Home > Category: Investing My Way
Viewing the 'Investing My Way' Category
July 22nd, 2014 at 06:19 pm
(I now blog weekly on frugal living, personal finance & earlier retirement at:
In 2013, I took 20% of my investing capital and moved it from high dividend stocks to high yield bonds. I did that because a portfolio with stocks and bonds was supposed to be safer than an all-out stocks portfolio. Boy, did that theory go down in flames for me!
I bought into 9 corporate bond positions after doing A LOT of financial analysis of the companies involved. It was for naught. Four of the companies did unnecessary VOLUNTARY bankruptcies to get out from under their debt. Another four exercised tender offers for their bonds that left its bondholders grasping the short end of that transaction stick.
A year and a half after going into those bonds, I was all out of them. But I had incurred a $2740 out-of-pocket loss and missed out on about $9000 to $10,000 in dividends I would have collected if I had left the money in high yield stocks.
So, lesson learned. Goodbye bonds. And good riddance.
(You can read the whole gory story on my main blog at retiredtowin.com
July 12th, 2014 at 05:23 pm
I do not want my investing work time to cut into my free-for-fun time any more than is absolutely necessary. And that means doing just enough work to generate $20,000 a year of investment income(1*). Having that as a benchmark has radically changed my attitude towards investing. It has also relieved my pressure-to-invest stress level. And it has freed up a good chunk of extra time for more fun stuff. Here is how and why.
My previous maximum-income investing attitude had become a problem. That is because I follow a dividends-focused investing strategy(2*) that does not factor in (or expect) stock price appreciation. All my income expectations are based on dividends, so to maximize that income I need to stay fully invested in dividend-paying stocks. But those stock positions get regularly and steadily sold off(3*) as the positions build up enough unplanned for gain.
Those stock sales throw off a bunch of cash back into my investment account which in the past has virtually screamed at me not to be left sitting as cash but to be reinvested as soon as possible. And that pressure to invest has been a problem because it requires that I stay on the investing job until I do find other stocks to buy with that cash.
Now I have shifted to an enough-income investing attitude. As long as the projected annual dividends from my existing stock positions stay above $20,000 that is enough. The cash in the investment account no longer exerts an urgent pressure on me to be put back into stocks to maximize dividend income. I do not HAVE to give priority to the work of applying my research-intensive investing strategy(4*). I can take my time. I can do that research and stock buying at my own pace and when I like. And that has changed that activity from being a pressure job demanding many hours a week to a relaxed and interesting hobby I do when it suits me.
This has dramatically reduced my weekly investing work time. Instead of laboring 16 hours a week (and sometimes more) to stay fully invested, I just have to put 4 hours a week into essential avoid-at-your-own-risk portfolio monitoring(5*). That is "enough time for enough money." That has given me an extra 12 hours a week to hike(6*), or blog(7*) or just play(8*). And that has reduced my stress and made my days more relaxed. All of which has left me a much happier camper.
The takeaway: Seeking to maximize income can materially increase stress and definitely reduces time available for rest and leisure. If one cannot define a specific life-enhancing use for the extra money, it could be preferable to forego the added income and thereby avoid the labor and stress of producing it. Instead, one should consider enhancing one's life by taking the increased time that would thereby become available and using it to have fun and pursue personally satisfying activities.
# # #
1* Enough Money From Enough Time:
2* Why I Only Buy Dividend Stocks:
3* What Makes Me Sell a Stock?:
4* My High Yield, High Risk Investing:
5* How I Stay On Top Of My Stocks:
6* My Love Affair With Hiking:
7* Why Share My Retirement Journey?:
8* My Strategy Games Rainy Day Passion:
June 6th, 2014 at 11:16 am
Between February 5th and February 21st, I bought 1380 shares of OCI Resources (OCIR) for $29,288. On May 28th, about 3 months later, I sold those shares for $32,766. That sale gave me a $3478 realized gain. Just one month before that sale, OCIR had paid me $690 in quarterly dividends. All told, holding OCIR for a little over 3 months netted me $4168 which worked out to a 14.2% profit on my original investment. This was another "textbook case" of my dividend-based investment approach* in action. Here is how that worked this time.
I discovered OCIR during my weekly stock search. Its 9.4% dividend yield caught my interest. Its financials passed my tests.* And its business model, centered on long-term sales contracts, gave OCIR's dividends the extra stability I like to see.** So it was just a question then of when to buy shares of this utterly boring soda ash mining and production company.
OCIR was good to buy right then. That was because the stock was selling around $21 a share with solid price support at $20.00. So, if I bought around $21, the stock's annual $2 dividend would give me downside protection down to $19, which would be well below OCIR's $20 price-support level. This made OCIR a "safe buy"* right then and there.
I bought at an average $21.22 and sat back to collect dividends. Because that is what I always do. I buy stocks for the dividends.*** I never buy a stock on the expectation that its price will rise. (Well, almost never.****) But often, the price does rise. That is what happened with OCIR, due to some happy talk about the company here and there in the investing blogosphere.
And within 3 months, OCIR reached my sell point. That sell point was a 10% realized gain, which in my view is the same as collecting an entire year's worth of dividends in advance.***** So I pulled the trigger and sold OCIR once its price had risen past that point -- which is another thing I always do. And that (1) put a year's expected income in my pocket now from the $29K I had invested, and (2) gave me a year's time to find the next company in which to invest that now cashed-out $29,000.***** Like I said at the beginning: a textbook case.
