Tag Archives: investing

Choosing a stock – Part 3: Buy on sale.

In the last entry we talked about the second factor to consider when buying a stock – the dividend rate. My overall goal is to develop a stream of income from my portfolio and collecting regular dividend payments is one way to do that. I buy companies on the S&P 100 which pay the highest dividend rate. In this entry we’ll move on to step 3.

Let’s go back to our analogy. I’m trying to buy a new piece of camping gear and I’ve decided to go with a well-known supplier. I’ve chosen a good quality piece of equipment (companies on the S&P 100) that will last and add value to my hiking experience (companies that pay the highest regular dividend). Being a frugal person (some friends would say ‘cheap’) I’m going to wait until the item I want is on sale. Why pay more than I have to right? If I wait for a sale I can get the same item for less!

walmart_priceWhen choosing a stock, I apply the same principle. The good news is, with so many companies on the S&P 100, there’s nearly always something on sale. You might be wondering what on earth I’m talking about when I say a company is on sale. Let me explain. I figure a good way to estimate the value of something is to see what people are willing to pay for it. This is true of camping equipment and stocks alike. It’s easy to see what people are willing to pay for a stock because that’s what the current trading price is. We can see from the image above that Walmart was trading at $61.30 per share on December 31, 2015.

Ok, now we know what the current price of a stock is but how do we tell if that’s a sale price or not? Easy! I look at the maximum price people were willing to pay over the last year (called the 52 week high) and compare that to the current price. Pretty simple, right?! Again, I find that price for every company on the S&P 100 and calculate how far below the 52 week high the current price is. Let’s look at an example.

picking_a_stock_part_3Basically, people were willing to pay $66.36 for this stock within the last year and I can now buy it for $33.49 – a discount of 49.5%. This is a solid company on the S&P 100 so, chances are, it’ll be back to that high within a year or so and I will have realized a 98.1% return. Oh yeah, and collected my 5.49% dividend in the meantime. Sweet! Would you be excited to buy something you think is valuable at that kind of discount? Of course, you would!

Just like with the dividend rate, I assign a score to each stock depending on how far below the 52 week high it’s trading. In other words, I look to see which stocks are really on sale. That score is added to the score the stock earned from its dividend and I’m one step closer to making a decision.

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Choosing a stock – Part 2: It’s all about the dividend!

Our last post described the first criterion we use when choosing a stock to buy. We stick to companies listed on the S&P 100. These are safe, solid companies that have a proven track record. They’re not going to post meteoric gains but won’t you lose any sleep worrying about the bottom falling out either. The name of this blog is, after all, Passive Dividend Income, so we don’t want to be spending lots of time working on or worrying about our portfolio. Having said that, let’s move on to step 2.

dividendsRemember our analogy of purchasing a piece of camping equipment (or whatever you want to imagine buying)? We decided to buy from a major supplier – one we feel we can count on to be there if we need them. What else do I want from my purchase? I want the equipment to last so I can enjoy it for years to come. I want it to ADD value to my experience. This is like the dividend a company pays – it’s going to add to the value of my portfolio and, when it comes time to retire, is going to provide the income I’m looking for.

Some companies choose to distribute a portion of their earnings to their shareholders. This is called a dividend. Our goal is to build a stream of income from our investment portfolio and this income will be in the form of dividends. That means it’s important to choose stocks that pay the highest rate. As you learn more about companies on the S&P 100 you’ll see that most of them pay a quarterly dividend but you’ll soon discover that the rate of return of those dividends vary considerably from company to company.

For example, on December  AT&T Inc (T:NYSE) closed at 34.64 and paid a quarterly dividend of $0.48 which is a return of 5.5% (0.48 x 4 times/year divided by 34.64). This means for every $1000 you invest in this stock, you’d be paid $55 in dividends. By contrast, on the same date FedEx closed at $149.65 and paid a quarterly dividend of $0.25 which is a return of 0.67%. For every $1000 you invest in FedEx, you’d be paid $6.70 in dividends. As you can see, the stock you choose makes a HUGE difference. The first step in our strategy is to look up the dividend for every company on the S&P 100 and assign a score to each one based on the dividend it pays. While this score is mostly arbitrary, it serves as a means of ranking the companies based on several factors (the dividend is only one of 5 factors we consider) that we use to make a choice. It’s a way of removing emotion and bias from our investing choices. We’ll see the criteria for assigning scores in a later post.

And that’s step 2. Short and simple. Buy shares in companies that pay the best dividends.

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Choosing a stock – Part 1: Stick to the S&P 100

A few years ago I realized that I had to change my investment strategy. Until that time I had been playing pretty fast and loose with my investment dollars. I was choosing risky stocks and riding the excitement of the big wins while mostly pretending the big losses didn’t happen. Sure, I was coming ahead overall but I knew one big loser could wipe out my capital. As I got older I recognized that I had less time to take advantage of compound growth to accumulate wealth and I had to start looking for a safer alternative.

stock_marketThat’s when I started working on my own strategy for choosing stocks. I have to disclose that I have no formal education or training in stock investing or financial advice but I do know that nobody cares more about my money than I do! I took it upon myself to start learning everything I could about the stock market and evaluating a stock. Let’s just say that didn’t go well. There were all kinds of factors to consider: beta, price/book ratio, return on equity, net profit margin, EBITDA, blah, blah, blah. When I wasn’t falling asleep reading about all that stuff I was worried about being in over my head and that it would never make sense to me. I quickly realized as an amateur I was going to have to dramatically simplify things so I began trying to figure out what the most important things were.

