Archive for the 'dividends' Category

A Productive Use of Time

A book review by Jim Kilgore CFP® and Bill DeShurko

There are thousands of books on the market aimed at individual investors who are attempting to go it alone and invest on their own.  Whether that be for retirement or some other financial goal, investing is a challenge… because the market does not always go up!

In Why Bad Things Happen To Good Investments, William Hepburn walks the reader through some of the most important concepts to understand regarding investing and managing risk.  He explains why buying a basket of stocks, mutual funds, or ETF’s and holding them forever does not always have the intended result and gives many examples where an active investment strategy can be superior to the buy and hold strategy.

We are in the business of investing and financial planning and we have read hundreds of books on investing over the years.  Mr. Hepburn’s writing style is such that anyone can read this book and understand the concepts he is trying to teach.  The book truly is written to the amateur investor looking to educate themselves on how to do it wisely.  Mr. Hepburn does not use a ton of heavy math and statistics and he is still able to explain things concisely. That said, there is much information in here for the experienced professional and individual alike.

Jim: One of the quotes I really enjoyed from the book was the following “There is an old saying on Wall Street that bulls can make money and bears can make money, but pigs and sheep get slaughtered.  The way to protect yourself from these emotional risks is to have systems and the discipline to stick with them.”

I think my favorite part of the book is how Mr. Hepburn explains to the reader over and over how Wall Street says one thing to the individual investor about how to invest, but does something entirely different with their own money.  If for no other reason, you need to read this book about how Wall Street does not have your best interest in mind, but rather their own. (Bill: especially if you think you are learning anything useful from watching the “business” news channels all day!)

Chapters 16 and 17 on Hedging and stops are invaluable to helping an individual investor and professionals alike limit the downside in their portfolios and is worth the price of the book by itself.

Bill: I’d also add that I first met Mr. Hepburn at an investment conference back in the 1990’s when you were a pariah in the industry if you recommended anything but buy and holding Morningstar ranked 5 star mutual funds. Well before that strategy was debunked, Will was a leader in the field of active portfolio management in the independent investment advisor arena.

As investment professionals, we highly encourage both do it yourself investors and those working with advisors to read this book. We don’t think you’ll be disappointed. Remember:

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Mr. DeShurko is the Managing Member of 401 Advisor, LLC an independent registered investment advisor. Jim Kilgore is an Investment Advisor Representative of 401 Advisor, LLC. They are also  registered representatives of Ceros Financial Services, Inc. (Member FINRA/SIPC).  Ceros is not affiliated with 401 Advisor.  The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.

Past performance does not guarantee future results.  There is no guarantee that any investment or strategy will generate a profit or prevent a loss. 

“Lies – damn lies – and statistics”

I love statistics. My favorite book is “Money Ball” by Michael Lewis about how Billy Beane turned around the Oakland A’s baseball team with the help of Paul DePodesta. The two combined to rethink how to evaluate talent – removing the “gut feel” of a scout and replacing it with a new look at the performance statistics that really mattered. Since their system came up with different attributes than most other talent evaluators, they were able to acquire good players “on the cheap”. His team did make it to the American League Championship game, but not to the World Series. But it was still quite a turn around.

But to the point, one thing that Money Ball highlighted is that statistics, by themselves don’t suggest a course of action. Statistics need to be interpreted. What is important or relevant is most times open to debate and still subject to human bias. Thus the interpretation that statistics (and I will qualify with misused statics) are nothing more than damned lies!

For the past several years, and especially last year the financial media and talking heads insist on talking down the economy and raising the specter of the imminent recession/market crash. Had an investor listened, they would have missed out on one of the best years ever in terms of the S&P 500’s return. Despite my more paranoid nature, we stayed pretty much invested throughout the year. I attribute this decision to focusing on the statistics that matter to the market and ignoring those that don’t.

One example is debt. And in this case, I am only talking about consumer debt. Analysts spend a lot of time talking about the volume of debt. With debt levels at record highs, a recession is most certainly around the corner. Instead they should be talking about the number of dollars consumers spend on servicing the debt. And only then, in relation to the dollars available to make those payments. Debt does not become an economy wide problem unless increasing numbers of people can’t make their payments. Below is a graph from the St. Louis Federal Reserve that shows the historic amount of household debt payments as a percentage of disposable income (after tax income).

While the percentage is rising, it is currently near an average level of the last 40 years or so and well below pre financial crisis and tech wreck levels.

What this tells me is that the consumer is pretty healthy. The economy is still nearly 70% consumer driven, and the consumer relies on debt. Debt servicing payments have room to grow, especially if incomes continue to rise.

What Does Matter?

