Tag Archives: investment strategy

Due Diligence

Whenever you come across a company that you’re interested in investing into it is best to make sure that you do your due diligence before you invest. The reason you want to do this is to:

  1. Minimize the risk of losing your investment. All investments have an element of risk associated with them. But a smart investor wants to minimize that risk.
  2. Know something other than the company’s name and stock price. How is the company doing? Is it a good investment? This last point is based on your pwn investment criteria.

In order to do either of the above you need to access the company’s fundamental information. From there you need to be able to calculate certain benchmark data. There are many benchmark calculations that are suggested but in this post I will highlight the ones from the Income Statement. I may not look at all of these but these are the most common ones investors suggest.

  1. Net Revenue (Revenue – COGS)
  2. Gross Profit Margin (Gross Profit – Operating Expenses)
  3. Operating Margin (Operating Income /Revenue)
  4. Post-Tax Income (Pre-Tax Income – Income Tax)
  5. Net Income Margin (Net Income/Revenue)

I may not check each and everyone but I am interested in a company’s Gross Profit and their Net Revenue. This tells me how well the company is doing in its market niche and how well they are managing/controlling their operations. The benchmark for these is up to each individual investor to establish. I usually don’t calculate these for single companies but as a comparison between multiple companies.

I have limited funds available to invest so that if the other criteria benchmarks are relatively close with each other I use these benchmark data to narrow down my selections. The reason that I use benchmarks, even though I am a dividend investor and growth in stock price is secondary, because I want to make sure that the company will be around for the long-term. I’m not looking to invest for the stock price to jump up within a relatively short time. I’m looking to capture a passive income for the long-term. Once I buy a company stock I’m reluctant to sell unless the company cuts their dividend payout 2 times.

Here are some other calculations you can use to narrow down your selections:

What is my investment strategy?

In discussing investments with others I am asked what is my investment strategy? I am going to try to outline my strategy here but you must remember that the strategy is a bit broad and in special cases I will make exceptions to certain criteria.

I only invest in:
1. Long standing, existing businesses. I tend to avoid emerging/startup companies and IPO’s.
2. Companies that pay dividends. This is the rule that is pretty much set in stone. No dividend then no investment from me.
3. Companies that have a dividend yield of between 2.5 to 5%.
4. Companies that have at least a 5 year history of dividend payouts.
5. Companies that show a positive dividend growth.
6. Companies that are rated at Average or below in risk and Average and above in returns.
7. Companies whose stock price allows me to maximize the quantity of share that I own.

The above points are all relative. Such as the dividend yield. If a company is paying out a dividend of $6/share and it’s stock price is $200, this gives me a yield of 3%. This passes my criteria.for dividend yields but does not pass my ability to maximize the number of shares that I own because I am limited by my investment budget. If I have only $200 to invest each month, buying the one stock for $200 only gets me that 1 share. But if I can buy another stock that sells for $50/share and pays 3% dividend yield I can get 4 shares. The dividends I can get will be the same for both at $6 but when I re-invest the $6 I can only get 0.03 shares of the $200/share stock but 0.12 shares of the $50/share stock. I try to maximize shares owned and maximize dividends earned.

I am focusing on the growth of my stock investments based on share growth in addition to any increase in stock price value. Share growth is more critical to me than share price growth. I will increase my position with a specific stock if the share price drops or increases no more than 10%. If the share price increases more than 10% I will just hold and wait for the next DRIP.

I’ll be detailing my different strategy points in later postings.

Rule#1 by Phil Town

This is another book that I seriously recommend that you read. The book is called Rule 1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week! written by Phil Town.

In this book Phil Town goes through the different calculations and math of determining the best investments that meet your strategy and criteria. He expalins things in terms that anyone can understand. He also explains how he’s used the different calculations and what his criteria is that he used. This book is one that every newbie investor must have in their library.

The Money Game

As as newbie investor (I just got seriously started this year) I make a point of finding books and articles that are informative and allow me to learn more about investing. One such book is The Money Game by Adam Smith.

I came across this book and got interested because it deals with Wall Street and how it functions. It details stories about people making money on Wall Street. A way to learn is to understand how others have made their money on Wall Street and then try to apply certain aspects of their strategy to our own.

