No Need to Own it All !

It seems many investors are in the mindset that in order to be properly diversified you have to own stocks in every single corner or subset of the market.

I was reading an article lately about Farmland Partners (FPI). The article was centered around whether or not FPI would be able to cover its future dividends or not because so many of their land leases were being terminated despite the fact that they have a 25% penalty for early termination. One of the commenters on the article stated that maybe people should consider owning (CUT) Guggenheim MSCI Global Timber ETF instead. Get real ! First of all you are paying middle men (which my readers know I despise) and second it has a yield of less than 2% !

This got me to thinking in an entirely different direction. Why would I want to own this REIT sub segment at all ? The fact is there are lots of areas that I shy away from in the markets. Some examples are most Retail, Airline Stocks, Railroad Stocks, Banks, and many others. I avoid these areas because I have learned for various reasons not to trust them as they can be very volatile, subject to high Bankruptcy rates, have below average dividend yields etc.

It seems many investors are in the mindset that in order to be properly diversified you have to own stocks in every single corner or subset of the market. This is not true. My advice is to give as much thought to the types of stocks you are investing in as to which stocks you are investing in. By avoiding segments that are traditionally low performing areas you can help to avoid potential losses in the markets. There  are no rules saying you have to buy these stocks just because someone dreamt them up.

While it is wise to invest in a diverse area of stocks it is equally unwise to invest in all areas of the stock market just to be in them. Only invest in areas that you believe will not only pay good dividends abut will continue to thrive. Be selective and cautious about your investments.

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Dividend Yield Levels

“Official” Dividend Stock Yield Level Chart:

What are the Dividend yield Levels of Stocks?

I know there has been no “official” categorization of Dividend Yield levels so I am taking it upon myself to attempt to give clarity to a subject that quite frankly has irritated me for many years.

As a Dividend Income Investor that invests in high yield stocks it just angers me to read articles that call a stock yielding 2% “high yield” ! Sorry, but it is a just one of those things that is so absurd it makes me angry every time I read something like that. So, in lieu of Anger Management classes I have decided to make up my own “official” chart for the classification of Dividend Stock Yield levels.

Many have asked the following questions :

What is a Normal Yield for a Stock?

What is a High Yield Stock?

What is considered a low yield Stock ?

So here it is:

“Official” Dividend Stock Yield Level Chart:

  • None Dividend Stock – No Dividend Yield – 0%
  • Extremely Low Yield Stocks – 0% -.9%
  • Low Yield Stocks – 1.0% – 1.9%
  • Normal Yield Stocks – 2.0 % – 3.0%
  • Moderate Yield Stocks – 3.1 – 4.9%
  • High Yield Stocks –  5% – 10.9%
  • Extremely High Yield Stocks – 11% & above

 

I believe you will find this chart useful in that it gives clarity to the classification of stock dividend yields. So the next time you read an author that states that a yield of 2.5% is “high Yield” please feel free to promptly correct them and refer them to this “official” dividend yield chart!

 

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Market Sectors

“Market sectors are especially important to investors trying to make sure your portfolio is well diversified”

What are the different Sectors of the Stock Market ?

There is no consensus on what constitutes a Market Sector but we are listing the major sectors and sub-sectors of the Stock Market. Market sectors are especially important to investors trying to make sure your portfolio is well diversified. By purchasing stocks from differing sectors you help isolate your portfolio from large losses should a particular sector experience a “bubble” ( a phenomenon that occurs when a particular sector is extremely overbought, usually due to speculators). It is advisable for investors to buy stocks in every major sector of the market if you can, while nothing will help with a general market downturn it can help stabilize your portfolio during turbulent market sector volatility..

Stock Market Sectors with their respective sub-sectors:

Technology Stocks

  • Internet Stocks
  • Software & Services
  • Applications
  • Networking
  • Semi Conductors & Microchips

Commodities & Basic Materials

  • Agriculture& Cattle
  • Basic Materials
  • Metals( Aluminum, Gold, Silver , Steel, Copper ..)
  • Chemicals

Energy

  • Oil & Gas
  • Refineries
  • Pipelines & Storage
  • Coal
  • Machinery & Support Services

Healthcare

  • Pharmaceuticals & Drug Manufacturers
  • Biotechnology
  • Medical Appliances & Equipment
  • Medical Laboratories & Research
  • Medical Instruments & Supplies
  • Healthcare Diagnostics
  • Hospitals
  • Medical Research

