Send us a Text Message.
Welcome to Safe Dividend Investing’s Podcast # 156 on February 22nd of 2024.
Today, I will be answering five interesting investment question.
QUESTION (1) Why spend time building your own stock portfolio when you can invest the same amount in units of a Standard and Poor 500 Index Exchange Traded Fund or a Mutual Fund?
In Podcast #154, I announced a contest to select 20 stocks using $200,000 in “play money” that will generate the most capital gain and most dividend income over 12 months. I have now received the first completed Excel Spreadsheets from listeners who are participating in the contest. I was impressed with their choices.
While this contest was created as a learning exercise for those who have been hesitant about investing in the stock market, it is open to anyone who wants to test their investment skills. To make it a bit more captivating, the winner will receive $100 as an incentive.
SIX INVESTMENT BOOKS, BY IAN DUNCAN MACDONALD, ARE AVAILABLE FROM AMAZON.COM KINDLE BOOKS, THE FOLLOWING ARE THE 2 LATEST.
(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. Released September 23.
(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.
A TRANSCRIPT OF THIS PODCAST IS AVAILABLE.
FOR MORE INFORMATION ON HIS 6 INVESTMENT 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
PODCAST 156
SAFE DIVIDEND INVESTING
22 FEBRUARY 2024
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 156, on February 22nd of 2024.
My name is Ian Duncan MacDonald. In today’s podcast, I will be answering one interesting investment question.
In Podcast #154, I announced a contest to select 20 stocks using $200,000 in “play money” that will generate the most capital gain and most dividend income over 12 months. I have now received the first completed Excel Spreadsheets from listeners Who want to participate in the contest.
While this contest was created as a learning exercise for those who are hesitant about investing in the stock market, it is open to anyone who wants to test their investment skills. To make it bit more interesting the winner will receive $100 as an incentive at the end of 12 months.
Request a printed copy of Podcast #154 and the Excel entry file if you are interested in participating.
The objective of my books, my website and my podcasts are to show all those seeking financial independence how to become informed, confident, successful, self-directed investors.
QUESTION 1
Why spend time building your own stock portfolio when you can invest the same amount in units of a Standard and Poor 500 Index Exchange Traded Fund or a Mutual Fund?
The Standard and Poor 500 Index is a compilation of stocks selected by a committee called the S&P Dow Jones Indices. It is managed by S&P Global Inc that sells financial information and analytics. This company is an evolution of the century old McGraw-Hill publishing company.
The S&P 500 tracks the 500 largest American companies selected by their stock market capitalization, which is the value of all the shares held by investors in a company. Fund management companies selling units in their S&P 500 mutual funds and ETFs, are quick to brag that just nine of the 500 companies account for 31% of the market capitalization of all 500 companies. These nine are Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta, Tesla, Berkshire Hathaway, and JP Morgan Chase. Their selling pitch for buying units in these funds is how can you lose with such well known, successful companies in a S&P 500 fund.
These very high-profile companies are the bait to distract you from considering the vast majority of mediocre, but large low-profile stocks in the S&P 500. In my earlier podcast #151, on January 18 of 2024, I described how seven of these nine stocks were referred to in reverent terms by investment salesmen as the “Magnificent Seven”.
I described these seven as being overvalued when you compare such things as their very high share prices to their much lower book values. For example, Apple’s book value was $4.00 compared to its share price, at the time, which was $185. Book values are calculated by professional auditors subtracting what is owed by a company from their assets. The net figure is then divided by the number of outstanding shares to arrive at the stock’s book value. A book value’s logical calculation is far removed from the chaos of optimistic and pessimistic speculators bidding daily for millions of Apple shares in a stock market influenced by media hype, greed, and fear.
Many Investors seek safe stocks that will provide them with a reliable income to support them in their retirement. They look for companies who have demonstrated for years that they share the company profits with the company owners, who are the shareholders. This sharing is done through significant regular dividends.