I Like REITs

You can’t swing a dead cat on the internet or investment groups without getting someone to tell you that you should invest in this stock or that stock. For myself, still being an investment newbie, I tend for discuss generic investments. One of those that I am drawn to is REITs (Real Estate Investment Trust). I can’t afford to go out and buy individual real estate property so the next best thing are REITs. When I was in the real estate industry I was always told that real estate was a finite commodity. New land was not being created/manufactured. True.

So, why do I like REITs? They invest in most major property types with nearly two thirds of investment being in offices, apartments, shopping centers, regional malls, and industrial facilities. REIT shares are bought and sold on a stock exchange. Buying actual property is more involved and usually needs to have additional parties included in the transaction process. Picking a REIT is less stressful than trying to pick a property to buy. Depending on which REIT you decide to invest in, it can be a low-risk & high return investment. Don’t misunderstand me, you can’t just pick any REIT to invest in, You need to do your due diligence and learn whatever you can about the REIT. Does it’s business focus on buying & managing properties? Or are they focused on originating mortgage loans and servicing them? Maybe their business is trading in mortgage backed securities. I tend to lean toward REITs that own and manage properties but won’t shy away from those that originate mortgage loans. I prefer those that deal in commercial and industrial properties. I own 2 REITs –

$ABR – operates as real estate investment trust, which engages in the provision of loan origination and servicing for multifamily, seniors housing, healthcare, and diverse commercial real estate assets. 
$ACRE – engages in originating and investing in commercial real estate loans and related investments.

Tax issues for REIT investors are fairly straightforward; REITs send 1099-DIV to the shareholders which contain a breakdown of the dividend distributions. Because REITs do not pay taxes at the corporate level, this leave more of the profits for distribution as dividends BUT the investors are taxed at their individual tax rate for the ordinary income portion of the dividend.

There are some drawbacks to REITs. The current COVID-19 pandemic can have adverse impact on the ability to collect rents. Also, changes to local property taxes can impact the REIT’s operating costs. I’ve never heard of property taxes ever going down. Another downside is that taxes are due on dividends, and the tax rates are typically higher than most dividends are currently taxed at. This is because a large chunk of a REIT’s dividends (typically about three quarters, though it varies widely by REIT) is considered ordinary income, which is usually taxed at a higher rate.

That said, I still like REITs but my portfolio isn’t too heavy in them. Pertaining to real estate I also own a real estate ETF ($VNQ). This allows me to own shares in many different real estate properties (i.e. $PSA) and REITs (i.e. $AMT) at a price I can afford.

Why I Never Recommend Stocks To Buy

I’ve only been investing a short time but as I’ve been trying to learn what I can about dividend investing, I’ve been coming across many posts and tweets regarding what stocks to buy. What I haven’t seen is how to decide which stocks to buy. It would go a long way if those that post stock recommendations would also give an explanation on how and why they come to recommend that specific stock. There’s an old saying:

Those people posting their stock recommendations without any explanation or method of how they got there are giving out a “fish”. Some people will blindly follow but never know why. Their only reason for selecting that particular stock is that “someone recommended it”. Hmm. How does that help you go forward? How can you move forward to deciding which stocks to invest in next? How well do you know the person giving the recommendation? What is the recommender’s agenda? Lots of questions come to mind.

We also have those that recommend lists of stocks to watch. Watch for what? What are we supposed to look for? Why should we be watching these stocks? Again, what is the poster’s agenda? When I get recommendations from my broker/financial advisor, they are based on my financial goals and broad selection criteria. Without an explanation of how they came to recommend these specific stocks you could miss some opportunities because you may not be looking at the same things that they are because their strategy is different than yours.

But if you give people the methodology of how you came to recommend these stocks you now are at the point of “teaching to fish”. Because now they can try to replicate your steps and maybe modify them to their strategy and decide on their own which stocks to buy. Telling me to buy a specific stock because it pays extremely high dividends is not useful by itself. There is more to my strategy than just dividends paid out. I’m not a one dimension investor.

Whenever I see the stock recommendation postings I always wonder “What is the poster’s agenda?” What are they after? I won’t recommend stocks. I will, however, detail a decision that I made about a specific stock or between 2 different stocks. I’ll explain what I looked at and what data was important to me and how my decision falls within my investment strategy.

