Podcast 162
4 March 2024
SAFE DIVIDEND INVESTING
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 162, on April 4th 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. Seek out the transcript attached to Podcast #154 for more details.
While this contest was created as a learning experience for those who are hesitant about investing in the stock market, it is open to anyone who wants to test their stock picking skills. To make it bit more interesting the winner will receive $100 as an incentive at the end of 12 months.
Request the Excel entry file, if you are interested in participating, at ianduncanmacdonald@hotmail.com.
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
What should I be doing to minimize the possibility of being stock scammed?
If you are not greedy or looking for a quick easy buck, it is very easy to ensure that a stock you are about to purchase is legitimate. You never want to be in a rush to buy any public stock.
Unlike shares in private companies, all stocks traded on public stock exchanges are monitored by the Securities Exchange Commission. They confirm that the audited financial information public companies are reporting represents their true financial picture. Although the S.E.C. is overseeing what goes on in a stock exchange this does not mean that fraudulent audited information could not be used to manipulate stock prices, it just lessens the possibility.
A famous fraudulent stock manipulation resulted in several new laws to protect investors. This was the Enron bankruptcy. In that 2001 bankruptcy investors lost 74 billion dollars. Enron’s share prices dropped from a high of $90.75 to a low of $0.26.
From 1995 until it went bankrupt in 2001, Fortune magazine, each year, had named Enron the “Most Innovative Company” in America”. The lesson here is just because you only invest in the leading high capital stocks on an exchange does not mean you are immune from being scammed.
It is the Enron loss that caused Washington to pass the 2002 Sarbanes-Oxley Act. This act greatly increased the penalties for altering, destroying, or fabricating financial statements. Auditing firms and companies’ boards of directors were also now held to a much higher standard of ethical conduct than they were prior to the Enron bankruptcy.
Arthur Anderson was Enron’s accounting firm. It was one of the five largest accounting firms in the USA. Their reputation for high standards and quality risk management was destroyed with Enron’s massive fraud. They never again did audits of public companies. Their accountants had either failed to detect the fraudulent practices or ignored it. However, an experienced short seller detected the fraud.
For those unfamiliar with short selling a stock. It involves borrowing a quantity of a company’s shares stock from a broker at its current price with the agreement that you will return the same quantity of shares at a set date in the future. Since short seller believes the share price is about to fall they immediately sell those borrowed shares on the open market.
Prior to the set return date the short sell buys the same number of shares on the open market to fulfil their obligation to return the shares to the broker. The short seller pockets then pockets the difference between the share prices at the beginning and end of that transaction.
In Enron’s case the short seller had recognized that the glowing financial information Enron was reporting was a fabrication. He was sure the stock would drop like a stone when this fraud became public. The share price did drop, and he made hundreds of millions of dollars on the shorting of Enron’s stock.
The message here is that short sellers serve a purpose in the stock market. While short sellers will actively promote their belief that the stock is about to fall, it can be unwise to ignore their warnings.
You have to take what they say about a stock into consideration in managing your portfolio. However, never forget that shorting stocks is a dangerous investment strategy. If the share price should increase instead of dropping the short seller can be in serious trouble as the date approaches where he must buy shares to replenish the shares he borrowed. There is no limit on how high a stock can go.
Accurately predicting future share prices is not possible. It is always a gamble.
Enron’s fate was sealed when their manipulation of financial information became public, and the chief executive and other executives departed. A failed attempt to desperately close a merger with a stronger company was the final chance of survival.
The lesson here is to keep on top of the business news every day. Be aware of changes going with the stocks. There are news services available that will bring important information on your stocks to your attention for free or for a modest charge.
To often, many investors lose sight of the fact that when you invest in a company, you are really investing in the skills, integrity, and experience of the company’s senior executives. It is their decisions that impact the revenues and the expenses that result in the company’s profits. When you see a large corporation, laying off thousands of employees, you are often seeing a strategic decision being made to protect profits before a situation becomes uncontrollable. Without profits companies cease to survive as was the case with Enron.
This raises the question, if a new start up company is unprofitable why would anyone invest in it when there are hundreds of financially profitable, established companies to investing in? Often the answer is that a financial advisor said that this stock had great potential. you could buy for a few dollars and it rumored to be another Microsoft or Apple. It will be worth hundreds of dollars per share. Do your own research. Confirm the stock’s strength and accept that predictions of future share prices are just guesses.
Investing is about patience and common sense. When you look back over 20 years or more of a stock’s constantly rising share prices and dividend payouts, you are seeing a company whose executives are focused on building the company’s strength and its predictability. Buying what they have sell has become a habit for their customers. While you will not become wealthy over-night investing in strong stocks, your wealth will increase.
For example, one of my shares now costs $130. 00. It is paying out a dividend yield percent of 4.65% which provides an annual dividend payout of $6.04. In 2000 their share price was $30.25 and their quarterly dividend payout was $0.25. By 2010 it cost $63.04 and was paying out $0.70. By 2020 it was at $70.72 and paying out $1.06. In 24 years that stock’s share price has grown by about 450% but more importantly the dividend payout has steadily grown even more.
That stock is BMO, the Bank of Montreal, which is traded on both the New York and the Toronto stock exchanges. It was founded over 200 years ago and is recognized as one of the five safest banks in North America. Its score is usually around 78 out of 100 and There are many established stocks with similar track records waiting for you to safely invest in.
To ensure an average dividend yield of at least 6% in your total portfolio a high scoring stock like BMO should be twinned with a lower scoring stock paying a much higher dividend. An example might be the long-established mining company Rio Tinto PLC It has an impressive dividend yield of 10.14% with a score of 63. The message here is that you do not need to speculate and run the risk of investing in scams and questionable stocks being promoted on the basis of their alleged “potential”.
