Tag Archives: Income Investing

What you need to know before you invest in IPO’s

I have not seen this type of brand name IPO trading volume for quite some time. From Groupon (GRPN) and Pandora (P) to Zynga (ZAGG) and now Avaya, the media would have you believe that investing in a brand name IPO is a quick fix for your portfolio.

Take the recent public stock offering in LinkedIn (LNKD) for example. The IPO price was set at $45 and jumped to $90 after one day of trading. As of this writing, the price is just below $73. At its current valuation, Morningstar estimates the Price-to-Earnings (P/E) ratio at 466. By comparison, the tech-heavy NASDAQ has a P/E of less than 20 (as of this writing).

Clearly, many people are very excited about the LinkedIn IPO and it shouldn’t surprise you that investors have had a long history of enthusiasm for IPO stocks. But has this enthusiasm ever paid off over the long-term? Continue reading

How Much Money Do You Need to Retire?

I came across a very highly commented article on SeekingAlpha today called With The Right Dividend Stocks, How Much Do You Really Need to Retire?

The focus of this article is to ask whether you can get away with a smaller portfolio value and still retire comfortably if you invest in stocks that have high dividends.

This is an interesting question, and one that I examined in a recent article for Advisor Perspectives.

A rule of thumb for retirement income is that you can expect to draw an annual income equal to 4% of the value of your portfolio at retirement. If you retire with $1 Million, you can plan to draw an inflation-adjusted $40,000 per year.  So, you will draw $40,000 the first year, and escalate this with inflation in each year thereafter.  The typical assumption is that the portfolio is invested in a simple mix of stocks and bonds–say 60% stocks and 40% bonds.  This type of portfolio typically is projected to have a total return of about 7% per year.

Why can you only draw 4% when your portfolio is expected to grow at 7%?  Two reasons.  The first is inflation–part of the return on the portfolio goes to make sure you keep up.  The second reason is investment risk.  You may average 7%, but the ups and downs mean that you can count on drawing only 4% or so if you want to be confident that you will not run out of money. Continue reading

The Case for Dividends

I am a fan of stocks that consistently pay dividends, but even I was surprised by a chart (below) that I just ran across from iShares / BlackRock.  In an article on dividend-paying stocks in October 2010, there is a chart showing that the average dividend-paying stock in the S&P500 has massively out-performed the average S&P500 stock, going back to the early 1970’s.  It is also striking that this out-performance is a long-term phenomenon.  Even during the go-go 1990’s bull market for growth stocks and tech stocks, the cumulative out-performance of the dividend stocks held up. Continue reading

Interesting way to select dividend stocks

I just ran across an article that Kapitall has on SeekingAlpha that posits an interesting and, I believe, useful way to screen for dividend paying stocks.   The basic idea is to look for high-yield stocks that also have a high level of open interest in call options vs. put options.

What does this indicator mean?  In theory, people buy call options when they believe that a stock is likely to go up and they buy put options when they believe a stock is likely to decline.  The premise in the Kapitall article is to look for stocks with high yields that also appear likely to go up according to the open interest on puts vs. calls.  So, these stocks seem like they are likely to be winners on the perspective of yield and price appreciation.

From my perspective, the story looks a little more nuanced.  Continue reading

Investing for Income or Total Return?

I recently wrote an article for Advisor Perspectives that examines the tradeoffs between investing for total return vs. income investing, in which one emphasizes assets that generate dividends and interest payments.  In theory, if the markets are reasonably efficient, investors should not care whether they live on income generated by their portfolios or they sell assets to provide their income.

My article starts by looking at a study by Vanguard that compares income investing to total return investing.  The Vanguard study concludes that a total return approach makes more sense.  I find that the study’s results unfairly penalize income investing strategies and ignore certain important ‘real world’ effects.

I do not find that income investing is necessarily superior, but I do conclude that there is not reason for investors who are inclined towards an income-focused approach should be discouraged.

Your thoughts?

The Rise of The Female Investor

Women are taking a more active role in investing, and there’s evidence that may be to the good.

Earlier this year, for the first time ever, more U.S. women were employed than men. That’s unfortunately not because of huge gains for women, but rather enormous job losses for men. Continue reading