98.5        –  5.4        249.2        23.4            2.6

Duke Energy                      65.938      1.08         4.3           0.2          15.9         19.0           4.2

T-Mobile                              61.128      1.76       65.5        -16.3       297.5         19.1           0.0

Dominion Energy              51.429      1.32        18.6      –   0.7          59.9          0.0            4.7

Exelon                                  48.671      1.41        39.9      -38.1          156.3        31.2          3.1

American Electric               41.995     1.26          4.9           6.4            1.1         23.7           3.4

Public Service Enter            30.053    1.2          47.0           18.9        126.8        21.4          3.5

Consolidated Edison            27.256    1.27        13.7            8.3           39.9        10.1          3.7

WEC Energy Group              25.030    1.54        27.1           0.5              81.8       27.3         3.2

The other utilities listed were: Eversource Energy, CenterPoint Energy, Atmos Energy, Alliant Energy and Pinnacle West Capital Corp

Linking to dividend paying stocks, it is hard not to have a utility in your portfolio because the regulators increase prices every year which means the company has the ability to keep earning money and paying to shareholders. As long as the company does not let is costs get out of hand, it is a good investment.

On a side note: in late March the state of California generated 59% of its electicity needed by solar panels. Solar panels cost less than nuclear plants.

There are more questions than answers, till the next time – to raising questions.

 

In reality, the decline of any large organization happened over time although when people in senior management look back it seems there were catalysts. On You Tube there is a clip 5 reasons why Sears went bankrupt. This means you can learn from them and have warning signs for you investments. The You Tube interview 3 people but the ideas are valid.

1. Diversification  in the mid 1990’s Sears bought a stock brokerage company to complete its Financial Services division. This was at a time when it was generally thought that companies had to scale up and offer customers something for everyone. Sears previously owned Allstate Insurance for decades, and had credit cards, so why not make the step into stock brokerage? The reason most of Sears customers did not have brokerage accounts and those that did were not going into Sears to do there business. The business began to take away senior management’s eye on the retail stores.
2. In 1993, the last of the Sear Wish Books was given to every household in the country. People had grown up with it, they identified with the company and equally important, but now a missed opportunity, Sears gained a great deal of information about their shoppers. The information was is an asset to Amazon, was not put to use by Sears.
3. Softer Side of Sears ad campaign. The good news it was aimed at the female shopper and many of the shoppers are female. The bad news, the customer when asked where they bought a piece of clothing wanted to say the Gap or any other store besides Sears. It was the rise of semi independent companies and Sears missed out.
4. K-mart merger – Sears bought K-mart but the synergies were not good, the average Sears shopper was more affluent than the average K-mart shopper. The average Sears shopper was not going to shop at K-mart and the average K-mart shopper was not going to shop at Sears. After World War II, the suburbization of America happened and Sears rode the wave, they expanded to the suburbs and the malls and because of their national name, rents were very inexpensive relative to the rest of the mall. K-mart was a second tier company and did not get premier mall space or they were in secondary malls or nearby the big malls in stand alone stores. The real estate was not a reason to buy K-mart.
5. Edward Lampert – the present owner of the chain. Mr. Lampert saw value in the real estate and is not a retailer. Over the past number of years to his companies, he has done very well in the selling of the real estate but he is not interested in same sales growth of the stores or retailing except for some high end aspects.

Linking to dividend paying stocks, when insiders and people who care about companies look back and see opportunities taken and missed, there will have been some mistakes, but somewhere along the line the exectuion will be the most important thing. The Sears people who were rewarded by shareholders for a long time missed more opportunties than normal. The stores were in decline for years, a number of years ago the Wall Street Journal ran a story about a reporter going into the store to see how the manikins were dressed in the ladies clothing – the stockings had runs. That is not to say all manikins had stocking with runs, it is to say, but standards in the biggest malls were going down. Looking back one can see when the retailer lost the way, however, to make money you have to ensure you believe the corporate strategy is the best one and is being excuted to the customer’s satisfaction to be a repeated customer.

There are more questions than answers, till the next time – to raising questions.

On the You Tube channel selections the TV series Dragnet came up and thus a number of shows were watched. The TV show has a distinction musical opening and for a long time the show was very popular. The show featured detectives lead by Sergeant Joe Friday who gave the voices to the action and the cases were based on true cases in Los Angeles.

There are many shows by this blog will focus on 3 of them. 2 people were robbing Candy Stores and receiving $20 to $50. The men were on skid road and needed extra spending money and thus robbed stores. There sentence 5 years in jail at San Quentin – a jail on an island near San Francisco.

The second person, heard someone wealthy was leaving the city from the pet groomer, broke in and stole jewellery valued at $25,000.  The person tried to sell the jewels at a seedy bar. When the police had a search warrant the person hid the jewels in the fish tank protected by Piranhas and was given 5 years in jail at San Quentin.

Another person, was running a pyramid scheme which only the first two levels make any money. In the scheme, a math professor was asked at the 18th level how many people need to buy into the scheme. The answer was 360 million, the US population at the time of the show was closer to 200 million. Sergeant Friday worked many hours on the fraud squad and a conviction was done. This was a person who was selling a pyramid scheme which cost people $299 to get in and in the past her husband had raised over a $100,000 in the 1960s. The court fell the person guilty, a $500 payment was made and a 6 month suspend sentence was the result. Who knows the person could have started up business the next week.

