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Welcome to Safe Dividend Investing’s Podcast # 151 on January 18th of 2024.
Today, I will be answering one interesting investment question.
QUESTION (1)
Value Investing or speculative investing? Which is safer for the long term?
(A transcript of this podcast is available.)
SIX INVESTMENT BOOKS BY IAN DUNCAN MACDONALD, ARE AVAILABLE FROM AMAZON.COM KINDLE BOOKS)
(1) CANADIAN HIGH DIVIDEND INVESTING -
In this 325-page book, learn how to select, purchase and build a portfolio of 20 Canadian strong dividend stocks. Summary records of 215 stocks are sorted in multiple ways, and each stock's unique page provides detailed scoring data and 24 years of price and dividend trend data.
(2) NEW YORK STOCK EXCHANGE'S 106 BEST HIGH DIVIDEND STOCKS -
In this 334-page book, there is a 2-page report for each company scoring 11 data elements. It also lists 23 years of historical share price and dividend payouts so that investors can judge the stock's reliability. Released December 2022.
(3) AMERICA HIGH DIVIDEND HAND BOOK
&
(4) CANADIAN HIGH DIVIDEND HANDBOOK
in these two books, pages of charts are sorted four ways by stock score, share price, dividend yield percent and alphabetically. A page for each stock provides eleven facts which created each stock's total score. Both books list all common stocks that were paying dividend yield percentages of 3.5% or more on the New York Exchanges and the Toronto Stock Exchange.
(5) SAFER BETTER DIVIDEND INVESTING:
All 628 stocks paying dividends of 6% or more on the NYSE and the NASDAQ are scored and sorted by score, price, dividend % and alpha. Plus 199 high dividend Canadian stocks. The answers to 128 questions asked by investors are provided. This instructional reference book will make building a better investment portfolio faster and easier.
(6) INCOME AND WEALTH FROM SELF-DIRECTED INVESTING
In this, his first investment book, in easy to understand language, Ian MacDonald reveals the serious concerns you should have about entrusting your money to investment advisors. Step-by-step, he shows you how you can realize an annual 6% income while your portfolio continues to grow year-after-year. 654 stocks paying dividend yields over 3.5% or more on the Toronto Stock Exchange are scored and listed.
FOR MORE INFORMATION ON THESE 6 BOOKS, HIS 3 NOVELS, PAINTINGS, PHOTOGRAPHS AND DIGITAL ART VISIT www.informus.ca and also www.artgalarian.com
Ian Duncan MacDonald
Author, Artist, Commercial Risk Consultant,
President of Informus Inc
2 Vista Humber Drive
Toronto, Ontario
Canada, M9P 3R7
Toronto Telephone - 416-245-4994
New York Telephone - 929-800-2397
imacd@informus.ca
Safe Dividend Investing
Podcast # 151
18 January 2024
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 151 on January 18th of 2024.
My name is Ian Duncan MacDonald. In today’s podcast I will be answering one very important question.
Every day I hear from readers of my books and listeners to my podcasts. I find their questions, like today’s question, keep me current with what is now of concern to investors. So please keep sending your questions to my personal email address, ianduncanmacdonald@hotmail.com.
QUESTION #1
Value investing or speculative Investing? Which is safer for long-term investing?
When it comes to buying and selling stocks, value investing” Is just investing. It is where you see what appears to be an undervalued stock for sale that you can buy now with the expectation that you will get more money back over time than what you are now paying for it. Real Estate is often a good example of a value investment.
Speculative investing is a form of gambling. You consciously pay an inflated price for a stock with the hope that it can be quickly sold (at a profit before its price declines) to someone who thinks they too can buy and sell it at a much higher price before its price declines. This creates a game of musical chairs, where when the music stops (or in other words when there are no buyers left who will pay a higher price for the stock) that you are not the one holding that stock that will now shrink in value low enough to again attract speculators.
We live in a capitalistic society where there is a thing called competition. There is a limited time that a company can maintain a dominant share of the market. There are always competitive, economic, and technological changes that bring the high and mighty down to an average mean. Monopolies are not possible to maintain.
The best examples of speculative stocks are what they call the “Magnificent Seven”. The share value of some of these seven stocks exceeds the share values of all stocks being traded on many of the world’s stock exchanges. They are Alphabet Inc (GOOGL), Amazon Com Inc (AMZN), Apple Inc (AAPL), Meta Platforms Inc (META), Microsoft Corp (MSFT), Nividia Corp (NVDA) and Tesla Inc (TSLA).
