Friday, February 29, 2008

Watch What The Rich People Do!

I'm sure that just about everyone who has read anything about investing has heard the expression, "If you want to be rich, watch what the poor people do and don't do it." While a simple truth in itself, the other side of the coin is just as valid, you need to also watch what the rich people are doing and follow their example. I'm not talking about the people who look rich but are up to their eyeballs in debt, I'm talking about the truly wealthy.

If you've kept up with the financial news lately, you'd think that everything is falling apart and there's no real hope for a stock market recovery. But what are the truly rich people doing? You can rest assured they are not sitting on the sidelines. With some of our nations best corporations selling at share prices well below a year ago, or even 3 months ago, you can bet they are using this opportunity to buy on the cheap. I read recently that Warren Buffet's company just purchased more shares of Kraft and Wells Fargo, both great companies selling at unbelievably low prices right now. I haven't read much about Bill Gate's investing habits, but I think it's probably safe to assume that he's in the buying mode also. After all, you can never be too rich.

Shouldn't it also be a wake up call to all investors in the United States when so many foreign sovereignty funds are beating down our door to buy huge positions in some of our largest companies? I certainly think so. Now is not the time to be faint of heart and follow the heard mentality that is gripping our investment community. Now is the time to buy, buy, buy! Have we reached the bottom? I certainly couldn't say, but one thing I'm sure of. Eventually our economy will recover and the stock market will come roaring back, just as it has in the past. So I'm going to do what the people with the real money are doing and buy everything I can afford while the prices are cheap.

Monday, February 25, 2008

Why I Don't Invest in Mutual Funds

I know I'm going against the trend here, but I no longer invest in mutual funds. When I first started investing, I held shares in 7 or 8 different mutual funds, thinking, like so many others, that this would provide great diversity and lower my risk of losses. Well I did lower my risk of losing money, however, in the years that I held these funds I made practically no money! I would have been better off at the time to simply have kept my money in a regular passbook savings account. It wasn't that the share prices did not go up, it was the expenses associated with the funds. The fees charged by mutual funds eat up a great deal of money that, to my way of thinking, should go to the investors. Yeah, there are a lot of people getting rich off mutual funds, but they are mostly the people who manage the funds and the company's they work for.

The real turning point for me was when I purchased shares in Mobil Oil six months prior to their announcement of a merger with Exxon. In those six months my investment doubled in value and I sold my shares for a nice tidy profit. The only costs associated with this transaction were my broker fees for purchasing and selling the stock. Of course I did have to pay capital gains taxes, but you have to pay those on mutual funds too. What I didn't have to pay were exorbitant management fees for lackluster performance. Like Peter Lynch says in one of his books, you only need a few investments in stocks like this to make a lot of money. So I sold all my mutual fund shares and invested entirely in individual stocks. I've had several more great investments since then and some misses too, but I sure don't miss the fees.

Thursday, February 21, 2008

Tuesday Morning Is Out, National Beverage Is In!

I just finished reading a news article where the board of directors announced they were canceling the dividend for Tuesday Morning (TUES), while they pondered what to do with any future earnings? Since I think there should be no question in this regard, PAY YOUR SHAREHOLDERS!, I placed an order to sell my shares. When I bought in the price was good, the dividend was great and I really like their stores. I'll probably still shop there occaisionally, but it was time for their stock to go.

I will be replacing Tuesday Morning with National Beverage (FIZZ), whose products (Shasta and Faygo) I am very familiar with. I like the way this company strives to run a low cost operation and the fact that they've been in business for a very long time. Add to this a low volatility rating for the stock, a 5 year average return on equity of 14% and a dividend yield of 10.7% and this company is looking like a bargain to me. I have considered adding shares of this company to my investments in the past, but I have to say I'm pretty happy to buy in now with the price being roughly half of their 52 week high. All in all, I think this will make a wonderful addition to my stock portfolio.

Sunday, February 17, 2008

Recent Changes To My Portfolio

I'm always on the lookout for new stocks to add to my portfolio to boost my returns. I found two stocks that I think would be great additions to my investments and have decided to purchase shares in both. The first stock I am adding when the market re-opens Tuesday morning is CapitalSource, Inc. (ticker symbol CSE, NYSE). CSE is a beaten down financial stock that has suffered, in my opinion unjustly so, along with other financials during the sub prime mortgage crisis. There are a few reasons why I like this stock. With the recent price per share of $16.44 and an annual dividend of $2.40, the stock has a dividend yield of over 13%. During my research, I have read only good things about the management team and I really like the fact that insiders hold over a 30% stake in the company so they have a vested interest in the future of the company. While they do hold some residential mortgages, these are of the highest quality (no sub prime) and should perform well for the business. As if the dividend yield and good management were not enough to justify investing some money here, the current price is well below the 52 week high of $27.40, so there is room for price appreciation as well. I've already placed an order with my brokerage and expect to have some good results with this one.

The second stock I'm considering is CEMEX a Mexico based cement company. While the dividend yield on this one is not as attractive, I really like the fact that the company is retained a good portion of earnings for future expansion. They are truly an international corporation, with operations in over 50 countries worldwide. Add to this their near monopoly status in the cement business in Mexico and I think the future prospects for this company are very good. They have shown a knack for expansion through aquisitions and have very effective systems in place for keeping costs down. For my personal portfolio, this stock will be more of a growth play, but I will still benefit from current dividend payouts.