Financials

  • Banks
  • Investment Brokerages
  • Property & Casualty Insurance
  • Accident & Health Insurance
  • Life Insurance
  • Credit Services
  • Asset Management

Consumer

  • Discretionary – Leisure & Entertainment…….
  • Non-Discretionary – Autos, Food,Beverages ……..
  • Tobacco, Alcohol Products

Industrial

  • Machinery
  • Aerospace & Defense
  • Electric Equiment
  • Farm Machinery
  • Lumber & Wood
  • Small Tools

Telecommunications

  • Telephone Services
  • Internet Services
  • Entertainment Services
  • Cable TV

 

Utilities

  • Electric Utilities
  • Gas Utilities
  • Water Utilities
  • Renewable Utilities
  • Diversified Utilities

Transportation

  • Airlines
  • Railroads
  • Trucking
  • Shipping

Services

  • Entertainment
  • Home Improvement
  • Restaurants
  • Delivery Services
  • Mail & Internet Orders
  • Delivery Services
  • Department Stores
  • Specialty Stores
  • Grocery Stores
  • Casinos

REITS & Real Estate

  • Agriculture & Land REITS
  • Data Center REITS
  • Diversified REITS
  • Healthcare REITS
  • Industrial REITS
  • Infrastructure REITS
  • Lodging REITS
  • Office REITS
  • Retail REITS
  • Residential REITS
  • Specialty REITS
  • Storage REITS

 

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Three Types of High Yield Stocks

“So what are you waiting for ? Put some high yield into your portfolio and boost your income performance today.”

Some people are so afraid of High Yield Stocks that they shy away from them. The end result being that they have cost themselves thousands of dollars in potential income.

The thinking goes because most of the blue chips only pay 2-3% in dividend yields and the average for the S&P 500 is around 2.5% that anything beyond that is “High Risk.”

Being prudent and cautious in the investing world is a good trait but come on folks, use a little bit of common sense also ! Why don’t “Blue Chip” stocks pay higher dividends then? The main reason is because these stocks are highly desirable and the demand for the stock drives up the stock price and the higher the stock price, well it cause the yield to decline. Another factor is that these behemoths are for the most part very mature and as such grow slower that the younger, smaller and more nimble companies. There really is no comparison.

There are basically three types of high yielding stocks:

  1. They are in naturally higher yielding sectors. Example of these are REITs, MLPs, or BDCs. All sectors known for paying out higher yields. Other examples are Tobacco stocks, and communication stocks, think Phillip Morris, AT&T, and Verizon.
  2. Stocks that are in sectors that for no reason of their fundamentals have found themselves in an “out of favor” scenario with investors. Now admittedly you may want to take a very close look at these stocks first, but this is where you can usually pick up some bargains and buy stocks at higher yields than normal. An example is when a whole sector of stocks are out of favor for one reason or another. An example is tobacco  stocks. At one point everyone thought for sure tobacco was going away but the brave souls that stepped up and purchased the stocks are much wealthier for having the guts to buy them. Another are was the coal stocks, I myself saw 50 to 150% gains on these stocks because everyone convinced themselves that coal stocks were doomed. (And they might be in the very long run, but short term I knew coal could not go away over night) Just a little common sense and you could see how impossible and impracticable it would be to replace coal plants. Things like this takes years and decades to play out.
  3. The third type of high yielding stocks are the ones that are out of favor because of their poor company fundamentals. These of course are the stocks you want to avoid at all costs if you can. Leave the purchasing of these stocks to speculators and gamblers because you will not receive warning before they go bankrupt and rest assure the bigger players will always get out ahead of you and you will be left with nothing but memories.

So in my  opinion it is not only okay to seek out higher yields it is highly desirable. Even when I am purchasing “Foundation Stocks” and all things are equal I ALWAYS pick the stock that has the higher yield. Even a quarter or a half a percent can make the world of difference over a long period of time.

When purchasing stocks keep in mind your desired total yield for your portfolio. If you desire a 10% overall yield for your portfolio then seek out stocks that are at or near that yield. But when doing doing keep in mind why is it at that high of a yield. Is it simply because of a sector selloff  because there is a temporary factor that is causing the sell off? Is the stock in a normally higher yielding sector such as a BDC (Business Development Company) or a REIT (Real Estate Investment Trust ) ? Or the one you  have to be concerned with – because of the companies underlying fundamentals.

So bottom line – I don’t have any qualms about investing in higher yielding stocks but I am very careful and selective about it. It takes a little patience and a little more effort but the reward is certainly worth it. For an example say you have a portfolio producing 3% in income and you can push that up to 6% – well, look at the results:

$100,000 x 3% = $3,000 per year or $250 per month.