The corollary to the debt is too high argument is that, if interest rates increase rapidly debt service costs will rise and the graph above could start looking ugly soon. Yes, and if monkeys start falling from the skies. I grew up in the 1970’s, the years of double-digit inflation, (inflation is what drives interest rates higher). 90% of economic thought at the time revolved around inflation. Inflation was talked about more than debt is today. I was schooled on inflation. I too am paranoid about the prospects for inflation. But guess what? It is just not on the horizon. Remember one phrase – global capacity utilization. There is just no price pressure on anything that can be manufactured overseas. Country of origin doesn’t matter. And the world is full of unemployed people that will work for a lot less than Americans. The Steve Jobs of the business world will continue to pay sustenance level wages to women and children around the world as long as a sustenance level wage is the only alternative to no wage.

Where we do see inflation is in services. Tradesmen are in high demand and so far, you can’t fly in a plumber from China to remodel the bathroom and then fly them home for less than the cost of the local plumber! But such services are still a small enough part of the overall economy that they haven’t had a major impact on the overall national numbers.

What are we Watching?

In addition to the graph above we have a systematic approach to looking at the economy. A non-emotional statistics driven flowchart of steps taken to interpret data. We look at things that history and economics say really matter. Things like money supply – the biggie! Not the yield curve that everyone else is obsessed with, but the forward yield curve and for the market it’s always all about future earnings.

As we have transitioned into a new calendar year remember too that 2020 is all but in the books for the stock market. While the election process is likely to cause more than normal volatility, the market’s focus has turned to 2021 and that crystal ball is still pretty hazy.

The best advice we offer, is the same advice: Make a plan and stick to it, that way you are not emotionally reacting to the story, and the bad statistics, of the day.

For a plan for your portfolio we are always here to help.

Bill DeShurko, President and Portfolio Manager

James Kilgore, CFP

Ofc: 937.434.1790 Bill@401Advisor.com or Jim@401Advisor.com

Investopedia Q & A

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WILLIAM DESHURKO’S ANSWERS
How can a nontraditional college student gain more income to provide for a brighter future?
Well you could try and win the lottery, search www.ancestory.com for an unknown rich relative, or marry rich. Rule those out and your best alternative is to get that degree… Read More
Are qualified dividend paying stocks a reliable source of passive income for retirement?
Yes…Yes…and Yes!!! Not only are taxes lower on dividends then an IRA withdraw, but think of it this way; if you take regular distributions from a mutual fund within your IRA,… Read More
Does rolling over 401(k) funds to an IRA for charitable contributions satisfy my RMDs?
Regardless of the purpose, you can always roll over a 401(k) plan investment into a rollover IRA without paying taxes. Since the money is not taxed at this point and remains… Read More
How would rolling over my 401(k) to a Traditional IRA affect my contribution limit for 2017?
Rolling over a 401(k) plan account will have no effect on the amount you can otherwise contribute to a regular or a Roth IRA. Congratulations, you have a nice start on… Read More
Should I hold on to a temporarily suspended stock?
Well, if its been suspended, you don’t have much choice! Once the stock begins trading again, you will need to make that decision. My suggestion is to do as much… Read More
What should we do with two mature IRA CDs?
I see some form of this question all the time, and it is confusing. An IRA is not an investment, it is a tax designation that applies to virtually any… Read More
I received a lump sum pension when I retired. Can I roll this lump sum into a 401K or IRA?
You can roll it into an IRA and defer taxes until you make withdrawals. If you already received the money, you have 60 days from the receipt to deposit it… Read More
Are penny stock mutual funds a solid aggressive investment?
You assume that an “aggressive” mutual fund will make you more money than a less aggressive mutual fund. Why? Aggressive means more risk. Risk means there is an increasing possibility… Read More

Another Raise

One of our more popular holdings, McDonalds (MCD) has come under a bit of pressure lately  both in the media and on Wall Street. After reaching a high near $102 a share in May of this year the stock price has dropped to below $90 a share in October. The media has pounded their menu saying that the younger millennials are avoiding MCD for healthier alternatives. And yet Ive doggedly held their stock in many  client accounts.

While the jury is still out, we are starting to see the reasons for holding and our continued purchase of MCD. First, MCD is held in our Dividend and Growth strategy accounts. Their dividend has been above 3% even at its peak price. More importantly the dividend has been increased for 38 consecutive years and in this area MCD did not disappoint  they announced a 5% dividend increase payable to shareholders at the end of November. This brings their current yield to 3.59% as of market price on 11/6/2014 and annualizing the dividend.