I didn't have quite enough cash to purchase shares in both of these companies, so I reviewed my current stock holdings and decided to sell my stakes in a utility company, which is currently having some accounting issues, and a couple of Canadian energy trusts. Although the CanRoys have been great performers (one of them doubling in price in less than a year, along with great dividend yields), I decided to limit my exposure to one energy trust and sell the others. I purchased shares in 4 different energy trusts last year when the prices were beaten down after the Canadian government passed unfavorable new tax legislation. Since the new taxes weren't set to take effect until 2010 (and may actually be overturned before then) I figured I could make some money off of the yields in the mean time. I have done quite well with these and will continue to hold my remaining stake in Pengrowth Energy Trust (PGH) which I consider to be the best of the 4 that I owned.

I believe these changes will further diversify my portfolio by investing in a multinational and help boost my dividend income as well. As always, before you invest in any of the stocks I write about here, I would recommend that you do your own research and decide whether these stocks are right for you.

Friday, February 15, 2008

The Number One Goal For Investors!

I've written previously about the importance of setting goals, both short and long term, when it comes to investing. I've recently given a lot of thought to what my number one goal should be. Of course I'm sure most people would say that their number one goal is to make themselves rich as soon as possible and I'm all for that. However, what one person's idea of rich is may be entirely different from the next person's. So I think it's more productive to come up with a more definitive goal, one that could apply to everyone.

After careful consideration, I finally decided that my number one goal is to build my investment portfolio to the point that it pays enough cash to meet my monthly expenses. Once I have attained this goal, then everything else is icing on the cake, so to speak. Let's consider what this really means for just a moment. If a person concentrates on building their investments to the point that monthly income from dividends, interest, rental income and so on is equal to the amount of money that they pay out every month to live, then they have reached the point where they are no longer dependant on a paycheck. At this point you could decide to stop working and you would have the money to cover all of your necessities. This is the point of true financial freedom! No longer are you tied to a job you don't like simply because you need the paycheck. You can choose to work as much or as little as you prefer. Of course this does not mean that you are truly rich, but you could consider yourself well off. I plan to continue working even after I have reached this point, so that I may build additional investments and income to keep my wealth growing each year. Once I am sure that my investments and residual income will continue to grow on their own, then I will retire, from the job market anyway.

So the number one goal as I see it:

Build residual income until it meets all monthly expenses.

Saturday, February 9, 2008

What To Do With A Tax Refund?

It's never really much of a question of where my tax refund (usually around $600) is going each year. I regard tax refunds as a small windfall of cash and like every small windfall of cash I receive, it goes directly in to my investment account. This year it went partially to my money market account and the rest went to purchasing more shares in Universal Insurance (UVE), a small but growing insurance company in Florida. (They recently announced plans for expanding to 5 additional states.) I was pretty happy knowing that this small refund of my tax dollars went towards increasing my future income. What better use could be made of the money?

I have to say that I was shocked by what I've heard from friends and aquaintances about the way they've used their refunds. I realize it's their money and they have every right to spend it as they see fit. However, these are the same people who moan and groan about not having the money to pay their rent, or their electric or telephone bills each month. Yet they're going out and buying a lot of high ticket items that they don't really need and for the most part, wil just end up costing them even more money. I recently read an article about what you should do with your tax refund. One thing that I really appreciated was the account of one woman who said that she uses the money to make her life easier. Instead of spending it, she pays her rent, utilities, phone bill and internet for the entire year. That way she knows that if she loses her job she doesn't have to worry about her kids having a roof over their heads or heat in their home while she's on the internet looking for a new job. If your not going to put the money to work building your passive income, then this woman has the right idea.
Under the economic stimulus program, many of us will be receiving an extra tax rebate later this year. So it's not too late to come up with a plan to use this tax rebate wisely.

Thursday, February 7, 2008

High Dividend Yields, Not Always A Good Thing.

I recently saw an advertisement for an investment website touting a stock with a dividend yield of over 17%. Sound too good to be true? Well there are definitely stocks with extremely high dividend yields, but you have to ask yourself if that's always a good thing. Why is the yield so high? In some cases a stock carries a high yield because the company has fallen on hard times and the stock price has dropped dramatically. If that is the case, how long do you think it will be before the board of directors decide that wisdom dictates a corresponding cut in the dividend payout. At other times a company may have a very high dividend, but they may not have the sales to maintain the payout rate and when a company reduces their dividend you can bet that their share price is going to drop, at least in the short term, because all of the shareholders who invested their money to collect the dividends are going to bale. Certain sectors may also fall on hard times. I personally got clobbered on my investments in real estate investment trusts in the past year. I suppose in retrospect, I should have seen it coming, but regretably I held on to some of these shares way too long. That's why I say it's not always a good thing to buy a stock for the high dividend. It may be better to settle for a lower yield, with potential for future increases, than a high yield that tanks.

You have to do your research and make sure the underlying business can support the payout. You also want to make sure there is room for increasing dividends in years to come. If a company is retaining a portion of earnings, has little debt and is carrying a substantial amount of cash on the books, then it's a pretty safe bet that you don't have to worry about collecting your dividends. Once you've identified a company with good potential and you've made an investment, it's also important to keep up on what's going on with the business. Read the annual reports, keep up with news stories about the stocks you're invested in and the economy in general. If you identify a potential problem affecting the investments earnings and thus their ability to pay the shareholders, it's time to consider selling the stock and investing your money elsewhere.