If you own more than one dividend stock, invariably it will be a bank. The banks generally are money makers – their large retail base gives them access to low cost money which is lent out in higher cost money, the only exception is when the loan losses go to high or think financial crisis. Banks are an excellent stock to collect dividends from. But which one should you buy? Wells Fargo is the biggest bank in the world by market capitalization (share price times number of shares outstanding), the smaller ones can give better overall returns, whatever you pick start similar to the example below:

Mr. Bowman of Wickham Investment Counsel did an analysis looking for the biggest and most efficient banks.

First we narrowed the field to over $ 5 billion in market capitalization.

Second, Tier 1 capital is a measure of the bank’s strength – the higher the better but must be over 6%.

Efficiency ratio shows the percentage of dollar needed to produce $1 in return.

A low number of non-performing assets or loans with greater than 90 day payments frequency.

North American banks ranked by efficiency ratio

In the summer more books are read, perhaps because reading in the outdoor natural light is wonderful. A recent book read called The Heist by Janet Evanovich and Lee Goldberg, Bantam Books, NY , 2013 was well worth the time reading it. Within the book was a short line which all spy novels must do to achieve success – Logistics and resources are the key. If you start to think about that simple line you will notice most of what you do or try to do is captured in the line. To do something the planning starts and depending on what logistics and resources you have to make it work, will generally imply the scale you can do. If you start to stretch the line to companies – those that do well, execute well. They have the right product at the right time at the right place or logistics and resources are working well.

Linking to dividend producing stocks as the company grows and pays a dividend it is sometimes hard for an investor to determine if the company is doing the right thing all the time. One of the keys is to look at its logistics and resources – how does it get the right product to the right place at the right time to be bought? This is one of the methods as an individual you can do research on the companies shares you own or considering buying. How well does your company do the logistics and resources?

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

The other day while eating lunch, a lady and her friend were talking about her hairstyle. As she explained her hair colour, she pulled out her cell phone and showed a picture. Then took a picture of herself to show the differences. After that not sure what she did with the pictures. Her actions similar to many others show how innovations change our regular behaviour. The phone can take many pictures at low cost for either information or to share with others, the lady had a plan that the cost was secondary to the instant reaction. Just a few short years ago, the camera phones were used for business purposes or special events, then camera became better and while there is a camera business, the business model changed. If companies could not embrace the rapid change or like the old margins better, they are out of business or radically alterted. The illustration above shows how quickly people change innovation to their lives and how difficult it can be for companies to maintain their market leadership.

Linking to dividend paying stocks, while the company is making a profit and paying a dividend, all is good. We have seen many events include the simple use of the camera to revolution the method companies operate. That is not a bad thing, it can be a great thing – notice police investigations often ask for pictures from cell phones. Those that take pictures, take them all the time, not just at special events. Remember there is limited privacy now days and being and trying to do the right thing is more important than ever. If the company is doing the right thing hopefully it can adjust to the changing realities and continue to pay dividends.

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

When we go somewhere on more than one occasion we start to recognize landmarks or something to give us a sense of direction for the next time. When you commute on a regular basis, those landmarks give us a sense of time of how much further to go and how far we have travelled. It is the reason why even if the landmark changes its name or outside structure, you will likely refer to it as you initially learned it. In the case of the writer, one of the buildings on the commute gives a digital time reading. As the building is passed, the sense of leisure time shortly leaves for it is off to work.

Linking to dividend paying stocks, one excellent method to get time working for you is to pick stocks that regularly pay dividends. The management of the companies job is to pay you and with those regular payments more leisure time is possible. The payments of the dividends plus the long term capital appreciation has consistently shown to be a proven winner because profit making companies are worth more.

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

As a human, we all want to make better decisions and a book called How We Decide by Jonah Lehrer, Houghton Mifflin Harcourt, NY, 2009 discusses this issue

There is no one method to make decisions although there are some guidelines – often times the expert pundit does not make any better than decisions than a random chance would give. The reason is from Isaiah Berlin’s essay The Hedgehog and the Fox. The hedgehog has only one defense – it rolls itself in a ball is protected by its spines. The fox does not rely on any one strategy, it adjusts its strategy to fit the particulars of the situation. It terms of the pundit –  similar to the hedgehog – one grand strategy is seen as certainty and anything else is rejected. The fox in terms of the pundit – relies on the solvent of doubt. The fox gathers data from a wide range of sources and listens to a diversity of opinion before making predictions and decisions.