If you double that

$100,000 x6% = $6,000 per year or $500 per month.

And triple :

$100,000 x9% = $9,000 per year or $750 per month.

Now which one would serve you better? Personally I would choose the $750 per month in income ! Yet, very few do, because they have the misguided illusion that they will lose their money if they even attempt to invest in higher yielding stocks. In reality it is costing them big time not to invest at least a portion of their portfolios in higher yielding stocks.

I also want to briefly touch on one of the arguments against high yields. Many will argue that the stock cannot possibly sustain that high of a dividend. Well I have been doing this for many years now, and I can attest that most of the stocks I pick do in fact sustain their yields. One of my reasoning’s was that even if a particular stock cut it’s dividend 50% say from 9% to 4.5% it is  still a higher yield than the 3% stock ! Sure I have had a few disappointments with my methods but I am not married to the stocks. When a stock disappoints me I simply sell it and replace it with another stocks that has my desired yield. In many cases they are replaced with a yield that is even better than the original stock.

If this seems like something you would like to try for yourself but you are scared then what I would suggest is that you open a brand new brokerage account and use it to experiment  with. In this way you can limit your risk and it will give you a clear indication as to whether or not you can make it work for you. I would suggest picking maybe 5 stocks at most in a couple different sectors.

A sample pick of stocks might be:

  1. Whitestone REIT (WSR) – 10% – REIT
  2. Newtek Business Services (NEWT) – 9.1% – BDC
  3. Omega Healthcare Investors (OHI) -7.3% – REIT Senior and Assited Living
  4. Starwood Property Trust (STWD) – 8.88% –  REIT Diversified
  5. Vector Group (VGR) – – 7.64% – Tobacco & Real Estate

Note: Yields effective – May, 2017

So what are you waiting for ? Put some high yield into your portfolio and boost your income performance today.

 

 

 

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Keep Your Focus on the Objective

“Sometimes investors lose sight of what their objectives are”

Sometimes investors lose sight of what their objectives are. Yes, it is hard to believe I know, but even hardcore Dividend income Investors find it hard to remain focused one hundred percent of the time. This can be especially true when you see the value of your portfolio dropping like a rock.

This past couple of weeks have been especially trying for me as I am heavily weighted in REITs and other stocks that for what ever reason have been in steady declines. Our first instinct as human beings is the “Flee or Flight” response and perhaps from my own observation this tendency is a self preservation technique for most species. Given an opportunity I believe most of us as well as most animals choose to Flee when confronted  with danger. And this response makes a lot of sense when you stop and think about it. Fighting should be the last choice because of a great number of reasons not the least of which we might lose our life in the process. As Investors though, this is most  likely the wrong choice to make. We should usually decide to stand our ground and “fight”.

If you stop to think things out you can begin to focus on the right decisions even in the majority of the most trying times. Ask yourself just a few simple questions.

  • Why did I invest in this stock?
  • Has anything changed that would have persuaded me not to invest had I known prior to purchasing the stock?
  • Have I lost faith in the company and its fundamentals?
  • Will it still provide me with the income I expected?
  • Is it just this stock declining or the whole sector that is pulling back?

Why would I sell a stock just because some investors have decided that this sector might not do as well over a short period of time? Investors in general tend to panic and over-react to most situations. Other investors have different objectives than you do. If you are a Dividend Income Investor your objective is to generate high income. IF the other investor is a trader they make money by trading in and out of stocks  to maximize their profits and timing is very important for them. If you have a stock that is generating the income you desire and the fundamentals are still sound and the outlook for continuing that income then why would you want to sell?

When Stocks are on Sale – Go Shopping !

If you stop and think about it this is exactly the time you should be making stock purchases – not selling stocks. Why is it that when a stock drops in price the majority of investors run for the exits and sell their share? If you were at a regular store shopping for items you need would you turn and run out of the store because the store announce those products were now on sale for 5, 10 or 25 percent off? Of course not. buying stocks when others are selling gives you advantages over the others. You are purchasing the stock with a lower cost basis and at a higher yield than normal. Both are great for the long term.

As an example let’s look at the returns of a stock that normally yields 5% and because the stock drops in value you can now purchase it for 6.25%:

We invest $10,000 into the 5% yield of XYZ. The shares are valued at $50 and pays a dividend of 2.50 per share.

$10,000 would buy 200 shares and would provide you with $500 per year in income.

