Investing 102

[AU Doc]

Originally Posted by Stuart Adams

Greg,

Thanks for all you do in contributing to the site. This thread has been awesome.
Your broad knowledge and experience is awesome.

Agreed! This is a fun thread with a lot of high value information. I appreciate all the effort that has gone into it.

[GregWeld]

Originally Posted by Stuart Adams

Greg,

Thanks for all you do in contributing to the site. This thread has been awesome.
Your broad knowledge and experience is awesome.

Originally Posted by AU Doc

Agreed! This is a fun thread with a lot of high value information. I appreciate all the effort that has gone into it.

Thank you..... it's been fun for me as well. The thrill I get when I receive communication from someone that retires comfortably - or suddenly has some real savings/investments and is doing well on them - or someone that paid off their house early.... whatever.... that's a real high for me.

Retirement SHOULD BE the best time of peoples lives.... worry and hassle free... and should be the payback period for everything they've done in the past to get there. Having some money does, in deed, buy happiness.

[dhutton]

How do you deal with shrinking dividends as a percentage when stock prices rise? I started out with stocks that pay high dividends but the dividend percentage has shrunken over time. Do you sell them to buy stocks with higher dividends or do you hold them and live with a smaller percent on a higher value portfolio?

Hope this makes sense.

Thanks,
Don

[GregWeld]

Originally Posted by dhutton

How do you deal with shrinking dividends as a percentage when stock prices rise? I started out with stocks that pay high dividends but the dividend percentage has shrunken over time. Do you sell them to buy stocks with higher dividends or do you hold them and live with a smaller percent on a higher value portfolio?

Hope this makes sense.

Thanks,
Don

I think you're doing the math incorrectly!! Or at least I hope you are!


The dividend should only be calculated on YOUR COST basis. To do this --- divide the ANNUAL dividend paid - by your cost per share....

DON'T look at what it's paying currently on the price it's trading at today. What should really be happening is that your dividend PERCENTAGE should increase as they raise the payout - and your cost stays the same (unless you're adding to the shares at which time you need to calculate your new cost basis).

Does this make sense?

[AU Doc]

Originally Posted by GregWeld

I think you're doing the math incorrectly!! Or at least I hope you are!


The dividend should only be calculated on YOUR COST basis. To do this --- divide the ANNUAL dividend paid - by your cost per share....

DON'T look at what it's paying currently on the price it's trading at today. What should really be happening is that your dividend PERCENTAGE should increase as they raise the payout - and your cost stays the same (unless you're adding to the shares at which time you need to calculate your new cost basis).

Does this make sense?

Now that is something I hadn't considered. Assuming even a moderate increase in the share price and a static dividend, the dividend calculated at your cost basis could be quite high! I suppose the company could reduce their dividend to compensate and keep the payout flat.

With that in mind, I guess the screening tactic is to look for a stock with an increasing price and either a static or increasing dividend.

[dhutton]

Originally Posted by GregWeld

I think you're doing the math incorrectly!! Or at least I hope you are!


The dividend should only be calculated on YOUR COST basis. To do this --- divide the ANNUAL dividend paid - by your cost per share....

DON'T look at what it's paying currently on the price it's trading at today. What should really be happening is that your dividend PERCENTAGE should increase as they raise the payout - and your cost stays the same (unless you're adding to the shares at which time you need to calculate your new cost basis).

Does this make sense?

That’s entirely possible. I understand what you are saying. But here’s the way I was looking at it. Suppose I’m retired and my portfolio that cost me $1000000 is now worth $2000000 thanks to your awesome advice. The 5% dividends on the $1000000 cost basis is now yielding 2.5% on the current value of the portfolio. But because I am retired I would really like to see 5% on the current $2000000 value. So would it make sense to move into stocks that are paying 5% on their current value today, assuming I could find any that I understand and trust?

Hope this makes sense.

Thanks,
Don

[Flash68]

Originally Posted by GregWeld

Having some money does, in deed, buy happiness.

I see what you did there.... even if inadvertently, I like it. I like deeds.

