Mulzar.com

There has been numerous studies that has come to the same conclusion: A basket of high dividend blue chip stocks beats indexes like dow jones, S&P 500 etc. I’ve read a swedish university study on this case. The interesting thing I noted it’s the same thing here. High dividend paying stocks on the swedish stock exchange beat the genereal index OMX over a ten year period, 1995-2005. Is this a global phenomenon?

When I read the swedish study I found a few interesting facts. The reason why the high paying dividends stocks beat the index is because high paying dividend stocks are usually cheap stocks at the time they are paying high dividend relatively to their stock price. I’m going to talk about third variable effects here people. There has been another study showing that a basket of stocks that has suffered from heavy declines usually outperforms the market the following year. Yes, think about that, 20 blue chip companies that pays dividend and all of them suffers from heavy decline in stock price. What status do they achieve? That’s right HIGH DIVIDEND PAYING STOCK ( given the fact that they don’t slash dividends ).  Back to the high paying dividend stock studies, when the stocks were bought it was usually stocks that had suffered from heavy decline in stock price but hadn’t slashed its dividend, thus becoming high dividend paying stocks.

Why buying high dividend paying stocks might not be a market beating strategy. I’m a going to disappoint my readers here. The number one reason is the market is very effective of absoring information and numbers making it hard to see leaks to outperform the market in the future. Yes folks I’m talking about the effective market hypothesis. If all the information about high paying dividends stocks beating the index, in example dogs of dow being a better investment than just to invest in dow jones won’t the demand for dividend stocks drive the prices up and making it harder to beat the index. It’s easy to backtest and find strategies that outperform the market but this high dividend paying stocks strategy might as well stopped working because many more people are dividend investors and this might lead to finding good high dividend paying stocks tougher.

I’ve read tons of articles about dividend reinvesting and how great dividend is and etc. One thing many articles have in common is that they point to the power of reinvesting. I’ve seen so many example charts of stock return of you were to reinvest or not reinvest. It usually goes something like this, if you were to reinvest all dividends you would return 1000% instead of just 100% and that proves the strength of dividends!

Yeah, that’s great. But wait, let’s say I receive my stock dividends every quarter and instead of reinvesting it in the same stock I save the money and wait for a opportunity to invest it in another stock. I would be forced to calculate the new stock’s return + the original stock’s return to get total return. It’s almost like most articles are saying if you don’t reinvest the money, it disappears or they assume you spend it. Why not just keep the dividends in cash when the particular stock that is paying dividends is priced high and look for other investments? Wouldn’t that in theory increase total return instead of just religously saying dividend reinvesting is the best long term strategy ever?

I don’t think it’s fair to show 100 year chart pointing to amazing return of dividend reinvesting instead of getting the dividend in cash. I might aswell get higher return on my dividend by investing it in other companies.

The biggest gain in net worth since my last million dollar goal update was from the weakened dollar. With the current dollar/sek exchange rate I have amortized $812 of my mortgage and about $100 from my cash loan. While I’m at the amortize subject I want to quickly note why I amortize. A few of my readers has critized me for amortizing. I could easily beat the 4.32% interest I have on my fixed loan by investing in the stock market. Yes I know that I probably would on average gain 7-10% in the stock market over a long period and have 3-6% higher return than amortizing BUT I like safety and I’m old fashioned ( even though I’m young ). I don’t like the new credit era where everyone has 80-90% loan, if my apartment would drop in price over the course of 2-5 years I still wouldn’t be worried because I’ve amortized a bit of the loan by then, as of right now 71% of my apartment is loaned. Besides amortizing is a safe bet to build wealth slowly. But I’m willing to admit that investing is a smarter choice than amortizing.

Anyway back to the currency talk: My loan is at $71583 now. I know what you’re thinking, I amortized and still my loan got bigger?!