The takeaway: Have a plan for your investing. Have the discipline to stick to it if it is working, and the flexibility to change it if it is not working. Know how much money you want to make and take it when you have made it. Do not be greedy. And know how low a stock's price can fall before you need to start worrying. Do not be a Pollyanna. But do not be a scaredypants either.
# # #
* My High Yield, High Risk Investing:
** Stacking The Deck For Dividends:
*** Why I Only Buy Dividend Stocks:
**** Stock Panic Nets Me 13% Overnight:
***** What Makes Me Sell a Stock?:
May 17th, 2014 at 04:47 pm
Overseeing and managing my stock portfolio is just like having a part-time job.* To be sure, at $100 an hour** the pay is great. But the truth is I do not need that money*** and spending it does not come easy.**** So I have had to ask myself whether I should "quit" this part-time job and increase my time freedom even more.***** Here is how my thinking went.
My baseline living expenses would still be covered. Heck, at $18,000 a year****** my baseline living expenses get covered by my Social Security pension. And that $18,000 a year includes premiums for insurance to cover just about anything.******* So I do not need my investment part-time job to make ends meet.
I would still have extra money coming in. If I stopped putting time into managing my stocks, the portfolio would still generate a lot of dividends.******** In fact, if I did leave my stock portfolio on "autopilot" it would throw off about $32,000 a year without touching the principal. So I do not need my investment part-time job as a backup to Social Security or to have plenty of spending money in my pocket.
My stock portfolio would still be my ace in the hole. Besides the social security income and besides the stock dividends, I would still have my portfolio's principal value. At the presently accepted 4% so-called safe withdrawal rate, that principal value by itself would keep me solvent for 20-plus years. So I do not need my investment part-time job as a backup to my backup.
So why should I hang on to this part-time job?
There are 2 main reasons to stop. The first reason is that I would reclaim the 8 hours a week that the job eats up. The second -- and really the main reason -- is that I would eliminate the mental pressure that comes from always having cash from dividends and stock sales sitting in the account demanding to be reinvested. If I stopped my stock selling*********, the portfolio would remain fully invested and I would not have to constantly be looking for companies in which to invest. So I would have no reinvestment pressure and no time demand.
But there are other reasons NOT to stop. These reasons cannot be about money, because I have already decided that there is little point in more money. The reasons have to be about the doing. And it turns out I do have such reasons. Like finding the financial research and the learning about how companies operate interesting. Like finding the evaluation and decision-making that comes from that research mentally stimulating. Like finding that those profit-making sales actually feel like emotionally rewarding "scores" in some complex computer game.
So it is not just a job after all. Overseeing and managing my stock portfolio is -- almost -- a hobby. And I can turn it into an actual hobby by removing the pressure to reinvest the cash from sales and dividends. I know I can do that. So I will.
The takeaway: Work is not always just about making money. Sometimes the activity itself is part of the reward... even the main reward. A small adjustment may be all that is needed to make that work feel like it is not work. But we may have to look behind the surface to put all that together. So let's make sure we do look.
# # #
* My High Yield, High Risk Investing:
** Profiting From Working My Stocks:
*** My Six Lines of Financial Defense:
**** Making Sure I Spend That Money!:
***** Optimizing My Use of Time:
****** My $18K Annual Baseline Budget:
******* My Stash-Shielding Insurance:
******** Why I Only Buy Dividend Stocks:
********* What Makes Me Sell a Stock?:
May 15th, 2014 at 03:41 pm
On Friday May 9th, I bought 1040 shares of Niska Gas Storage Partners (NKA) for $13,138. On Monday May 12th -- the very next market day -- I sold those shares for $14,802. That is a gain of $1664, representing a realized profit of 12.7% overnight (since weekends do not count as market days). I made that money thanks to a flash stock panic. I made that money by keeping my head, not falling victim to the panic and taking advantage of it instead. Here is how that went down.
On May 8th, stock analysts panned NKA. They did that based on their perception of "challenging fundamentals for natural gas storage providers." They discounted everything NKA had recently done and is going to do to overcome those upcoming industry challenges. So the analysts threw out the baby with the bathwater and set a $12 price target for NKA -- which was trading around $15 that day. And the selling panic began.
On May 9th, I saw opportunity in the panic. My daily stock monitoring* brought NKA to my attention. I ran the company's financials through my tests** and found NKA solid. I read the company's conference call transcript and saw how NKA was taking big steps to stay ahead of the game. Refinancing its debt so it would not come due until 2019. Reducing the company's interest costs by $15 million a year. Building up a war chest and making concrete plans to use it to diversify away from gas storage. Bringing in new top management experienced in such diversification. It was all good! And it had all been ignored by the stock analysts.
So I bought NKA for its dividend. NKA's stock price had dropped from around $15 on May 8th to around $13 on May 9th. With an annual dividend payout of $1.40 and a price of $13 a share, NKA would yield 10.8% a year. That made the stock what tv stock guru Jim Cramer calls an "accidental high yielder" -- which is the only kind of company I will invest in.*** So, taking into account the stock's downward price momentum, I set my buy price at $12.63 early on May 9th and waited.
I got my buy and it was well hedged. NKA's annual $1.40 dividend made my $12.63 price a safe buy for me even if the stock's price dropped down to $10.23.** And for an extra bonus, the next 35-cents quarterly dividend would lock in on May 15th, less than a week away. That made my buy safe even if the stock price dropped to $9.88.