Are their share prices overvalued? An indication of being overvalued would be a comparison of the stock’s current share price to the stock’s book value. The book value is an accountant’s valuation of a business according to the company’s financial statements. It calculates the net amount investors would share in, if all the company assets were sold and all its debts and obligations were paid. The amount left over would be distributed according to how many shares were owned by each individual.
On January 12 of 2024 the book value of Alphabet was $19.93, and its share price is $142.
Amazon’s book value was $14.26 compared to its share price of $154.
Apple’s book value was $4.00 compared to its share price of $185.
Meta’s book value was $48.09 compared to a share price of $374.
Microsoft’s book value is 27.75 compared to a share price of $388.
Navidia’s share price is $547 compared to a book value of $8.96.
Tesla’s share price is $218 compared to a book value $14.13.
Shares of these seven stocks are being traded among optimistic and pessimistic speculators at an incredible rate. Fifty million or more shares of each of these stocks can be traded in a day. Often a few hundred thousand shares being traded in a stock is more of a norm.
Another factor that could indicate that these are speculative stocks is the price-to-earnings ratio. It measures the current price of the share compared to its earnings per share. Earnings are the after-tax net income, or profits. The long-term Price-to-Earnings ratio for most large companies would be around 16, which would make the typical share price 16 times greater than the calculated earnings of a share. It is not unusual to see single digit price-to-earnings ratios.
In the case of the magnificent seven you have price-to-earnings as high as 80.7 for Amazon, 72.2 for Nividia and 70.5 for Tesla. On the low side, but still high, you have 27.3 for Alphabet and 30.3 for Apple.
The seven companies are profitable. Their operating margins range from a low of 4.76% for Amazon to a high of 45.94% for Nividia. An operating margin indicates how much the company makes on a dollar of sales after paying for such things as wages and raw materials, but before the company pays interest on money owed or taxes. The higher the number the more it indicates the company is efficient and good at turning sales into profits. It is possible to find stocks with operating margins over 100% and unprofitable stocks with less than 1%.
Value investors looking for the most profitable, safest stocks seek out those companies who are paying dividends from their profits. However. hot speculative stocks like the Magnificent Seven do not concern themselves with attracting value investors. The sharing of their profits by paying good dividends is not important to them. Only two of them pay any dividends. Nividia is paying a negligible dividend of 0.03% and Microsoft is paying 0.71%.
It is interesting when you compare these giants to the business listings in my two latest books: “New York Stock Exchange’s 106 Best High Dividend Stocks” and its companion book “Canadian High Dividend Investing 215 Scored Stocks”. None of the Magnificent Seven appears in these books because every stock listed in these books must be paying a dividend in excess of 3.5% of its share price.
You see some unusual dividend payers in these books. For example, the stock paying the highest dividend on the New York Stock Exchange was Petroleio Brasileiro SA Petrobas. Its unusually high dividend was 48.27% and it could be bought for $13.06.
On the Toronto Stock Exchange, the highest dividend payer was Alpine Summit Energy Partners Inc . it was paying a 48.76% dividend and could be purchased for 81 cents a share.
When you look at historical records of share price and dividend payouts for these two companies you quickly see that the dividend percentages are one-time wonders with no certainty that they can ever be repeated. It shows that selecting stocks for a safe portfolio is more an art than a science. You are wise to consider the total picture. You must also consider the total picture when considering the purchase of a Magnificent Seven stock.
While very high dividend percents are unusual, it is not difficult to find financially strong, safe companies with dividend yields of more than 6% that can be bought for under $20 a share. So why are speculators paying, in some cases, hundreds of dollars for a Magnificent Seven stock that pays no dividend?
Most of the Magnificent Seven were once penny stocks. If those who bought them as penny stocks had held onto those shares for 20 or more years, they could have realized a fortune from their modest investment. Those who are now buying what appear to be overvalued shares think that the same dramatic upward momentum of these stocks can go on forever. Unfortunately, it can’t and won’t. Investors now buying these stocks are too late to the party.
