PODCAST 165
SAFE DIVIDEND INVESTING
25 APRIL 2024
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 165, on April 25th of 2024.
My name is Ian Duncan MacDonald. In today’s podcast, I will be answering 2 interesting investment questionhe 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
ARE THE STOCKS OF LARGE BANKS A GOOD INVESTMENT?
The first rule of investing is to not lose money. When you invest in a large bank you are Investing in one of the largest corporations in your country. These are companies who have often operated with ever increasing profits for a hundred years or more. Their long-established reputation helps remove any fear that you are investing in a speculative risk.
Well run, large, successful banks can employ a hundred thousand employees. They are larger organizations than the governments of many small countries. Their size makes them bureaucracies with rigid rules and standards.
Cultivating a reputation that they are as safe an investment as a government savings bond is their objective. Their customers expect all banking transactions to be handled and documented in a transparent, professional manner. These businesses are built on trust.
They are not nebulous bitcoin operations or newly formed unprofitable tech companies, on the cutting edge, but with nothing going for them but their potential. Nor are they commodities whose profits fluctuate up and down on world demand, far removed from the steady, unexciting, profitable world of banking.
Interest rates are controlled by each country’s central bank. The retail and commercial banks raise and lower the interest rates they charge to maintain the same steady profitable spread over the central bank rates. Providing they carefully manage their operating expenses and meet their customers’ rates expectations; banks are able to maintain their solid operating margins.
A customer is not about to abandon the safety of a large bank for a small bank over a half a percent difference on loans or deposit interest.
Since large banks have this “rock-of-Gibraltar” strength and reputation, they do not have to hard sell investors on buying their shares. Mutual funds and retirement accounts often contain the shares of large banks for safe stability.
Let us look at the financial strength of the two largest banks in the United States, the largest bank in Canada, and the largest bank in China. The Chinese bank is the largest bank in the world.
If you were to only invest in just one of these four banks, which one do you think would give you the best return on your money?
Best might be described as the one most likely to have a much higher share price in five years and pay the highest most reliable dividends. All four of these stocks do pay dividends.
The two largest banks in the United States are JP Morgan Chase Company (stock symbol JPM) and Bank of America Corporation (stock symbol BAC). Both are traded on the New York Stock Exchange.
On April 21st of 2024 JPM’s share price closed at $185.84 and 13,402,000 shares were traded. Its market capitalization was $533.6 Billion dollars.
BAC’s closing share price was $36.97 and 56,273,000 shares were traded. Almost 5 times more shares than JPM. Its market capitalization is $292.7 Billion dollars was about half that of JPM.
The Canadian bank, the Royal Bank of Canada (stock symbol RY) is also traded on the New York Stock Exchange. Its share price was $97.87 and 882,487 shares were traded. Its market capitalization was 137.7 billion dollars. All amounts have been converted to US dollars.
Now comes the interesting one. The Chinese bank, the Industrial and Commercial Bank of China Limited (stock symbol IDCBF), despite being much larger the JPM with a market capitalization of 2.1Trillion dollars, which makes it four times larger than JP Morgan, it is not traded on a major US stock exchange. Its shares can only be bought on the “pink” OTC market” or the “Over The Counter Market”. Companies that trade on the OTC often do not want to meet the listing requirements of the US Securities and Exchange Commission. Since they are not listed on the stock exchange, there is limited information available on them. For example, the daily volume of shares traded is not available. None of its executives are identified. The daily range of share price bids is not available.
The interesting question is why the Chinese bank is being recommended as a stock to buy by analysts at J.P. Morgan and Nomura. They both see its share price increasing by 20%.
This share price increase sounds impressive until you realize the share price is only 50 cents. However, money is money and a 20% increase in the value of a stock is significant if you were to buy 2,000,000 shares.
What is also noteworthy is that of the four stocks IDCBF has the highest dividend yield of 8.42%, an incredible book value of $11.40 for a stock trading at 50 cents, plus the highest operating margin of 50.84% which beats the operating margin of 38.93% at JPM, 32.05% at RY and the 27.02% at BAC. The dividend yields at these three banks are also significantly lower: RY dividend yield is 4.10%, BAC is 2.60 and JPM is2.48%.
While the historical information for IDCBF is limited you can see that the share price was 61 cents in April of 2023 ; 71 cents in March of 2021 and 95 cents in 2018. The two analysts who predict that the IDCBF could rise to 60 cents from 50 cents are not wildly speculative.