But NKA's stock price went up, not down. The panic subsided. Other people must have begun seeing what I had seen. And they pushed NKA's stock price up to $13.74 by the close of market May 9th.
So on May 12th I set up to sell. I was up 8.8%. Though I buy a stock for its dividend, I will sell it at a 10% profit.**** And it looked like NKA would get to that point that very day. I got ready to put in an order to sell at $13.89, which would give me that 10% profit. But then (greedy me) I decided I also wanted that May 15th 35-cent dividend. So I upped my asking price to $14.24. And I got it that day. A 12.7% realized profit in just ONE market day.
The Takeaway: Never pay attention to stock brokerage analyst recommendations. If they knew what they were talking about, they would be stock-market rich and not be working for a living. In fact, do not listen to anybody's opinion on a stock (including me). Get the facts and make your own assessment. When you do, never judge a company solely by its industry's prospects. And remember that you must be nimble. The opportunity to grab a ride up -- or jump off before a plunge down -- comes and goes in a flash.
# # #
* How I Stay On Top Of My Stocks:
** My High Yield, High Risk Investing:
*** Why I Only Buy Dividend Stocks:
**** What Makes Me Sell a Stock?:
April 28th, 2014 at 07:28 pm
I follow a high dividend / high risk investment strategy.* It gives me an average 8% dividend yield on my portfolio. One would think that should be enough. It must not be, though, because I actively work my portfolio to realize profits from stock sales.** The question is whether all the time and work that takes* is worth it -- or whether I would be better off letting the stocks just ride, collect my dividends and free up all that time. Here is how that shakes out.
Selling a stock can lose me its dividend. That happens because I sell the stock while the next quarterly dividend is still pending. In the worst cases, I sell a stock just days before that quarterly dividend would have been locked in. So, for all my extra work to make sense I need to end up better off selling the stocks than holding them and collecting the dividends.
Buying and selling stocks takes work. There is a set amount of work I do every week to stay on top of my stocks***. That much I have to do whether I hold the stocks or sell and buy them. But there is extra work to do if I do not hold the stocks. Because, when I sell a stock, I have to find something else to buy with the money from the sale. And going through that search process* takes me 6 to 8 hours a week. I would not have to do that work if I left my portfolio alone and just sat back and collected dividends.
But the extra 350 work hours a year do pay off. In 2013, my portfolio's average dividend yield was 7.9%. IF I had left my portfolio (and my wife's, which I also manage) alone, the 2 portfolios would have collected around $56,000 in dividends. Because I sold and bought stocks instead, they only collected $49,090 in dividends. But I more than made up for that $7090 dividend "shortfall" by realizing $43,470 in profits from sales. And that means the net extra profit from buying and selling was $36,560.
That is more than $104 an hour for my labor. And that is four times my preretirement hourly wage! So I do think I will keep on actively working our stock portfolios. Doing the work and not being a passive investor makes financial sense to me.
# # #
* My High Yield, High Risk Investing:
** What Makes Me Sell a Stock?:
*** How I Stay On Top Of My Stocks:
April 23rd, 2014 at 12:37 pm
In late 2012, I bought shares of regional phone company OTT for $14,142. One year later, I sold those shares for $1667 after the company declared bankruptcy. That was an 88% drop in the stock's value. I lost $12,475. Or so it seemed at first glance. A catastrophic stock loss like this seemed to prove the folly of my high-yield high-risk investment strategy*. Or so it seemed at first glance. But when I analyzed the numbers carefully, I found that my real loss was significantly lower and that my investment strategy is proving successful. Here is how that can be in spite of that huge stock loss.
As part of my stock investing process*, I run a screen for high dividend companies once a week. OTT first came up on that screen in August of 2010; it passed my financial criteria tests, and I bought shares. A few weeks later, OTT hit my sell-at-a-profit trigger** so I sold my initial position at a gain. But then OTT came up again on my high-dividend screen as its price dipped from its previous spike and I bought it again. The thing is that over the following 2 years this process repeated itself a total of thirteen times. That means that I bought and sold that original block of OTT stock 13 times. And made a total realized profit of $6483 doing so. In retrospect, that takes my final loss on my OTT investment down to $5992. But there is more.
I only invest in dividend-paying stocks.*** So during the 3 years or so that I held OTT stock in my portfolio, I collected $1101 in dividends. (It would have been more had I not been flipping the stock so often.) Those collected dividends take down my final loss on my OTT investment down to $$4891. And that is a 35% loss on my last OTT stock purchase -- which is a whole lot better than the 88% loss it first looked like. But there is still more.
Following my portfolio diversification strategy,**** I never put more than 5% of my portfolio's book value in OTT stock. That final OTT stock purchase in late 2012 represented 3.8% of my portfolio book value at the time. So the net loss to my overall portfolio from OTT's bankruptcy and subsequent stock sale was severely limited -- to a paltry 1.3% of my portfolio book value. But there is still more.
All of my portfolio's holdings are selected based on the same investment strategy that led me to buying OTT stock. Looking only at my OTT experience, my investment strategy would seem to be a losing one. But not so when I look at my entire portfolio experience. Because, between the time I made that final OTT stock purchase and the time I sold it at a big loss, my portfolio book value had GROWN by 14.5% -- even factoring in the loss on OTT. Even more persuasive, between the time of my first OTT stock purchase and my last OTT stock sale, my portfolio's book value (as well as its dividend payout) had risen a satisfying 40%. So I am way, way ahead. And, yes, I am staying the course with my high yield, high risk dividend investment strategy*.
