Category: Value Investing

A category of articles on value investing and the principles of the dividend growth strategy.

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Investments Ideas Value Investing

Contrarian Investment Strategy

contrarian investment strategy iinvested.com
contrarian investment strategy iinvested.com

Contrarian investment strategy is investing in contrast to the prevailing sentiment of the time. A contrarian investor believes that certain crowd behavior among investors can lead to opportunities in securities markets.

In an article from The Canadian Press entitled “Dividend stocks protect against inflation.” A portfolio manager cited in the article tells us that high dividend stocks are the alternative of choice for investors seeking regular income in an environment of low interest rates on guaranteed investment certificates (GICs) and securities. government bonds. They would even offer protection against inflation, precisely because of their high yield.

The case for high-dividend stocks is intuitively appealing: Dividends paid by publicly traded companies are a generally stable source of income despite turmoil in the markets and the economy. For anyone looking to earn regular income from their portfolio, dividend stocks therefore seem to be a good solution.

But now, if you compare it to the recent index earnings of the past 13 years they seems to be less rewarding.

It’s the total return that matters

Or is it? Some investors prefer stable income and others prefer growth and can handle some volatility.

First myth to be debunked: It is the total return of the equity portfolio that matters to an investor, even an investor seeking income. This return is made up in part of the dividends paid by the companies, but also and above all of the appreciation in the price of their shares on the stock market. Thus, by betting too much on dividends, there is a strong risk of achieving a lower return, either by excluding from the portfolio high-growth companies whose shares go up on the stock market (Tesla and Shopify do not pay dividends!) Or even worse, by excluding from the portfolio buying shares of companies unable to maintain their dividend in the medium to long term.

Inflation protection?

The argument that dividend stocks offer better protection against inflation is also questionable, to say the least. This is because high-dividend-paying stocks are more sensitive to changes in interest rates, since these companies often have a higher debt ratio, which hurts their bottom line when interest rates rise. Investors also tend to move away from them to buy bonds when rates rise, causing their prices to fall. Since inflation is usually accompanied by rising interest rates, it is better to bet on common stocks than on those with high dividends.

Taxes and fees

As we know, taxes and fees eat up a significant portion of returns and therefore of investor net income. Here, too, dividend-paying stocks are at a disadvantage. On the one hand, dividends are often more taxed than capital gains when paid into a non-registered account. On the other hand, a portfolio of dividend-paying stocks requires active management (to replace stocks that no longer meet the selection criteria) which forces the fund to realize its earnings and its holders to include them in their taxable income. Common stocks, in contrast, pay less taxable dividends and require no active management, which allows taxable gains to be deferred often for decades.

Active management of a dividend fund also results in higher fees (0.22% for XEI versus 0.06% for XIC) which weigh on investor returns.

What about bonds?

GICs and bonds do not offer protection against inflation. If inflation persists at current levels, its holders will effectively realize negative forward yields after inflation. However, we should not sell our bonds to invest everything in stocks – dividend or not. Rather, the role of bonds is to offer protection against the other big risk: disinflation or its first cousin, deflation. And the current yield on a bond portfolio – including a reasonable portion of corporate bonds – compares favorably with dividends on a common stock portfolio, at about 2.8%.

In summary

If you are looking to optimize the return on your portfolio after fees and after taxes – whether to generate retirement income or to grow your capital over the long term – bet on a good mix of common stocks of all capitalizations and quality bonds. These 2 asset classes are accessible in low-cost ETFs. When making a withdrawal from your portfolio, all you have to do is liquidate a portion of your ETFs in order to generate the required liquidity and get closer to your target allocation.

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Value Investing

Initial Public Offering Investing Strategy

Initial Public Offering Investing Strategy
Initial Public Offering Investing Strategy

Initial Public Offering Investing Strategy is the process of investing in IPO’s. IPO’s are securities that have not been publicly traded before, and are being offered for sale to investors by a company seeking capital or going public. The IPO process begins with the underwriting of an IPO, which includes creating an IPO prospectus, offering shares on behalf of the company to institutional investors, and then having these institutions offer shares to their clients. IPO Investing Strategies can be carried out through any number of investment channels including directly from issuers via online marketplaces such as Second Market Inc., or indirectly through intermediaries like banks or brokers who participate in IPOs on behalf of their customers.

A different investment strategy

Investing in an IPO is a strategy based on growth. The investor who buys the shares of a company on the first day of trading expects that the business will grow in the coming years. IPO Investing requires a long term view and faith in the IPO company.

The IPO investing process

The IPO investing process usually takes between three to six months, with some IPOs taking up to several years before they are available for purchase on the stock market. The IPO is only accessible at certain points of time throughout this period; thus, an investor will have limited opportunities to purchase IPO shares. Most IPO’s are sold to large institutions, such as hedge funds and mutual funds who then distribute them among their clients based on a pre-set investment policy or investment strategy.

Examples of IPO successes

Here are a few cases where investing in the initial public offering of a company were a great success.

Facebook IPO

The social media company, Facebook Inc., had its IPO in 2012. On May 18th of that year, the IPO priced at $38 per share and the stock opened around 11% higher at $42 a share, making it one of the most successful IPOs since Google’s IPO back in 2004. In fact, Facebook ended up being the biggest IPO in history, when measured by market capitalization.

