PODCAST 175
Safe Dividend Investing
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 175, on July 4th of 2024.
My name is Ian Duncan MacDonald. In today’s podcast, I will be answering 3 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
HOW DO BUYBACKS AND CUTTING DIVIDENDS IMPACT STOCK PRICES?
The executives of some companies are very good at convincing speculators that buybacks immediately increase the value of their shares. However much of that money in the buyback could have gone to improving the company's operations. In time this would have increased the share value by improving the financial strength of the company.
A portion of those profits could also have been allocated to the owners of the company, the shareholders, to give them the incentive to retain their ownership in the company. This discourages them from chasing the next hot stock and causing the share price to drop.
No one can accurately predict how changes in the business climate, technology, and government legislation can change the fortunes of a company. A company that did not invest enough in new technologies when they had the money to do so can find themselves in serious financial difficulty. Set backs can not only impact share prices but the company’s very survival.
When the going gets tough, the short-sighted executives who engineered buybacks often move on to another company that lets them repeat their short-sighted practices to enhance their selfish objectives.
Often shareholders are not aware that the reason the buyback was put through was to make sure that the executives received their very generous stock options. Stock options given at the beginning of the year as a performance incentive allow the executive to buy thousands of shares of the company’s stock at a set share price at the end of the year. The options are worthless if the share price at year end is lower than the amount quoted in the stock option.
The executives of some companies make sure they get their stock option reward by taking money from the company profits and buying back company shares on the open market. This can create the illusion that the stock is in high demand. Speculators anxious to get a piece of this supposed rising stock rush in and buy the stock. This causes the share price to increase. The executives can now immediately cash in on their stock options and pocket the difference between the current share price and the much lower option price they were given. Tens of thousands, even hundreds of thousands, of dollars are realized by executives playing this game.
Now, without the continued investment of the company profits in buying back shares, the share price drops down to a much lower amount. Speculators who were tricked into buying the inflated shares can lose fortunes.
I never worked for a company where we had so much spare money that we could ignore investing in research, new product development or in reducing operating costs to improve profits by through vertical and horizonal acquisitions orbuying assets instead of leasing or renting them.
There is a reason why buybacks were made illegal in the greatest depression we have ever experienced in the nineteen thirties. Fifty years passed before the memory of the bad practices that led to the depression faded. Lobbyists for large corporations were again able in the nineteen eighties to convince the government to again allow buybacks.
The companies who regularly buy back their shares work very hard at convincing shareholders, who are mostly speculators, that they are doing it to protect the all-important share price and lowering investor’s income taxes.
Dividends and buybacks are paid out of profits. If dividends encourage customer loyalty and strengthen share prices, why do some companies cut or eliminate their dividends?
They cut dividends because some companies are arrogant and think that shareholders will not sell their shares if they believe the share price is increasing without the apparent benefit of dividends. This can give some company executives access to more money that they can transfer to their pockets via stock option grants instead going into the shareholder’s pockets.
Some companies also cut dividends because they see a real opportunity for making the company much stronger in the future by investing every dollar they can now in new technologies and improvements.
Others cut dividends because the company has fallen on hard times and are no longer as profitable as they once were. They are just scraping by and do not have enough profit to pay dividends.
This is why when considering the purchase of a stock I look at the history of dividend payouts since 1999. I want to see dividend payouts increasing every year, even in the market crash years.
I was an executive and it was very important to me that this year's profits exceed last year's profits. I want to invest in companies run by executives who are also devoted to constantly increasing sales and profits.
Many years ago, it was ground into me that to survive companies must increase their sales every year just to stay ahead of inflation. I think of the careful price increases I made. Every year it was important to me to increase prices even though I knew a small percentage of the customers would leave because of the price increase. Getting it right meant that the revenue increase from the price increase would be greater than this loss of a few customers. There are millions of experienced executives making wise revenue and expense decisions. Investing in the shares of such companies increases your wealth.
A financially strong company able to pay an ever-increasing high dividend payout year-after-year is a rare thing and should be sought out and cherished.
QUESTION 2
WHAT CHANGES ARE YOU INTENDING TO MAKE TO YOUR STOCK SCORING SOFTWARE?
Several investors have asked me if I intend to make changes to the IDM stock scoring software that I email, on request, to those who purchase my investment books. I provide the software because I want them to re-score every stock just before they purchase it. The need to be sure the company is still as strong as it was when I wrote the book that they are using to guide them in the building of their strong investment portfolio.
Be assured, I will not be making any changes to the stock scoring software because I now have years of information on thousands of scored stocks. Every score was calculated in the same way. To change it would destroy the important benefit of being able to use the scored data for accurate comparison purposes.
Many investors have bought all my books. They can go back to the first book in 2019 (Income and Wealth From Self-Directed Investing) to do reliable historical comparisons.
For example, when you look at a stock like the Bank of Montreal (BMO is traded on both the Toronto and the New York Stock exchanges) in each book you can see trends that reassure you that you made the right stock selection.