# # #
* My High Yield, High Risk Investing:
** What Makes Me Sell a Stock?:
*** Why I Only Buy Dividend Stocks:
**** Stock Diversification My Way:
April 20th, 2014 at 04:34 pm
Three years ago, all my investment capital was in common stocks. Then, about a year ago, I ran into a dry spell where I could not find any common stocks to add to my portfolio* with the cash that was piling up from dividends and profit-taking stock sales. So I started looking into preferred shares as a way to fill out my portfolio. Here is how I handled that.
I practice a high-yield, high-risk income investing strategy.** That means in part that I have selected the common stocks that I have bought for my portfolio screening in for the highest possible dividend percentage payout, and then screening out from the resulting list those stocks whose issuing companies fail my own particular set of financial performance criteria.** But evaluating preferred shares requires an additional level of scrutiny.
What I learned about preferred shares boils down to this. They are issued by most companies at a set face value price, usually either $25 or $100. They carry a fixed percentage dividend yield that cannot be changed or cancelled (unlike common stocks). And the payment of this preferred stock dividend takes precedence over the payment of any dividend on common stocks (which simply means that preferred stock holders get paid first). But there is still more.
Preferred shares can be "callable" (that is, redeemable) at any time by the issuing company at the company's sole discretion and for a price that has been stipulated at the time the preferred shares were originally issued. Preferred stock can also be "convertible" (that is, exchangeable) into common stock shares at the sole discretion of the issuing company at a predetermined time. And preferred stock dividends can be "cummulative" (that is, accruable) which means that, if a preferred dividend is skipped by the company for any reason, that skipped dividend remains due and must be paid before any other dividends are declared.
With that information in hand, my buying criteria for preferred shares (over and above my core buying criteria**) became very clear. Never buy preferred shares that are not cummulative because I want every chance of actually collecting my dividends. Never buy preferred shares above their issue price because if I do I am certain to lose money if the company calls in those shares. And never, never, never buy preferred shares that are convertible to common stock because the chances of getting shafted on that deal are way too high.
Other than that, it is easy-peasy. I screen for higher-yielding preferred shares. I then check each share issue against my three preferred share never-nevers. Once those special hurdles are cleared, I make sure there is still room in my portfolio for the industry the issuing company is in.*** If that looks okay, then I run the issuing company through my standard business model review and four-hurdle financial criteria gauntlet** just like I would with common stock shares. And if all still looks good, then I put in a buy order for the preferred shares and lock in their dividends until and unless I am later able to sell at a 10% or better profit.****
# # #
* Why I Only Buy Dividend Stocks:
** My High Yield, High Risk Investing:
*** Stock Diversification My Way:
**** What Makes Me Sell a Stock?:
April 19th, 2014 at 11:49 am
I bought 480 shares of EPB (El Paso Pipeline Partners) for $14,423 on March 31. Those shares sold on April 17 for $15,869, giving me a profit of $1446. That means I realized a 10% profit in 18 days holding the stock. That was certainly nice. And it is another example of how my investing strategy* can work when it works right. Here is how things went down this time.
EPB came up on my weekly high-dividend company screen in late March with an 8.9% dividend yield so I started my evaluation process* on the company. Did I have room in my portfolio for a company operating interstate natural gas pipeline and storage facilities**? Lots of room. Did EPB's business model look good? Yes; this is a business built on longterm fee based contracts.*** So I checked out EPB's balance sheet. Was EPB's ratio of current liabilities to current assets less than 1? Yes; it was 0.91. Was its ratio of longterm debt to total assets (not counting goodwill) less than 1? Yes; it was 0.64. Then, on the company's income statement, was the ratio of operating income to interest expense more than 1? You bet; it was 3.1. And on the cash flow statement, was the ratio of cash from operations to paid dividends greater than 1? Yes; it was a solid 1.6. EPB had passed my financial criteria gauntlet with flying colors*.
Next I checked for any bad news or possible hidden problems****. Nothing there, except for the fact that EPB is actually a subsidiary of Kinder-Morgan, and KM could decide to basically swallow EPB any time; but that was a remote possibility. So, I was ready to buy. But at what price?
The next stop in my evaluation process was EPB's six-month price chart. I found 2 key things. First, EPB stock had taken a price dive from $40 to $35 in early December (get this) because the company had not raised its dividend that quarter. The price had been drifting downwards ever since. Second, I found strong price support on EPB's price chart at $30. And the price that day had dipped below that support to $29.19. (But that was not to last, as we shall see.)
To calculate what I would consider a "safe to buy" price for EPB, I took the $30 price support and added to it the stock's $2.60 annual dividend. In my view, that made the stock safe to buy all the way up to $32.60 -- from which, if the price fell to the $30 support, I would recover my money in the form of dividends over the following 12 months*.
I put in my order to buy EPB at $30.03 a share and waited, because by then the price had spiked back over that $30 support level. On March 31st I caught the stock at $30.03.
I monitored EPB's news and price every day, as I do for every stock in my portfolio****. When I saw that the price was up over 7% from my buy point, I put in an order to sell if and when the stock rose to my 10% profit price.*****. And on April 17, that price was reached, the sale was triggered and I had a 10% realized gain in less than 3 weeks.
