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5 Dividend Investing Success Stories

History can teach us a lot. I’ve shown just how much we can learn from mistakes past with the bankruptcy research, and now I want to flip the script. Let’s examine 5 case studies of the most successful dividend investing stories from the last 2.5 decades.

dividend investing success stories

While we can’t expect to follow these guidelines exactly, the takeaways should help us increase our chances for finding the next dividend investing success.

Even one future successful dividend investment can set up a substantial cash flow for years to come. In fact, research from the world’s largest money manager BlackRock has indicated that dividends and dividend growth have made up 90% of investor returns in the past century.

There’s no doubting the importance of dividends. Yet even the most novice investor can agree that you can’t just throw darts at a wall and hope every stock you buy will continue paying dividends.

Not only does a company need to pay dividends, but increase earnings so those dividend payments can increase. That’s when the real power of compounding kicks in.

I implore you to additionally learn about the components of selecting a good stock after you read this article about dividend success stories. While the dividend component should be there, the promise of future growth and a strong balance sheet remains even more critical.

And you’ll only be able to find a company in such a promising situation if you know how to do fundamental analysis. So get yourself educated if you want to make some real money.

Caveats to the Case Studies

For this dividend case study examination, I took 5 of the most popular dividend growth stocks that have performed exceptionally well.  [click to continue…]

What is dollar cost averaging? Also called the constant dollar plan, it is the technique of investing a fixed amount of money consistently. When purchasing stocks, this allows more shares to be purchased when prices are lower, and less shares when prices are higher.

dollar cost averaging

For example, let’s say you established dollar cost averaging of $400 a month into a manufacturing company. At $25 a share, you’d be able to buy 16 shares the first month. If the price dropped in the second month to $20 a share, you would purchase 20 shares… and so on.

If you can understand that investments rise and fall in value constantly, you can become better prepared to deal with the fluctuations. When dollar cost averaging, you look at a loss in value as a greater buying opportunity, instead of immediately writing off the experience as a loss.

Assuming the price of the investment does eventually rise, a dollar cost averaging plan will help you capitalize on lower market swings by assigning you more shares. It also helps you stay consistent as an investor, which will materialize into superior gains in the long term. [click to continue…]

The Basics of Stock Ownership

Stock ownership is the part ownership of a business or corporation. When a company issues stocks, they bring in capital to invest in more resources so that they can meet the demands of the consumer.

stock ownership

 

How? Well, lets say a clothing company only has $300,000 in cash. Customers want to buy more clothes, but the company needs $600,000 to get the resources, equipment, and facilities to meet the demand. When the company issues stocks, they get investors like me and you who want to buy a share of the company. The company sells shares of stocks to these investors and receives capital it can then use in its business.

Now, why would the average person want to invest in stocks? Well, there’s two main reasons. You can either earn a profit by buying the stock when it’s low and selling when it’s high, or you can hold on to it and earn constant money from the company through dividends.

What’s a dividend? Every 3 months, or quarter, a company will release the amount for their dividend for that quarter. The dividend is a percent of how much the company earned. Since stock ownership is part ownership of the company, you will earn the percent of how much the company earned based on how many shares of the stocks you own.

For example, if a company proclaims a $0.50 dividend for the quarter, and you own 150 shares of the stock, you will receive $75.

What you choose to do with the stocks you buy is your decision, but the smartest and more reliable thing to do would be to keep the stock and earn dividends every quarter. What do you do with the money you just earned from the stock? Reinvest.  [click to continue…]

Here’s a great question from a subscriber to The Sather Research eLetter about trailing stop limit vs. trailing stop loss.

“I really liked your book and it has been a big help to me. 
I do have a question about the 25% trailing stop on close of market:
What is the difference between trailing stop loss and trailing stop limit & which should I use.  I’ve read what I could and I’m still not sure of the difference.”

Use the trailing stop loss.

trailing stop limit

A trailing stop limit is an order you place with your broker. It places a limit on your loss so that you don’t sell too low.

