Continuing on my series of posts around dividend investing here is another one.
With the recent slowdown in economy starting 2008, interest rates started falling short term borrowing interest rates have been near the 0% mark. Average certificates of deposit rates in the US have slumped, with current 1 year CD yielding around 0.9% average annually (according to bankrate.com) . During these times investors look for more return to their money and start investing in dividend yielding stocks. Capital /principal and steady dividend yielding is what investors look for during this time.
The purpose of this post is to check if dividend investing make sense when the interest rates are higher , the economy is doing well and CDs yield more.
Let us start with an example of the recent past. According to this source for this historical CD data Between 2003 to 2007 average one year CDs yielded anywhere between 2.0 to 5.4% annually respectively falling to 3.9%, the average being 4.0% . A CD return is one of the safest investments where the principal is guaranteed not to change.
During the same time let see the yield if a hypothetical investor had put money in the total stock market fund like VTI.
VTI started 2003 with a share price around 42 and finished around the same price by the end of 2008. During this time it gave dividends of 69 c in 2003 to a max of $1.15.
The yield on the above is anywhere from 1.6% to little over 3% and surely not beating the yield of CD. The capital / principal increase was almost negligible for this period.
The reason I selected VTI was to select one of the most stable or non risky investments in the stock market compared to the CD. I did not bring dividend re-investing or compounding interest in my calculations.Yes, one could argue that they could beat the market with another selection of stocks.
I did not compare selection during earlier bull markets however.
What are your thoughts? Are there more ways of looking at these scenarios.
Wednesday, July 20, 2011
Wednesday, July 13, 2011
Netflix: Poised to rise higher? Technical analysis
Over the last few days, months and probably years Netflix stock has been touching new grounds and has been on an uptrend. When the stock broke the $200 barrier there were talks of it being overbought. Let us look at some quick technical facts for NFLX.
As you can see from the chart below the stock trades in a pattern from being oversold to overbought. MACD looks to be well in the high range and has been higher. I am beginning to think that the stock is in overbought range and we will see a pullback to the late 200s.
Courtesy: stockcharts.com
Moreover the stock trades or tries to touch is 200 day MA and seems to rise above it or go marginally below and then rebound.
Recently NFLX has been sharing some news about latin America expansion followed by change in pricing.
Is NFLX done with its run?
Disclosure: I am long NFLX
As you can see from the chart below the stock trades in a pattern from being oversold to overbought. MACD looks to be well in the high range and has been higher. I am beginning to think that the stock is in overbought range and we will see a pullback to the late 200s.
Courtesy: stockcharts.com
Moreover the stock trades or tries to touch is 200 day MA and seems to rise above it or go marginally below and then rebound.
Recently NFLX has been sharing some news about latin America expansion followed by change in pricing.
Is NFLX done with its run?
Disclosure: I am long NFLX
Friday, July 8, 2011
Dividends: Dividend reinvesting calculator
I have seen some investment gurus always mention how good a dividend re-investment strategy could be. Recently I have been following some dividend stock blogs and am a dividend investor myself.
Always interested in mathematics I was curious how the numbers add up and what the compound rate of return would be under different scenarios. Let us start with a simple example:
Investment capital : $1000
Stock Price: $1
Yield : 5%
Dividend growth rate: 5%
Time span: 5 years.
I used the calculator here.
Total value of this portfolio without dividend reinvested would be $1580.88 and with dividend reinvested would be around $1,648.38. The net yield is 9.51 vs 10.51 respectively.
Lets play around with some numbers. Increasing the timespan to 20 years which is typically realistic with dividend or long term investors we can see the difference: 7.4% vs 10.5%.
If the stock price remains the same for 20 years with no variation one can get 5.16 vs 8.35 % for reinvested dividends.
Now if the stock price is 10% down annually in a timespan of 5 years then the ROI for the reinvested dividends is -3.43 which is lesser than -3.16. In my example if I set the stock price move to 5% down annually for 10 years then the dividend reinvestment scheme still proves better.
Overall I feel like a dividend investor should have an exit strategy just like any other investor. If the fundamentals for the company look good then reinvesting in a downtrend might be risky but worth it.
Before I forget, there is a definite tax advantage to these reinvested dividends which is a separate topic itself. But the flip side is that calculating cost basis for re-invested dividends could be time consuming.
What is your re-investment strategy? From most of the examples above it seems that re-investment does make sense unless ofcourse you want free cash flow.
