My Investing Journey with Passive Income and Stock Market investing

Month: July 2019 Page 1 of 3

New Positions for 2nd week of July + awesome day in the market

It’s Tuesday, July 16th and I normally don’t get excited about short-term capital gains/losses, but hey what can I say? I’m human, and today was one of the best days I’ve had in the market in a LONG time. The part that makes it so great is today the market was Down but I was UP. This shows me my risk management and portfolio balancing is paying off. This is partly why I choose to buy individual stocks; I already own an index fund, I don’t need to chase the index with other investments. I believe it helps with diversification.


Some Highlights:

American Eagle Outfitters-up over 5%, it’s had a rough month for what reason? I don’t know, books and reports still looking fabulous.

Schneider Trucking-up 4.5% (I’ll take this because I was down over 12%). I’m not sure why it went up, not any good news. Transportation sector is getting hit hard lately.

Leggett and Platt up 1.63%, I just bought this a few days ago. We are off to a good start.

Kaiser Aluminum up 1.3%, another brand new position.

Eastman up 1.04%, one of my favorite stocks! It’s been on a nice run lately, wished I could buy more.

I had many others up as well, basically, the only things down were Treasury bond ETF, General Mills, Darden Restaurants and Medical Properties Trust (in my IRA). General Mills is another stock I’d like to buy more of it but it won’t stop hanging out at the 52 week high long enough for me to buy. Maybe later when we have a correction.


How about those New Positions Joe?

I added more new positions this week than planned. I’ve been on the hunt and finally bit the bullet with some less than optimum prices. I’ve stayed patient but could wait no longer. I do believe I’ll get some better prices in the future on 1 or 2 stocks. However, I think it’s better to just throw the capital and money into use as long as it’s not tremendously overvalued with no future of getting back up there for a while.

About the only thing in my portfolio I feel I overpaid for is Medical Properties Trust and Darden Restaurants. Both were near 52 week highs (I broke my normal investing rules). I’ll dollar cost average in later, especially since I only bought a few shares.


New Brokerage Account Positions

1) Kaiser Aluminum-I’m a HUGE fan of the materials sector, even if it does get hugely impacted in economic slowdowns. I think it helps balance out my portfolio.

2) Darden Restaurants-The books look incredible on this. Even though it was a little high, I couldn’t resist. It’s on a clear trend upwards. The markets valuing this stock higher and I believe it’ll play out well over the next ten years.

3) Eaton Vance-This is the ONLY financial stock I own. I was drawn to their cash flow and the fact that they have never cut their dividend. Another fact is during the Great Recession they were hit pretty hard; however, they bounced back at an insane rate, beating early 2008 earnings within a year of the fall. I think it’s well managed, they are forward thinking with their products. At the same time, the projected earnings are iffy with this one. However, as an income investor the dividend is more of a concern than earnings on the short-term. I tend to stay away from banks and financials but I need another dividend payer during certain months and this fit the bill.

New IRA positions

1) Ryman Hospitality Trust-I never knew this existed, ha. I’ve actually performed on the Grand Ole Opry and stayed in the Opryland Hotel. In addition, I’ve played at the Ryman Auditorium. This is a REIT and like all REIT’s I purchase, it’s in my retirement account. This pays a good dividend and caters toward higher-end corporate meetings with its properties. It was a toss-up between this and Host Hotels, but liked the dividend growth on this one more. All I see that bothers me is the debt but it’s a REIT and somewhat expected. If The Grand Ole Opry and Ryman fail, we know something is SERIOUSLY wrong 🙂

Planned maneuver captain-I hold a Fidelity Select Health Care Mutual Fund in my retirement. At the moment it’s on the move back up. I’m usually not one to sell a lot but if it goes up about 5% more I’ll probably sell some of it and reallocate elsewhere. There is just too much volatility with the news, politics in the healthcare sector; it’s calmed for a bit but I don’t see it improving over the course of the next year. I bought this when I was a NOOB investor and unfortunately bought too much, my IRA is too heavily weighted towards healthcare because of it. I’m gonna sell it and use the funds to buy more shares of REIT’s or market indexs.

I am also contemplating selling some of my bond funds. It’s been a nice ride of over 13% return. I just don’t think it has much further to go up, even if interest rates do fall (which it seems like they will). MUB for instance, has been a real dog. I wished I hadn’t bought it even though it’s safe. TLT would have been a better idea (My TLT shares are up nicely) or I should have bought shares of PMM (kicking myself, lesson learned!)