I LOVE it when a plan works!
# # #
* My High Yield, High Risk Investing:
** Stock Diversification My Way:
*** Stacking The Deck For Dividends:
**** How I Stay On Top Of My Stocks:
***** What Makes Me Sell a Stock?:
(Please remember: I am not a professional financial or investment advisor. I am just relating my personal experiences. You need to do your own research and reach your own conclusions.)
April 14th, 2014 at 11:53 am
The success of my stock investing strategy is based on actually being paid the dividends offered by the companies in my portfolio*. But those promises to pay depend on the future earnings success of those companies. And the further out one looks into the future, the more speculative those promises become. But that is not the case for all companies. There are some that have their earnings locked in for years to come -- which makes their dividends a lot more reliable. Here is how I have stacked the deck for dividends in my portfolio with those companies.
Certain types of companies, in certain industries, have business models that allow them to (1) operate based on longterm sales contracts and/or (2) enter into financial operations that guarantee the future price of their products. This makes it possible for me as an investor to have visibility well into the future regarding those companies' sales and cash flow. And that is what the continued payment of dividends depends on.
As I write this, 15 of the 20 companies in my portfolio have those types of business models. It is only because of my stock diversification strategy** that I do not have 100% of my portfolio companies falling into those categories. But the 15 I do have give my portfolio a more reliable future dividend payment stream.
Longterm equipment lessors. As I write this, I am holding stock in 6 companies whose business model it is to own equipment which they lease out on multi-year contracts for set daily rates. This includes companies owning and leasing out dry bulk cargo ships, container ships, offshore drilling rigs, and tankers. Because of that business model, I am able to see that the cash flow to pay out dividends is (almost) sure to be there years into the future.
Basic materials producers. As I write this, I am holding stock in 6 other companies whose business model it is to dig stuff out of the ground and sell it to other companies that then process it. This includes companies extracting oil, natural gas and soda ash (trona). Not only do these companies sell their production by future contracts, but they also engage in hedging operations that allow them to predict and secure how much they will be paid in the future for their production. Because of that business model, I am again able to see the future cash flow that will support my dividends.
Fee-based servicers. As I write this, I am holding stock in 1 company whose business model it is to own pipelines and storage facilities that its clients contract to use on a multi-year basis at guaranteed rates for specific storage capacities and volume flows. Because of that business model, I can project that the cash flow to pay out my dividends will be there years out.
Interest and dividend accruers. As I write this, I am holding stock in 2 companies whose business model it is to provide financing to other companies through mixes of secured loans and equity investments under contract terms that lock in set rates of return for years out into the future and also secure substantial termination fees if the loans are paid off ahead of time. Because of that business model, I am able to see where the cash flow is going to come from to pay out my dividends well ahead.
What all these companies share in common is longterm cash flow predictability. That predictability makes my future dividend flow more reliable and lowers the risk of my high-yield, high-risk portfolio***. And that is what I call stacking the deck for dividends.
# # #
*Why I Only Buy Dividend Stocks:
**Stock Diversification My Way:
***My High Yield, High Risk Investing:
April 13th, 2014 at 12:02 pm
I follow a high-yield, high-risk investing strategy* under which I only invest in high yield dividend stocks**. The "high risk" part of the strategy speaks for itself. I am taking serious chances with my money. One way I reduce that risk is to spread my money among a certain number of stocks and industries. I make sure I put my investment eggs in many baskets. I decided long ago that the right number of baskets for me is 8 industries and 16 companies. Here is how I came up with those numbers.
If I invest the same amount of money in each company, then the more companies I include in my portfolio the more I evenly spread my risk among those companies. But as I increase the number of companies in my portfolio, I also increase the amount of time and work I must put into monitoring those companies and managing my portfolio.*** So I have had to find my personal comfort point balancing those 2 factors.
Stock guru Jim Cramer of the television program Mad Money tells his viewers that to be diversified they must own 5 stocks in 5 different industries. In his view, holding fewer stocks means you are not diversified enough. And holding more creates too much of a workload for the average part-time investor. Maybe so. But his approach places 20% of the risk on each of those 5 stocks (20% x 5 = 100%) and that is too risky for me.
On the other hand, a typical managed mutual fund may hold 50 or more stocks. That makes the risk per stock very low (if they were equally weighted, which they never are). But the work of monitoring and regularly updating my fundamental evaluation of that many companies is way too much for me.
So I have arrived at my middle ground of 8 industries and 16 stocks by simple math combined with some introspective intuition. I looked for the point at which further diversification did not (for me) deliver additional worthwhile risk reduction. I found that point at 16 stocks. With 16 stocks, the risk from each is 6.25% (16 x 6.25% = 100%). With 18 stocks, the per stock risk would only be reduced an additional 0.65% to 5.6% per stock. For me, that is not enough added risk reduction to justify the 12% increase in work that those extra 2 stocks would require (18 divided by 16 = 1.12).
But I cannot have those 16 stocks concentrated in too few industries. If I did, bad times for an industry could whack too big a slice of my portfolio. So, applying the same math-and-intuition approach I have arrived at an industry risk comfort level of 8, with a 12.5% risk share per industry (8 x 12.5% = 100%). Again, increasing the number of industries to 9 would only reduce the risk per industry to 11%, while increasing my monitoring workload by 12.5%. So I set a stop at 8 industries.