Linking to dividend paying stocks, why is it the white collar crime or stealing money does not result in a harsh sentence as robbing a store? There is no doubt, because of the lack of harsh sentences which means to take the proceeds of crime away from the person or they are not allowed to live a lavish lifestyle often is a serious deterrent from doing the same thing again. There are always multiple frauds going on and when you have made money the old fashion way or saving and using compound interest, if someone want s to steal your money there should be a jail sentence the same as if the person robbed the bank.

There are more questions than answers, till the next time – to raising questions.

In the 1960’s Clint Eastwood starred in a some cowboy movies and they were known as Spaghetti Westerns, partly they were shot in and around Italy although the stories were from the western US. The movie producer was Sergio Leone and the movies were commercial success. Recently on You Tube saw the movie For a Few Dollars More and the movie is still entertaining.

In addition, if desired one can learn something about management systems and those that plan and those that rush in, hoping for the best. The Clint Eastwood character with the poncho was the bounty hunter with terrific given skills in the ability to shoot people and collect rewards. In some ways he made the country safer. The Lee Van Cleef character is the planner, because he does not have the skills on Clint’s character but he can made modifications to be his equal. In the movie, the two bounty hunters are after the same person for different reasons – the money and revenge.

If you love westerns, there are books and blogs about management and the westerns.

Linking to dividend paying stocks, the words of the westerns are still to be found in the financial markets because men grew up on cowboys and Indians movies. The reality is for most investors, they do not have more knowledge and information that the professionals who manage money and work on Wall Street. That being said, there is no reason to believe small investors can not do as well or better than Wall Street. In the movie For a Few Dollars More, both the criminals and bounty hunters were carefully watching how security was done at the bank. It took time and patience; when the safe was removed, the Lee Van Cleef character was the only one who knew how to open the safe without exploding sending the money all over the place. Everyone was talents, they see something, the trick is take patience, not swing for the fences and manage the risk, to maximize the reward. One way to do this is invest in companies that make profits and regularly pay dividends. You will be rewarded over the long term.

There are more questions than answers, till the next time – to raising questions.

If you asked where is the most productive oil drilling program in the world right now? Would you have answered in Texas? The Permian Basin is an area in Texas and New Mexico where the biggest oil companies in the world has made the US the world’s top oil producer. In an article by Jennier Hiller of Reuters more importantly, the oil major companies are continuing to commit billions of dollars and they believe if oil prices go up that is great, but if oil prices go down, they still make money.

The oil giants have pipelines, trading, logistics, refineries, chemical businesses based in the area. Exxon operates 48 drilling rigs and plans to add 7 more this year. There is a book or many books about Exxon and their engineers typically only do projects when there are double digit returns. Exxon chief exectutive Darren Woods said the size and buisesses could allow Exxon to earn double digit percentage returns even if oil prices were less than $35 barrel. When the article was written the number was $58. Exxon will be doubling the capacity of a Gulf Coast refinery to process oil.

According to IHS Markit’s Daniel Yergin the Permian Basin is expected to generate 5.4 million barrels a day by 2023, more than any single member of OPEC other than Saudi Arabia. Exxon, Chevron, Shell and BP hold more than 5.4 million acres and are poised to pass the independent Pioneer Natural Resources.

Linking to dividend paying stocks, for over 100 years owning the big oil companies has been a healthy dividend pay and good for capital gains. While climate change is something all companies have to deal with, the reality is the economy is still dependent on oil and until the world makes the big shift, oil companies are a good fit in your portfolio.

There are more questions than answers, till the next time – to raising questions.

The Diamond Heist is a movie made in 1992 staring Ben Cross and Brian Dennehy about stealing a large uncut diamond. Every large city has their area where expensive jewelry is found – New York has 5th Avenue; Chicago has the Magnificent Mile, Hollywood has Rodeo Drive in one of those type of stores, an owner has bought the biggest diamond in the world to show it off. In the movie, all the high tech gadgets and apparatus are used to protect the diamond. Brian Dennehy plays a Police Officer; Ben Cross is the jewel thief.

If you watch the movie on You Tube, you can watch the thinking behind Ben Cross’s character of how to integrate himself into the store to try to figure out how to get in, take the diamond and equally important to get away safely. The movie has the pace of planning, but it was interesting something like a fishing pole is needed to gently push up the camera so the view is changed. If you install cameras can the vision be moved?

In the movie, there are a few twists and turns including a love interest, but for this blog the important aspect is the planning.

Linking to dividend paying stocks, in all markets, people want to sell high and that is a good thing to do. For most of us, we do not know when the market will be at the highest and lowest, but we do know dividend paying stocks will provide income while we wait and decide. Profitable companies tend to rise in value as the multiple to next year’s earning increases. Overtime dividend paying companies tend to rise in value, which increases your total return with limited risks. Patience is a good thing.

There are more questions than answers, till the next time – to raising questions.