Investing 102

[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.

[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 AU Doc

5% is the number that came to mind for me. Though it's likely because it's something I've read somewhere in the past. I doubt I'm clever enough to come up with that myself It does make sense for the return to be at least high enough to account for inflation, which is less than 3% currently if my Google search is to be believed.

So all in you're looking for a return in the range of 7% to 14%. I guess the gold standard is to do better than the market, which will depend on the time frame you're looking at. I think historically that's going to be around 12%, or doubling your money about every 7 years. I could certainly live with that!

I don't know that I ever held myself to any particular standard..... seriously. What I'm trying to do is to create enough cash flow to more than cover living expenses and taxes.... and not dip in to the capital.

Generally there is capital appreciation over time (time is variable) with "most" investments (NOT BONDS)... and that is gravy in my eyes.

For most people - they're not yet taking the dividend to live on - and that's where the growth really gets accelerated. Taking the cash - and the growth, combined - is where the magic can really start. At some point then - you're retired (I've been for 24 years or something like that) and want to live on the cash created - which is where the accumulated pile needs to be sufficient.

If you figure (as I do) to average 5% dividend - and factor a 20% tax rate - then you're net cash is about $40,000 PER MILLION. Scary when you think about it really..... that if you're earning $150K a year now - you'll need 3 million invested to replace that spending.

This is why -- when you come to retirement - you don't want 20 years left on your mortgage....

[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

[AU Doc]

Originally Posted by GregWeld

..........
If you figure (as I do) to average 5% dividend - and factor a 20% tax rate - then you're net cash is about $40,000 PER MILLION. Scary when you think about it really..... that if you're earning $150K a year now - you'll need 3 million invested to replace that spending.........

Here's a question I've been chewing on for a while, if I put all of my retirement savings in an IRA, if I decide I can retire before 59-1/2 am I going to have to pay an additional 10% penalty every year until that 59-1/2 mark? If so, that's going to HURT!

EDIT: It looks like there is a way to make early withdrawals, but it carries some risk. There is the 72(t) Substantially Equal Periodic Payments (SEPP) option. It would require some planning to get it right, though.

[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?

[GregWeld]

Originally Posted by AU Doc

Here's a question I've been chewing on for a while, if I put all of my retirement savings in an IRA, if I decide I can retire before 59-1/2 am I going to have to pay an additional 10% penalty every year until that 59-1/2 mark? If so, that's going to HURT!

EDIT: It looks like there is a way to make early withdrawals, but it carries some risk. There is the 72(t) Substantially Equal Periodic Payments (SEPP) option. It would require some planning to get it right, though.

I have no idea and would only discuss questions like that with a tax professional.

I'm 64 now and don't withdraw from our IRA... nor do I add to it either - but I do have it entirely invested in high risk growth stuff. We don't need it - so why not try to have it grow until they force me to take it (70). My wife is only 60 and is also retired.... I want her to hurry up and get her Social Security. LOL ---- Seriously not really but I rib her all the time about it.

[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