Monday, July 6, 2015

Why Invest For Dividend Income?



Why are dividend investors fanatical about rising dividend income?
The answer illuminates why dividend investing continues to attract new adherents.
Simply put, dividend investors realize that investments should pay you real money. Too often, people approach the stock market as the world’s largest virtual casino.
The World’s Largest Virtual Casino
It is very easy to think of each stock ticker as a virtual bet. Sometimes, the price rises, and sometimes it falls. It all feels so random. It is the same feeling you get in Las Vegas… You either get lucky and win money, or you don’t.
Stocks are much more than virtual lottery tickets.
Buying a share of stock entitles the investor to a fractional share of ownership of a business. When you buy a stock, you are investing in a real-world business.
Business and gambling are very different. Businesses earn money when they provide services or products that their customers are happy to purchase. If a business is run well, it will continue to grow larger. If it is run poorly, it will eventually decline.
Notice the stark difference between business and gambling. In business, success depends on serving your customers better or more efficiently than your competitors. Sure, there is some luck involved, but intelligence and hard work will lead to favorable results.
Gambling is completely different (this does not include games played against other people instead of the house, like poker). The odds in gambling are set. You will lose over time. There is no amount of skill that can make someone a winner playing slots or roulette. You will lose if you play long enough. The house always, alwayswins.
The stock market is not a large casino, even though many investors treat it that way. The stock market allows people to purchase small percentages of the world’s greatest companies (or mediocre companies, if you want).
Dividend Paying Businesses
At this point, hopefully readers see the difference between buying random stock tickers and investing in sound businesses to take advantage of their attractive economic prospects.
Dividend paying businesses are different than non-dividend paying businesses. First, for a business to pay a dividend for any lengthy amount of time it must be profitable. Businesses that lose money simply cannot pay dividends for any meaningful length of time. Unprofitable businesses will run out of money and declare bankruptcy faster by paying dividends.
Profitable businesses, on the other hand, can return profits to their owners by paying dividends. A dividend payment is the return of profits to the owners of a business. As a shareholder, you are an owner.
Take Coca-Cola (KO) as an example. Coca-Cola pays out 64% of its earnings as dividends. Every time someone buys a Coke, Coca-Cola shareholders get 64% of the profits paid to them.
You may be wondering, what happens to the other 36% of Coca-Cola’s earnings? If shareholders own the company, why aren’t 100% of earnings paid out to shareholders as dividends?
The reason Coca-Cola does not pay out 100% of its earnings as dividends is because the company’s management attempts to maximize the long-term value of Coca-Cola shares.
To do this, Coca-Cola needs to grow. Coca-Cola’s managers have estimated that the optimal amount of profits to reinvest in the business is around 36%. This money goes to repurchasing shares, building up cash balances for stability, repaying debt, and investing in future growth.
Coca-Cola is expecting earnings-per-share growth of 7% to 9% a year. The company will likely grow dividends at around the same rate.
If Coca-Cola paid out 100% of its earnings as dividends, it would have a yield of 5.1%. Coca-Cola stock currently has a yield of 3.3% and is expected to grow at 7% to 9% a year. In 10 years, Coca-Cola shareholders will have a yield on cost of around 7.1% thanks to growth. If the company paid out all of its dividends and reinvested nothing in growth, shareholders would be worse off in 10 years than if Coca-Cola does reinvest some of its earnings for future growth.
Why Invest for Dividend Income?
Investing for dividend income places focus on what matters in investing – a businesses’ ability to generate growing income over time. Dividend investors look for businesses that will be able to pay increasing dividends because the business is growing its income.
This eliminates unprofitable businesses from consideration for dividend investors. Avoiding the worst businesses is certainly a good start in not losing money investing. If you aren’t losing money, you will end up making money.
Dividend paying businesses also produce passive income. Dividends roll in each month or quarter, without you doing a thing. Over time, this passive income stream will grow as the businesses grow and as you invest additional money. This ‘snowball effect’ results in compound growth of passive income.
The ultimate goal of dividend investing is to be able to live off the passive dividend income your portfolio generates. The speed at which a dividend investor reaches this goal depends on a few key variables:
  • What your monthly expenses are (the lower, the better)
  • How much you save every month (not how much you make)
  • How quickly your dividend income grows
Why invest for dividend income? Because you will build a growing, passive stream of income while focusing on what makes investments successful.