My last dividend payout is on July 23rd this month. I am out of town on vacation until August so I probably won’t get to a video and updated report until then. Talk soon! Happy investing!

New Position-Leggett & Platt #LEG

Why I’m investing in LEG? Here are some reasons:


What does LEG Do?

Leggett & Platt is the company that literally invented the bed spring in 1883. They make springs for beds, its “innersprings system is the most used sleep system in the United States. They even have coils and springs that are easily rolled up and shipped for those buying bedding online.

From LEG website

They make carpet cushioning, sewing and finishing machines, mattress packaging and quilting machines. Auto seats are yet another area they’re involved in. Lastly, they serve manufacturers of bedding and upholstery furniture.

Size: They have 145 facilities in 18 different countries. However, 62% of their manufacturing is inside the United States.

They just acquired Elite Comfort Solutions who is a leader in foam technology. This foam is used in autos, furniture and even in the medical industry:

http://elitecomfortsolutions.com/

In summary, LEG is a diversified company with many areas to increase profits, R & D new products and expand their customer base.

Here is their main website:

http://leggett.com/


Their Most recent Earnings report Summary

Q1 sales grew 12% from 2018

Acquisitions contributed to 13% of sales

Total sales up 8.3% in 2018, some of it’s income gains were due to tariffs.

Volatility of steel prices has hurt some margins

While Revenues were up, EPS was down from .57 Q1 2018 to .45 Q1 2019. However, this includes a reduction of .04 due to the acquisition of ECS.

They are exiting the fashion bed business because it’s not profitable, auto seat sales are in a decline due to slowing demand of vehicles.


How does the Dividend look?

Yield-4.10%

1 yr dividend growth-5.26%

5 yr dividend growth-5.92%

Payout Ratio-71%

DIVIDEND GROWTH From LEG Website

Some Comments about the Dividend

This company has one of the most impressive records of increasing its dividends out there. It’s grown its dividend for 47 years! If that’s not impressive, I don’t know what is. This company is a DIVIDEND ARISTOCRAT.

Another fun fact-This company also did NOT cut its dividend during the great recession. We can see the dividend is growing at a decent rate (I generally like the 6% area). The payout ratio is a little higher than I like, as it doesn’t give the company a huge ceiling to grow it’s dividend. However, for now, I can live with it. Given the payout ratio and cash flow, I do believe the dividend is safe.


Valuation Metrics

P/E = 17.66

P/Book = 4.15

Enterprise/EBIDTA =12.72

Profit Margin = 6.58%

Return on Equity = 24.19%

P/Cash Flow = 11.72

Long term Debt/Equity = 136%

Projected EPS growth = 10.53%

Credit Valuation= BBB rating

The P/E is a little above 15, but I think the stock is fairly valued, especially in today’s market where finding value is more difficult each day and the market itself is overvalued. A price to book of 4 is higher than I’d like to see it but I’ll take it. Profit Margin is on the low side but this is a capital intensive business; I don’t expect high margins.

Return on Equity is outstanding and a projected EPS growth of around 10% is very good. It’s nice to see a small-cap value company with decent growth numbers. Their revenue growth is pretty good for the last 5 years. I can’t say I like the Long-term debt to equity number. However, the dividends are safely covered regardless of long-term debt. Not to mention the debt to assets is only about 18%.


Closing thoughts

Some closing thoughts-I do believe there’ll be better prices for LEG in the future when the market corrects or slows down. I expect the P/E and P/Book to decrease at some point within the next year. This is due largely to the housing industry exposure of LEG. However, I’m going ahead, purchasing and deploying cash for the dividend yield. I’ll dollar cost average in later as my investment timeline is over a 10 year period with no intentions to sell.

Please keep in mind I am NOT a financial advisor nor is this financial advice. I am simply presenting my investment decisions for entertainment purposes only or to archive my own decisions. As always, please consult a professional and do your own research before making any investment.

Risk vs. Reward

Does Risk really equal reward?

We’ve all heard the old saying, “Risk equals reward.” While some level of risk is usually involved in many of life’s rewards, it’s simply not always true that greater risk equals greater rewards. In fact, greater risks can often lead to greater losses.