[GregWeld]

Originally Posted by dhutton

That’s entirely possible. I understand what you are saying. But here’s the way I was looking at it. Suppose I’m retired and my portfolio that cost me $1000000 is now worth $2000000 thanks to your awesome advice. The 5% dividends on the $1000000 cost basis is now yielding 2.5% on the current value of the portfolio. But because I am retired I would really like to see 5% on the current $2000000 value. So would it make sense to move into stocks that are paying 5% on their current value today, assuming I could find any that I understand and trust?

Hope this makes sense.

Thanks,
Don

AH HA!! Yes that's a better question --- but hopefully you've also made certain that you know the real dividend percentage based on your cost.... Many (not always) dividend paying stock appreciate in lockstep with the dividend payout.... but I also totally get what you're asking about. I'm having this very issue with the last apartment complex I invested in!! It was a million dollar investment paying 7%..... so now the apartment is valued at almost double - so my capital appreciated but my payout is static.... thus - if I use your method it's paying me about half what I could try to make if we sold and took the capital gain.

Okay -- gets complicated and try not to trip yourself up!


Example --- you bought Altria (MO) 6 years ago and it's now doubled in value. Let's say you sell half - and create a LONG TERM capital gain. That gain is going to be taxed at 20%.... so you'll have "less than double" than you think you were going to have (can't forget about the tax man).... now let's use 10 grand as an example -- so now you really have 8 grand to re-invest.... and you want to earn that 5% on those "new money" investments.

Let's not forget to calc the current dividend on the actual cost basis.... you might find yourself making 8 or 9% on that holding -- and therefore you're really not going backwards - or earning half what you thought! Don't trip yourself up here! Do the math! Now -- if your investment has doubled in value and you're getting 9% on the actual cost - you're really getting about 4.5% on the current value.

Generally companies that are good investments INCREASE the dividend as they go along.... Just look at some of your current dividend payers and look at the 5 year chart and see if they haven't had nice increased payouts along the way. Those SHOULD continue....

Warren Buffet gets more in annual dividend today than his original investment in COKE (KO)..... think about that -- he gets back the entire investment every single year. Not a bad return....

Should you decide to sell that WINNER --- you're going to find yourself in the below dilemma....


YES YOU SHOULD BE DOING THIS generally as a matter of course..... I always TRIM investments and scoop the cash when they are in that 75 / 80 / 90 or more % growth in capital! That does two things -- it helps you further diversify - and it locks in a gain rather than riding it down at some point. Now - you may ride the new investment down or you may pick another winner and they BOTH double again and if the market goes down - they'll both go down -- but we're trying to be smart about it and get that money working and paying you. This is where investing gets hard!

The other day I sold a large chunk of NetFlex (NFLX) because I was up 107%.... it doesn't pay a dividend - it was a pure speculative growth play.... TAKE SOME GAIN!!! Nobody ever went broke taking gains!! If it still continues to steam ahead -- what's left will ride that train.... will I be sorry I didn't leave it all to ride? That's an individual choice. I like to take outsized gains and live to play another day. I scooped 80 grand.... I'll invest that in something and hope I picked correctly and it will still grow or better yet - I'll get 5% on the 60 grand I'll net. I look at it as FREE MONEY. The stock did exactly what I'd hoped it would do (grow like crazy) - it did - and therefore I should be happy.

I'm writing a book here...... but what I'm really saying is -- "it depends" -- depends on the situation.... if you're living off the dividends now -- and you have great capital gains -- and you've done the math - then SPEAK TO YOUR TAX MAN FIRST -- and make sure you're not doing something stupid tax wise..... then by all means take that gain and reinvest it in another cash cow.

Now --- I've been putting money in AMAZON (AMZN) -- it pays zero dividend... but the growth in capital has been stellar! Way more and way faster than a dividend payer. I have a few of those... this is, again, an individual situation. I earn way more than I spend - so I can "afford" to take a few fliers like that (Netflex - Amazon - Alibaba (just sold all of it) - Google etc)..... If a guy is young - so are these companies - to me they are the IBM and COKES and CHEVRONS of yesteryear..... is the market hot for them -- yes - will they sell off big time at some point? I'd assume so... there is RISK... but I'm not using them to live off of - now - or in the future.... I'm just playing and trying to make my money grow....