Thursday, July 2, 2015

The 5 Best Pieces of Financial Wisdom From Warren Buffett

Warren buffett quotes sayings do not put all eggs in one basket

The "Oracle of Omaha" truly lives up to his name.
Between 1964 and 2014, the S&P 500 increased by a whopping 2,300%. On the other hand, the stock price of Berkshire Hathaway, the company of which Warren Buffett is chairman, president, and CEO, grew an even more mind-blowing 1,800,000% over the same period.
This performance cements Buffett's reputation as the most successful investor of the 20th century. Here are his five best pieces of financial wisdom that you should take note of.

1. Invest in Stocks

In his 2012 letter to shareholders of Berkshire Hathaway Inc., Buffett wrote "American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance."
Buffett's optimism in the American economy is backed up by strong facts. Remember that stocks still managed to return 2,300% from 1964 and 2014 — despite wars and recessions. The takeaway is that the average investor shouldn't be discouraged by the normal ups and downs of the U.S. stock market. Invest in stocks and do so for the long run. In Buffett's own words, "if you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes."

2. Don't Chase "Winners"

Everybody is looking to buy low and sell high.
For example, if you had purchased AOL stock at a rock bottom price of $12 per share on September 1, 2011, you would be jumping with joy at AOL's May 2015 price (now over $50 per share due to Verizon's acquisition of AOL). (See also: The 4 Greatest Stock Reversals in the Last Decade)
However, Buffett recommends that the average investor not play stock picker. Instead, he recommends that the average investor invest in a low-cost S&P 500 index fund.
Keeping true to his own advice, Buffet laid out in his will that his trustee puts 10% of the cash left to his wife in short-term government bonds and the remaining 90% in Vanguard's S&P 500 index fund. That's as simple as it gets.
In simple terms, you already have a day job, so stick to it. You'll save a lot of money in trading fees, too.

3. Avoid Get-Rich-Quick Schemes

In the book The Tao of Warren Buffett, you can find many inspiring sayings from The Oracle of Omaha. Here is a great baseball analogy from Buffett about the stock market:
"The stock market is a no-called-strike game. You don't have to swing at everything — you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"
Past stock picking performance is not a guarantee of future success. Take any five-year period and only 20% to 35% of actively managed funds beat the benchmark for their category. Resist the temptation of jumping on any "hot investment," particularly when you don't understand what the investment is about. (See also: 5 Investors With Better Returns Than Warren Buffett)
"When promised quick profits, respond with a quick 'no'", Buffett suggests.

4. Pay Yourself First

Roughly half of Americans are saving 5% or less of their incomes. Even worse, 18% of us are not saving at all.
The main problem is that most people are going the wrong way about saving. Most of us first pay rent or mortgage, then take care of bills and debt payments, and after that spend on dining out and shopping. With such a strategy, it's no wonder that 18% of us aren't saving.
"Don't save what is left after spending; spend what is left after saving," recommends Buffett. Just like you budget based on your net paycheck after federal and state taxes have been applied, you need to start planning on your net paycheck after savings.
There are three key ways to pay yourself:
  • Retirement account: Participate in your employer's retirement plan or set up your own, such as a Solo 401(k), to build up your nest egg and postpone your tax bill until retirement.
  • Savings account: Set up an automatic monthly deposit into your savings account. Take advantage of high-yield online savings accounts, such as Ally Bank and Capital One 360.
  • Emergency fund: 26% of Americans have no emergency savings.
Pay yourself first by automatically funding your retirement, savings, and emergency fund accounts. Only start paying bills and spending on necessities after you have taken care of these three key items.