In that first book (Income and Wealth from Self-Directed Investing) BMO’s score was a high 74, its share price was $106 and it was paying a dividend yield percent of 3.80%.
By 2020 in my next book (Safer Better Dividend Investing) you can see that the score dropped to 66 and the share price had also dropped to $72.02. With a lower priced stock, the dividend yield percent had increased to 5.89%. Since the score was calculated just after the market crash that year, such a decline would not be unexpected.
When the next 2 books came out in 2021 (Canadian High Dividend Handbook and American High Dividend Handbook) the score was again back up to 74, the share price had climbed to a new high of $117.14 which had caused the dividend yield percent to fall back to a more normal 3.62%.
In the last 2 books released in 2023 (Canadian High Dividend Investing and New York Stock Exchange’s 106 Best High Dividend Stocks) the BMO score hit a new high of 76 (the highest score I have ever calculated out of thousands of scored stocks was a 78), the share price was now at a record high of $136.21 and despite the higher share price the dividend yield had still climbed to 4.62%.
Since these last two books were enhanced with share price and dividend payout data going back each year to 1999, you could now see the steadily increasing dividend payouts even during the market crash years of 2000, 2008 and 2020 when the share prices had dropped by 20 or 30 percent from before the crashes.
I think the reason many people have adopted my stock scoring approach to investing is because it is simple, explainable, and most importantly it works. The typical investment advisor immediately loses many investors seeking investment advice as soon as they utter a sentence like the following,” The Beta indicates how a stock behaves when market indexes fluctuate , particularly the S&P 500. The CAGR measures the average price changes over a given period, weighted by the time scale from the beginning to the end date. "
Investors do not like being made to feel stupid and ignorant. They are not about to ask that glib advisor what the hell he is talking about.
The advisor is hoping that he has been successful in intimidating the prospective client enough that they realize that investing is beyond their ability and they must give the advisor complete control over investing their life saving.
Successful investing is not complicated or difficult, if you keep it simple. This means avoiding investment advisors, their jargon and their complicated investment strategies.
My books devoid of jargon have shown thousands of investors how to invest in a logical, straight-forward manner while retaining total control of their portfolio. Over a lifetime a self-directed investor can save hundreds of thousands of dollars in investment advisor fees, commissions and charges. This is money that could have remained invested in their portfolio to help them achieve financial independence more quickly. There is something illogical about entrusting your investments to anyone who is being paid to transfer as much as possible of your wealth from your pocket to their pocket.
QUESTION 3
HOW WOULD I GO ABOUT USING YOUR STOCK SCORING INVESTMENT SYSTEM TO BUILD A STRONG PORTFOLIO?
First you need one of my books to guide you. Then you need a source of current stock information that would be used to calculate a stock’s score.
Yahoo Finance is a free internet source that could be used. It should have all the information you need.
To buy your carefully selected stocks a self-directed investment trading account with a financial institution is needed. The bank that you now use may offer such a service. Ideally you would want the bank to provide free stock research information access for its customers. You might find the bank stock data easier to work with than Yahoo data. The bank should also offer many additional useful free investment aids.
The next step is to choose the stocks for your portfolio. To me the most important thing is the strength of the stock and how high is its dividend yield.
For safety, it is always good to have a mixture of stocks from different industries and geographic areas in your portfolio. However, diversity is not the primary objective in building a portfolio. It would be safer and more profitable to invest in stocks whose share prices and dividend payouts have risen steadily for 20 years then it would be to choose a stock that was weak just to add diversity to your portfolio. There is a limited number of strong stocks paying high dividends.
It is possible to achieve both diversity and strength in a stock. For example, on page in my book “New York Stock Exchange’s 106 Best High Dividend Stocks” you can find a history of share prices and dividend payouts for the stock, BHP, going back to 1999. This is a stock with steadily rising share prices and dividend payouts. It is a financially strong stock with a score of 64 with an unusually high dividend yield of 12.94%. The operating margin (or profit %) is also high at 52.39%.
Under the “Internet Search Results” section at the end of the BHP listing you can see that it is an Australian company in the mining industry. It is one of the largest mining companies in the world.
Thus, if you were looking for geographic diversification, industrial diversification, a high dividend and financial strength, you can see that such stocks do exist.
It would always be important before you bought any stock to re-score the stock with the stock scoring software provided on request to book buyers. You want to make sure a stock’s strength has been maintained. It is also recommended that you do a Google search under the stock’s name with the words "complaints and legal" in the search criteria. It could bring to your attention negative information that might discourage you from investing in BHP.
To meet any need for further diversification, it is possible to check the "Internet Search Results" at the end of each stock listing. While it does not take long to flip through the 106 pages, to make your search easier you can consult Chapter 8 in the book. Here you will find all 106 stocks are sorted by their stock scores. This can eliminate having to look at weaker stocks.
This is a quick overview of how you can use the book and the stock scoring software to build a strong dividend portfolio.
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