However, if you invest in large major banks because they are transparent with ever rising share prices and dividend payouts the lack of financial data for IDCBF turns the largest bank in the world into a speculative investment.
The IDCBF is owned by the Chinese government. They have a monopoly on banking services in China for a population that is 4 times larger than the US population. This explains their large capitalization.
Ideally you want to have a portfolio of 20 stocks whose dividend yield percent is higher than the average inflation rate over the last 100 years of 3.5%. Only one of these three North American banks would meet this benchmark. That is the Royal Bank with a dividend yield of 4.10%. If it were twinned with a financially strong stock paying a dividend yield of 8% you could expect to achieve a steady 6% average dividend return.
A high dividend rate from your portfolio removes the insecurity of having to sell stocks to gather enough cash to live on.
The other factor to consider is the gain in the share price over 25 years. Two of these three stocks have shown good capital gain. The Royal Bank was trading at $15.26 in 1998 and is now at $97.87. JP Morgan was at $28.54 in 1998 and is now $185.84.
The Bank of America record is spotty. It was $43.59 in 1998 and is now at $36.97. It has been higher. In 2006 it was at $54.85 and in January of 2023 it was at $49.18.
I own several bank stocks, but I do not own any of these four. Why? Because there are stronger stocks paying higher dividends with more consistent ever rising share prices. Check out my two guidebooks, the New York Stock Exchange’s 106 Best High Dividend Stocks and Canadian High Dividend Investing 215 Stocks Scored and Analyzed. They provide dividend payout and share price data going back to 1999.
Dividends are paid from profits. The purpose of a company is to make a profit. I only invest in companies who are willing to generously share their profits with the company owners, which are the shareholders.
QUESTION 2
WHY DO INVESTMENT ADVISORS HAVE A REPUTATION FOR UNETHICAL DEALINGS WITH THEIR CLIENTS?
There are several daily publications that are delivered over the internet that describe the recent unethical behavior of Investment advisors. They are not hard to find.
One that came across my desk today described a mutual fund advisor/salesman who defrauded a retired couple. It started in 2010 when the advisor created a fake, non-existent real estate fund. He got them to initially invest $250,000 in the fake fund and eventually received a total of $330,000. The fraud was not detected until 2019 when he tried to get the investors to contribute even more money to maintain the investment. They refused and demanded he liquidate their holdings and return their money. It was only then they learned that they had been sold a fake investment. For all those years, he had provided false account statements.
Although he was kicked out of the industry and required to pay over half a million dollars in fines, penalties, and restitution, he was not jailed. The financial industry is self-regulated and takes care of its own. If he had robbed a bank for a fraction of what he stolen as an advisor, he would have been jailed.
This fraud is like the classic Ponzi scheme where the payment of very high returns to existing investors is not coming from the investments but from funds being deposited by new investors. The investor thinks he is getting very high returns with no risk.
Hedge fund investor Bernie Madoff’s name often comes up when Ponzi schemes are discussed. He stole billions from his clients. Everything was going fine until the 2008 market crash when his clients wanted their money back.
Ponzi schemes are often tied into conning a particular group. They may be members of the same religious or cultural group. Their trust in each other makes them think that surely since everyone in the group has invested, it must be a safe good investment.
Anyone promising or even guaranteeing higher than normal market returns for you money should be immediately suspect. A normal return might be in the range of 6% to 12% in a year. The promise of doubling your money in a year is meant to appeal to your greed and dream of easy money. Keep in mind that over the last 100 years, the Standard and Poor 500 has averaged a total return of between 9% and 12% annually.
The slow unnecessary churning of portfolios every month can also steal thousands of dollars every year out of hundreds of thousands of investment accounts. The advisor may be buying and selling a dozen investments in your portfolio each month. Each trade is incurring fees, charges, and commissions. Choosing good investments and sticking with them is the secret to acquiring wealth, not constantly jumping from investment to investment.
Do not hesitate to run your advisor’s name against the following websites to see if any negative information appears:
www.finra.org/brokercheck,
www.adviserinfo.sec.gov,
www.nasaa.org,’
www.naic.org,
www.cfp.net.
A simple Google search of an investor advisor’s name and the companies he has been associated with can often disclose complaints by disgruntled former clients who have lost money.
To scare away the investment conmen always ask for a written document that details exactly how your advisor will be compensated by you.
Do not invest in any investment they are promoting that you do not understand or cannot easily verify its credibility. Make the advisor clearly detail in writing the advantages and disadvantages of the investment. This is a chore he must incur for you to consider letting him get his hands on your money. You are in control, not the advisor.
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