Now the same XYZ stock drops down to $40 per share and is now yielding 6.25%

$10,000 would purchase 250 shares and would provide you with $625 per year in income !

So the motto oft his story ? Stay Focused and keep your sight on what your true objectives are. it is easy to get caught up in the hype and the panic of others but if you just stay calm, take a deep breath and make the “Logical” choice as a Dividend Income Investor you will be rewarded for years to come !

 

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Unlucky becomes Lucky !

“but I will tell you that I was just plain Lucky on this one.”

This is a personal experience I had with the GEO Group stock and how I went from one sad hombre to one very happy hombre !

It was the morning of August 18th , 2016 if memory serves me correctly. I had been looking for another stock to add to my portfolio. As a Dividend Income Investor of course I was looking for a higher yielding stock but I was also looking for an area that was unique to my portfolio and was a solid company. After researching The GEO Group (GEO) I liked what I saw. First what they are about, here is a quote from their website in the companies own words:

GEO provides complementary, turnkey solutions for numerous government partners worldwide across a spectrum of diversified correctional and community reentry services. From the development of state-of-the-art facilities and the provision of management services and evidence-based rehabilitation to the post-release reintegration and supervision of individuals in the community, GEO offers fully diversified, cost-effective services that deliver enhanced quality and improved outcomes

The GEO Group operates 143 correctional and detention facilities world wide. In the U.S. they have 74 facilities that contains over 80,000 beds with over 100,000 beds world wide. In the U.S. the have contracts with 3 Federal clients and with 10 states and several localities ( cities and counties) Internationally they operate 7 correction facilities  located in Great Britain, South Africa and Australia.

In addition they operate 50 Residential Reentry Facilities, 61 Day Reporting Centers (DRC) and 12 Residential Youth Facilities.

For financial information I suggest visiting their Investors Website.

So getting back to my personal story I thought everything looked great. It was certainly no Johnson & Johnson (JNJ) but with a yield that exceeded  8% at the time it looked fantastic for me. I didn’t know at the time but a lot of people think it is wrong for governments to have private prison and correctional facilities. I’m not sure it would have influenced my decision though because I am agnostic on the subject.

I waited for the market to open and it looked like a calm market day so I submitted my order to buy 185 shares at $32.31 per share. Just under $6000 worth of stock. I guess about an hour later I took off for my lunch break. I was hungry and it appeared to be a non eventful market day. I had  a great lunch, (sorry for those wanting to know, I do not recall what I had! ) and the day seemed good.

I have to share that it is not unusual for a stock I purchase to decline for a day or two or even for a week or two after I purchase it. I have learned to expect that about 99% of the time I purchase a stock it will decline in value for a period of time. That is what I believe is my own personal luck. But never has something like what was about to unfold ever happened to me before.  It was when I returned from lunch that all Hell broke loose! I looked at my computer screen and I could not believe my eyes. Everything looked fine except for the stock I had just purchased that morning – The GEO group! While I don’t recall the exact price that morning the stock I had just purchased now had a total value of about $2,500 dollars. Less than half of what I had paid for it just a couple of hours earlier. What in the heck had happened? I quickly went into full blown panic mode. Should I sell what was remaining ? What had happened? I didn’t know. I immediately started searching the internet and the financial sites to try and figure out what had happened and try and piece together a strategy before I lost every penny of the stock.

Finally I discovered it. The Obama administration had announced its intentions to no longer contract private prisons. Okay, now I had a reason but I still did not know what to do. Sell the stock, buy more stock (it ended up at over a 12% yield) or just do nothing and sit on the stock I had. I spent well into the next day trying to figure out what to do and reading every article or comment I could find to try and gain guidance from others. Unfortunately most of the investors seemed to be strangely quite on the stock. Usually these folks are out boasting that they know everything in the universe and the rest of us are lucky to be on the same planet with them, but this time …… Crickets!

I have to say the greedy part of me was saying, “Double down, buy more stock, the yield is over 12%!” But the more reserved and sensible side of me was saying just stay the course. Don’t risk any more money but have faith that this stock would recover. So that’s exactly what I did, nothing.

The stock did recover somewhat but it wasn’t until President Trump won the election that the stock skyrocketed, not only to recover to the price I had purchased it at but over ten dollars a share higher. Recently the GEO stock split in a 3:2 split. Now as of today, 2 May 2017 I have 277 Shares of the GEO stock , its share price is $33.00 per share and the total value of the stock is $9,141 ( Not counting dividends received).