5. Pay Down Debt

Of course, to be able to save, you must first take care of debt.
In another letter to shareholders of Berkshire Hathaway Inc., Buffett warned, "Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks."
The "chronically leaking boat" that Buffett is referring to is living paycheck-to-paycheck, which 76% of Americans are doing. On the other hand, the "patches" are expensive forms of financing, such as car and payday loans, and withdrawals from retirement accounts. (See also: 25 Dumb Habits That Are Keeping You in Debt)
Robbing Peter to pay Paul will catch up with you. For example, the more you treat your 401(k) as an ATM, the bigger the financial hole that you'll build. A study of borrowers from 401(k) plans shows that 25% of themtook out a third or fourth loan, and 20% of them took out five or more loans. Borrowing from your nest egg too often turns into a vicious and expensive cycle.
If you think that paying down that huge credit card balance is near to impossible, think again. One couple was able to pay off $48,000 in debt over 2.5 years and a young entrepreneur paid off $40,000 in student loans by age 24. Any debt monster can be slayed no matter how scary it may appear. All it takes is consistency and time.
What are other Buffett-isms that have improved your financial situation?


Monday, June 29, 2015

11 Pointers to Investing in Your 60s and Beyond

Prepare for the read ahead
Investing in your 60s is a different ballgame than when you focused mostly on growing your retirement funds. When you crack into your retirement nest egg, you need to change your investment strategy. The idea is to withdraw enough to help you get by now while holding enough in reserve to finance the rest of your life.
Making the transition to investing in your 60s and beyond requires a new way of thinking about investments. Here are 11 pointers:

1. Estimate how long your savings must last

You can’t plan effectively without an idea of how long your money should last. Of course you can’t know how long you’ll live, so we’re talking here about estimating the longest you might live, so you won’t run out of money.

A 65-year-old woman can expect to live to nearly 87, and a man the same age will live, on average, until 84, says the Social Security Administration, whose Life Expectancy Calculator gives a rough idea of expected lifespans. Or use The Wharton School of Business’ Life Expectancy Calculator for more-specific estimate based on your answers to questions about behavior, family history and health.

2. Calculate annual expenses

To plan your finances in retirement, you’ll need to know how much you need to live. Especially if money is tight, you’ll need specific spending data, not estimates. If you budget and have tracked your spending, you’ve got the data you need. If not, start now. Automatic tracking is simple with free tools like one from Money Talks News’ partner PowerWallet. But a notebook or spreadsheet, to name a couple of alternatives, also will do — as long as you keep it up. After tracking for a few months, you’ll begin to see where your money’s going and can decide how much to withdraw from investments.

3. Fully fund emergency savings

Keeping a cushion of savings in cash or short-term CDs lets you ride out market downturns without selling stocks at low valuations. Some experts advise having an emergency fund to support yourself for a year and a half to two years.

4. Plan your withdrawals

Retirees need a system for regular cash withdrawals. For example, one popular system suggests withdrawing 4 percent of your initial savings balance each year, then adjusting that amount annually for inflation. The creator of this approach, William Bengen, says savings split equally between stocks and bonds should last at least 30 years with this system. While, as he recently told The New York Times, the 4 percent rule “is not a law of nature,” it does provide a framework. The key is to adopt a system, then adjust it as necessary.

5. Seek safety

How much you will keep in CDs, bonds and high-yield savings accounts depends somewhat on how much safety you require. Intelligent risk is necessary with part of your investments if you don’t want inflation to erode your portfolio’s value.
Many retirees follow this rule of thumb (called the “glide-path” rule):
  • Subtract your age from 100. The resulting number is the percentage of your investments you should hold in stocks.
  • Invest the remaining amount in bonds and money market funds.
If you’re 70, for example, keep 30 percent of your portfolio in stocks, including mutual funds and ETFs, and the remaining 70 percent in bonds.

Does this rule provide enough growth to keep a portfolio going strong? Experts disagree. Writes CNN Money:
[W]ith Americans living longer and longer, many financial planners are now recommending that the rule should be closer to 110 or 120 minus your age. That’s because if you need to make your money last longer, you’ll need the extra growth that stocks can provide.
Take a look at the results of various asset allocations at Vanguard’s portfolio allocation models. These illustrate the performance of various stock-bond mixes since 1926.

6. But don’t neglect growth

The other end of the retirement seesaw is the need to grow your nest egg, at least a little.
Unless you have so much money that you don’t need to worry about inflation, you’ll need some growth investments. Usually, that means stocks and stock market mutual funds and ETFs. Learn more about growth investing here: How to Get Into the Stock Market — Safely.
How much of your portfolio to devote to growth? Again, there is no single approach. Travis Sollinger, director of financial planning at Fort Pitt Capital Group in Pittsburgh, tells US News’ Kira Brecht that he advises retirees to allocate 60 percent of their portfolio to stocks and 40 percent to bonds because “your years in retirement will still be significant.”
“If you have a well-diversified portfolio with a heavy equity exposure, you should see annual returns of 6 percent, 7 percent or more,” Sollinger says.