But (of course) there is going to be waffle room in that thinking because (1) special opportunities present themselves, (2) not every stock "deserves" a full 6.25% share in my portfolio, and (3) not every industry "deserves" a full 12.5% share in it either. That is why, as I write this, my actual portfolio holds 20 stocks in 10 industries. That makes my portfolio "accidentally" even more diversified. That is good. The extra work is not so good. But it is what it is and I will not complain (too much).
# # #
* My High Yield, High Risk Investing:
** Why I Only Buy Dividend Stocks:
*** How I Stay On Top Of My Stocks:
April 9th, 2014 at 03:49 pm
I have to stay current on what is happening with the companies in my stock portfolio*. If I do not, I could get badly hurt. Or I could miss a great opportunity. So I have developed a simple 3-step procedure to stay on top of my stocks. Here is what I do.
I monitor news about my portfolio companies daily, dividend announcements on their due dates, and earnings reports quarterly. Any of these could foretell a major stock price shift in the foreseeable future. Or right away. And I must not miss those signals to buy or sell.
Daily news. Monday through Friday, I get on the worldwide web at 8am (EDT) and go to the Yahoo Finance website. It is Yahoo for me because this site aggregates in one place all the news and major opinion pieces for each publicly traded company. It is 8am because those companies almost always release their news -- particularly their bad news -- after the 4pm stock market close and before the 8:30 am bond market opening. And I know I have to be nimble. I have to decide what -- if anything -- to do before the stock market opens at 9:30 am.
Dividend announcements. I only invest in dividend-paying companies**. The continued payout of that dividend is crucial to me. So I keep a list of dividend announcement due dates for my portfolio companies, which I update by projecting forward 3 months from the most recent past announcement. A missed dividend announcement due date is a huge red flag. And I must spot that red flag and act on it because it may very well mean that the dividend is going to be either cut or eliminated.
Quarterly earning reports. I select my stocks based on specific financial data* but that data is constantly changing. The quarterly earnings report is my chance to update that data. For the company's earnings report press release, I again rely on the Yahoo Finance website. For transcripts of earnings report conference calls, I go to Seeking Alpha (by clicking on a link at Yahoo Finance!) Once I have reviewed the company's report and conference call, I either give the company a continued thumbs-up or I immediately make plans to eliminate it from my portfolio. Otherwise, I am asking for trouble.
It takes me an average of one to one-and-a-half hours a day to carry out this monitoring. I consider that time to be part of my investment in my portfolio because up-to-date information is essential to its management. And so I make sure that I have that information.
# # #
*My High Yield, High Risk Investing:
**Why I Only Buy Dividend Stocks:
March 22nd, 2014 at 05:42 pm
March 21st, 2014 at 11:26 am
I just sold 1700 shares of oil stock MEMP for a 10% profit in just 5 weeks. I bought the shares on February 4th for $35,323 and sold them on March 10th for $38,855. My realized gain was $3532. That is a 10% profit in 5 weeks -- which is equivalent to a 100% annual profit. This was an excellent example of how my stock price setting strategy works. And here are the details.*
How I decide which stocks to buy I have outlined in my post "A 16% Stock Profit in 6 Months"** and explained in detail on my blog page "How I Invest in Stocks".*** But the profit I made on this stock sale was a function of the limit price I set for the buy. Because one doesn't just have to pick "good" stocks; one also has to pick "good" stock prices. Here is how I did that this time.
On January 31st, MEMP closed at $21.93 per share. That presented a very good opportunity because MEMP's price chart showed strong buying support at $19.50. When I added MEMP's yearly $2.20 dividend to that $19.50 support price, it gave a "safe" buy price of $21.70. (See my blog page "How I Invest in Stocks"*** for the reasoning.) And MEMP's January 31st price was just 1% above that!
So I put in my buy order on February 3rd at a buy price of $20.77, to allow some room for the price to drop due to a quarterly dividend expiring on February 4th. That next day, I caught the stock as its price predictably dropped. In the following 3 days, MEMP's price slumped to $20.43 but held above its 200-day moving average line. And sure enough, MEMP's price started moving up after that. Which set the stage for me to take a 10% "yearly dividend in advance" profit a short time later. (See my blog page "How I Invest in Stocks"*** for that reasoning.)
# # #
*I am not a financial advisor and this post is not stock investment advice.
**"A 16% Stock Profit in 6 Months":http://retired-to-win.savingadvice.com/2014/03/10/a-16-stock...
***"How I Invest in Stocks":http://retired-to-win.savingadvice.com/how-i-invest-in-stock...
March 10th, 2014 at 11:46 pm
I just sold 1378 shares of oil stock QRE for a 6-month 11.4% gain. I sold for $25,313 and my cost was $22,751, so I made $2562. Plus I collected $1120 in dividends during the 6 months I held the stock. That gives me a 16.2% total 6-month profit amounting to $3682. This is a perfect example of how my high-yield high-risk investing strategy works when it works. Here's what I do.
I only buy stocks with dividend yields above 8%. To contain my risk, I limit any one stock to 5% or less of my portfolio value. I make sure I understand the company's business model going forward. And I only buy into companies passing these financial health tests: (1) current assets exceed current liabilities, (2) total assets (minus goodwill) exceed long term debt, (3) operating income exceeds interest expense, and (4) operating cash flow exceeds dividends being paid.