Well the answer is simple, I bought the real estate in swedish crowns and the dollar has gotten weaker since then. But that’s a good thing. I am closer to my million dollar goal because of that.  My rise in net worth has gone from $23800 to approximately $29000, the loan gives me leverage that’s why the rise is quite big.

Besides the gain in real estate I have made I’ve saved some money and invested it in emerging markets funds. I managed to save and invest $1200 and it has grown to $1300, so far so good

Status:

Net Worth: $29300

Holdings,

Stocks/Funds:

$1300 in emerging markets funds. I will give details about which funds/countries  next update!

Real estate:

One apartment, market price = $100800 // My readers might get really surprised by the strong rise in real estate price but you have to remember that the price is actually the same as when I bought it. The only reason why it has gone “up” $10800 in 3 months is because the dollar has fallen a bit against the swedish crown. It’s only a “currency gain”.

Loans:

$71583 real estate loan.

$1100 cash loan.

A dividend reinvestment plans means exactly what you think it means: An investment plan offering to reinvest dividends. Basically you get more shares in dividend instead of cash, the company automatically buy more shares for you. As you can guess this is a very long term investment strategy.  There are independent firms that do all the paper work for you to open a drip account. An example is MoneyPaper, there is an enrollment fee but usually after that it’s commission free to reinvest dividends. It depends on the stock. Take Pepsi for example:

// Copy and pasted from MoneyPaper.

The only charge is the one-time-enrollment fee that is $100. That’s a small price to pay for a long term investment, assuming you buy more than just a few shares. After all your paperwork your DRIP is on autopilot, automatically buying more shares for no commission at all! I would call this a low stress investment. You don’t need to react with emotions every time the stock plunges or rises, because you keep getting your dividends. This strategy is best suitable for the income investor not the capital appreciation investor. In fact if a company with no cuts in dividends would plunge for a period of time it would actually benefit the investor because you would get more shares.

For example if you owned 100 pepsi shares and pepsi would stay  at $56.32 for 10 years paying the same dividend you would been dealt:

3.20% dividend

1.032^10=1.37

37%. You would now own 137 pepsi shares with reinvested dividends.

But lets say for 9 years pepsi is trading at half the price $28.16 with no dividend cuts and the last year it would spike up to $56.32. Now it might sound like you would have the exact amount of money as the first scenario but it’s a dramatic change. Because the price is in half you would get double the dividend relatively in shares but you would still get the exact same dividend in cash.

Pepsi pays $1.80 per share in dividends. It would still pay $1.80 in dividends if the price of the stock cuts in half for no apparent reason. 1.8/56.32 = 3.20% yield but 1.8/28.16 = 6.40% yield. You will be getting 6.40% more shares every year instead of 3.20% as long as the price remain at $28.16.

Scenario 2 calcuation:

9 years:

1.064^9 * 1.032 ( the price spikes up to $56.32 the last trading year ) = 1.80

You would now own 80% more shares. Even though the last trade price is exactly the same in both scenarios you would have 180 shares in scenario 2 and 137 shares in scenario 1.

80% return instead of 37%. That’s more than double the total return over a ten year period. This is the reason why DRIP makes people stress alot less. As long as the stock keep paying dividends or even increase dividend payouts you don’t need to worry about the stock price.

Just a last note, you should avoid companies that charges for dividend reinvestments, that can be devasting to your total profits in the long term. Take Coca Cola for example:

 You really feel comfortable giving up 5%(to $2) + 3c / share every dividend payout? Of course if you really believe the company will greatly outperform a major stock index then go for it even if it has a fee for dividend reinvestment.

I am going to explain what DRIP is for my novice readers. DRIP = Dividend Reinvestment Plan . The difference is that instead of getting your dividend in cash you get more shares. If your dividend isn’t enough to buy a whole share you will get fractions of a share. For example it’s possible to get 2.37 shares in dividend. I was thinking about using MoneyPaper to start a Coca Cola DRIP. Opening a drip account at Pepsi has also crossed my mind.  MoneyPaper does all the the paper work and makes YOU the owner, that’s why I might use their service. I will write more about dividend reinvesting soon, there is alot to discuss!