Being open minded is not enough, you must study your decision-making process. Asking why did you do what you did? why did others do what they did? what were you missing?

Some simple guidelines to better decision making

Simple Problems Require Reason – for items you do not particularly care about allow reason to give your answer. For more complex items that you care about – allow emotion to dictate. Others you will likely overthink and come up with something you do not really want.

Novel Problems Also Require Reason – think about your past experiences before going forward.

Embrace Uncertainty – hard problems rarely have easy solutions. Before deciding on a hard decision try to have competing hypotheses. When you force yourself to interpret the facts through a different, perhaps uncomfortable lens, you often discover that your beliefs rest on a rather shaky foundation. Also continually remind yourself of what you do not know. Colin Powell said, “tell me what you know. Then tell me what you do not know, and then you can tell me what you think.”

You Know More Than You Know. – to become an expert means you have made many mistakes and learnt from them. The brain always learns the same way – accumulating wisdom through error. Once you are the expert, trust your emotions to help make decisions.

Think About Thinking – whenever you make a decision, be aware of the kind of decision you are making and the kind of thought process it requires. You will make errors, but when you learn from them, the next time about you will make better decisions.

Linking to dividend paying stocks, we all are trying to make better decisions and one of the better methods of investing is try to have dividends attached to stocks. The price if beaten down will rise faster, every year the payment will be received which increases the total return of holding the stock.

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

As a human, we all want to make better decisions and a book called How We Decide by Jonah Lehrer, Houghton Mifflin Harcourt, NY, 2009 discusses this issue. Within the book is a number of stories about the decisions people make and how the decisions are made or were thought to be made. One of the examples is the football quarterback finding the open receiver in seconds. In this series of downs the quarterback within seconds found the open man after seeing the others were covered. Part of the reason he could do what he did is the past study of game film to help correct the things he did wrong or he learnt from his mistakes. Perhaps after seeing the things he knew were impossible, he saw the possible and it felt the right thing to do. Nobody is 100% positive, but he pass was caught, which put the team in a position to win the game but part was learning from the past, part was emotion – it felt right, and part was chance.

If you listen to basketball, you know the expression – x has the hot hand today, Most of us believe the expression, however the evidence says it does not work, Those that believe they have a hot hand, often shoot more, but the shots from a percentage point of view get riskier. When the shooter thinks he is cold, he takes more higher percentage shots which should go in or less riskier shots.

In the stock market, the only perfect information is the past information. The stock market is a classic example of a random system. The past movement of the stock can not be used to predict the future movement. However our brains try to impose a rational pattern or meaningful trends. The example is if you invested and your stock went up, instead of focusing of what went right, we focus on the profits missed, we could have bought more or used leverage to buy even more. If if your stock lost money, you focus on the money lost and race to dump assets. The lesson is it is silly to try to beat the market with your brain. Your dopamine neurons were not designed to deal with random oscillations of Wall Street. This is why in the long run a randomly selected stock portfolio often beats the experts. Since the market is a random walk with an upward slope – one of the best solutions is to buy a low-cost index fund and wait. Patiently. Do not fixate on what might have been or obsess over someone else’s profits. The secret of the stock market is there is no secret  – the world is more random that we can imagine, that is what our emotions can not understand.

Linking to dividend paying stocks, learning from your past investments allows you to make better investments in the future.

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

The other day while riding my bike, the lights turned red and a Ferrari and a Porsche pulled up beside me. Those two cars are high performance vehicles with quick acceleration. On the city streets, they are not that practical, but people buy them anyways. As the light in the other direction turned red, my bike was first to go because there is a gap between the red and green lights. However the drivers of the two cars looked at one another and then they zipped by my bike and were down the road in seconds. Fortunately there was other traffic on the road and the two cars had to slow down for no accidents were caused. My bike made it to its destination faster than the alternatives that were available to me on the lovely summer evening, but slower than the two cars, unless there was lots of traffic and traffic lights down the street.