Part II of my thesis is that McDonalds is still a cherry job for anyone in advertising. Their contract has to be one of the largest in the advertising world. Money buys the best and the brightest. MCD will find a way to come back into the good graces of the fast food consuming public. Surveys are already showing some in roads from campaigns such as this social media campaign that coincides with the relaunch of the McRib sandwich.

MCD is a great example of an investing concept I will come back to in future posts: the difference between buying a company and buying a stock. Stock buyers look for price appreciation in the near term. The media is created for stock traders. Investors like the Warren Buffets of the world buy companies.  Companies generate cash flow that is unaffected by stock price that allows them toraise dividends by 5% even when their stock price slides by 12%.

While Im not happy with the stock, I am happy owning the company, mainly because they pay my clients a 3.59% dividend while we wait for their stock to turn around. And next year we will likely get another raise.

Market update

Money pasteThe stock market has had a five week “correction” followed by a one week recovery – that recouped 70% of the corrections losses. While sentiment has seemingly shifted from an extreme doom and gloom outlook over the past few weeks, statistically the stock market retests its lows about 67% of the time. Meaning we will likely give up this week’s gains.

aWhile I remain cautious, we did buy a couple of holdings for our portfolios this week. Notably P&G for our dividend strategies. P&G is THE dividend aristocrat based on its history of paying a dividend every year since the mid 1890’s (that’s not a typo!). P&G just hasn’t been cheap enough to meet my criteria. Yesterday I gave in and took a position across our dividend portfolios. P&G released earnings this morning and we were rewarded with a 3% gain in early morning trading.

Our growth portfolios are also seeing changes. We will focus more on individual stocks as we rotate into the “Buy in October” seasonal strategy.

I’ve also added an article on the bond market that was published yesterday at horsesmouth.com. The main takeaways are 1. While the stock market can’t decide if the economy is too strong (meaning the Fed will start raising interest rates) or too cool (economy drops to recessionary levels) the bond market seems pretty convinced that the economy will continue in the “just about right” pace. And 2.  Even if the Fed raises short term rates, longer term rates aren’t likely to keep pace. While the economy is growing it is too soft to support a sharp rise in long term interest rates. While Fed action could spark a recession it is likey  4- 5 years out. My caveat to that is Europe. Major European bank failures will roil our market and economy. PDF:  Horsesmouth _ Bonds

The take away is this. Many advisors are recommending clients move into short term bonds as a defensive move against rising rates. However, the bond market is telling us that intermediate bonds – in the 8 – 10 year maturity range may actually be affected less if the Fed starts to raise short term rates.

Market Outlook

cantin1For sometime now we have remained fully invested, but very nervous. Starting in mid-September, I have been cutting back on our risk exposure. Our Seasonal Growth model has been in more conservative (lower beta) equities since May. In addition we are now about 25% in cash as well. For our Dividend portfolios I started moving out of some of our more cyclical stocks in September as well. While we may look fully invested, the Toews High Yield Fund is currently 100% in cash. Additionally I continually look at our holdings and am only looking to buy stocks that are particulary cheap.

For those that enjoyed this week’s red moon/lunar eclipse, you might (or might not) enjoy this bit of stock market history from thedailypfennig.com:

“As it happens, we find ourselves smack in the middle of an astronomical/market phenomenon known as a “Puetz window.” In the early 1990s, researcher Steve Puetz looked into eight epic market crashes — starting with Holland’s tulip mania of the 17th century, ending with Japan’s meltdown in 1990 and  including the U.S. crashes of 1929 and 1987.

Turns out every one of them took place within a few days of a full moon/lunar eclipse. And each time, that  lunar eclipse took place within six weeks of a solar eclipse. (We’ll spare you the suspense: A solar eclipse is
coming up on Oct. 23.)

Puetz ran the numbers and concluded the odds of these circumstances being sheer coincidence were 127,000-to-1.

We leave it to others to debate the validity of the “Puetz window” as a useful forecasting tool. We’ll note here the current one continues through the end of the week. We’ll note further that while epic crashes tend to occur during Puetz windows, not every Puetz window results in a crash.

The next Puetz window, you wonder? Early next April. About six months from now.”

 

(photo from nasa.gov)

While the markets have shown some recent volatility, the one thing we can count on is our dividends and dividend increases. One of our popular holdings, Microsoft (MSFT) announced a dividend increase yesterday. Their quarterly payment has been upped from $.28 to $.31 giving investors an 11% raise in their income. When is the last time you received an 11% raise?

For more information on how to have a life long stream of rising income schedule a free portfolio analysis today!

bill@401advisor.com

No Need to Worry: Positive Trends Remain in Place

Last week I published an article at horsesmouth.com that can be downloaded here: Liquidity Worries.