Now I am sure that some out there will try and convince you of their genius ( and just maybe they are) but I will tell you that I was just plain Lucky on this one. The only thing I will take credit for is taking a somewhat calm approach once the initial panic and shock wore off and going with my gut instincts. There is a part of me though that still thinks I should have been greedy when the others were panicking, but when things happen that fast it is very, very hard not to follow the herd and stampede with them. For those they did buy the stock when it was yielding over 12% – congratulations. I hope you also had the foresight to hold on to it through the split and are now reaping those rewards also.

Investing is easy, except when it isn’t. If I had panicked and sold I would have lost almost $3,500 instead I made almost $3,500. What is the lesson here? I think the lesson is that you have to remain calm, and think things out rationally. Making panicked decisions will cost you money and make you a poor investor. Each time something like this happens it should be a learning experience for you. None us knows everything and if you think you do, someday it will cost you.

 

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My Daughter Did Not use her College Funds for College!

“what if you took the Dividend Income Investor philosophy and applied it to paying for college?”

Many people take the student loans and use them to live on , pay for college expenses and quite frankly, to party for four years. What they end up with is hopefully a degree that they may or may not be able to use towards finding a job and tons of personal debt.  But what if you took the Dividend Income Investor philosophy and applied it to paying for college? You know the “Golden Rule of Investing” which basically says don’t spend your money. As a Dividend Income Investor we know that the best use of money is to produce income.

I have convinced her the best way to start college is at the community college level. It is much cheaper, she can live at home and is spared the expenses of living somewhere else. So her first two years will be much cheaper than going off to some far away college. The second thing we talked about is going to school to develop a career opportunity not to just go to college without direction. Fortunately she has it narrowed down to two choices, both of which can be completed in two years and pay well. Her choices are Dental Hygienist and Registered Nurse. Both are offered as two year programs at out local community college. This way after two years she has a great income coming in and should she decide to pursue a 4 year degree she has a way to support herself while doing so. I know a lot of people think it is impossible to pay your way through college and I say they don’t know what they are talking about. I had one person tell me I did not understand how expensive college was now days and I could not do so if I were getting a degree in today’s world. First, I will admit , College has become more expensive than it should ever be but saying it cannot be done is just an excuse by someone who is misinformed or maybe just a little lazy. (I’ll let them judge themselves as to which one applies) .

Here’s my daughter’s plan. She has 23,000 saved for college and has another $2,000 in a separate account. In addition her grandfather is giving her $10,000 each year to help fund her college. I have talked to her and we will put the entire amount into a brokerage account with Dividend paying stocks. Her yield will average 9%.

So the first year – $35,000 in stocks are purchased – This will produce $3,150 per year in Dividend Income. Her tuition will be $160 per semester hour and her degree requires 69 semester hours so the total amount for tuition is $11,040. Of course there will be other expenses like books and lab fees. She has to attend 5 semesters so the average amount of tuition is $2,200 per semester or $4,400 per year. Just $1,250 shy per year but she will also get a part time job. If she works 20 hours per week at $10 she can earn about $200 per week or $800 per month, and in just three months she has earned the rest of the required tuition.

When she starts her second year of college she will get another $10,000 from her grandfather – So now she has $45,000 invested and bringing in $4,050 per year in income or $337 per month. Add this to her part time job and she has finished her first two years of college, has a degree in Dental hygiene or Nursing and Can go to work earning much more money. She not only owes nothing to anyone but she still has her $45,000 invested and is earning income from it. Also her grandfather will give her $10,000 for the third and fourth year of college so it will grow to $55,000 and the start of the forth year to $65,000. At this point her Dividend Income is $5,850 per year or $487 per month ! At this point she has – A 2 year degree, A great Career, No debt , a great start on her Investments, and a very good start on Dividend Income.

Okay so you say “but my daughter does not have a grandfather giving her $10,000 per year for college”. I thought you would never ask. The same scenario applies but using various types of student loans both private and federal.  Because of the interest rates on the loans and you have to pay them back you will not have as much left at the end of school but you can still come out ahead by investing the money and only paying for college out of Dividend income. Another way is to work more hours during school breaks and summer vacations. Or try and save more towards college before she starts to have an advantage in that respect.

There are tons of ways to eliminate college debt or reduce it substantially but one thing is certain you have to be an active participant in the finances of your education. To allow your child to make the mistake of accruing massive debt from his or her education is irresponsible parenting in my opinion. There is no need to start ones life off struggling to pay bills.

Thoughts or comments ? I would love to hear from you.