7. Plan for required minimum distributions

After age 70 1/2 the Internal Revenue Services requires savers to begin taking minimum annual withdrawals from IRAs, 401(k)s and other non-taxable accounts into which you contributed funds before taxes. The IRS requires you to pay tax on the income.
(Note: The rules, penalties and taxes on withdrawals from Roth IRAs are different from regular IRAs and 401(k)s. Be sure to check the specifics of your Roth account.)
These minimum withdrawal amounts are calculated by the IRS based on life expectancy and account balances. The IRS rules are specific and inflexible about how much to withdraw and when. Ignore them, and you could face stiff IRS penalties. For example, if you were supposed to withdraw $4,000 and didn’t, you could owe a $2,000 penalty, writes the New York Times.
Here’s an IRS worksheet that shows when to make withdrawals and how much to withdraw.

8. Keep a lid on spending

Financial discipline is crucial if you are to outlive your money. Take an unsentimental look at your spending, decide how much to withdraw annually from savings and investments and stick to that plan through bad times and good.

9. Get help now and then

When you manage your own money it’s a good idea to pay an expert for an independent review at least occasionally. Bengen, who came up with the 4 percent rule, tells The New York Times that even he uses financial advisers:
“Go to a qualified adviser and sit down and pay for that,” he said. “You are planning for a long period of time. If you make an error early in the process, you may not recover.”
Hire a Certified Financial Planner who works on a flat hourly rate to review your retirement plan, income and expenses. A CFP adviser must put your financial well-being ahead of their own.
Money Talks News founder Stacy Johnson discusses when and how to find a trustworthy financial adviser. Consumer Reports tells how to shop for a financial adviser and what their credentials mean.

10. Rebalance your portfolio yearly

You’ve decided what proportion of your investments to allocate to various types of investments but, over time, your investments perform differently, throwing off your original allocation. Once a year you’ll need to adjust, or “rebalance,” your portfolio to restore it to your original allocation choices.

11. Consider other sources of income

Stocks and bonds are not your only investment choices in retirement. Two other possibilities are longevity insurance and annuities.
AARP financial writer Jean Chatzky says that longevity insurance starts payouts when you reach a specified age — 85, for example:
Say at age 60 you buy a $50,000 policy from MetLife. If you live to 85, you’ll start receiving annual payouts of $15,862 if you’re a man, $15,511 if you’re a woman.
No doubt you’ve heard of annuities, which are financial contracts sold by insurance companies. There are several annuity types, as explained in this piece by Stacy: Ask Stacy: Should I buy an Annuity for Retirement Income?
“As with all investments, the more a salesman is trying to jam something down your throat, the more cautious you should be,” Stacy says. If you are considering an annuity, get expert advice, and not from a salesperson but from an accredited financial adviser who charges a flat hourly fee. 


Thursday, June 25, 2015

5 Traps that Will Rob You of Your Financial Peace

There is no trap so deadly as the trap you set for yourself.

Financial traps lurk around every corner. We fall into these traps when we become a little too smart in how we manage our money. Perhaps we think we can get a great deal with 0% financing. We have a spending plan, but don’t really follow it each month (spending is under control). Or we buy in advance, borrow from our savings with the good intention of paying ourselves back. While on the surface these moves seem harmless, dig a little deeper and you’ll see how they can rob your financial peace.

0% Financing Deals

I know 0% financing seems to make sense and on the surface seems like a great deal! After all, you’re not paying any interest unless you miss a payment. A lot of people use 0% financing for TV’s, appliances and cars. We’ve certainly used 0% financing for items in the past. However, this is never as good of a deal as what it seems. 0% financing is still debt no matter how you look at it. You’re locked into making payments every month until your pay off date and there are typically big penalties if you miss.
The biggest problem with this type of financing, or any financing really, is presuming you will always have the money to make the payments each month. The bigger the payment, the bigger the presumption you’re making. Surprise expenses come up from time to time for all of us and that’s just a fact of life. If money is tight, you might be forced to miss a payment or have to put that surprise expense on a credit card because of your 0% payment obligation. Forget about 0%, avoid the temptation, and simply consider whether or not you want the debt hanging over your head.