Maybe I could think about choosing a stock like making any other purchase. What are the factors I consider when buying other things? A car, a TV, a mobile phone, whatever. I like to go backcountry camping whenever I can and that hobby requires some special gear which I’ve slowly acquired over the years. I wondered, when I’m thinking about a new piece of gear, what things do I consider when reaching a decision? First, I want to buy from a company with an established reputation I can trust. I want a company that has proved its longevity and is going to be there if I have a problem. I’m likely going to stick with suppliers like Cabella’s, MEC, or REI and manufacturers such as Patagonia, Marmot, or Arc’teryx.

In the world of stock market investing, we’re talking about the companies on the S&P 100. Companies on that list represent a variety of sectors and account for about 57% of the market capitalization of the S&P 500 (a similar index containing a greater number of companies) and almost 45% of the entire market capitalization of the U.S. equity markets. The stocks in the S&P 100 tend to be the largest and most established companies in the S&P 500. These companies have proven themselves worthy of inclusion on that list and that makes me very comfortable buying them. They’re companies we’ve all heard of. They are Coca Cola, Wal-Mart, Microsoft, AT&T and 3M. Take a look at the list and you’ll recognize many of them. Do I occasionally find a deal so great that I stray from a really well-known camping equipment company and take a chance? Of course! But mostly, I’m sticking with the big guys. That’s also true of picking a stock. Once I gained a little confidence – acquired from seeing the performance of my portfolio – I started to occasionally branch out into companies that aren’t on the S&P 100 if I thought they presented an opportunity. More about that in a later post.

So that’s Step 1. Stick to well-known companies that are listed on the S&P 100. They’re solid, safe, blue chip stocks that have a proven track record.

Trading time for money
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Trading time for money

A few years ago we realized the wealth we could create would always be limited if we continued trying to build it in the traditional way. By ‘traditional,’ we mean the way our parents taught us and their parents taught them. There’s a good chance it’s the way your parents taught you, too: trading time for money. Essentially, trading time for money means you go to work for several hours most days and  someone pays you for the time you spend there. Because we all have only 24 hours every day, we’re all limited in the amount of money we can earn using that model.

We wanted more.

Trading time for moneyWe began to talk about ways to build wealth while on vacation, or watching a movie, or hanging out with friends, or… asleep. Early on in this journey (and it really is a journey), we learned there was a term for what we were looking for – “passive income.” While there are lots of ways to earn passive income, the one that appealed to us most was buying stocks that pay dividends. To be honest, some of the early appeal was that we both had experience investing in the stock market so it didn’t seem scary to us. In this blog, we hope to narrate our journey to share what we’ve learned with anyone who might want to do the same. Remember, writing a book, selling a product online, affiliate marketing, real estate (though that one isn’t completely passive), and lots of others are all ways to earn passive income. We would never claim that investing in dividend-paying stocks is the best method, it’s just the option we chose. We happen to think they’re the most passive as well.

A dividend is a payment a company makes to shareholders as a way to distribute a portion of its earnings. Dividends can be paid as cash payments or in additional shares of stock. Start-ups and other companies that want to grow quickly rarely offer dividends because they reinvest their profits to finance their growth. Larger, established companies tend to pay regular dividends as a way to attract and keep shareholders. These are the companies we want to own.

You would be forgiven for asking how a company’s decision to pay a dividend can affect the share price. Basically, shareholders are less certain of receiving the benefits of future growth that might result from reinvesting profits than they are of receiving current dividend payments. Investors place a higher value on having a dollar in their pocket today than on a dollar which may (or may not) be paid some time in the future. It stands to reason, then, that they are willing to pay more for a share of the company.

When you combine the stability of large, blue chip companies with the near-certain income stream of regular dividends, you get a recipe for a money-making machine you can use to build your financial independence. If building a stream of dividend income is something that interests you, we hope you’ll find our blog helpful.

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Building a money-making machine

The Passive Dividend Income Blog is our way of sharing our interest in investing (pardon the pun). Investing is really a hobby for us, but more than that, successful investing transcends the need or want for money, and really gets to our core value of having more choices in life and creating multi-generational wealth. For us, wealth is freedom. Freedom to have more leisure time, freedom from worry about bills, freedom to enjoy hobbies.

Money-making machine

In this blog, you will hear two “voices.”  We aren’t Chartered Financial Analysts; we’re not licensed to sell investment products. All we offer are our investment ideas in a 100% transparent way. We are two high school teachers excited about the possibility investing offers, who exchange ideas during our once-per-week corridor duty at our school. We thought we’d share our ideas with the world and see where it takes us.

Let’s talk about building a money-making machine. If a machine existed that could produce the income you want or need, would you build or buy one? We would! Luckily, such a machine exists and the blueprint is very simple: invest money. If you invest $1000, and it earns 5% annually, that $1000 is a money-making machine that produces $50 of income every year. FOREVER!  Talk about multi-generational wealth!  It really is that simple.

Many investment blogs and ‘gurus’ will tell you how to realize growth by talking about risk and capital appreciation. They’ll have hot stock tips and ‘guaranteed’ spectacular returns if you act right away! Nearly all of them offer their “insiders” newsletter for a modest price (how can you afford to say no?). While there is some truth to some of these claims (unless they use words like ‘guarantee’), the bottom line is that money needs to be invested to grow and you don’t need to pay a broker to do it. We hope by reading our blog you’ll learn that you can invest money on your own.

For us, dividend income is a great way to build a money-making machine. By investing in the stock market, we are giving money to businesses that earn money. If we choose companies that are profitable and pay dividends, then we are sharing in their profits. These companies will give us a portion of their profits every single quarter. The potential capital appreciation of the stock is not the only consideration for investing in a company, although companies that are profitable will also appreciate in value. What we look for is a strong company that pays reliable dividends.

Our plan is to share our progress as well as everything we’ve learned along the way so that you, too, can build your own money-making machine. Welcome to the PDI (Passive Dividend Income) Blog. Thanks for reading and happy investing!

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