Send us a Text Message.
Welcome to Safe Dividend Investing’s Podcast # 172 on June 13th of 2024.
Today, I will be answering 2 interesting investment question.
QUESTION (1)
WHY DO 80% OF INVESTORS IN STOCKS LOSE MONEY?
QUESTION (2)
WHY ARE MANY COMPANIES SO CONCERNED ABOUT THEIR DIVIDENDS?
SIX INVESTMENT GUIDE 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 IAN'S 6 INVESTMENT BOOKS, 3 NOVELS, PAINTINGS, PHOTOGRAPHS AND DIGITAL ART VISIT www.informus.ca
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 172
Safe Dividend Investing
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 172, on June 13th of 2024.
My name is Ian Duncan MacDonald. In today’s podcast, I will be answering 2 interesting investment questions.
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 80% OF INVESTORS IN STOCKS LOSE MONEY?
Investors in stocks lose money because most have been conditioned to approach investing with a speculative mentality. They believe it is only possible to achieve great wealth in the stock market by buying the “right” stock now for a few dollars with the questionable belief that this stock will be worth hundreds of dollars almost overnight. They have been influenced by the success of stocks like Apple and Microsoft whose share prices have increased by ten or more multiples since their listing many years ago. Unfortunately, such price explosions rarely occur, perhaps out of the16,000 stocks available to invest in, there might be one or two stocks who would now have such dramatic increases.
To realize a profit from buying such a stock, you must sell it. Human nature is such that investors are loathe to sell a stock that is rising and loathe to sell a stock that has risen to great heights and is now falling. They are usually sure it will rise to new record highs again. and speculators are prone to buy and sell stocks at the worse possible times.
Speculative investors who are trying to time their entry and exit from a stock choose to ignore the studies that prove no one can accurately predict future share prices. This proof is contrary to the investment theories and beliefs they are being sold by investment gurus which will allow them to pick that one magic money-making stock.
Speculators who are after a quick buck ignore the reality that the stock market is an auction vehicle in which millions of optimistic speculators are bidding against millions of pessimistic speculators. One is willing to pay more for a stock that they are sure is going to increase in share price and the other is willing to sell the same stock for less because they are sure it is going to decrease in price. Both cannot be right.
Perhaps the worst thing that can happen is that they do luck into choosing one magic stock. This one win convinces them of their stock picking skill and encourages them to be constantly buying and selling stocks for the rest of their life. Over the next ten years they will still not have made a profit but that does not discourage them.
Such investors would be much further ahead if they concentrated on the more realistic objective of achieving financial independence instead of instant wealth. This change in direction would force them learn to carefully manage their expenses by concentrating on becoming debt free and living frugally.
Careful money management would allow them to invest as much of their employment income as possible in a diversified portfolio of 20 carefully chosen, financially strong, profitable companies paying high dividends. These would be companies whose share prices would have risen steadily over the last 25 years and whose dividend payouts had increased even faster and paid out steadily during the market crashes in 2000, 2008 and 2020.
Dividends are paid out of profits. Profits are derived from the management of revenues and expenses by the experienced executives of a company – not from speculators bidding on the company’s stocks.
Investors who chose 20 such strong stocks that they never intended to sell expect to see their portfolio doubling within five years. It comes from both normal capital gain and from investing the dividend income back into the portfolio. A normal annual capital gain for such a portfolio would be 12% with a 7% dividend yield. Such a return would not be unusual most years.
The compounding impact of this approach to investing eventually results in realizing a dividend income greater than the income you would have made as an employee. You would then have achieved your objective of financial independence. You can now live comfortably on the dividend income your portfolio is delivering, if you choose to.
That dividend income will continue to grow because most of your 20 stocks share prices will continue to increase each year. Such stocks also increase their dividend payouts each year to keep their dividend yield percent at least as high as it was when their share price was lower. This growth will offset the impact of inflation which without this income growth would decrease the investor’s buying power.
At some point you will probably see your portfolio exceeding a million dollars in value, not that it matters a great deal because you have already achieved the more important investment goal of achieving financial independence. A million dollars just becomes a number despite it being the ultimate for many investors. You have learned that no matter how much your portfolio grows that you must always be careful about your spending. To have sacrificed so much to achieve financial independence you are not about to jeopardize it. This portfolio is now the source of your income for the rest of your life.
