Learn the stock market in 7 easy steps. Get spreadsheets & eBook with your free subscription!

HEY! DID YOU KNOW…

 

  • The median age in the U.S. is 36.8
  • The median income in the U.S. is $51,939
  • The average 401k match is $1 for $1 up to 6%

A 36.8 year old investing 10% of their $51,939 income with a $3,116.34 match:
With just average stock market returns of 10% would have $1,114,479.31 by retirement.

Join 7,200+ other readers who have learned how anyone, even beginners, can easily make this desire a reality. Download the free ebook: 7 Steps to Understanding the Stock Market.

Investing in MLP Closed End Funds

Master limited partnership closed end funds, commonly known as MLP CEFs, are hybrid MLP companies that operate in the energy sector. Most MLP closed end funds are formed by larger energy companies that seek to restructure their low growth assets by replacing debt with equity.

mlp closed end funds

If you are an income-oriented value investor, MLP CEFs are an attractive investment as they combine a high yield, high distributions, and a tax-deferred income. In addition, if you keep your MLP CEF in a qualified retirement account and you invest in multiple MLP funds, you get the investment exposure you want, and you avoid the K-1 tax hassle.

The tax advantage of the MLP CEFs

In fact, the MLP closed end funds combine the advantages of corporations and partnerships because they issue publicly traded equity interests (units) but pay taxes as limited partnerships. To better understand the tax advantage, consider that most equity funds are RICs (regulated investment companies), which allows them to pass the capital gain taxes and income to investors and avoid taxation.

However, RICs cannot invest more than 25% of the portfolio in MLPs. Therefore, most MLPs are organized as C-corporations to invest exclusively in MLP closed end funds and pay the 35% corporate income tax.

The tax advantage of the MLP CEFs is effective if they earn at least 90% of their income from oil and gas products as well as natural resources that pertain to the section 613 of the federal tax code. So, if you are seeking exposure to the energy sector along with a tax-deferred income, MLP closed end funds can be worth considering.  [click to continue…]

The Magic of Dividend Champions

Dividend-paying companies are the backbone of value investing. Besides the fact that they are consistently delivering a dividend payment, most of the time they are also raising their annual dividend payment.

Also, although most investors believe that great dividends come with expensive price tags, the truth of the matter is that often the market cap is irrelevant of the dividend payment.

dividend champions

What is a Dividend Champion After All?

Dividend champions are companies that have raised their dividend payment for 25+ consecutive years and are different than dividend aristocrats, which are all members of the S&P500 index.

The dividend champions is a list of 98 companies, released by the DRiP Investing Resource Center, which includes large caps and mid-caps that are 25+ consecutive dividend increasers. The list also includes the special dividends paid and information on which companies are offering a dividend reinvestment plan (DRIP).

Dividend Champions Are Strong, Yet Not Necessarily Large

Large caps are more likely to deliver a dividend in a consistent way. Why? Because they have a global brand name, and they generate strong economic results with the potential to attract more investors. As more people are trusting their money with a stock, the price of the stock rises.

However, in practice, there are many overvalued stocks that trade way above their fair value exactly because investors have massively believed in them.

On the other hand, evidence shows that there are mid-cap companies with the potential to even outperform the large caps in their dividend payments. Don’t forget that delivering a dividend is a combination of three factors: strong earnings, low debt, and growth.  [click to continue…]

Hedge Your Portfolio Like a Billionaire

Did you know that you can hedge your portfolio just like a billionaire? In this post I’ll lay out a simple strategy used by large banks, Fortune 500 companies, hedge fund managers, and billionaire investors across the globe.

This is a strategy, that with a little creativity, you can employ in your portfolio as well! It shouldn’t be a secret from which only the rich few can benefit.

hedge

[This is a guest post from Patient Wealth. His bio: I live in the Mid Atlantic region with my wife and children.  I am a finance manager for a Fortune 100 Company with over 10 years experience and have an MBA and CPA – but my true passion is investing!]

Before I get into some of the details let me give you the basic idea. What is hedging? Hedging is simply managing the risk of your portfolio through taking a position which makes money when your portfolio decreases in value. This allows an investor to limit losses.

Hedge Funds

You may have heard about hedge funds or hedge fund managers like Bernie Madoff. Or how about George Soros who famously bet against the British Pound? And what about Long-Term Capital Management which went down in flames and almost brought down the global banking system with it?

