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Whenever you apply for a mortgage loan, your lender calculates your debt-to-income ratio in order to check your affordability to repay. Debt-to-income ratio is the percentage of your monthly gross income that you pay towards your debts. It is also referred as debt income ratio or simply DTI.

How to calculate DTI

Debt income calculation is very easy and you can do it yourself. You need to divide your total monthly debt by the total gross income you earn every month.

Types of DTI calculation

You can calculate debt-to-income ratio in 2 ways, which are described below.

1. Front end ratio ? The percent of your income that you utilize in paying your housing costs. It comprises of loan principal, private mortgage insurance, mortgage interest rates, property taxes, hazard insurance, etc.

2. Back end ratio ? The percentage of your monthly income that goes towards paying your recurring debts (such as, credit card payments, car loan payments, etc.). It also includes your monthly housing expenses.

Meaning of 28/36 debt income ratio

There is a 28/36 rule with the help of which, the lenders assess your affordability to pay off a mortgage. The numbers 28 and 36 are considered to be the ideal front end ratio and back end ratio respectively. If your front end ratio is less than 28% and your back end ratio is less than 36%, then it?ll be easier for you to take out a home loan.

How debt income ratio influences mortgage payments

You can take out mortgage loan with low interest rates if your debt income ratio is low. On the other hand, taking out home loans will be difficult for you if your debt-to-income ratio is high.

Do not worry if your debt income ratio is high. You can lower your debt-to-income ratio by preparing a budget and cutting down your monthly expenses.

I have been thinking about DRIP investing for a long time now. There are 3 companies that keeps popping up in my head, coco cola, pepsi and yum!. I also noticed that these 3 high dividend companies all outperformed dow jones, s&p500 and other major indices. High dividend companies in general usually outperforms indexes like S&P 500 and dow jones but these 3 high dividend companies really stood out in the crowd of blue chips.

Coca cola is a great company but is the stock price relatively cheap? Hard to say. KO has resisted the financial crisis increadibly well. Trading at $53.66 per share, I would say this one of the few blue chip that was barely touched by the recession. Coca cola has one of the most powerful brands in the world and has steady increased its dividend over the long term. Coca cola is a good DRIP investment in my opinion. Coca Cola’s dividend is 3.00%.

Pepsi reminds of me coca cola ( duh! ). I can barely taste the difference between coke and pepsi. But keep in mind that Pepsi’s main income is not from selling the pepsi drink, the majority comes from other products like snacks, other soft drinks, etc. Coca cola’s major income is coke however. Pepsi’s dividend growth is similar to Coca Cola’s. I wouldn’t be surprised if they both performed roughly the same over a long period of time. Pepsi’s dividend is currently 2.90%.

Yum! Brands is probably the company I will least likely open a DRIP in of three mentioned in this article.

I’m not saying Yum is a bad company, I actually find it to be a very strong and reliable dividend payer. But I do believe both Pepsi and Coca Cola are better DRIP investments than Yum. For those of you that are not familiar with Yum, they own and specialize in quick service restaurants like: KFC, Pizza Hut, Taco Bell, Long John Silver, and A&W All-American Food. They have strong brands. Yum’s dividend is standing strong at 2.40%.

The above companies doesn’t really qualify as high dividend companies. But with their continous growth in dividend only time will tell when they are qualified as high dividend stocks.

Note that moneypaper has a fee on the Coca Cola DRIP program:

But Pepsi only has a enrollment fee after that it’s totally free.

Coca cola’s fee on reinvesting is really going to get costly in the long run. This makes more biased towards pepsi’s DRIP plan.

Good luck fellow DRIP investors!

We all like high dividend paying stocks. Who doesn’t?

Studies show that high dividend paying stocks outperform S&P500 in the long term but one should avoid these rookie mistakes:

1. Buying a stock that has totally crashed in stock price that results in a high “dividend yield.

Example: Company A that has serious problems announces that next quarter profits and has to make som writeoffs will probably go down in stock price. The dividend yield however increases as the stock price declines because the company hasn’t slashed its dividend yet. A random investor buys the stock with a dividend yield of 10% at that moment. One week later the company announces that dividend will be suspended.

This happened to many financial stocks during the storm of the financial crisis. The majority of them cut their dividends and went further south. Anyone who thought about high dividend investing during that period would have lost a substanial amount of money.

A good example of a high dividend stock that declined in price thus yielding very high and later got its divdend suspended is Capital Trust.

Capital Trust was a typical pseudo - high dividend paying stock.

2. A moderate company with no growth prospects. The company hasn’t raised the dividend in the last 10 years but the dividend yield is higher than average. In my book it’s still a stock to avoid. A company that doesn’t grow nor raises its dividend will probably not beat the major indexes over the long term.

I rather buy a company with a future and a dividend below average that is growing with more than 10% a year.  It’s also a known fact that dividend growers beat the general stock indexes over the long term. The dividend growth is another discussion.

I am a bit surprised that nobody has pointed out my fatal mistake…. People have even been thanking me for advising them on Rubicon minerals. Rob Mcewen and RBY is a good combination for making money without a doubt. Just to let my new readers understand what I’m talking about I made this graph:

My old readers will probably remember that I started talking a lot about Rubicon when I first bought the stock. I didn’t dump my shares because I stopped believing in Rob Mcewen or Rubicon I sold because I needed the cash for a down payment on my apartment. Even after I sold my RBY shares I still made some bullish posts about it. Even though I missed alot of the action I am still proud that a few people profited on my advice.

For those who can’t see the graph:

“Bought @ $1.31 per share”

“Sold @ $1.50 per share”

“Banging my head” ( when I point at the top of the graph where the stock is priced at $4.50. )

Final note: RBY is currently worth $4.57 per share.

Texas Pacific Land Trust is a stock that I would call a value stock. Asset stocks like Texas Pacific Land Trust should be loved by the conservative investor. This is a asset stock that I would definately keep in my watch list.

They own alot of land with zero debt. They actually have cash sitting in the company. The cash in the company equals to $0.84 per share. The stock is currently valued at $30.81 per share by Mr.Market.

The company owns roughly 963,248 acres land in Texas.  The market cap is $309.73 minus the cash sitting in the company, its enteprise value is:

$309.73m  -  $8.44m ( cash ) = $295.36 million dollars.  So in other words if you buy land indirectly through TPL you are buying it for:

296.36m/963,248 = $308. The price per acre is $308. That might seem like an increadible good deal for novice land investors but even I who has very limited experience in land knows that it isn’t as cheap as it seems. Last time I checked the average price for an acre of land in Texas was pendling between $330 and $350.  In my opinion the stock is not currently trading at a large discount from its net asset value, but it is trading at a small discount. The reason why big land holdings have a very low price per acre is simple, the marginal utility decreases greatly after your first 0.10 acre of land.  I won’t get into a microeconomics lesson in this article, but I will explain the marginal utility term later.

TPL pays 0.19 cent per stock in dividend. A whopping 0.63% dividend yield. I know that it’s not an impressive high dividend paying stock but the dividend has been increasing at a faster than inflation pace the last 3 years. You don’t need worry about the dividend growth ending because of the company’s very strong balance sheet and high return equity. The company should be able to maintain a faster than inflation growth dividend in the coming years.

TPL makes money by leasing out its land to the ranching industry for grazing purposes.  The company was founded in 1888 and have survived this long. I would say this is a low risk stock but the potential is not huge. I have hard time seeing TPL being a multibagger in the short term.