PODCAST 158
SAFE DIVIDEND INVESTING
7 March 2024
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 158, on March 7th of 2024.
My name is Ian Duncan MacDonald. In today’s podcast, I will be answering 3 interesting investment questions.
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.
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
HOW DO YOU CONVINCE MILLIONS OF INVESTORS ABOUT THE BENEFITS OF SELF-DIRECTED INVESTING?
The following is an exchange between myself and someone who is both a reader of my investment books and a listener to my podcasts. I think it may encourage those who have been hesitant about investing in stocks to see self-directed investing through someone else’s eyes other than mine.
THIS IS MY FIRST REPLY
Thanks for your message. I often wonder after sending out these podcasts if people understand what I am trying to teach them. My objective is to make people think and look behind the BS that pervades the investment industry.
That BS caused a financially illiterate person, like me, to lose $300,000 by entrusting my money to a professional long established investment advisor. That loss forced me to learn how to become a successful investor out of necessity. Fortunately, my decades in commercial risk analysis and scoring gave me direction in how I could approach stock investment risk. Since I am still financially well off twenty-four years later it seems to have worked.
What I find interesting is that those in the financial industry actually believe their BS and have never questioned many of their beliefs. I know that few, if any, of the financial analysts I have come in contact with get into the nitty gritty of stocks that I do, even though they love to throw around all sorts of jargon and complex mathematical formulas.
Although they are selling shares in companies, most do not understand what is involved in creating and operating a profitable company. They have never done it. Their learning seems to be theoretical book learning from authors who have also never created or operated a profitable business.
THIS WAS THE READER’S RESPONSE
…I have had a profitable business… and at least know how hard that was. But financial and investing education is another thing entirely. I find Google news results on investing to be full of traps and (likely) AI generated Motley Fool articles recommending hot stock to the masses. Plus, when I sought advice last year, the financial advisors (yes- the sharks) literally swarmed me to play on my insecurities….
Thank heaven for people like you- giving confidence to …people like me to invest for themselves. I am much happier managing my own money directly these last 5 months- even if not all my investment decisions are perfect... Thankfully, I didn't lose anything but gained knowledge to slowly but surely better forge and sharpen my portfolio.
THIS IS MY FINAL RESPONSE
Thanks for the note. You and a growing number of other investors understand the importance of self-directed investing. Interestingly, you are not the first one to tell me how after a few months the tensions and stresses surrounding their investing disappeared after choosing financially strong companies paying high dividends. It is because these investors now know exactly what they are invested in and why they chose to invest in it.
When working with investment advisers they were forced to fly blind and trust someone who was also flying blind. I have yet to hear of any investment adviser who ever sat down and explained in detail why your money should be invested in a specific stock that he had spent at least half an hour researching. The industry just doesn't work that way.
Your only contact is with salespeople who know little about running businesses and picking financially strong stocks. They are paid to sell what they are told to sell, using all the hype their marketing people can dredge up. They love to sell funds which relive them of the responsibility and work of specific stock research.
Now, how can I convince millions instead of just thousands, to take total control of their investments?
QUESTON #2
Why and when do you decide to buy or sell a stock?
I buy stocks whenever I have accumulated $10,000 in cash. The source of this money is the dividend income that I have lived on for 24 years. Where do I invest it? Back into same portfolio of 20 stocks from where that money originated.
How do I decide which of my 20 stocks to put the money into if they are all financially strong stocks paying high dividends? What I look for are those strong stocks with good operating margins whose book values are close to or higher than their current share price. I hope to see one or two whose share prices have been beaten down by speculators. A few may even have lower share prices than what I originally paid for the stocks. These are bargains asking to be bought.
Over these last 24 years of investing, I have seen the share prices of many of my 20 stocks rise and fall. The easily obtained, free, historical records show that over several decades that the falls of share prices are temporary and in time these financially strong stocks will again rise and reach new record high share prices. Not that it matters to me, because I will never sell a financially strong stock paying a high dividend.
Share price become almost an irrelevant consideration when compared to the financial strength of a company. What I am buying is a reliable growing dividend income to put food on the table, pay the rent, and provide excess funds for further investing.
Often with such financially strong companies you will find that even in market crashes and recessions, when my stocks’ share prices, and all share prices drop, that such companies will often increase their dividend payouts. How is this possible? Because the speculators driving down share prices, only control share prices. They do not control the profits from which the dividends are paid.
Speculators are betting on the movement of share prices. They are intent on selling their shares as soon as they have realized a significant capital gain. Thus, every reported twitch and jerk that could impact a share price causes their share prices to dip and rise. It is the exception for a speculator to even consider historical financial strength and dividend payouts.