For example, say you have a stock trading at $10 and you put a stop loss at $9 and a stop limit at $8.50. If the stock suddenly crashes to $7, making your sell order at $7, the broker wouldn’t execute the stop loss because it is below your limit of $8.50. So the stop limit protects against fast price declines.

In a stop loss situation, your broker would’ve just sold your stock as soon as it crossed below $9, in this example you would’ve sold at $7.

I prefer the trailing stop over the stop limit because I don’t care to protect against such fast swings. Since I’m doing end of day trailing stops, the presence of these cases are already much more minimized. At the end of the day, a loss is a loss.

If I lose a couple of percentage points more than 25% because I didn’t have a limit, I’m ok with that. It’s much better than the alternative, which is a stock that skips under the limit and keeps crashing. That’s a much worse situation than losing a couple basis points.

Now, I don’t advocate putting in a trailing stop loss or a trailing stop limit with your broker for several reasons.  [click to continue…]

25 Money Investing Tips for Beginners

Anyone can become a good investor. You just need a little work, a little patience, and the desire to improve. Here’s 25 money investing tips to help you on your way.

money investing

1. First and foremost… diversify
As a beginner, this first tip is the most important one you need to process. Yes, any investment carries with it some sort of risk, but much if not all of it dissolves if you diversify.

Don’t load up in company stock where you work. Remember the Enrons of the world. Truth is, you or nobody else knows what the future will hold. So be prepared, and diversify.

Most of your investments will probably go up over the long term. One or two bad investments won’t, and you can’t lose your future on one unlucky pick. A basket of investments, therefore, will almost certainly go up.

2. Long term plan is a winning plan
The market peaks and it crashes. This we know. But over the last 100 years, the stock market has averaged around 7% annual returns.

This is an encouraging fact. Investments in the stock market are like roller coasters. You won’t get hurt, as long as you don’t jump off during the ride.

A bear market, stock market crash, recession, and even depression aren’t new or unique circumstances. In fact, we have regularly seen recessions and recoveries dating back to 1600s.

3. If you want to be successful, dollar cost average
My investing mentor gave me the biggest tip contributing towards my success in the stock market, and that was to dollar cost average.

Dollar cost averaging is simply investing the same amount of money consistently. I like to invest monthly. Of course, you can always add more, but dollar cost averaging keeps a minimum investment at all times.

This helps immensely in mitigating market timing, allowing me to profit no matter what the market is doing. It naturally helps you buy low, sell high. You’ll see this concept is also one of the most important with investing.

4. Compounding interest is your best friend
Albert Einstein also called it the “8th wonder of the world”. And for good reason. Investing your money works so well because of compounding interest.

You can’t work as hard or as long as money can. Once you put money away, and starting investing it… it makes you more money. If you reinvest that made money, you grow your pile of wealth. As the made money makes you more money, your wealth grows like a snowball.

Once you’ve been investing for many years, that snowball will grow exponentially. Just the sheer physics behind the numbers makes big numbers get bigger– thus the phenomenon of the rich get richer. It’s because of the math of compounding interest.  [click to continue…]

Value Trap: The Value Investor’s Greatest Threat

As value investors, our main goal is to find a company trading at a discount to its intrinsic value. Outperformance and a sufficient margin of safety can only be established through this search of value. It’s basic buy low, sell high.

However, looking for an opportunity such as this tends to attract stocks that are trading at a discount for a good reason. The presence of a value trap can ensnare investors, and lead otherwise profitable strategies into turbulent waters.

value trap

Risk management is an often overlooked aspect of the investing world, and it entails more than just a simple diversification solution. Every investor must face the same simple fact. An individual position that records a loss must often gain a much higher percentage return in order to break even.

For example, a 10% loss on a stock requires a subsequent 11% gain in order to break even. The discrepancy raises as the losses become bigger. A much larger 50% loss requires a full 100% gain to break even, and a 75% loss requires 300% returns to break even.