The short version is that the stock market seems to be continuing along in its uptrend. Despite a few recent bumps and a little volatility the trend is firmly in place. However, and this is becoming a more and more troublesome however, there is definitely some signs of worry appearing. You may have heard or read about a selloff in high yield bonds. Or you may have noticed that we sold a large position from your account (BKLN) if you are a client in our Dividend and Growth Strategy. High yield bonds have in the past acted as an early warning signs to trouble in the stock market. A sharp selloff is worth watching.

Specifically in this case, it is my opinion that such a selloff has occurred because there is way too much money in the high yield market that doesnt really belong there. That is normally safe money that would be in bank CDs or maybe higher quality corporate or even government bonds or mutual funds. But since yields and interest rates are so low, the money has migrated up the risk sladder to grab the 5%+ yields in the high yield market. Money that is stretching for yield is typically skittish it heads for the exits quickly with a hint of trouble. And that is what we saw at the end of July into early August.

The point of my article is that the same conditions safe money stretching for return, exists in the stock market. CD money is eschewing sub 1% interest rates for 3%+ dividend yields. Investors have taken out record amount of margin debt (borrowing money using stocks as collateral to buy more stocks). Record high margin levels as we have now were associated with both the Tech Wreck of 2000 and the Financial Crisis collapse in 2007. Although I dont see a particular reason for a stock market collapse, should a selloff get started it could very easily begin to snow ball, and a normal 10% correction could become twice that or more very quickly.

Bottom line. Now is not the time to take on added risk to your portfolios unless you have a very defined plan to act and act quickly should a market selloff start. We have refocused our portfolios on high quality dividend payers, and have sold our high yield investments. Im currently targeting a 25% cash position.

For more information read the entire article here, or give me a call at 937-434-1790, or send an email to: bill@401advisor.com

“The time to build an arc is when the sun is shining.”

The stock market is reaching new highs while the economy seems to be sputtering along. This has created an environment that has led Brian Nelson, CFA of Valuentum Securities appropriately using a baseball analogy during the baseball All Star Game and Home Run Derby to say, ” If there is an environment more difficult to hit a pitch out of the ball park, I don’t think I’ve seen one.”

My take is similar. The economy is improving and I don’t fear a rise in short term interest rates from the Fed. I’m in the camp that we need modestly higher interest rates to encourage banks to lend. On the other hand, while I don’t see any reason for a market correction, we are definitely due a routine 10% – 20% correction. What I am afraid of is that conditions exist such that an innocuous 10% correction could quickly become a full blown sell off – and very quickly.

And thus we have decided to start building our “arc.” My intent is to stay fully invested within the parameters of our investment models. However, we are definitely rotating our stock holdings into quality holdings. We’ve sold some of our higher yielding but lower quality investments and have sought out low cost, dividend growing cash flow kings that have proven they can weather a storm. We have backtested our holdings against several market scenarios and feel very comfortable should we get a surprise on the down side. At the same time, if the market continues its trek up, I think we will be well rewarded for holding low priced quality stocks.

This is when being “small” works to our advantage. With slim pickings in the markets for stocks that meet our stringent criteria, I am happy to hold 15 – 25 non-correlated stocks in a portfolio and not be forced to own hundreds of issues like a mutual fund.

I recently described my portfolio building process in an article for horsesmouth.com, a subscription site for financial advisors. A copy of the full article has been posted in the Library section of this web site.

Portfolio Changes

Last week market sentiment was decidedly negative. While the news has focused on turmoil in emerging markets (not a factor), the real question is economic growth in the U. S. As I have said many times, corporate earnings have to be strong in 2014 to justify current market values. Last week’s sell off centered around a PMI report that came in much weaker than expected. My feeling was that the market did not fully consider December’s bad weather, and the affect of mid-week Christmas and New Year’s holidays. This week we have seen some stabilizing technical indicators that imply the market is holding at these levels and is due a rebound.

In response, for our Dividend and Growth Strategies we have sold off a fixed income position and purchased Ford (F), Altria Group (MO), and GE (GE). I have avoided owning tobacco stocks for 27 years, but at current valuation and a 5.65% yield I had to jump on MO. GE is one of my favorite stocks, and looks better now after an 11% decline and a 3.59% dividend yield. While Ford is more cyclical than I like, it has suffered an 18% decline and is cheap with a 2.72% yield. I am very bullish on the outlook for the aluminum bodied Ford F-150 pickup truck.

While these purchases over allocate us to equities, I expect to re-balance in a couple of months if not weeks. I’m comfortable that we can ride through a correction due to our relatively high dividend yields and low valuations across the portfolios. If we see the short term rally I expect, we’ll take profits and reallocate back into our 20% fixed income position.


bill@401advisor.com • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

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