You will also see, when financially strong companies do have runups in their share prices, that they will raise their dividend payouts to maintain their high dividend yield percents. The executives of such companies often take great pride in being able to show a consistent high dividend yield percent going back for decades. Especially if they are competing for shareholders with others in the same industry.
The only time I have sold a financially strong company that was paying an initially high dividend was when it did not increase its dividend payout to match its share price growth. I had bought the stock at about $4 at a time when it was paying a dividend of 5% or 20 cents. A few years later the share price had increased to $20 but it was still only paying a dividend of 20 cents. The dividend yield percent had thus mathematically thus fallen to 1%. I sold that stock and invested all that money with its capital gain into a financially strong stock already in my portfolio paying a dividend yield 5% or $ 1.00 a share. This is a revenue gain of 500% over the original dividend on the original investment.
A speculator blinded by a dramatic increase in the share price of such a stock would convince themselves that the share price was going to climb for ever. Perhaps it might, but an increase in your net worth by the increase in the share value is not the same as an increase in your income. To realize income to live on you must liquidate some of that net worth.
Financially strong dividend companies often grow by several multiples over time, but as you watch you net worth increase with such stocks; you are able to live well off the regular dividends they pay their shareholders for holding on to the stocks. That growth in net worth sits there like an insurance policy. Its capital can be liquidated in an emergency. In 24 years, I have had no such emergencies.
Two or three times during the year I will score all the stocks in my portfolio. The score is out of 100. (The highest score, out of the thousands I have calculated was a 78. The lowest was an 8). If a stock’s score fell below 50 while at the same time its dividend yield percent fell below 5%, I would sell it. I can go for years without any stocks ever falling below these benchmarks. Their share value may fall below what I paid for them, but their dividend payouts almost always never decline. I can afford to be patient as I wait for their share prices to climb. Since there are 20 stocks, the few stocks showing such declines have minimal impact upon the total growth of the portfolio.
Perhaps, if your objective were to be the richest person in the world, by speculating on rising share prices, it might be worth the gamble of investing all your money in a single high flying stock. One, that you just knew had to increase by several multiples almost overnight. Unfortunately, no one can accurately predict future share prices. Ignoring this reality is why it is believed 95% of speculators lose money investing in the stock market.
I expect that when my time is over that my wife will eventually add my stock portfolio to her own portfolio. It will be our heirs who will eventually be the ones to liquidate the generous portfolios that we have created over the decades. I have always considered myself just the careful money manager responsible for the safety of this money.
If you wish to live a stress-free life, I recommend building a portfolio of financially strong, high dividend paying stocks. If you need assistance in identifying such stocks, you will find guidance in how to do it in my six investment books and the stock scoring software that comes with them.
QUESTION 3
How can you avoid investment scams?
If anyone approaches you with an investment opportunity, assume, until they prove otherwise, that they are either a scam artist or someone who would not be able to recognize a good investment opportunity if it fell on them. It requires that you verify the credibility of the promotion with objective third parties. You want the promoter to provide verifiable financial records and references that prove that others have benefited from the proposed investment.
The interesting question you must ask yourself, is If the investment is that good, why are they out there selling it, instead of investing in it and enjoying its benefits?
Investment scams involve anything where you must first come up with the cash to realize the benefit. It could be a time share investment at a resort where you will be treated to luxurious accommodation for what sounds like a low financial commitment on your part. What the commission salesman will not mention is the penalty for getting out of this contractual agreement or that you will have no control over the increase in the annual charge.
It is important that you understand all the financial implications. This can even be encountered in buying bonds where much to your surprise you find out that thousands of dollars are being deducted in commissions from the money you have given them when you both buy the bond and sell it.
What if a proposed investment being offered at a cheap price is teetering on the edge of insolvency. It is important that you ask for a copy of the financial statement of the corporation that you are buying into. If it is a scam, usually as soon as you ask for an audited financial statement to prove the proposal’s financial credibility, the scammer will quickly terminate the sales pitch and seek out easier sheep to fleece. A legitimate business will quickly supply audited financial documentation.
However, even with financial documentation, it can require some experience to interpret the strength of a company. If you do not have this experience do not sign anything until you have consulted with someone who has that financial expertise.
One quick verification check to do in front of the salesman trying to close a sale, is to take out your phone and do a Google search of the company name with the words: “scam” “legals” and “complaints” in the search. You can sometimes be amazed what a one-minute search reveals. As soon as you start such a search, you may find the scam artist abandoning you. Despite their warm greetings do not mistake salesmen for friends.
Do not let yourself be pressured into make a hasty decision, despite their spiel that this is a one time offer only available today. If this is a legitimate investment, it will be available tomorrow.
Scam salesmen are paid high commissions to encourage them to say and do anything that they think will get you to sign their contract. There is always a contract to be signed otherwise they do not get paid. Recognize that to them you are just money on the hoof.
The End