There are several sights on the internet where you can look back over decades of share prices and dividend payouts to spot stocks with ever rising share prices and dividend payouts. You then score such stocks to get an objective fix on their value. Scamming an investor who spends the time to thoroughly search out such stocks is very difficult.
One simple rule that immediately eliminates many potential investments is If there is not enough information on it to score it then don’t invest in it. A second rule is never invest in just one stock. Invest in several strong stocks.
To have no more than 5% of your wealth at risk in any one stock portfolio, invest equally in the shares of 20 strong companies. They are never all going to be all up or all down at the same time. It is the average for the entire portfolio that is the most important, not any one stock at any one time.
QUESTION#2
Is it best buy a stock when it is cheap, wait for its price to increase, sell it and then wait for its share price to drop and then buy and it sell over and over again?
This is such a simple formula for becoming rich. Unfortunately, it does not work and has been the ruin of many speculative investors who fail to recognize that public companies are illusions. A “company” is just a legal entity. It does not have a brain or experience. All decisions that impact a company’s profits are made by the executives who manage the company. Their job is make decisions that will maximize revenues and minimize expenses in order to create the highest profitable return for the shareholders.
In a logical world, companies that were very profitable should have the highest share prices. The reality is that there are many un profitable or barely profitable companies generating billions of dollars in sales whose share prices are over $100.
Share prices are not controlled by the managers of a company. Share prices are controlled by a disorganized, often irrational mob of speculators. They are buying shares because they are betting the share price will go up and make them rich and by speculators selling the shares for they fear the share prices will go down and leave them penniless.
When a speculator buys a stock, he is only guessing that it will increase. The guess may be right, or it may be wrong. If after buying the share that was to make him rich, drops in price and continues to drop, at some point in time the speculator will lose faith in his stock picking ability, cash out and take his loss.
Something similar happens when the stock does climb as he had guessed it would. It rises higher and higher. He is feeling richer and richer. How high is this stock going to go? When should he cash out and take his winnings? Perhaps the stock pauses in its growth. The investor wonders is this a sign that share price is now going to plunge down or is it just a temporary retreat before it again moves upward?
If he sells and it again moves upward, he will be frustrated, for not having maximized his wealth. If he sells and it continues to move downward, he will be frustrated because he should have sold it sooner.
Do you really want to be on that roller coaster ride of speculative investing, constantly trying to predict something that is at the whim of millions of optimistic and pessimistic speculators. Stress can kill you. There must be a reason why I keep seeing reports that 90% of speculators lose money investing in stocks. Since accurate stock price predictions are not possible is it any wonder that speculators have a reputation for never getting the timing of their buying and selling right?
The only safe, stress-free, way I have found to invest, is to invest in 20 financially strong stocks with long histories of both ever rising share prices and ever rising dividends payouts. I do not care how high a stock goes or how low the stock goes. I live off the consistent growing dividends of such stocks.
Investing this way has given me a reliable 6 digit dividend income and has grown my portfolio by 500% since I was forced into careful self-directed investing 20 years ago.
I can go for years without seeing a need to make a change to the stocks in my portfolio. There are only two very rare reasons I might discard a stock. I would look for a stronger stock if a stock’s score fell below 50 out of 100 while at the same time its dividend yield fell below 5%.
The second reason is when a stock price might have increased by 600% in value, but the dividend payout has never changed. Thus, while it may have been paying a good dividend of 24 cents when I bought a thousand shares at $4 each, years later when its share price is now $24 a share its dividend payout is still 24 cents. I can now sell this stock for $24,000 and invest all its enhanced value in a new strong stock paying a 6% dividend yield or more.
Such investment benefits are a long way from speculative buying and selling.
QUESTION #3
What are the best industries to buy stocks in that will make a lot of money?
A soon as I see a question like this, I conclude that I am dealing with a speculator who has never made money on the stock market and most likely never will. They have a limited understanding of businesses and how to invest safely and well.
First, every industry has winners and losers. Companies who compete for the same customers are constantly making changes and refinements to their products to gain greater market share, this means taking customers and revenues away from their competitors.
In our capitalist system everything is in constant motion, nothing is ever static. If a company is not increasing its sales, then it is moving backwards and if it does not smarten up and make changes that are attractive to more customers it will eventually fall and be trampled by a more nimble, smarter company.
In addition to competing with competitors in the same industry, a company is also under attack by changes taking place in society such as fashion and technology.
Many years ago, I called on a very successful manufacturer of sheepskin coats who taught me a lesson on reality. He told me while at this time they were the largest manufacturer of sheepskin coats in the world, fashions could and would change and no one would be wearing sheepskin coats any longer. His acceptance of this reality was an eye opener to me. He fully expected and accepted that in the future he would be in another line-of-business.
Therefore, the question should not be to ask what industry is best to invest in. Ignore industries and concentrate on which 20 companies have shown for twenty years that they can grow their share price and pay ever increasing dividend payouts from their ever-increasing profits.
While all companies in every industry eventually fail and disappear. Fortunately, strong companies take a long time to do it.
In the meantime, you ride that money train as long as it is feasible. With 20 strong companies in your portfolio the growth of the majority will offset the weaking of any companies, should they ever appear in your portfolio. This gives you time to find a strong replacement for them.
What about diversity? Twenty companies will give you diversity. If some are in the same industry and are strong, I would rather have them then have a weaker company in another industry just to give my portfolio industry diversification.
While you can make a “lot of money” investing this way, this of course depends on your definition of a “lot of money” and your patience?
The End