Tag Archives: 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.

Which Advice To Follow?

Every since I started on my journey in dividend investing and trying to learn what I can, to develop a strategy that works for me to attain my financial goal, I have come across a myriad of financial advice. But which ones should I heed? Which ones will help me reach my financial goal? As with any aspect of life you will always find people that will want to tell you what to do…usually for their own benefit.

That’s not to say that there aren’t people that can actually help you. I always wondered about those that tend to hawk specific stocks and funds. I always ask “What’s in it for them? Are they just being altruistic?” General advice should be such that it makes you think and analyse about what they are advising. Not to just blindly follow without question. As an example I see many posts and comments regarding specific stocks. If you followed each one then at some point in time, in the very near future, you’d run out of investment funds. But be very wary of anyone telling you that a certain stock is a sure thing. The only way I can explain it is to relate a story from my past experience in my first ever foray into stock trading.

This goes back to over 10 years ago and my wife was working in a casino. At the gaming table she was working at was a young guy playing. During the course of the game he began to talk about stocks and things with his job as a broker. One of the things he brought up was that there was a stock coming out that was a “Sure thing.” He mentioned that stocks name during the conversation and my wife made a note of it because he was super confident that the stock price would sky rocket. He told a few people at the gaming table that they’d be foolish not to invest in the stock.

My wife came home and told me about it and we discussed about investing in that stock. We scraped up the money (yes, we were not overloaded with cash) to invest and I opened a Charles Schwab account in order to buy the stock. I don’t remember the exact details except that in the end, we lost all of our money. How? It seems that many people were interested in the stock and were buying it, thus driving the price up. I bought it one day and didn’t check what was going on with the price for a couple of days. I was very, very ignorant about stock trading in those days. What happened was that about a day after we invested in that stock, there was a massive sell-off of it and the price dropped down below the price that we initially paid for it.

The lesson here was to make sure that you have a basic knowledge of stock trading and the nuances involved. After the fact, we felt that we were scammed. We were used, as many others were, to beef up the price and then when it hit a certain price or timeframe, the stock was dumped and someone made a handsome profit. Again, this is just conjecture of ours at the time but we stayed away from stock trading for a while.

That is, I stayed away until I learned the basics and developed a solid strategy for my investing activity. And this blog is not to give advice as it is to detail what I have done right investing, what I did wrong in investing, and detailing information that I found to be useful to me. I never recommend a specific stock or fund because everyone’s strategy is different. We all have different comfort levels when it comes to risk. I’m hoping that when you read me blog it will help you with your investment goals.

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.

Value or Dividends

The one question that I had to ask myself was I going to invest my money into stocks that were going to increase in value (price/share) over time or stocks that would be paying a specific amount per share.

Investing for value is by far the more riskier process. You can’t always tell if a stock’s price will go up or down. Take for example the 2 shares of Obalon (OBLN) that I bought back in 2019 before I really had a grasp of what I was doing. I had just signed up with Robinhood and I had $5 burning a hole in my pocket. At that time I bought 2 shares at $1.89/share and I bought 5 shares of Guardian Health Sciences (GHSI) for $0.206/share. I bought those shares because, at that time, I was focused on the Health sector and thought that investing in anything Health industry related was a smart investment. As I learned more I ended up changing my investment strategy (which I didn’t know it was a strategy then). A couple of month’s later I sold the Guardian stocks for $0.55/share. The Obalon share price had dropped down to below $0.80/share and hasn’t moved up over $1. I have a standing sell order to rid them at $2.20/share (about a 20% increase over what I paid for them). At this time, I’m not looking to lose money.

At the time I signed up with Robinhood I received a free (no cost to me) share of Lyft (LYFT). When I got it the share price was in the $40 range. I didn’t know anything about the business model for the company nor what their plans were. So, I just held on to the share and started doing some research about what was going on with Lyft. One of the things I learned was due to the lockdown because of the Corvid-19 neither Lyft or its competitor, Uber, were going to be going great guns in price. I also learned due to the restricted revenue due to the virus, revenue wasn’t planning on growing. Additionally, in all of the years that Lyft has been in business it has never paid any dividends and was not planning to do so in the near future. I ended up selling it for $29/share. I didn’t pay anything for it but I didn’t maximize the gain I could have gotten. I determined that value investing was not for me.

So, where did this leave me? It left me looking into dividend investing, where I invest in stocks that pay high dividends on a consistent basis. This is where Seeking Alpha and Finviz came in handy. I used Finviz’s Screener feature to identify companies/funds that were paying out high yield dividends. The criteria I used was:

  1. High Dividend Yield greater than 5%.
  2. The share price must be less than $20/share (I’m not overly rich).
  3. They have been paying dividends for many years and their dividend growth is on the positive side.

The logic for these is to be able to get the largest return I could and to be able to buy the maximum amount of shares (because dividends pay per share) with the limited funds. That’s not to say I am not invested in higher priced funds, but that’s for another post at a future time.

Based on the above criteria I identified 2 stocks; Arbor Realty Trust, Inc (ABR) and Ares Commercial Real Estate Corporation (ACRE). I then researched these stocks further on Seeking Alpha. They both fit with what I was looking for, were well within my comfort zone regarding risk, etc. I will use the dividend from these socks to reinvest into the same companies. At some point I will be looking to take the dividends instead of reinvesting but that will be a few years in the future.

Where to start

If you are like me you are new to investing and just starting out. Where do you start? A great question and I was lucky to know someone who was a seasoned investor and able to nudge me along in the right direction. The first thing my friend suggested was that I develop an investment strategy. What did I want to accomplish and what was the timeframe I was working with.

The first question was fairly easy – I wanted to replace my current wages with the passive income. The second one was already answered for me – 5 years. I didn’t have too many work years left for me. Father Time tends to catch up with all of us. Another factor in my strategy was that I wanted to avoid high-risk investments. I couldn’t eliminate ALL risks but I could avoid the high ones that have devastating financial results.

The other thing that I did was to learn whatever I could about investing and the different aspects of investing. I needed to learn which investing method would help me reach my goals. To this end I searched for online communities where I could just lurk and learn about investing. One of the ones I found was Investing For Beginners on Facebook. Although every group is going to have their share of annoying posters and useless posts & comments, you can still find some useful information.

I learned that Day Trading was not for me. Too risky. Proponents of Day Trading will tell you that you have to take big risks for the big payoffs. But to me that is too much like gambling at the casinos and I don’t do that. Value investing is not going to get me to where I want to be. Yes, I may win big but I also can lose all of my investment, which I may not have enough time to start from scratch again and recover. That left me with Dividend Investing.

Dividend Investing is where you invest in stocks that pay high & consistent dividends. Well, that was surely the way to go for me. Again, I spoke with my friend. He steered me to 2 online services that would help me determine which stocks to potentially invest in. They were Seeking Alpha and Finviz. So, I started to develop my detailed strategy of how I was going to invest my money.

  1. The primary step was to set aside 5% of my income toward investing.
  2. I then searched for stocks to invest in. My criteria was to select those that paid better than 5% and that had continuous and consistent dividend growth.
  3. I also wanted to remain within the REIT sector.

This was a good start.