But hedge funds may or may not employ the strategy that I will be discussing. I want to deal with this first to dispel any misconceptions that may come to mind when talking about hedging.

The term “hedge fund” is loose jargon to refer to an investment fund which is only available to qualified (wealthy) investors as defined by the federal government. They use many many techniques, including but not limited to hedging, in order to execute their strategies.

But these funds can really be doing anything and are not a homogenous group at all. So don’t think about hedge funds when thinking about the strategy of hedging. They are two different things.

So What is a Hedge?

A hedge is simply a way to lessen your risk. Let’s take an example that most of us can identify with. Let’s say there is a trucking company that has contracts to ship goods across the country. The trucking company makes great money and provides good service to their customers. Everyone is happy.

But nothing in the contract allows for an adjustment in the cost of shipping based on the price of diesel.  [click to continue…]

Stocks Vs Options: What Beginners Need to Know

If you haven’t already, you’ll quickly discover the sexy, fast moving counterpart to stocks — options.

It’s hard not to stumble upon these shiny derivatives. Brokerages constantly pitch them as a quick way to massive returns. (They’re also a quick way for the brokerage to generate commissions for itself.)

“Options can double, triple, or even quadruple in price overnight! And you barely need any capital to play!”

Stocks, on the other hand, appear far more boring. It can take years to realize a 100% gain and you need A LOT more capital to purchase shares.

The combination of fast moving prices and high leverage will leave you staring at option quotes like they’re a tray of doughnuts. Everything looks incredibly delicious.

stocks vs options

[This is a guest post by Alex Barrow from Macro Ops. He co-founded Macro Ops with two other former hedge fund analysts with the goal of helping friends and family navigate these volatile markets.]

You won’t be able to stop thinking about how much money you’ll make when the option increases 500%.

But… I would caution you to fight off that urge.

Throw away the desire to buy that option like you would throw away a doughnut right before beach season.

Although options appreciate and depreciate with the price of stocks, the two vehicles are very different.

Stocks are an asset. A stockholder has partial ownership in a real cash flow producing business.

Options are merely a contractual agreement between two parties which eventually expires. That’s it. This extra time component of options makes trading them very hard. Every few months you’ll need to place new positions to continue making profits. This requires constant analysis day after day, week after week, and month after month.

Compare this to stocks where you can park money into great companies and hold for decades. Option trading is like a full-time job. Stock investing on the other hand can passively build a sizeable nest egg with little day-to-day effort.  [click to continue…]

What is a Margin of Safety?

One of the worst feelings in the world is when you purchase a stock and immediately it goes down. Let’s say that the stock drops 25%! Yikes. You think to yourself, what have I done? Why did I buy this and what am I going to do?

How do we protect ourselves from this ever happening to us? First of all, there is never any complete protection from this happening. It happens to the best of us but the trick is to try to minimize your loses and protect yourself by giving yourself a margin of safety.

margin of safety

[This is a guest post by Dave from IRA for Beginners. His favorite phrase is Knowledge is power.  He has a passion for investing and helping people learn how to save and invest for the future.]

Okay, so what is a margin of safety?

A margin of safety is principle of investing that in which you the investor will only purchase a stock if it is below its intrinsic value. This means that if the market price is below your estimation of the intrinsic value of the stock, the difference would be your margin of safety.

The bigger the difference the larger the margin of safety. Warren Buffett used to insist on a 50% margin of safety when he was purchasing stocks.

Let’s give an example of how this works.

Say you find a company that you really like and the market price is currently $100. You feel like that is a fair value but based on your intrinsic valuation you determine that your price would $75. Now you want to put a margin of safety on that price. So you determine that you are willing to buy it a 25% margin of safety, which would be $56.25. So you wait until the price drops to your target of $56.25. Once it hits that mark you can buy with confidence.

Keep in mind this means that you might not be able to buy the stock for a while and patience is a key to this strategy. Also know that you need to ensure that there is not some reason for the decline, like a sharp drop in earnings.

Next question. What is intrinsic value?

“The intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value.”

Intrinsic Value Definition by Investopedia

The last sentence of the above definition is key. We are always looking for safer bets when we are searching for companies to buy. So it’s imperative that we find bets that are below the intrinsic value.

The market is going to price the stock according to its whims. Mr Market will go up and down as he sees fit. Our goal is to find the best bets that we can and take advantage of those opportunities.

Practitioners of Margin of Safety

Let’s talk about some of the most important figures that have shaped and championed margin of safety.  [click to continue…]