Always interested in mathematics I was curious how the numbers add up and what the compound rate of return would be under different scenarios. Let us start with a simple example:
Investment capital : $1000
Stock Price: $1
Yield : 5%
Dividend growth rate: 5%
Time span: 5 years.
I used the calculator here.
Total value of this portfolio without dividend reinvested would be $1580.88 and with dividend reinvested would be around $1,648.38. The net yield is 9.51 vs 10.51 respectively.
Lets play around with some numbers. Increasing the timespan to 20 years which is typically realistic with dividend or long term investors we can see the difference: 7.4% vs 10.5%.
If the stock price remains the same for 20 years with no variation one can get 5.16 vs 8.35 % for reinvested dividends.
Now if the stock price is 10% down annually in a timespan of 5 years then the ROI for the reinvested dividends is -3.43 which is lesser than -3.16. In my example if I set the stock price move to 5% down annually for 10 years then the dividend reinvestment scheme still proves better.
Overall I feel like a dividend investor should have an exit strategy just like any other investor. If the fundamentals for the company look good then reinvesting in a downtrend might be risky but worth it.
Before I forget, there is a definite tax advantage to these reinvested dividends which is a separate topic itself. But the flip side is that calculating cost basis for re-invested dividends could be time consuming.
What is your re-investment strategy? From most of the examples above it seems that re-investment does make sense unless ofcourse you want free cash flow.
Monday, March 21, 2011
To go , dine in or take out?
Waiting in the line for Olive garden I witnessed atleast ten groups of people marching outside, all of whom had a take out bag with them.
The financial part of me started thinking about the comparative costs of take-outs, dine-in or the to-gos.
A typical dinner menu at a restaurant like Olive garden varies from around $11-$12 to around $20 . This might not include appetizers based on what you chose. For an average price of $15 with taxes and tip we round up around $36 for a dinner for two.
If you take do take left overs home and use it as next days lunch it counts for $36 /4 which on an average is $9 per person which is not that bad. However if your intention is to cover next day's meal with the leftovers then this is not a bad choice unless ofcourse you are too hungry or your whole intention was to spend time together and did not care about take-out.
On the other hand if you go for a buffett at a restaurant at night the pitfall is you pay the price pretty much for that meal and cannot take-out. That being said specials like the Sweet Tomatoes deals for $8.79 dinner specials still end up around the $9-10 average per meal.
Can take-outs be cheaper? Answer is it depends. If you already have some food and want something more substantial to make a meal,say like left over curry, combind with the fact that you want to watch a favourite movie at home then yes it makes sense to take out. Moneywise you might save tip if you are the kind who does not tip take outs.
This is ofcourse comparing restaurants of reasonably similar standards and not comparing fast-food or subway type of food outlets.
Ofcourse at the end it depends where you are comfortable and would like to eat.
The financial part of me started thinking about the comparative costs of take-outs, dine-in or the to-gos.
A typical dinner menu at a restaurant like Olive garden varies from around $11-$12 to around $20 . This might not include appetizers based on what you chose. For an average price of $15 with taxes and tip we round up around $36 for a dinner for two.
If you take do take left overs home and use it as next days lunch it counts for $36 /4 which on an average is $9 per person which is not that bad. However if your intention is to cover next day's meal with the leftovers then this is not a bad choice unless ofcourse you are too hungry or your whole intention was to spend time together and did not care about take-out.
On the other hand if you go for a buffett at a restaurant at night the pitfall is you pay the price pretty much for that meal and cannot take-out. That being said specials like the Sweet Tomatoes deals for $8.79 dinner specials still end up around the $9-10 average per meal.
Can take-outs be cheaper? Answer is it depends. If you already have some food and want something more substantial to make a meal,say like left over curry, combind with the fact that you want to watch a favourite movie at home then yes it makes sense to take out. Moneywise you might save tip if you are the kind who does not tip take outs.
This is ofcourse comparing restaurants of reasonably similar standards and not comparing fast-food or subway type of food outlets.
Ofcourse at the end it depends where you are comfortable and would like to eat.
Tuesday, March 15, 2011
Market correction analysis
In my previous blog I mentioned that I was looking for a market correction around 12000. We did not have a correction at 12000 but we went ahead to around 12400 before make a dive and recent earthquake in Japan has left the down below 12000. If you take a look at a six month picture of the DOW we see a similar pattern in the last market correction in Novemeber 2010 when the DOW corrected from 11400 to 11000.
