Podcast 170
30 May 2024
Safe Dividend Investing
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 170, on May 30th of 2024.
My name is Ian Duncan MacDonald. In today’s podcast, I will be answering one interesting investment question.
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 DO PORTFOLIOS WITH HI-TECH STOCKS NEED DIVERSIFICATION?
A company’s great success guarantees that competitors will attack their dominance and in time this will lead to the demise of that great company. This is why it is so important in the stock market to diversify your investments and recognize that no matter how strong a stock may appear that its success is limited.
The highest growth stocks now appealing to speculators would be the magnificent seven. These seven stocks have a market capitalization of nearly 14 trillion dollars. They are: Microsoft Corporation (stock symbol MSFT) Amazon.com (stock symbol AMZN), Meta Platforms Inc (stock symbol MEGA), Apple Inc (stock symbol AAPL), Alphabet (stock symbol GOOG and GOOGL), Nvidia Corporation (stock symbol (NVDA) and Tesla Inc (TSLA).
As the most valuable companies in all stock markets, the Magnificent Seven are all currently focused on popular technology growth trends such as artificial intelligence , cloud computing, online gaming, and cutting-edge computer hardware and software. While the Magnificent Seven are perceived as incredibly valuable by speculators who daily trade hundreds of millions of their shares, when you look closely at them you find that they are far from being the financially strongest stocks on the stock market.
A quick way to easily identify financially strong stocks is if that stock is paying a high dividend yields over 3.5%. Four of the Magnificent Seven pay no dividend and three pay insignificant token dividends of less than one percent.
While Microsoft is the world's largest software company and is best known for its Windows operating system and office data processing tools, it is also a market leader in AI innovation.It has invested enormous amounts in its pursuit of growth and innovation. This has excited the speculators who have bought 3.2 Trillion dollars’ worth of its stock on what they want to believe is its perceived potential for ever increasing revenues and profits that will make them rich.
These high-tech speculators don’t listen to the naysayers who say no one can accurately predict future share prices and that all businesses will eventually fail. They do not accept that the larger a corporation gets the more it is removed from reality and the changes taking place in the marketplace.
They should pay heed to the fate of the company that invented the world’s first smart phone. It was Blackberry not Apple. It ceased to provide smart phone services in January of 2022, only twenty years after it was launched.
The Blackberry phone was revolutionary. For the first time you could carry your office around with you. Its multi-faceted functionality filled such an obvious need that it was immediately embraced. BlackBerry had it all.
Unfortunately, Blackberry, like many quick internet successes grew into a smug billion-dollar dinosaur. It either chose not to see or could not believe they were not immune from technological change. just Like Blockbuster video stores and printed newspapers could not believe that a new technology, the internet, had hijacked their customers.
The BlackBerry had a full QUERTY keyboard that you could tap away at with both thumbs. They scoffed at the idea that their market would prefer typing on an I phone’s flat sheet of glass. They were certain their market preferred pushing keyboard buttons, after all, hadn’t President Obama referred to his Blackberry as Crackberry because using it was so addictive.
Within a year after the introduction of the Iphone, the BlackBerry had become the old technology. In 2008, its sales crashed and caused Its share price to from $ 144.56 down to $35.34. Its shares are still traded but it now exist as a cybersecurity company. You can buy its shares for $2.88. They have a book value of $1.32 and the stock has an operating margin of minus 14.65%.
Do those who have just paid $420.26 for a share of Microsoft ever question the strength of the stock when they see that the stock’s book value is assessed by independent accountant audits as only being $27.75. Do they grasp that a price-to-earnings ratio of 37.3 is high and indicates an overpriced stock?
Did they never consider when they bought this stock because it was going to make the rich that a seller sold that stock to them because they were worried that if they held onto it that they were going to lose a great deal of money when the share price drops, as it will in time?
Perhaps they were the same bullish investors who bought Blackberry in June of 2008 at $140.32. Interestingly in 2008 a share of Microsoft was at $25.25 which is close to its current book value.
The public are fickle. It only takes one new competitor with a game-changing invention to revolutionize an entire industry. Sooner or later, something will come along to surpass the iPhone and all the Microsoft technology. This is why for safety you divest your portfolio among many carefully chosen strong stocks.
Unlike a bank or an insurance company that buys investor loyalty with high dividends, Microsoft, like most technical companies, seems to recognize that there is no investor loyalty. They are only as good as their last technical innovation. To maintain their inflated share price, they must always be chasing and choosing what they hope will be next hot technical money maker. This is probably why they chose to pay a token 0.70% dividend instead of generously sharing their profits with their shareholders. Of course, having pumped so many shares into the market to meet the demand for their shares they have made it almost impossible to pay a higher dividend yield. The token dividend becomes is a marketing ploy to satisfy those investors who want to see a dividend
Meanwhile they must keep pouring money into technical innovation while hoping they will be able to avoid the usual smugness of market leaders.
Bill Gates once said there is some young entrepreneur working away in their parent’s garage just like he did creating something that will eclipse Microsoft’s technology.
Microsoft is quite profitable with an operating margin of 44.63% but there are hundreds of companies out there with book values closer to their share price who stronger financially than Microsoft. These other companies’ share prices are not overvalued and they have long histories of paying high dividend yields greater than 5%.
Amazon is another one of the overpriced Magnificent Seven stocks. While Amazon was founded as an online bookstore thirty years ago, its investments in technical innovations and acquisitions have diversified its revenue sources and impressed investors with its potential.