As we can see, the presence of substantial losses, or drawdowns, in our portfolio greatly hinders our ability to create an outperforming portfolio. The simple principles of mathematics thus make losses more substantial than gains, and force an investor to focus more on limiting losses than maximizing gains. At least an intelligent investor would do such a thing. It turns out, this reverse focus mindset fares very well in other competitive fields.

One of the great chessmasters recently shared that his secret to success lies in a reverse focus mindset. While most other chess players focus their energy on the opening strategy, this chessmaster studied the end game instead.

He soon discovered that no matter which ending scenario the game turned to, he was able to adapt and dominate his opponent through his sheer mastery of the end game. He went on to become one of the greatest chess players of his time.

Investors can also study the “end game” of an investment, as it pertains to a value trap or value opportunity. At the end of the day, a stock has two possibilities. One is that it continues to be traded on the exchange and life goes on.

The second possibility is that a stock goes bankrupt. It is this second possibility that disturbs me the most, and is most detrimental to a successful value investing strategy. The gain required on a 100% loss is infinite. That’s money that is lost forever. As you might already know, some of the best looking opportunities are actually value traps, and it’s a value trap that turns into a bankruptcy that causes the most damage.

Looking back at some of the most shocking bankruptcies of the past, I was able to quickly comprehend just how deceiving a value trap can be. In late 2008, Lehman Brothers seemed to be a fine value play through many income statement valuations, with a P/E below 15 and a P/B below 2. In the same token, a company like Borders looked like a strong value play to some narrow minded investors, who saw the consecutive dividend increases and low price to book valuations as signs of a strong opportunity for profits.

Instead, both companies went bankrupt. An investor who faced these losses also had to face the prospect that this kind of a scenario could happen again, without warning or insight.

Yet a prudent investor would look at these situations as opportunity for learning. While these companies looked attractive on the basis of a few select valuations, a bigger picture analysis would uncover that Lehman Brothers also carried a debt to equity of 29, and Borders had recorded negative earnings for over four years.

If we were to look at other value trap bankruptcies, we’d hope to find predictable symptoms that show that these deceitful traps are actually easily avoidable if you know where to look.

Value Trap Research Results

Turns out, this is exactly what I’ve found. Knowing that the value investor’s greatest threat is a value trap, I took a backwards approach and tried to study the worst case scenario of any investment: the bankruptcy. By examining the 30 biggest bankruptcies of the 21st century, I was able to discover that not only are value traps quite predictable, but many of the bankruptcies had the same symptoms. If we know the symptoms of bankruptcy, we can greatly reduce exposure to them.

With this valuable information, I took the most common symptoms and formulated a number based indicator to decipher value situations. By looking at all three financial statements, the income statement, balance sheet, and cash flow statement, I pulled the most important valuations from each and incorporated them into the indicator. This had the net effect of flagging any company that had even one poor valuation metric. This might seem like a strict condition, but consider how just one valuation tipped investors off to Lehman Brothers’ perilous situation.

With a solid foundation of seven categories, and a wide coverage of the most important and bankruptcy predictive valuations, the Value Trap Indicator would’ve avoided 29 of the 30 bankruptcies examined, a full 96% accuracy rate.

The information from the bankruptcy research clearly identified the two biggest possibilities of a value trap turning insolvent. These were the presence of negative earnings (annual), and a high debt to equity relative to the average.

The average debt to equity of any stock on the major exchanges is usually around 1. Any company with a much higher debt to equity ratio was increasingly at risk to bankruptcy, as was a company with a combination of negative earnings and higher debt to equity.

So by avoiding these situations, a value investor can greatly increase overall return and limit major drawdowns. This has the double effect of keeping an investor in the companies that are profitable and successful, thus increasing probability for out-performance by principle as well.

If I can just leave you with one great idea as a result of this blog post, it’s to not underestimate the destructive power of a value trap. Learn how to avoid exposure to them. Research and personal experience help, but a reverse focus mindset and an outside-of-the-box approach fares much better.