Linking to dividend paying stocks, there are many alternatives, in this case when the Ferrari and  Porsche pulled up, these cars can be seen as  growth stocks. It is possible to have short term profits, however in the case of the cars roaring down the street, their progression was quickly stopped by slower moving vehicles or there was risk involved with the great speed. My bike going at a slower pace, covered the same ground and as an added bonus, the weather was lovely. If you buy dividend paying stocks, you will likely get to the point a little slower, unless the market has been beaten up the sector and then the stocks can have great gains (see US Bank stocks) and a dividend as an added kicker. When you buy beaten down dividend stocks, always start with the quality ones for more return less risk.

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

We all have insurance of some kind – home, auto, life, medical, and host of others. The bills come every year or month and ideally we never use them. However, the companies that we pay to have insurance earn money and if there are not many payouts, the insurance companies earn profits and pay dividends. Recently Mr. Bowman of Wickham Investment Counsel (Michael@wickhaminvestments.com) did some homework on insurance companies. To narrow the field, his criteria was market capitalization greater than a billion, and dividend yield of 1.5% or higher. The list was further narrowed by a ROE or Return on Equity of greater than 8% – this is a measure of cash generation divided by what shareholders have invested. The higher the better. The other screens are ROA or Return of Assets indicating how profitable a company is or how a company uses its assets to generate returns. The criteria was great than .4 %.

Notice the total return on insurance companies. The average return for the past 12 months was 29% because after the hurricane season many of the companies’ stock prices went down. Now days most hurricane seasons are going to put downward pressure on insurance company stock prices. It maybe a strategy to sell before the hurricane season and buy quality companies afterwards. If the hurricane season is particularly bad, the stocks will be driven down and as what is termed normal comes back, the good companies should return to normal prices. The key is stay with quality companies.

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

Many people have seen or heard James Cramer’s Mad Money and it makes sense every once in a while to reread his books. The process typically does not change, the names of the companies often do. In rereading his book Real Money, Simon and Schuster, NY, 2009, it provided very good lessons to write about.

Mr. Cramer recommends 10 companies for a diversified portfolio.

1. A company that you know or can relate to. It is easier to do your homework and you can keep an eye on it.

2. An oil stock – these are consistent performers with high dividend yields, great cash flows and businesses that do well in times of tension. Perhaps the company you buy gas from.

3. A brand name blue chip that currently yields at 2.5% or greater. The yield is the current yield and the yield gives a floor so the price does not fall below it.

4. A financial company, Mr. Cramer likes to buy local.

5. Something speculative – to narrow the field, Mr. Cramer looks at stocks that have a minimum of 100,000 shares issued, $100 million in market cap and a price between $1 and $15.00. You may want to even narrow the field by stocks that have prices greater than a hamburger. In this group of companies are where the biggest percentage gains are made. You might be able to find the next google. Note the something speculative allocation is one stock out of 10 or 10% of your portfolio, most of the portfolio is in best of class, dividend companies. It is important for this stock to learn to sell for there is only capital gain or loss, no dividends.

6. Use rotation to buy the blue chips when the price has declined and sell when they have reached new highs.

7. When the news headlines is doom and gloom, some stocks will lose value because  they are in the traditional smokestack industries. However the record of Dow, Deere, DuPont, Caterpillar, 3M and others is outstanding. The stocks tend to lose market price because of worries and then come roaring back as the gloom and doom subsidizes.

8. Technology companies with yields or make the technology company your speculative pick.

9. A young retailer which has the potential to grow big

10. A hope for the future – ie biotech stock in the mid cap index.

It is okay to buy and sell part positions. Buy the best quality you can and do your homework to ensure the market helps you. There is always choice and usually the best companies trade near the right multiple, however there are times when there are mispriced securities or opportunities to buy.

Linking to dividend paying stocks, notice Mr. Cramer likes dividend paying stocks because they are consistent money makers. He asks you to consider letting the economic cycle work for you. There is no reason you have to but consider the highs and lows of the dividend paying stocks. For some companies there is a $10 gap, most of the gap is explained by the rotation of the economic cycle, note the dividend needs to be paid.

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