Should you be buying in this market dip?
Long term investors may look at this as a buying opportunity and short term traders may well think of looking to get in for few days. With previous market corrections some aggressive strategies that did well were finding most beaten down stocks in the current market correction.
Recently I have been following James Stewart from Smart Money. In his latest article he suggest these growth stocks when market makes a 10% correction which means a 2541 on the NASDAQ.
Market bears look at the volatility and uncertainty over impact of the Japan earthquake and predict that markets might go down further.
Last few days have seen some selling at high volumes and volatility which means there might be further downside potential. What are your thoughts? Will you be buying in at these levels?
Fibonacci series for this last bull run from 11000 to 12400 for the DOW returns 11544 as the 61.8% mark at which some support could be seen with the DOW bumping on these levels.
As for long investing I would add positions into my long term portfolio.
Should you be buying in this market dip?
Long term investors may look at this as a buying opportunity and short term traders may well think of looking to get in for few days. With previous market corrections some aggressive strategies that did well were finding most beaten down stocks in the current market correction.
Recently I have been following James Stewart from Smart Money. In his latest article he suggest these growth stocks when market makes a 10% correction which means a 2541 on the NASDAQ.
Market bears look at the volatility and uncertainty over impact of the Japan earthquake and predict that markets might go down further.
Last few days have seen some selling at high volumes and volatility which means there might be further downside potential. What are your thoughts? Will you be buying in at these levels?
Fibonacci series for this last bull run from 11000 to 12400 for the DOW returns 11544 as the 61.8% mark at which some support could be seen with the DOW bumping on these levels.
As for long investing I would add positions into my long term portfolio.
Wednesday, January 19, 2011
Market patterns and investing
With the current bull market initiating around March of 2009 we see some dips or selling as the market continues to climb. One of the past two run ups one from February to May 2010 in which the DOW climbed from 10000 to 11200 and then from Sept to November 2010 when the DOW roughly climbed the same amount. If past is any indication of the future then will the DOW have a correction in February around 12000 ?
If you are a buyer: One theory in long investing suggests buying in an uptrend. However as everyone knows market comes down quicker and bigger than when it goes up. Should an investor take a risk in getting in the DOW ride or wait for a correction?
If you are already in a market and want to cash out you might be looking at good exit points:
Technical pundits typically will advise selling a stock when it moves below its 20 or 50 day line. Investors business daily has a small course on sell signals .
If you are a buyer: One theory in long investing suggests buying in an uptrend. However as everyone knows market comes down quicker and bigger than when it goes up. Should an investor take a risk in getting in the DOW ride or wait for a correction?
If you are already in a market and want to cash out you might be looking at good exit points:
Technical pundits typically will advise selling a stock when it moves below its 20 or 50 day line. Investors business daily has a small course on sell signals .
Saturday, September 18, 2010
15 year vs. 30 year mortgage
NPR's marketplace recently had a clip talking about how mortgages used to be 15 or 20 years and the great depression changed it.
The rationale behind this was ofcourse make house affordable, the catch - pay more interest over long term.
With people refinancing or moving this have changed recently but one is likely to end up in some other 30 year mortgage.
Hypothetically if someone buys a house at 35, and then switches to another one at 45 then the0 move could reset the 30 years till 75 past retirement age.
The goal of retirement at typically 70 is be debt free. If that's the case can someone who can afford the mortgage at 45 still be afford when 71? Who's responsbility is it to pay off the mortgage by 70 or retirement age?
One of the answers before the housing collapse would have been that in 10 years someone could have made some money in house price increase and then earn some equity in the next house. With the housing collapse this might make easier for some people who bought their houses way before the collapse and now get a good bargain for their new dream.
Thoughts?
The rationale behind this was ofcourse make house affordable, the catch - pay more interest over long term.
With people refinancing or moving this have changed recently but one is likely to end up in some other 30 year mortgage.
Hypothetically if someone buys a house at 35, and then switches to another one at 45 then the0 move could reset the 30 years till 75 past retirement age.
The goal of retirement at typically 70 is be debt free. If that's the case can someone who can afford the mortgage at 45 still be afford when 71? Who's responsbility is it to pay off the mortgage by 70 or retirement age?
One of the answers before the housing collapse would have been that in 10 years someone could have made some money in house price increase and then earn some equity in the next house. With the housing collapse this might make easier for some people who bought their houses way before the collapse and now get a good bargain for their new dream.
Thoughts?
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