VDE vs. QYLD

I’m always on the lookout for ETFs to add to my investment portfolio. I came across 2 that I thought were possible candidates. Because I have a limited amount of money to invest, I tend to limit myself to 1 stock investment during my investment period. Currently, my eye is on these 2. Both are consistent performers in term of dividends.

  1. VDE (Vanguard Energy ETF) – VDE tracks a market-cap-weighted index of US energy companies. The index includes those companies deemed investable by MSCI and covers 98% of the market. The fund invests in stocks of companies operating across energy sectors. It invests in growth and value stocks of companies across diversified market capitalization. This fund will allow me to diversify my portfolio to include energy stocks. As the name implied, this fund was created and managed by Vanguard (which I tend to prefer) back in 2004. Cost ratio is around .10%, which is a bit higher than I prefer. The fund is designated as an average risk (all investment entail a certain amount of risk, nothing is a sure thing). And lastly, the key factor to me is the dividend yield and dividend payout which is 5.69% and $2.74, respectively. The 5 year growth rate is a modest 4.73%. The current share price is $48.46. Which would not allow me to maximize my share ownership with my limited funds. $100 investment would only get me 2.06 shares. At the current dividend payout amount this would give me $5.65 in dividends.
  2. QYLD (Global X NASDAQ 100 Covered Call ETF) – The investment seeks to provide investment results that closely correspond, before fees and expenses, generally to the price and yield performance of the CBOE NASDAQ-100® BuyWrite V2 Index (the “underlying index”).The fund will invest at least 80% of its total assets in the securities of the underlying index. The CBOE NASDAQ-100® BuyWrite Index is a benchmark index that measures the performance of a theoretical portfolio that holds a portfolio of the stocks included in the NASDAQ-100® Index, and “writes” (or sells) a succession of one-month at-the-money NASDAQ-100® Index covered call options. It is non-diversified. The cost ratio is around 0.60% (a bit high for me) but the dividend yield and payout are 11.78% and $2.55, respectively, which is better than most % yields. There is no data for the 5 year growth rate. The investment risk is above average but the return is considered high. This fund was started in 2013. Lastly, the current share price is $21.69. This is a better price in terms of maximizing share ownership. $100 investment will get you 4.61 shares. At the current dividend payout amount this would give me $10.97 in dividends.

From the start I’m going to tell you that I like Vanguard funds and tend to gravitate toward them. I’m not saying that Vanguard funds are better than Fidelity or others, just that I like them better than the others. Another factor that goes into my decisions is that I try to avoid risks in my investments. All investments have a certain level of risk associated with them and I try to minimize those whenever I can. I tend to stay away from high risk investments and investment activities (i.e. day trading, value investing, etc.) for no other reason that I’m at an age where I may not have the luxury of recouping any losses that I incur. Again, with all investments there is always a possibility of incurring losses but those, again, I try to minimize/avoid. I don’t gamble. I live in an area where I am no more than an hour away from a casino, yet I can’t remember that last time I was in one.

Another factor that affects my decisions is that I love dividends, consistent dividends. If one of my funds cuts their dividend payout two time within the same period, they become a prime candidate for me to sell. I’m in it for the income. My goal is to replace my current wages with income from my investments so that I can stop having to get up and go to work. Additionally, if I should die the income from the investments, if left alone, would be enough to sustain my wife. So I like dividend investments with dividend that pay consistently and grow.

So, based on many factors and data, including my investment goals and preferences, I’ll probably go with VDE.

This is NOT a recommendation to buy or not buy a certain ETF stock. This post is just a collections of information and thoughts that I had when I was going through to determine which ETF stock to invest in. This post is not intended to be any kind of financial analysis for evaluating specific ETF stocks, other than for myself and to show others what kind of evaluation I go through.

Avoid the pitfalls of investing

What Stock Should I Buy?

This question is one that I see all the time on different groups and social media. This comes from people who have experienced a financial windfall and have decided to have that money work for them. Some don’t give any additional details about their current finances so it’s hard to determine if investing that money is the optimal move for them or not.