I set my buy price based on the price support level showing on the stock's 6-month price chart. For example: if a stock's price support is at $18.25 and its annual dividend is $1.65, I add those 2 numbers together and set a limit buy price of $19.90. And under no circumstances will I buy above that $19.90 limit. That way, if the stock's price drops after I've bought I've got an excellent chance of having the dividends make up for the drop.
Then I sit back and collect my dividends -- unless and until the stock's price rises 10% above my buy price. At that point, I can collect a year's dividends in advance by selling. So I do, which is what I just did with that QRE stock. And having collected that $2562 "dividend gain" in advance has given me a whole year to find another stock to invest the $25,313 cash generated by the sale. Which is what I am doing now.
# # #
For a deeper look at my investing strategy, see my post My High Yield High Risk Investing Strategy at http://retired-to-win.savingadvice.com/2013/12/20/my-high-yi...
(Disclaimer: This strategy works for me, but there's no guarantee that it will work for anyone else. I am not a financial or investment advisor.)
January 14th, 2014 at 06:40 pm
I invest in dividend-paying stocks. I've explained why in my blog post "Why I Only Buy Dividend Stocks". And I've detailed how I choose which dividend stocks to buy in my blog post "My High-Yield, High-Risk Investing Strategy." But I also have a strategy for when to sell a stock. When to take a profit. And when to evict a company from my portfolio, regardless of profit or loss. Here is that strategy*.
I hold stocks to collect dividend payments. I don't buy a stock expecting to sell it. And as long as I think a company will continue to pay out the dividends I bought it for, I don't anticipate selling its stock "just" because its price has dropped. But enough of an unrealized gain in one of my stocks will cause me to sell it.
That "sell" signal is based on my portfolio's 8% average dividend yield. (Remember, it's a high-yield, high-risk portfolio.) If the price of one of my portfolio's stocks is up 10% from the price I bought that stock for, that unrealized gain is more than the dividends I could collect by holding that stock for an entire year. And collecting that whole year's dividends now, by selling the stock, is guaranteed. So in such a case, I will sell the stock -- at a 10% profit or better -- and collect all of the next year's dividends in advance.
Having sold the position, I then have to find some other company's stock to buy in order to put the sale's cash proceeds back to work. But -- because I've done the equivalent of collecting a year's dividends in advance -- I have plenty of time to patiently wait for a good buying opportunity.
I will also sell off a stock if a change in the company's business model threatens the continued viability of the stock's dividend. And I will sell it, whether at a profit or a loss.
One example: I've sold off a mortgage Real Investment Trust's stock because the company announced a change in its business model to begin buying mortgages not guaranteed by a government agency. Another example: I've sold a tanker company's stock because the company announced a change in its business model to shift from arranging long-term charters for its ships to putting the ships up for short-term "rental" on the shipping spot market.
In both above cases, I judged the business model changes to pose a serious threat to dividend stability. And so I sold off the stocks. But such sales are not prompted by a stock price drop. They are prompted by my perception of a threat to the high-yield side of my investing strategy.
That's my stock selling strategy in a nutshell. I'll take the profit if the sale will give me a year's worth of dividends in advance. And I'll dump the stock of companies making business strategy changes that I believe will threaten their dividends. Otherwise, I ignore stock market movements and the market price of stocks in my portfolio.
What is your stock selling strategy? What do you think of mine?
*I am not a financial advisor, and I am not recommending that anyone else do what I do. I have written this post to record what I do and to motivate discussion.
January 1st, 2014 at 11:03 pm
For 20 years or more, I invested pretty much the same way most other people do. I put my retirement savings into a basket of mutual funds and hoped the value of that basket would grow. But every price downturn would shake my confidence in that hope of growth. I would look at the drop in market value of a fund -- or of my entire portfolio -- and fret, worry, stress. And if the price drop was deep enough or continuous enough I would finally freak out and sell the position at a loss.
Why? Because my perception of the value of my mutual fund shares was solely based on their market price. Because I saw my retirement future as tied to and dependent on the market price of those shares. Because I did not want to lose any more of that retirement future to stock market drops.
Boy, that really did not work for me. My fear of loss was too powerful a force. Fighting it involved daily stress, doubt and anxiety. And each time I gave into it by selling "to stop the loss" I would be hit with feelings of failure. And if the share prices recovered some time after I had sold, I would add to that feeling additional feelings of guilt, recrimination... and more failure. I felt completely out of control of my retirement future.
Thank heavens I've found a different way of investing that has really worked for me. A way that has put me much more in control. That way is to only invest in carefully screened individual high-yielding dividend stocks.
Now, when I buy a block of a dividend-paying stock, in my mind what I am focused on is the dividend. I am buying the future income stream that will be provided by that dividend. I am not projecting or counting on an increase in the stock's market price (although I certainly will cash in on it if it happens).
I have built my stock (and bond) portfolio to provide me income based on my stock dividends and bond interest. I have NOT built my portfolio on the expectation of following the standard withdrawal strategy of cashing out positions and spending down the portfolio's principal. Some day in the future I may very well adopt a cashing-out plan. But that will be done either as an end-game or in response to IRS required distribution requirements. I will not be cashing out positions just to cover my living expenses.
So, to summarize: in my mind, the value of a stock is in its dividend, not its market price. So now I don't freak out when the market price of any of my stocks drops. As long as I can determine that the dividend will continue to be paid, I do not concern myself. The dividend is my mental defense line against stress and anxiety. Against pulling the sell trigger based on nothing but herd-driven market panic.