Sometimes losses aren’t difficult to recuperate from; however, when it comes to our finances, a huge loss may take years to recover from. In particular, those with lower income may find a financial loss particularly devastating. Unfortunately, it’s they who have little that often desperately take on foolish risks, an attempt to create a new world for themselves. I believe an investment choice should begin with a look at Risk vs. Reward.

You can peruse the internet for people that lost tens of thousands of dollars in cryptocurrency bets or visit Wallstreetbets Reddit below if you want to see some entertaining results of stock gambling:

https://www.reddit.com/r/wallstreetbets

You don’t have to go far to see the damage lots of leverage can do when the market turns sour. If the market goes down, you now lose twice as much or how much ever you’re leveraged. The greater the risk (the greater the leverage) the more you lose! Why do people only want to see one side of the equation here?


The idea of greater risk means greater rewards is easily disproved:

Take a lottery ticket, maybe a scratch-off that costs $5.00. Even though it only costs $5.00, you could stand to win tens of thousands. The reward is a lot but the risk is very little. Take your state lotto, now we are up in the millions but you can buy a ticket for $1.00. The reward is huge but once again, the risk here is very low. At the same time, as you buy more and more tickets you don’t suddenly gain more and more rewards. Most likely you end up with greater and greater losses.

The next time you get in your car increase the speed. As you increase the speed, does your reward or risk increase? I think your local police officer would agree that as the risk goes up, the reward goes down.

Now a personal example:

In October of 2018 I bought a Long-term bond fund; there for awhile this fund was beating the market. This bond fund was not a risky proposition or volatile relative to the equities market. In fact, it was less volatile and carried less risk.

If risk equals reward then how do you explain such an investment vehicle outperforming equities? Only as of a few weeks, the market began outperforming my bond fund by a few percentage points since October. However, this could change at any point. If the bull market suddenly turns into a bear market and my bond fund starts outperforming the S&P again, is it simply because it got riskier? Of course not, the idea is ludicrous.


Let’s go further-think about an Adrenalin junkie. The more you exposure yourself to risky behaviors the more likely statistics won’t be on your side. For instance, if you jump out of enough airplanes, rock climb without a rope or bungee jump enough times; sooner or later face meets the ground and you’re now a pancake. Maybe it’s just me but I’d rather not tempt fate.

It’s not hard to imagine countless scenarios where as the level of risk increases, the more dangerous it becomes and the more you stand to lose. Chasing greater beta and risks for some imaginary return is akin to playing with fire and hoping not to get burned.

These are some ideas I had contemplated before not only about investing but life and then I happened on this gem of a book by Eric Falkenstein about risk and low volatility investing. It expands on these ideas and goes further to prove just how ridiculous the notion of risk equals rewards truly is.

“The Missing Risk Premium:Why low volatility investing works”

This book is not meant for an investing beginner as he gets heavy on the jargon.

Here is a video interview he did that summarizes a few of these points:

Summarizing Eric’s thoughts:

Stocks with high Betas and greater volatility historically don’t outperform the market, they underperform.

What does Eric say a high beta is? A beta of 1.5 is a nice cut-off when it comes to equities. Avoid such risky stocks/funds/bonds, they provide no risk premium.

These risks don’t exist with equities alone. For instance, take your junk bonds versus say an investment grade bond or BBB bond. A junk bond has a poor historic return over an extended period of time in comparison to the investment grade bonds.

His overall theme is that no premium risk factor exists for most investments as previously thought.

Here is my youtube video where I summarized my own thoughts and feelings about this idea:

I am certainly not saying don’t take risks as any investment comes with risks. I am simply saying the risk to reward curve is not linear, at some point it starts to be negatively correlated and you are paying more for extra losses.

4 dates every Dividend Investor must understand

1)Announcement date:

This is the date when the company declares how much dividend it’s going to pay, the record date and when the dividend gets deposited into your account (Pay date).


2)Ex-Dividend date:

This is the most important date to understand. If you buy a stock on the ex-dividend date, it’s too late to receive the dividend for that quarter. You must purchase the day BEFORE the ex-dividend date to get that quarter or months dividend. For instance, if the ex-dividend date is Aug 2nd, then only people who bought on or before Aug 1st get the dividend. If you buy on August 2nd or anytime afterward, you aren’t eligible for that quarter’s dividend.