Only two of the Magnificent Seven pay dividends. Their dividends are so small you wonder why they bother. Nividia is paying a token dividend of 0.03% and Microsoft is paying 0.71%
There are about 25 million companies in the United States. Surely “owning” shares in the 500 largest stocks must be a good investment? However, that very much depends on what your definition of a “good investment” is? My definition of a good, strong, safe stock investment has nothing to do with high market capitalization, which is the primary qualification for being classified as a S&P 500 company.
To me a good stock investment primarily includes:
(1) A share price that has steadily increased over the last 20 years
(2) A high operating margin percent which is calculated from the percentage of the amount remaining after you have subtracted the expenses to generate the revenues from the revenues.
(3) A company that shares its profits with its shareholders by paying ever increasing annual dividends yields of at least 5% over the last 20 years. These would include even the market crash years of 2000, 2008 and 2020.
(4) The profitability of a company reflected in a price-to-earnings ratio that would be below 20.
(5) A book value for the company that would be close to or even higher than the share price.
Perfect stocks meeting all these criteria rarely exist. You make compromises based on how close the come to your ideal stock.
To make such compromises easier, I invented stock scoring software that calculates an objective number from zero to 100. This number allows the sorting of stocks from the most to least desirable. The higher the number the more desirable the stock. Having scored thousands of stocks, the lowest I have ever calculated was an 8 and the highest was a 78. I avoid stocks scoring under 50.
For safe diversification to avoid disastrous surprises you should aim at investing equally in 20 carefully chosen stocks. Your expectation from historical trends is that most of your dividend payouts and your share prices will increase steadily. This will keep you ahead of inflation.
There are about 16,000 stocks available in North America to choose from. Sorting through these thousands of stocks for your “best” 20 is not difficult once you understand how to do it. It can be done in hours, not days.
When I reviewed all the stocks that make up the S&P 500, I found only 5 stocks that would qualify for consideration in my portfolio. 113 of the S&P 500 were immediately eliminated for consideration because they pay no dividend. Even some of the very largest companies in the S&P 500 like Amazon, Alphabet, Tesla, Berkshire Hathaway, Facebook, and Disney pay no dividends. A further 288 of the S&P 500 stocks only paid dividends between 3.5% and 1%.
Why would a 3.5% minimum dividend yield be important? For the last 100 years the average inflation rate is reported to have averaged 3.5%. If you had bought a share that never increased or decreased in value but paid out a steady 3.5% in dividends your stock would theoretically have stayed ahead of inflation if it were invested back into the portfolio.
Strong shares have histories of steadily rising share prices. As share prices increase many companies steadily increase their dividend payouts out of pride and competitive reasons to at least maintain their traditional high dividend yield percents.
Of the 500 stocks you are left with only 100 who are paying dividends higher than 3.49%. To give you a reasonably generous income, the ideal is to realize an annual dividend income generating at least 6% of your portfolio’s value. On a million-dollar portfolio this would be $60,000.
There are only 12 of the S&P 500 companies paying a dividend greater than 5.97%. Two of the 12, AT&T and Altria Group had return-on-expense percentages of zero or less which eliminated them from consideration. When the remaining 10 were scored it was found that 7 of them were now paying a dividend of less than 6% which eliminated them. Of the remaining 3 only one had an operating margin greater than zero. This left just one company, Verizon, out of all 500 that would meet my minimum requirements for inclusion in my portfolio. It had a good score of 62.
Verizon’s score was based on a share price of $40.48, a price 4 years previously of $58.22, a book value of $21.98, Ten analysts recommending it as a buy, a dividend yield percent of 6.57%, an operating margin of 16.57%, a daily trading volume of 12,645,534 shares and a price-to-earnings ratio of 14.7.