Not Following a Spending Plan

We create a budget to plan our spending each month and it would be ridiculous to pretend that we’ll always stay within our budget. As good of a planner as we may be, there are still going to be times we spend a little more than anticipated. Maybe because we bought more groceries than usual or gas prices increased. There are many reasons. But if we consistently ignore our spending plan and don’t correct overspending problems, we’ll dig ourselves into a hole that can be difficult to get out of. Too much eating out? It will eventually catch up. We’re either forced to take money from another budget category to keep our spending in balance, or use a credit card to make up the difference. Otherwise, we won’t have the money to meet other expenses. Don’t beat yourself up about overspending a little, but don’t let it run out of control either. Create a plan so that you have a plan for your money and your money isn’t spending you.

Borrowing from Savings

Borrowing from savings is easy to do sometimes. Perhaps you’ve been told you’re getting a work bonus, but you won’t receive the money for a couple of months. Anyone remember Clark Griswold presuming upon the future and purchasing his swimming pool in the move, Christmas Vacation.
It’s easy enough to spend ahead from savings and then some. But the problem is using money today you may very well need tomorrow. Again, life happens and we all need our savings from time to time, right?
Things get really complicated when you have to put new expenses on a credit card because you’re waiting on the future money to pay back your savings. Borrowing from savings gets more complicated when you borrow based on an assumption that you’ll earn the extra money later.
What happens if you don’t earn that money? Again, you’re forced to swipe a credit card to meet expenses!

Buying a House with Little Money Down

The home of your dreams is certainly enticing, especially when you’re out touring homes on a Sunday afternoon. The bottom line here is that we’ve learned that a house isn’t necessarily a safe investment. It’s subject to economic swings just like the stock market. So, not having at least 20% down for a house potentially costs you more than monthly PMI and a higher monthly mortgage payment.  Should our economy go into a recession, you risk being upside down in your investment and either having to short sell or foreclose if you need to get out of it.
Play it safe and rent until you can save for a 20% down payment. There is no shame in renting and having more flexibility, less maintenance overhead and perhaps a more desirable location. Long term, buying a house is a great move, but step into it with financial sense and control dream house emotions.

Not Having a Least $1000 in Savings

“Make sure you have saved at least 6 months to a year in your emergency savings account!” The advice goes something like that. Honestly, I appreciate this advice from many financial gurus, but I sort of snicker when I hear it. I agree with it, don’t get me wrong. Sure, save, save and save to cover your expenses in the event of a job loss or illness. Cover yourself for emergency situations. But truthfully, Americans have a hard time saving, especially, this much. If it’s within your means, please do so.  Work hard to put away excess cash and find ways to save money. But, focus on one goal first: save $1000. I’ve met some emergency situations over the years and honestly, most of them are fundable with $1000 or less. I’m not suggesting that’s all you should have, but you’re going to meet an emergency here or there and $1000 is the minimum you need to have stashed to keep the financial peace.
All these things are certainly easy traps to fall into. Believe me when I say my wife and I’ve experienced every one of them and they’ve definitely robbed us of our financial peace, creating some stress and worry.
What do you think about these traps and what traps have you experienced?


Monday, June 22, 2015

The State of American Credit Card Debt in 2015

I think a lot of Americans are in credit card debt since it is so easy to get credit these days.
Americans continue to dig a deeper hole when it comes to credit card debt. According to the Federal Reserve and other government statistics, our penchant for indebtedness means that the average household now owes $7,281 in credit card debt alone.
But here’s the thing – that average includes even those who carry no debt at all. So when you take out the households and families that don’t carry a balance on any of their credit cards, the average outstanding balance surges to $15,609.
What’s more, as of early 2015, the total outstanding consumer debt in the U.S. has risen to $3.34 trillion. That figure includes car loans, credit card debt, personal loans, and student loan debt — but not mortgage debt. (That would add another $8 trillion to the pile.)