I was one of those guys who thought pep boys was done. I thought anyday now they will go bankrupt. All the signs were there. Crappy managment, canceled dividend, falling profits. When a company cancels its dividend you can be sure they have some serious problems. The stock hit the bottom at $2.62 and now it’s exactly $10.00 per share. One important thing to note that the dividend is back and that is a very good comeback sign.  The dividend of a company can give you alot of information about the health. Don’t underestimate the strength of dividends!

Ofcourse you hear about whacky speculations all the time about the managment restoring the dividend just to pump up the stock price so they can dump their shares at a higher price but that doesn’t seem to be  the case. I hope the managment cares about the company, not just for profits but to protect the strong and old brand name “Pep Boys“.

I have regrets but it could have been alot worse. It has “only” gained about 50% since I last wrote about it. It could have been a tenbagger but thankfully it wasn’t, if it was I would never forgive myself. You might recall when I wrote about Miller industries saying during the financial crisis hype ”hey, this stock is hitting new 52-week lows all the time, I will put this one on my watchlist!”.

Well here’s what happened, the stock was trading around $4.50-$5.50 during that period and I said to myself it might get cheaper. Well it didn’t get cheaper ( well it did a few cents, lowest sale was $4.25 ) and now the stock is currently $8.65 per share. I know I shouldn’t call bottoms but I didn’t expect it to just fall a few cents more. Miller Industries counts as a cyclical company so I assumed it would head below $4.00 atleast.  But anyway, done is done. I will move on with my life!

To be frank tech is not the only sector I avoid, all companies which I don’t understand I generally avoid. Many companies fall into this category: gun, tobacco, biotech, IT, tech, biotech, alcohol and the list goes on… so why do I avoid the listed sectors? The answer is quite simple I have no experience and know very little about them. I have never smoked, drunk, been a tech guy, used guns, etc. I simply don’t know anything about the listed categories. It doesn’t get any harder than this. My previous post was a good example of a company that looks fine on paper but I don’t really know anything about!

I have simple philosophy when it comes to stock investing: Buy good companies that you know very well.

First of all, DEP doesn’t own any land nor does it extract natural gas. Duncan Energy stores and transport natural gas. The company’s profile is well formulated in the yahoo description:

“Duncan Energy Partners L.P. engages in gathering, transporting, marketing, and storing natural gas, as well as in transporting and storing natural gas liquids (NGLs) and petrochemicals in the United States.”

So don’t confuse it with an pure natural gas company!

Now that we got that sorted out, lets look at some interesting facts about Duncan Energy Partners:

10.20% dividend

Heavy insider buying by Dan Duncan. Duncan owns 382,500 shares as of June 25 2009.

61% of the company is owned by insiders. 5% is owned by mutual funds and institutions.

The numbers look good but I am not going to buy DEP shares. The reason is they don’t sell a simple product which I have first hand experience of. I like to see the products and appreciate them before I take interest in the company. Not buying/using/seeing a company’s product makes it hard for me to really have an opinion of the company. I am not just talking about DEP this is an important rule to follow in general, “Buy what you know”.

Investing capital in capital trust has been a disaster investment so far, the company doesn’t really live up to its name. The current price is $1.25. It feels like yesterday when the stock was trading between $25-30 and the dividend was “awesome”. Bulls defended the stock even though this was after all the news about the economy going downhill. Apparently all the insider buying and the genius managment made CT look like an obvious buy. I didn’t short or went long on this stock, I was simply neutral and avoided it. So this isn’t a “I told you so” post, I’m just pointing out the danger with being overly optimistic when insider buying occurs.

I have no idea how Capital Trust will perform from now on, it might be a brilliant investment to buy it today. So you bulls don’t need to flame me, I’m not saying CT is going bankrupt.

And yes, I felt like I had to make a wise joke about “not trusting capital trust”