I hate to admit this, but before I knew what I was doing I once bought a stock on the ex-dividend date thinking I was eligible for the dividend! Don’t make this mistake, if you want the dividend you must buy BEFORE the ex-dividend date. Now to discuss why you may not want to wait and buy right before ex-dividend either:

The ex-dividend date comes with tax implications, at least if shares are held outside an IRA. A dividend is called a QUALIFIED DIVIDEND when shares are held for over 60 days inside a cycle of 121 days. This cycle is made up of the following:

60 days before the ex-dividend date and 60 days after the ex-dividend date.

If you hold the shares 59 days or less inside this cycle, the dividend is taxed as ORDINARY INCOME. In other words, taxed at your normal tax rate. If your normal tax bracket is 15% then you pay 15% taxes on ordinary income dividends.

The higher your tax bracket, the greater of importance these nuances are. I have some great news for those in lower income brackets-As of today, single filers with an income below $38,600 and joint filers with an income below $77,200 pay 0% taxes on QUALIFIED DIVIDENDS. Only those making 425K a year or more pay the 20% tax on QUALIFIED DIVIDENDS. This is why it’s so important to make sure your dividends meet the QUALIFIED status.

Do your best to hold shares for at least 60 days inside this cycle. Less taxes means more return.

An exception to these rules are REITs; they’re are always taxed as ORDINARY INCOME (A good reason to hold inside an IRA account!). I put all REIT’s in my retirement account to avoid the added taxes.

Another scenario to clarify the ex-dividend date:  One could hold the company through the ex-dividend and sell on that date (August 2nd) and still get the dividend. Since you held before ex-dividend, you are recorded as an owner of shares in the company, even though you sold the next day! I realize this sounds complicated. At the same time, it doesn’t have to be.

Most investors need not concern themselves with these scenarios, I’m presenting to hopefully bring a clear picture of the dividend. I do think everyone needs to understand the tax implications of the ex-dividend date before investing.


3)Date of Record

The date of record is when the list of shareholders who qualify for the dividend is made. This date is typically two days after the ex-dividend.


4)Pay Date:

Our favorite day, payday! This is the day you’ll see your dividend deposited into your account. Even though everything is automatic and computerized in today’s world, it’s a good idea to make sure you got your dividend.


I’ll close by saying it’s not a bad idea to have a calendar where you enter important dates for each stock, REIT or fund you own. I personally mark pay dates and ex-dividend dates in my calendar. As your portfolio grows to over ten stocks you will need a system of organization.

Here is the Youtube Video I made about Dividend Dates:

Dividend Investing

Why Dividend & Income Investing?

1)More Predictable and Stable-The market goes up and down; we have no way of knowing where it’ll be in the future. However, if you own shares in a company that has an annual dividend, then you can know what to expect with a high degree of certainty.
The only way this certainty is disrupted is if a dividend cut occurs. We’ll cover later how you can do your best to reduce the risk of dividend cuts.

2)Control of Allocation and Capital Flow-Some people prefer to reinvest dividends in the company they came from. However, this isn’t always advantageous. For example, I bought General Mills near the 52 week low, it’s currently at the 52 week high. I see GIS as overvalued; therefore, I’m not reinvesting it’s dividends back into the company. I take those dividends and use them to buy shares of the most undervalued or best-performing companies. I see this as a huge plus because you are efficiently moving the capital to the best place.

3)Less Time and Maintenance required-You’ll need to check on a dividend investment strategy less than a growth stock you are holding out for capital gains. There’s no need to sit and watch the market daily, anyone that’s done that knows it’s a good way to go crazy. At the same time, you will need to do your research in the beginning. An investment where you aren’t prepared to do the proper research will most likely be a bad investment.

4)Fees-Fees are less with dividend stocks than a Mutual Fund over time. Mutual Funds carry Expense ratios. These expense ratios don’t seem like much but over time they can add up, even fees as small as 1%. With a dividend stock, you only pay fees when you buy and sell. Since a dividend strategy tends to almost never sell, then you don’t have to worry so much about those fees.

5)Taxes-Yes, you’ll have to pay taxes on the dividends. At the same time, it beats being stuck in an unpredictable scenario and having to sell for a short-term capital gain, which is taxed more. Also keep in mind if you are in the lower tax brackets (Under $38,600 for single filers and $77,200 for joint filers), qualified dividends are not taxed.