We still needed 19 more stocks to create a strong diversified portfolio. Fortunately, there is a wide choice of many companies with lower capitalization who are paying dividends of 6% and will have scores higher than 50. Some of these are foreign based companies who were automatically excluded from being included in the American centric S&P 500. Some had high capitalizations that could have included them. Foreign stocks give the portfolio a geographic diversification which strengthens it.
If you had $200,000 to invest, you could do far better investing the $200,000 in 20 carefully chosen, high scoring, high dividend stocks than investing that $200,000 in S&P 500 fund units. While the 20 stocks could generate a dividend income of $12,000, the dividend income generated from the fund units of an S&P 500 fund would be a diluted 1.3% or an annual dividend return of $2,600. The total dividend income received from all 500 stocks is diluted when it is split among all those S&P 500 stocks paying little or no dividends.
What S&P fund owners receive would also be contingent on how much in management fees would be extracted from their investment. Most investors would not even be aware of how much is being extracted from their fund portfolio.
Investment costs are important. Depending on what, financial institution you used, you would pay between zero and nine dollars for each of 20 stocks you purchased. Thus, you might incur a charge as high as $180 to acquire 20 stocks. Since these could be shares, you may intend to hold for the rest of your life, you may never again incur another charge from that financial institution. I can go for years without making changes to my portfolio’s stocks.
The costs in acquiring $200,000 worth of S&P 500 fund units are much more expensive. You pay the financial institution you buy them through a percentage of the $200,000. It could be between .05 and 2%. In buying $200,000 of units this could be $1,000 and $4,000. The fund management company also takes a hidden cut from the fund which could be between .05 and 1% or $1,000 and $2,000 of the amount you purchased. They do not take this fee just one time. The fund and the financial institution take their fees every year that you own that fund.
Is the only benefit of buying a fund that You did not have to spend time picking your stocks? Interestingly, neither did the fund .All they did was buy all the stocks listed in the S&P 500. No expensive analysts had to be employed to pick the “best” stocks.
The largest and oldest ETF S&P 500 fund management company owns $425 billion dollars of the stocks in their fund. They charge each fund unit holder 0.095% annually for managing the fund. This seemingly tiny 0.095% creates $403,750,000 in revenue for this fund management company every year. They report that this amount covers their accounting costs, marketing costs, distribution costs and legal fees. You would wonder how much of this money finds its way to the hundreds of thousands of investment advisors to encourage them to sell S&P 500 fund units to their clientele? How much is spent on advertising to convince millions of investors that an S&P 500 ETF or mutual fund is the only safe option for their investment dollars.
When a fund’s unit value decreases in the inevitable next market crash, the investment advisor tells them to shrug off the loss and hope that next year the market will recover. The lack of a supportive dividend income from the S&P 500 fund which could take away the sting is not mentioned. Like sheep, they accept what they believe is wise advice by an investment “professional” who is just a fund salesman not impacted by the decrease. The fees earned by the financial industry come with no guarantees that the investor will make money.
S&P 500 share prices are totally dependent on the often illogical, impulsive buying and selling of shares by speculators. Just because fund units increased last year is no guarantee they will increase this year. No one can accurately predict future share prices. What is far more predictable are the dividend payouts made by the managers of companies who have consistently paid good dividends for decades.
It is interesting to look over the 500 stocks and see yesterday’s market leaders languishing. For example, Ford Motor Company’s return-on-investment is minus 4.30% and its price-to-earnings is minus 24.5. eBay’s return-on-investment is a minus 16.90% and its price-to-earnings is a minus 19. Most of the software and computer service companies in the S&P 500 not only do not pay dividends but have minus price-to-earnings figures.
Apparently about 80% of all the money invested by individuals is invested in funds. This is an investment in which the investor has no control over and little understanding of what they have invested in or how much it is costing them. These investors are just along for what is a costly ride. Getting off the roller coaster early in the ride may even results in a withdraw charge.
Investors must never lose sight of the reality that ETFs and Mutual funds are vehicles to create profitable income for the fund management companies and financial service companies.
THE END