[dhutton]

Originally Posted by GregWeld

AH HA!! Yes that's a better question --- but hopefully you've also made certain that you know the real dividend percentage based on your cost.... Many (not always) dividend paying stock appreciate in lockstep with the dividend payout.... but I also totally get what you're asking about. I'm having this very issue with the last apartment complex I invested in!! It was a million dollar investment paying 7%..... so now the apartment is valued at almost double - so my capital appreciated but my payout is static.... thus - if I use your method it's paying me about half what I could try to make if we sold and took the capital gain.

Okay -- gets complicated and try not to trip yourself up!


Example --- you bought Altria (MO) 6 years ago and it's now doubled in value. Let's say you sell half - and create a LONG TERM capital gain. That gain is going to be taxed at 20%.... so you'll have "less than double" than you think you were going to have (can't forget about the tax man).... now let's use 10 grand as an example -- so now you really have 8 grand to re-invest.... and you want to earn that 5% on those "new money" investments.

Let's not forget to calc the current dividend on the actual cost basis.... you might find yourself making 8 or 9% on that holding -- and therefore you're really not going backwards - or earning half what you thought! Don't trip yourself up here! Do the math! Now -- if your investment has doubled in value and you're getting 9% on the actual cost - you're really getting about 4.5% on the current value.

Generally companies that are good investments INCREASE the dividend as they go along.... Just look at some of your current dividend payers and look at the 5 year chart and see if they haven't had nice increased payouts along the way. Those SHOULD continue....

Warren Buffet gets more in annual dividend today than his original investment in COKE (KO)..... think about that -- he gets back the entire investment every single year. Not a bad return....

Should you decide to sell that WINNER --- you're going to find yourself in the below dilemma....


YES YOU SHOULD BE DOING THIS generally as a matter of course..... I always TRIM investments and scoop the cash when they are in that 75 / 80 / 90 or more % growth in capital! That does two things -- it helps you further diversify - and it locks in a gain rather than riding it down at some point. Now - you may ride the new investment down or you may pick another winner and they BOTH double again and if the market goes down - they'll both go down -- but we're trying to be smart about it and get that money working and paying you. This is where investing gets hard!

The other day I sold a large chunk of NetFlex (NFLX) because I was up 107%.... it doesn't pay a dividend - it was a pure speculative growth play.... TAKE SOME GAIN!!! Nobody ever went broke taking gains!! If it still continues to steam ahead -- what's left will ride that train.... will I be sorry I didn't leave it all to ride? That's an individual choice. I like to take outsized gains and live to play another day. I scooped 80 grand.... I'll invest that in something and hope I picked correctly and it will still grow or better yet - I'll get 5% on the 60 grand I'll net. I look at it as FREE MONEY. The stock did exactly what I'd hoped it would do (grow like crazy) - it did - and therefore I should be happy.

I'm writing a book here...... but what I'm really saying is -- "it depends" -- depends on the situation.... if you're living off the dividends now -- and you have great capital gains -- and you've done the math - then SPEAK TO YOUR TAX MAN FIRST -- and make sure you're not doing something stupid tax wise..... then by all means take that gain and reinvest it in another cash cow.

Now --- I've been putting money in AMAZON (AMZN) -- it pays zero dividend... but the growth in capital has been stellar! Way more and way faster than a dividend payer. I have a few of those... this is, again, an individual situation. I earn way more than I spend - so I can "afford" to take a few fliers like that (Netflex - Amazon - Alibaba (just sold all of it) - Google etc)..... If a guy is young - so are these companies - to me they are the IBM and COKES and CHEVRONS of yesteryear..... is the market hot for them -- yes - will they sell off big time at some point? I'd assume so... there is RISK... but I'm not using them to live off of - now - or in the future.... I'm just playing and trying to make my money grow....

Thanks for the excellent detailed response Greg. The stocks are in my IRA so no tax implications when I sell. Most of the stocks I purchased when I started following this thread have more than doubled in value. I’m currently not making any withdrawals and hope not to for another 5 years when I’m 65.

Thanks again, this thread is pure win. It has literally been life changing for my wife and I.

Don