As a self-directed investor, you know exactly what you are invested in and why you chose those stocks. This knowledge allows you to sleep well at night.
There is no easy shortcut. You cannot achieve this same income certainty by buying mutual funds and other fund products. With funds you have no control over what the fund has invested in, and you receive only a very small portion of any dividends paid into a fund. Furthermore, the fees and charges by the investment advisors selling the funds and the fund managers eat up most of your investment profits.
To many, who have limited experience in the stock market, self-directed investing can sound intimidating, but it need not be. You can be shown how simple, safe and easy self-directed investing can be. It is not the complicated and mysterious thing that investment advisors and other sellers of investment products want you to believe it must be.
To get some insights into self-directed investing visit my website www.informus.ca, listen to all 171 of my Safe Dividend Podcasts and start reading my six investment guidebooks.
Question #2
WHY ARE MANY COMPANIES SO CONCERNED ABOUT THEIR DIVIDENDS?
Companies pay dividends out of the company profits to reward those shareholders who maintain ownership of shares in the company. Dividend payments are a marketing incentive meant to retain investors who are not like speculators constantly buying stocks at a low price and trying to sell them quickly at a higher price.
The purpose of a company is to grow profits by maximizing its revenues and minimizing its expenses. The purpose of a company is not to rapidly increase share prices for speculators to make a quick buck.
One obvious sign of a company’s strength and ability to make a profit is the size of its dividend. High dividends can create a demand for the shares which results in the share price rising.
The executives controlling revenue and expenses own shares in their company. They do benefit from rising share prices. They also suffer when share prices which are controlled by speculators decrease.
It is not unusual to see unprofitable companies with rising share prices not pay dividends and to see very profitable companies with declining share prices that do pay dividends. These are situations where speculators not value investors are impacting the share price
How much a company decides to pay in a dividend from their profits is an arbitrary decision. Some companies may decide that they will pay out 40% of their profits in dividends. This might result in a payout to all shareholders of $1 per share on a $10 share price. This would be a dividend yield percent of 10%.
If in the following year paying out 40% of their profits in dividends from their more profitable operation might result in a payout to all shareholders of $2 per share on what is now a now $20 share. This would still be a dividend yield percent of 10% and be quite acceptable to investors.
However, suppose they decided to keep the dividend payout the same as the previous year at $1 per share on the higher share price of $20 share. The dividend yield percent would now have dropped to 5%.
Although the shareholders are getting the same dollar dividend amount as last year, they are not happy. They want to share fully in the company’s increased wealth. Some of them will sell their shares because the shares are now worth far more than when they had bought them. They can invest that money in another stock of that would pay them $2 a share instead of $1 a share for the same amount of money invested.
Dividends can and do become a competitive factor. Stocks of large banks will often compete for shareholders with their dividend yield percents. This often results in them all paying a similar dividend yield percent which ends up removing dividends as a competitive factor in attracting investors.
The last thing any company ever wants to do is cut their dividend payouts. If they have had a bad year and pay out the same dividend as last year that would be difficult to justify with their reduced profits. However, ignoring good fiscal management which dictates that they should cut dividends, they will still pay out a dividend the same as the previous year. To do this they may have to cut spending in other areas of the company or even borrow the money to cover the dividend payout. The management believe that it is important for a company to always maintain an image of prosperity in the marketplace.
Cutting a dividend would immediately draw the attention of analysts and the media who see it as a sign that the company is in trouble. Since they are public companies, they cannot hide this bad news. It must be reported. Shareholders would now receive recommendations to sell those shares.
If the company had a problem, it now has an even more serious problem. Its competitors would take every opportunity to denigrate them and compare the weakness to the competitor’s superior financial strength. Borrowing costs and other risk influenced business dealings would come under review.
While dividend stocks tend to be conservative and this is reflected in their relatively slow share price growth, these stocks do add consistency and strength to a portfolio. Even during market crashes when all share prices can lose 50% of their value you will find the dividend payouts of many financially strong companies paying out their same payouts as before the crash - in some cases even increasing their payouts. This is possible because the payouts are paid out of profits not out of share prices. Just because speculators drive the share price down in a market crash does not mean that a company’s profitability has changed. You will find that the share prices of strong dividend payers quickly regain their pre-share price as the market crash fades into history.
Even the most impulsive and ravenous of speculators would be wise to maintain a significant percent of their portfolio in financially strong, high dividend payers because another market crash is always a certainty.
END