American Debt Statistics

Source: government data; current as of 2015.
Further proof that credit card debt and general indebtedness are heading in the wrong direction comes from a recent study on credit card debtfrom CardHub. According to the study, consumers ended 2014 with a $5.71 billion net gain in credit card debt, which means we’ve now seen six consecutive quarters of increasing credit card balances as a nation.

What Does This Mean for the American Economy?

Credit card debt and household indebtedness aren’t necessarily a bad thing. New mortgages mean new homeowners, a huge driver of construction and retail activity. And the underlying consumer spending that results in credit card debt leads to economic growth and expansion. The more people spend, the faster our economy can grow – and the more jobs and wealth will ultimately be created.
And if wages are rising in a healthy economy, that’s a good thing. The problem is, prolonged indebtedness cannot necessarily be sustained; it may be a symptom of people living beyond their means or trying to keep up with rising prices even as wages stagnate. Furthermore, down cycles work to suppress credit card spending, further deflating the economy.
From 2007 to 2010, for example — which includes the prime years of the Great Recession and some of the hardest years the American economy has seen in decades — the number of Americans carrying credit card debt fell dramatically as many consumers buckled down and either cut up their cards or were forced to stop spending — or perhaps even went into default. Among households carrying debt, the median debt load dropped 16.1% from 2007 to 2010, from $3,000 to $2,600.

More Statistics on American Credit Card Debt and Indebtedness

The following statistics, courtesy of Nasdaq, break down the extent of American indebtedness even further.
Here’s what Americans owe on credit cards:
  • $1,098 per card that doesn’t carry a balance
  • $1,648 per account among U.S. adults with a credit report and Social Security number
  • $3,600 per person among U.S. resident adults
  • $5,234 per person, excluding unused cards and store cards
  • $5,596 per U.S. adult with a credit card
  • $5,700 per household with credit card debt
  • $7,743 per card that usually carries a balance
As total balances grow higher and higher, you would probably assume that the percentage of Americans carrying credit card debt has also increased with each passing year. However, the exact opposite is happening.
As American debt loads climb higher than ever before, the percentage of Americans racking up those debts is shrinking:
YearPercentage of Americans with Revolving Credit Card Debt
This can only mean one thing: While more and more households are choosing a debt-free lifestyle, households who feel comfortable carrying debt are taking on more of it than ever before.
While this may not pose a problem in every case, mounting debt loads may ultimately take a toll on many of those families.

Students and Credit Card Debt

The Credit CARD Act of 2009 added certain protections that made it harder for students, specifically, to get into credit card debt. The law took effect in 2010, and has two purposes according to the Consumer Financial Protection Bureau.
The first is fairness, since the law was designed to “prohibit certain practices that are unfair or abusive, such as hiking up the rate on an existing balance or allowing a consumer to go over limit and then imposing an over limit fee.”
A second objective was transparency. With its passage, the Credit CARD Act aimed to “make the rates and fees on credit cards more transparent so consumers can understand how much they are paying for their credit card and can compare different cards.”
With the average student loan debt expected to be nearly $35,000 for 2015 graduates, this law was very well-intentioned. Meanwhile, it’s had a relatively positive impact on the overall indebtedness of college students. Consider these statistics:
BalancePercentage of Students Carrying a Credit Card Balance in 2013
Don’t know3%
Zero balance32%
Debt levels also fluctuated among different age groups and college grade levels in 2013:
College Grade LevelAverage Balance in 2013

Where Is American Household Debt Headed?

The Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2013examined survey results to reveal some startling conclusions when it comes to Americans’ household indebtedness. A few interesting statistics:
  • A majority (57%) of survey respondents claimed to pay their credit card balance in full each month.
  • Of the remaining population who carried a balance, 82% had been charged interest on their purchases during the last 12 months.
  • Among those who carried a balance, 53% were only making the minimum payment.
  • Among those who carried a balance, 12% had gotten a cash advance from their credit card during the last 12 months.
With those statistics in mind, it’s fairly safe to say that household indebtedness may continue to increase until something drastic happens, such as an economic crisis on the scale of the Great Recession, which led American households to pay down debt from 2007-2010.
In the meantime, it appears many Americans are all too comfortable with their large outstanding balances.
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