This investing mindset works for me. But I am not a financial advisor and I am not saying this will work for you. So, what does work for you? What lets you sleep at night?
December 20th, 2013 at 03:07 pm
The stock market crash of 2008 convinced me never again to invest in any company that does not pay dividends to its stockholders. The crash also convinced me never again to leave the fate of my portfolio in the hands of mutual fund managers, whom I found were just as much at the mercy of crowd panic psychology as any "ordinary" stock investor.
At first, I saw dividends just as a psychological defense line that would buffer me from that crowd panic psychology by establishing an "income value" for my investment holdings independent of their market value and which would keep me from selling out of fear whenever the market value of a stock in my portfolio fell. But when I actually started screening stocks to build this income value portfolio, I saw that here was an opportunity to apply dividend investing as an offensive high-yield (and admittedly high-risk) strategy to grow my portfolio and reach the financial independence that a strong stream of dividend payments would give me.
And so the idea of pursuing a high-yield, high-risk dividend income investing strategy took hold of me. I am not a financial adviser and I am not saying that anyone should do what I have been doing since I had that epiphany 5 years ago. I am just saying that strategy has worked for me, and I'd like to tell how.
Managing The Risk
First I addressed the high-risk side of the equation. This strategy would be a stock-picking strategy. How could I protect myself against picking a stock that would crash on me by cutting or stopping its dividend? A three-part answer came to me: (1) screen the companies based on their financial fundamentals (I know, duh!); (2) diversify the portfolio so no one company's weight in it was too significant (double duh!!), and (3) monitor the news on the companies daily to catch early any indication that the positive reasons for which I had picked the company were turning negative.
Basically, I wanted to check the company's ability to actually keep paying its bills and its dividend. So on the balance sheet I would check to make sure that (1) current liabilities were less than current assets and (2) long-term debt was less than total assets minus the goodwill balance sheet line. I decided that I would bypass the income statement because too many non-cash and/or unrealized charges and credits incorporated into that statement could -- and too often would -- distort the company's real financial picture. And on the cash flow statement I would make sure that net operating cash was greater than the sum of interest expense -- no amortization of interest expense for me -- and dividends paid. (Otherwise, the company would be borrowing money to pay its interest cost and/or its dividends -- and that would be a very bad road to be on).
My personal sweet spot for diversification came down to the numbers 10 and 20. No more than 10% of my portfolio would be in any one industry -- so, I would invest in no less than 10 industries. And no more than 5% of my investment capital would go into any one stock -- so I would hold no less than 2 companies in any one industry and no less than 20 companies in my portfolio. Listening to my gut, I concluded that this would be enough of a hedge against a catastrophic business event hitting any one company (or any one industry) in my portfolio.
Finally, each morning I would monitor Yahoo Finance for company-specific news that might signal a significant change in fortune (good or bad) for a company in my portfolio and require quick action on my part.
Selecting the Stocks
Assembling a list of potential high-yield candidates turned out to be much simpler than all the document searching and mathematical calculating I would be doing to hedge against the high risk built into my strategy. By using my internet broker's customizable stock selection screen, I would be able to generate a list of dividend-paying companies ranked by their percentage yields. And, after thinking about it, I decided I would cut off the list at a minimum 6% yield.
Constructing the portfolio was then straightforward. I just started at the top of my ranked dividend-paying stocks list and worked my way down. I vetted each company based on my financial fundamental criteria. If the company made that cut, I "fitted" it into its allotted industry based on my diversification plan. The result was a list of 20 stocks, 2 to 3 per industry, and those 2 to 3 being the highest dividend yielding stocks in their industry that had passed my financial fundamentals tests.
Oh, and one thing I forgot to mention. NO financial company stocks. Even to this day, I cannot trust them or feel good about them.
Four years after I started on this investing road, I still use the same portfolio construction approach. Every weekend, I run the dividend yield stock selection screen and target industry gaps in my portfolio with the cash that has accumulated during the week from dividends collected and capital gains realized from triggered good-until-cancelled position sales.
As I said at the start, by no means am I recommending that anyone follow this approach to stock investing. But whether by method, skill, luck or a combination of all 3, this approach has worked well for me. Certainly I have hit my share of high-risk potholes on my investing road, but I have never been tempted to panic and on the whole my portfolio has moved steadily forward.
So Far, So Good
After cashing in my mutual funds in 2008, I started my high-yield, high-risk investing adventure with the $143,000 I had left in my IRA account after selling off the mutual funds. By late 2013, the portfolio's book value had grown to just over $344,500. Much more importantly to me, that portfolio is now yielding just over $29,000 a year in dividend income. (And that does not count the realized gains from profitable position sales!)
It's all very hands-on, I know. It requires a half-hour each morning monitoring stock news on the internet while I drink my coffee. It involves about 4 hours a week screening and vetting companies. It means analyzing quarterly reports and conference call transcripts for the companies in my portfolio (while sitting back in my recliner with a scotch!). It does take some work. But the payoff for me is that this high-yield, high-risk investing strategy has finally pushed me up and over the bar to make me financially independent YEARS before I otherwise could have.
How much risk would you be willing to take to cut years off your working life and add all of those years to a new financially free life? Or turn it around: how much longer are you willing to stay in your job in exchange for a less risky portfolio? Leave a comment and tell us!