6)Easier to measure your progress-If you receive $50 in June but three months later get $80, then it’s easy to see your progress. If you invest in stocks the typical way, you see $50 shares one week and $40 shares the next week and you are automatically discouraged and may even contemplate selling when you shouldn’t. Measuring your progress by the day to day or even month to month swings of the market can be nerve-wracking. I’ve had stocks fall 15% on a terrific earnings report only to go back in the green two weeks later! What if you had sold at the bottom? This is what happens to many investors. You can check my little spreadsheet here where I’m tracking my progress for an example:

You can check my little spreadsheet here where I’m tracking my progress for an example:

7)You can choose the sectors and companies-Unlike an index fund or ETF, you can choose where to put your dollars. Perhaps you know technology really well and would prefer to invest in tech companies, you can do that. Ideally, you can choose sectors you know the most about. Lastly, with an index fund, it’s not only buying the good but it’s buying the bad as well.


What are the arguments against Dividend Investing?

1)The dividend may be CUT-This is the prime fear of any dividend investor and is 100% correct. Kraft-Heinz is a perfect example of this happening recently. Even Warren Buffett, one of the greatest investors of our time didn’t see it coming. Always understand, ANY investment carries risk. It’s up to you to put those risks on the scale and weigh them out for yourself. I’ll say that the risks are greatly reduced when you investigate and evaluate a company. You must learn to concepts like Debt, Price/Book, Dividend Growth, Cash Flow & Reserves to evalute. The more the metrics look good, the less likely this happens. Keep in mind, some stocks have over 20 years of never cutting the dividend, look up DIVIDEND ARISTOCRATS. I personally believe the risk of a solid company with good books and a great history of paying dividends cutting its dividend is much less than hoping a growth stock moves up by a specific amount in the future.

2)Taxes-No one likes taxes and dividends held in a brokerage account trigger taxable income. If held in an IRA they are tax-deferred. REIT’s in particular, are a tax nightmare if held in a brokerage account; this is why I always put REIT’s in my retirement account.

At the same time, most dividend investors buy and hold, we don’t encounter short-term capital gain taxes. The impact of taxes is, of course, dependent on your income level. Those of lower income levels are in the most advantageous situation with dividend taxes, in particular once the dividends are QUALIFIED.

Finally, most investments trigger taxes, so unless it’s in a retirement account there’s no way to get around eventually paying taxes. The only difference with dividend investing is you don’t get to determine when you have to pay the taxes, dividends begat taxes today in a brokerage. If you hold a growth stock, you choose when to sell and incur that tax. If you hold it for 20 years, you only pay a tax after you sell. Please keep in mind there is no way of knowing whether taxes will be lower or higher at some point in the future.

3)Possible narrow focus on yield to the exclusion of everything else-Many dividend investors make no consideration to the financial shape of the company or the total return of their account. They get yield hungry. This is a good way to lose your money! If the share price drops from $45 to $5, what good is a 5% dividend? It takes decades to recover such a mistake. This is the risk inherent in all stocks, even dividend-paying stocks, you increase your risks greatly only chasing yield.

4)Diversification-If you only hold five dividend paying stocks you aren’t properly diversified. You’ll have to buy over 20 different dividend paying stocks to properly diversify and even then maybe it’s not enough. This is precisely why I recommend buying INDEX FUNDS in addition to dividend stocks.

Keep in mind Bond funds, ETF’s and Municipal Bond Closed Funds are diversification as well. A grave mistake many dividend investors make is believing they are diversified with a handful of stocks. I do believe Dividend investing can coexist with your basic Index investing. Dividend investors and Index investors like to wage wars on each other, I see no point in such thinking. I cannot recommend an investment strategy that only uses dividend stocks. I strongly believe there is a place for all investment vehicles listed above.

5)The necessary amount of money-Purchasing $100 of twenty different stocks is a bit silly with all of the fees associated with it. Hence why I believe a beginner is better off going with Index Funds until a certain capital and cash reserve is built up. One will need this many stocks because what will happen otherwise is you’ll have 4 stocks paying dividends one month, 2 stocks the next and 9 the next month. Your dividend income will be highly incosistent from month to month.

6)Not all companies pay a dividend-One could miss out on some great companies because they don’t pay a dividend. Amazon pays no dividend. I currently own Sterling Construction Company; it pays no dividend. I don’t believe a stock should be eliminated from consideration because they don’t pay a dividend.

7)Lack of growth-Not all but many dividend-paying stocks aren’t growing or are slow growers. If you are younger you should consider weighing your investments so you can capture more growth in addition to dividend investing. This depends on your goals. A good Index fund is a great way to capture growth in the equities market without risking picking a bad individual stock.

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