How to Start Small with Stocks

Here’s a question I got from a loyal email subscriber asking about starting small with stocks:

‎”How do we start small…. been following your mails for months now…. how do we start small and start with no admission fee”

That’s a great question. Let me try to make it as simple as possible.

start small

Stocks trade at all sorts of prices. You have stocks that trade as small as pennies per share, and stocks that trade at over $200,000 a share like Warren Buffett’s Berkshire Hathaway. There’s no right answer to which stocks you need to buy to make money. A stock trading at the thousands of dollars has the same chances of success as a stock trading at $5 or $10.

Why? Because there are millions, sometimes billions or trillions, of shares outstanding within these companies. Because the economy stands at trillions of dollars, publicly traded companies will be heavily traded between people and institutions that have way more money than the average, small-time investor.

Now I will make the caveat that you generally don’t want to be buying stocks that are trading at $5 or less. These stocks are referred to as penny stocks, and they tend to be much more volatile and risky than the average company. It’s not a great place for a beginner to start crafting a strategy.

Once we’ve established that any stock above $5 a share is fair game, it’s time to decide two more things. Firstly, how much do we want to invest– and of course, which stock do we want to buy.  [click to continue…]

An Honest Story about Losing $5,000 on Hot Stock Tips

The following is a guest post from Sam Broom of The Nude Investor. He talks about the first investment he ever made, and how it ended in disaster. He hopes his story will help you avoid losing money from hot stock tips and poor, speculative positions.

hot stock tips

Hot stock tips – we’ve all been there. Your buddy’s been loading up on the “next big thing” and has been urging you to get on board. You know the the kind – “This stock is about to explode”, “It’s almost a guaranteed winner” and “she’s a sure thing, bro”.

I’ll almost guarantee that anyone with any investing experience has heard familiar phrases from friends or family at some stage. Whether it’s been a hot stock tip, real estate investing advice or your buddy regurgitating some washed up tip from a “gold guru” he’s been following – they all have the same message: get in now before the rocket launches into the metaphorical investment stratosphere.

I know this sounds like an oxymoron, but hot stock tips are the bane of any beginner investor – I would know because I lost $5,000, over 80% of my original investment, following a “hot stock tip” when I first started investing in the stock market.

Before I get to the juicy bank destroying details, I feel it’s important that I provide some background information to my story.

I came from a solidly lower-middle class family with parents who had always worked exceptionally hard, but had never themselves been overly fussed with material things. They instilled in me their belief in a solid work ethic – I’ll never forget my dad’s mantra: “If somethings worth doing, it’s worth doing properly”.

A combination of good genes and that instilled work ethic meant I achieved highly at school and ended up gaining acceptance to a reasonably exclusive college. The majority of my fellow students came from wealthy private high schools and it was here that my eyes were opened to the fact that contrary to popular belief, those that worked the hardest weren’t always the best rewarded (in a financial sense at least).

All my friends’ parents were driving around in fancy cars and taking extravagant overseas holidays, yet it seemed like all they did was wine and dine and manage their investments. Meanwhile my parents were slaving away at the same “nine to five” they’d been at for the past 35 years, scraping together enough to renovate that dingy bathroom or to save for their first overseas trip at the ripe old age of 55. I could see that to get ahead, unless you were one of the lucky ones with a big ol’ trust fund, you had to not only save, but put your money to work earning a return that would compound over time.

[click to continue…]

How the Stock Market Cycles like the 4 Seasons

Like winter, spring, summer and fall… the stock market cycles. Now if you are aware of this phenomenon, you can better prepare your investments to reflect this reality. Being unaware of stock market cycles, on the other hand, can make you panic when things don’t go your way.

stock market cycles

One of the most important concepts about the stock market is this feature of moving in cycles. Like the seasons that fluctuate repeatedly, the stock market moves between periods of extreme optimism and pessimism. This is where the terms bear and bull market originate from.