It is interesting to compare the two approaches to investing. I like to imagine stock investing as being like a horse race on a giant racetrack. This racetrack is so long that it takes 365 days to get around it. The 20 horses (diversified, high dividend, financially strong companies) all owned by one value investor start off at a steady pace. Every month or quarter, these 20 horses pay out dividends. Thus, if $10,000 had been invested in the purchase of each of these 20 value horses at the end of the year you would expect to have received $600 from the average 6% dividend yield that these horses would payout.
Since you invested $200,000 in total on all the 20 horses you would realize a total return of $12,000 on your investment. You had expected to make that much because you looked at their dividend payouts over the last 24 years. The dividend payments were steady and increasing.
The company records show they are managed by executives who expect to share a significant portion of their profits with the owners of the company, who are their shareholders. Value investors seek out such companies.
This $12,000 dividend return keeps you ahead of inflation which over the last 100 years has averaged about 3.5% per annum. Thus, over that year the $200,000 you invested would theoretically have lost $7,000 of its value to inflation. Subtracting the $7,000 inflation loss from the $12,000 in dividends still leaves you $5,000 ahead on your $200,000 investment.
Value investors also have a second source of income. The share prices for most of these dividend paying stocks will increase during that year, as most have every year. The investor knows this before they buy the stock. They can look back over years of share prices and dividend payouts and see share prices increasing. While share prices may dip during the market crash years of 2000, 2008 and 2020, they do recover and most reach new record high share prices.
It is not unusual to see share prices of value stocks averaging a share price increase of 12% or more each year. Not that this increase is critical to a value investor. While their wealth may have increased significantly, they can only touch this wealth if they sell the stock. This would then leave them with cash from the sale of the stock.
What do they do with this cash? Will they be able to find another stronger stock that will do just as well?. Why not just leave it to grow even more. This is how the portfolio’s value investors can grow by many multiples over time. Since it is possible to live off their dividend income, selling stocks to cover living expenses need not be required.
The approach of the value investors to managing their portfolios is compared to the approach of speculators. Speculators believe, for whatever reason, that they can accurately predict future share prices. If you are so certain about the future, you would be tempted to invest all $200,000 in that one stock that you “know” is going grow in price more than any other stock. This would theoretically give you the highest return on your investment.
Speculators will have none of this spreading your risk among 20 carefully chosen financially strong companies who will generate a generous dividend return. They would take their $200,000 and place their bet on what they see as the best of the magnificent seven stocks.
Their intent is to sell that stock as soon as they have made a significant profit over the price they paid for the stock. They may be expecting a profit of 10%, 20% or even more. If they are living off this investment, they must either borrow money or sell some, or all, of the stock to generate cash to pay their living expenses while they wait to be rewarded for their cleverness. Selling some of the stock to live on, of course, reduces their wealth. They see this as a temporary price to pay for future wealth.
When the stock price does increase very quickly by 20%, they are now in a quandary. Surely if it rose that fast, it will go even higher. So, they greedily hold onto the stock and ride it longer, feeling very pleased with the accuracy (so far) of their prediction.
However, they may get to the end of the year without selling any of the stock. They may have received not one penny in cash from their magnificent portfolio. Meanwhile that $200,000 has lost 3.5% of its value or $7,000, to inflation.
If they are unlucky, the overpriced stock may shrink. They are faced with deciding do they sell it and take the loss or hold on and hope it will increase in value, so they can at least get back what they paid for it. Life is not easy for speculators.
Some speculators are very disciplined. When a stock increases by 10%, they take their winnings and find another stock to wager on. Many keep, doing this until they finally invest in that one stock where they lose all their money. I am told 90% of speculators lose money and most investors are speculators.
Is it a matter of education? Do most investors not understand that there is a safer way to invest and that no one can accurately predict future share prices? Is it greed that makes them treat the stock market like a casino?
Do they perhaps think that it cannot be that easy to be a value investor who consistently makes money year-after-year with little effort and stress? Once a 20 stock, diversified portfolio of financially strong companies paying high dividends is established, you can go for years without a need to make a change to it - other than to re-invest your dividend money back into those 20 stocks.
The six investment books I have written are all about teaching value investing to those who have never had it explained to them. It is not something that most of their friends can easily explain to them or something that an investment advisor would recommend. Advisors recognize if you can build a portfolio by yourself that requires little management, what would an investment advisor be adding other than an unnecessary expense.
THE END