However, when you look closely you see a similar financial profile to that of Microsoft. It is a $180.76 stock with a book value of only $19.44. Amazon’s shares have risen rapidly. In 2008 their share price was only at $3.45
Amazon’s price to earnings ratio is even higher than Microsoft’s. It is at 50.8 with a thin operating margin of 8.02%. Amazon does not even pay a token dividend out of its profits. Some investors want to believe that Amazon shares will continue to rise forever. The US government is already trying to introduce tariffs to control internet competitors from China.
Meta Platforms, which is better known as Facebook is one of the world’s leading online advertising companies. Every day 3 billion people are active in its various messaging and media platforms.
While its Meta shares are up a701% in the past 10 years and trading at $478.22 a share, it repeats many of the patterns seen with Microsoft. Its book value of $59.81 is low when compared to its share price. The price-to-earnings ratio of 27.5 is a bit better. The dividend yield of 0.42% is even lower than Microsoft’s as is its operating margin at 37.38%. However, the demand for its shares cannot be denied, it traded over twelve million shares on May 25th.
Apple is the leading consumer electronics maker among the Magnificent Seven. While it generates most of its money from iPhone, it also sells everything from desktop computers to Apple Watches. However, Like the other Magnificent seven stocks, it has a low book value of $4.00 compared to its current share price of $189.98. The price-to-earnings ratio is 29.5 which is better than Microsoft’s. Out of its operating margin of 30.98% it too pays a token dividend of 0.05%. This works out to 25 cents a share which is better than the 9 cents a share it first paid out in 2012 when its share price was $24.30 but far from keeping pace with its share price growth.
Apple started off as a penny stock in 1989 when it was priced at 39 cents. Even by 2008 it was only trading at $6.07 a share.
Apple is a big believer in using its profits to not pay dividends but to buy back shares in the company to manipulate and maintain its high share price. 36 million shares of the company traded on May 24th.
Alphabet is the parent company of the search engine Google and many other tech companies. With a 90% share of the world’s online searches, it dominates that search market. Like the other Magnificent Seven companies it too has a high share price of $176.33 versus a low book value of $23.65. The price-to-earnings ratio is a typical 27.3 as is the operating margin at 35.52%. The GOOGL Alphabet stock was first listed in the stock market in 2004 at only $2.71.
Nvidia designs and sells the high-end graphics and mobile processors used in personal computers. Because of its dominance in the AI chip industry, it is currently the leading growth stock in the Magnificent Seven. This is reflected in its high share price of $1,064.69 and a daily volume of shares traded exceeding 42 million. It too pays a token dividend of only 0.02% and has a low book value of $17.44. The 62.3 price-to-earnings ratio makes it only attractive to speculators. It is the most profitable of the seven stocks based on its operating margin of 59.84%. In 2008 this stock could have been purchased for $6.10 a share.
Tesla the United States leader in the manufacture of electric vehicles. Tesla is overvalued when you consider its price to earnings ratio of 45.84, its operating margin of 5.50% and book value of $20.19 in comparison to its current share price of $179.24. It is not surprising that it pays no dividend. It was first listed on the stock exchange in 2010 when its share price debuted at $1.28.
These seven speculative stocks require constant monitoring to make the best guess as to when to buy and sell the stock to realize a profit. Since their dividends are either miniscule or nonexistent, there is no dividend income to pay your ongoing living expenses as you wait to make what you think will be the best decision on these stocks.
Is there is a limit as to how high each stock will climb? Of course, there is, and a purchase of these overpriced stocks is a risk for any investor.
Those buying these shares at their current high prices are gambling that will be able recognize when to get out before the inevitable fall. They do not want to hear the statistics that 80% of speculators will lose money over the next ten years in pursuit of the big payoff that never comes.
It is interesting to compare a Magnificent Seven stock like Tesla to an established car manufacturer like Honda. Who is not a Magnificent Seven stock but is recognized as safe, financially strong and paying a steady dividend. Honda’s share price is only $33.24. Unlike Tesla whose share trading volume exceeds 68 million. Honda only traded 494,000 shares. Its book value is $50.25 which is more than double that of Tesla’s $20.19. Buying Honda’s shares is a bargain. Its low, healthy price to earnings ratio of 7.7 is another indicator of its value.
Although its dividend yield of 2.53% is far from impressive it still more than double the dividend yield of any of the Magnificent. What is truly impressive is that it has paid a dividend ever quarter for more than 30 years. from a low operating margin of only 6.76% which is a small fraction of the operating margins of Alphabet, Meta, Apple, Nvidia and Microsoft. Like its cars Honda is reliable and affordable.
Speculators who missed getting rich by investing in Magnificent Seven stocks when they could be bought for a few dollars are determined not to miss buying a Magnificent Seven no matter how much they must pay to join the millions who have bought these inflated stocks. Taking all their free cash and even borrowing money, they invest it all in one of these stocks. No thoughts of diversification or careful analysis is considered.
When inevitably such a stock crashes they bail out only after the stock has dropped below what they paid for it. This is the buy high, sell low strategy of investing that guarantees most speculators will never become rich.
If you run with the herd, expect to suffer the same fate as the herd when it plunges over the cliff. To be a successful investor you must isolate yourself from the herd and look at investing objectively and unemotionally. It requires that you make hard logical decisions based on facts which are available free of charge.
Many companies who have provided exceptional, reliable dividends are and have always been financially strong companies. Such companies increase their dividend payments as their stock prices rise in tandem with their rising sales and profits. While their stock prices will drop during market crashes, they will still continue to pay their usual dividends as you wait for their share prices to quickly recover. Their strength has little to do with their share price but everything to do with the experience and habits of their executives to manage revenue and expenses.
Past performance is no guarantee of future returns. A diversity of strong stocks in several industries distant from the technical stocks should be considered if you have invested heavily in the Magnificent Seven.
THE END