The interesting thing about strong bear or bull markets is that they aren’t readily apparent until after the fact. While general prosperity or low stock market returns are occurring, most investors are consumed with issues inside the current season, unaware that a new season might be and often is just around the corner.

This is one of the reasons why being a contrarian is so profitable. It’s also a factor in why value investing works so well. Value investing depends on investor sentiment and emotions wildly mis-valuing securities beyond its logical value. The difference of undervaluation becomes the margin of safety that value investors chase.

There’s two ways to look at the stock market. One is a very black and white approach. Either you buy a stock and it makes you money or loses you money. This is a very frustrating mindset to have, because you have no control over the situation. Anything can and does happen in the markets, and you’re just hoping that you come out ahead this time. It’s a short term and limited approach.

The other way is to recognize that the stock market moves like the seasons. Other than bankruptcy, nothing is permanent and things are changing all the time. Instead of trying to directly profit from our trades, you’re trying to hold for the long term and generally buy companies that are undervalued. This allows you to hold through less advantageous times and see opportunities where others don’t.

One glance at any stock chart will show you how much more the stock price fluctuates than the actual value of the business does. The ability to identify this value and capitalize on it is a major part of finding success.

Another major key to success is staying conscious of what season the market is in and making investment decisions based on this. Let’s examine some key characteristics behind the 4 seasons of the stock market.  [click to continue…]

With baseball season now in full swing, it’s time to bring out the hot dogs and nachos for some fun in the sun. Baseball is interesting not only because it can entertain us, but also educate us. I thought it’d be fun to compare the investor’s life to a baseball game. Turns out we see some striking parallels.

It might not be fairly obvious but an investor’s strategy should vary depending on the age. A 25 year old has a much longer time horizon and risk tolerance than a 65 year old retiree. However, the in between years aren’t always so clear.

Take this creative guide and use it to apply to your own life if you see fit. If anything, it can serve as a rough mindset.

This only represents the ideal. In baseball, people don’t go only to see the home team win. They come to the games for the atmosphere, the food, and the good times. Likewise with investing, it doesn’t have to be strictly about following the ideal. You can still reap many rewards even if you are “behind”.

investor's life

1st Inning (Age 0-16): This is the warm-up phase. At this point, the investor is just getting loosened up. Hopefully your parents have set up a 529 for your college fund, but it’s no big deal if they didn’t. Plenty of successful individuals didn’t need their parents to pay for college.

This is the time of life where the investor hopefully learns about the value of money and the power of saving. Life skills and mindset shifts are more important here than actual wealth.

2nd Inning (Age 16-23): The 2nd inning can be quite crucial, as it can set the tone for the rest of the game and your life. This is the time where you’ll hopefully get your first job, get into a good college and graduate with a useful degree.

Again, the investing will come later, but the decisions made during this time will impact how great your chances are for financial success. You can always come back, but it’s easier to jump out with a lead early.

3rd Inning (Age 23-30): Here’s where your college degree will be put to first use, and you’ll land your first “real” job with benefits. This is the perfect time to buy your first stock and start investing.

It can be an unsure time period, where many things are new and confusing. You’ll soon see that experience becomes a great teacher, and by taking action you are improving yourself in a much better fashion than with procrastination and analysis paralysis.

You might not know which investing strategy is best for you, and so this is the best time to try them all. Put little sums of money into different investments. Find stocks that will grow your capital for decades, and learn the importance of holding investments for the long term.

4th Inning (Age 30-35): This is about the time when the investor jumps in as a first time home buyer. In fact, The Atlantic talked about how the average age for the first time home buyer is stretching for Millennials from 31 to 32 – 34.

You’ll want to be growing your net worth at this age, and a house can be a great way to do it. However, you should still be maintaining the dollar cost averaging you should’ve established in the 3rd inning and beware of throwing away too much money to the bank with the wrong kind of mortgage. [click to continue…]