But let’s presume that the person’s financial situation is stable and they are not in financial distress personally. Then the move to invest is the right move but the question is wrong. Why do I say that it is the wrong question? Because a better question would be “HOW do I decide which stock to buy?”. That would be a much better question. It’s a better question because, unlike the first question, you’re looking to gain insight and knowledge about stocks so that YOU can decide which stock to buy.

The first question is asking for the answer to be handed to you, and thus, you end up following someone else’s agenda and strategy instead of your own. Remember the old saying. “Give a man a fish and they’ll eat for a day, teach a man to fish and they can eat for the rest of their life”. This applies even more with investing. It’s your money and it should work for you and not for someone else. What good does it do you if you get the investment information from someone else but you don’t know why you should buy that particular stock and how it fits into your own strategy? The first question precludes you even having a strategy.

But when you ask “How do I decide which stock to buy?” you’ll be able to hone your own skills and fine-tune your strategy. Because you’ll earn something you didn’t know before. If you already knew, you wouldn’t be asking the question. Before you can learn WHAT to buy, you need to learn HOW to buy. Before you can pick a stock to buy, you need to learn how to pick a stock. Basics.

If you don’t have an investment strategy the question “How do I decide which stock to buy?” will go a long way to help develop one by seeing what others are doing and determining which ones help meet your goals. The first question “What stock do I buy?” doesn’t do anything other than just spend you money without knowing why and is just a 1 shot deal.

Why I Prefer Mutual Funds & ETFs

As I mentioned previously, before you start investing you should spend some time learning the different options available to investors. One option is to invest in stocks. Another is to invest in mutual funds and ETF (exchange traded funds). Just so you have a basic understanding of those 2 options, let me recap:

ETF – “An exchange traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. ETFs are in many ways similar to mutual funds; however, they are listed on exchanges and ETF shares trade throughout the day just like ordinary stock.”

Mutual Funds – “A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.”

I prefer these because they include multiple stocks, not just a single stock. If you buy one stock and its share price tanks or the company ceases to exist then you have nothing. With mutual funds and ETFs there are multiple companies within the funds so if one starts to tank it can be replaced with a better performing one. You don’t lose that much value or shares.

With a single stock if the company decides to split its shares your stock price get diluted (price per share goes down). If the company does a reverse split you end up with less shares (not good if you’re looking for dividend income). With MF (mutual funds) & ETF (exchange traded funds) you never see this because these funds are managed for you. You do pay a small fee for this service but as long as the activity within the fund is low, so is the fee.

I do own a couple of individual stocks but the majority of my investment activities are with mutual funds and ETFs. I invest my 401K money with Vanguard 500 Index Fund Admiral Shares. My ETF investments are with Vanguard Real Estate ETF and Vanguard High Dividend Yield ETF. Yiu can pretty much surmise that I lean toward Vanguard funds. It’s pretty much a hands-off situation with those investments. I just invest more when I have the funds available and make sure I buy at the lowest price possible. That’s not saw that I don’t review the status of those funds but I don’t feel I have a need to be tinkering around with them.

I also have money invested in a mutual fund with my bank, FT Innovative Technology (FKUVBX). Again, I don’t concern myself as much with the share price as I am with the dividend payout. Especially with the mutual fund because the you need a minimum/increment of $1000 to add to the fund. This, to me, is the one drawback with mutual funds. At this time I can’t come up with $1000 to add to the fund. My investment fund is increased by $60-$200 at a time. Whenever I transfer any amount into the investment account, I like to have the money invested within a few days. I prefer to have my money working for me instead of just sitting and “collecting dust”.

So, to recap my basic strategy:
1. I want to add money into my investment funds in order to have funds available to increase my current holdings or to take advantage of a unique opportunity.
2. I want to invest in stocks that have a high dividend yield.
3. I prefer individual stocks to be priced below $20/share and ETFs to be priced below $100/share. The purpose here is to maximize the number of shares owned. I will trade off a higher price per share for higher dividend yield.
4. In the short term (within the next 5 years), reinvest the dividend back into the stock/fund. Grow the amount of shares owned.
5. View drops in price for shares as opportunities to increase number of shares owned because dividends are paid per share.
6. Keep a watchful eye on the declared dividend amount. If a company reduces the amount paid twice in a row, stock is a candidate for replacement. This only applies to individual stocks owned. Mutual funds and exchange traded funds are managed for you.