Apple IPO

The computer and mobile device company Apple Inc., had its IPO in 1980 at a share price of $22 per share. At that time, it was under Steve Jobs’ leadership who turned out to be an all-time great entrepreneur after creating one of the best IPO’s of all time.

eBay IPO

Before eBay Inc., became a household name, it had its IPO back in 1998 under the leadership of Pierre Omidyar as one of the most successful IPOs to date.

IPO Investing Strategy Summary

Initial Public Offering (IPO) investing is an investment strategy that can be carried out through any number of investment channels including directly from issuers via online marketplaces or indirectly through intermediaries like banks or brokers who participate in IPOs on behalf of their customers. IPO Investing Strategies are based on growth and require a long term view, faith in the IPO company, as well as limited opportunities to purchase IPO shares.

Here are a few cases where investing in IPO’s have been successful:

– Facebook IPO – Apple IPO – eBay IPO.

To learn more about IPO investment strategy we suggest that you keep reading the IPOday.com Blog.

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Value Investing

Preferred Stocks Investing

Preferred Stocks Investing I Invested IInvested.com
Preferred Stocks Investing I Invested IInvested.com

Writing this blog about dividend growth investment strategy, I had to write about preferred stocks investing. One can say a preferred stock is a hybrid. It may be half a common stock and half a bond. Preferred stock are those stocks that give regular stable dividends. They provide top priority over all other stocks. Common stocks cannot be paid dividends, until the complete dividend payment of preferred stocks has been completed, and in the event of bankruptcy, the preferred stock gets aid out first. During bankruptcy, the only party whose importance supersedes that of preferred stockholders is that of bond holder. Their repayment comes at the highest priority.

Preferred Stocks Investing

Each company will have a unique way in which it will classify its preferred stocks. And the possibility of the terms of preferred stocks differing from one country to another is relatively high. What may be common though, is the distinction of whether the preferred stocks are cumulative or non-cumulative. In a cumulative preferred stock, the unpaid dividends add up, i.e. they accumulate. They become dividends in arrears and the stockholder is entitled to the entire payment at the next possible dividend disbursement. The non-cumulative preferred stocks however are the opposite. If a dividend payment is omitted, then there will be no accumulation of that amount on to the next dividend payment. They will have to forego that installment.

Preferred stock may or may not come with voting rights. In the most common of cases, it is the common stocks that bear voting rights. There are instances where companies decide to award voting rights to preferred stocks to replace dividend payments.

The most logical question then becomes; should one invest in preferred stock? In all honesty the potentials of preferred stock investment are different between individuals and corporate portfolios. It may be difficult for a single person to see the benefit of investing in these over common stocks. This is because the federal law taxes income tax on the entire dividend received. With companies, Federal tax laws require them to only pay income tax on 30% of their preferred dividends, leaving the remainder tax free.

From here now we can close with the other minor type of preferred stocks.

Adjustable rate preferred stock

These stockholders receive adjustable dividends. The amount of dividends paid depends on a various number of factors communicated by the company at the time of the initial offering.

Participating preferred stock

This type of preferred stock receives an extra dividend on top of the usual one based on a stipulated percentage of either net income or dividend paid to stock holders of common shares.

Convertible preferred stock

These type of preferred stocks are tradeable for shares of common stocks. A stock holder has the advantage of weighing the dividend income or common stock profit. His investment has protection from the fall of either one. All the conditions to which the stock can change from one form to another are already in place.

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Value Investing

Why do Stock Prices Fluctuate?

Why do Stock Prices Fluctuate
Why do Stock Prices Fluctuate

Let us discuss why stock prices are constantly going up and down. Like any auction market, prices of stocks constantly rise and decline. The back and forth between buyers and sellers on how much the former is willing to buy the stock for and how much the latter is willing sell the stock at, will constantly cause the stock prices to fluctuate. Stocks are sold at places called ‘exchanges.’ An exchange is where traders buy and sell the shares of different companies.

Forces of supply and demand will begin to come into play. If there are several buyers of stock and fewer sellers of it, that stock will be deemed rare, and its price will rise. However if there are several sellers of those shares and fewer buyers, the price will decline. The fluctuations of the price of a shares has no direct relation with whether there is something wrong with the company, or whether there isn’t. It is merely the willingness of buyers to buy your shares. The price of a share may decline simply because no one is really interested. At a later date, those same share’s price may rise when buyers begin to gain interest in that company. It is the simple principle of supply and demand.

The investor vs the speculator

An investor is someone who carefully analyses a company, its earnings and financial forecasts, and its worth. An investor will not buy stock unless they are convinced that it is a good value investment. They make investment decisions based on factual data and calculated forecast. Often, the intelligent investor, like I am aiming to become, will analyze the company’s fundamentals before investing in its shares.

A speculator however is a person who will buys stocks for reasons other than careful investment decisions. They are ‘at play’ because they hope the value of the stock will rise and they will make a profit from the resale of the shares. Speculators buy without following the fundamentals and principles of investments. They make decisions on a whim and they are only interested in short the, profitability.

The importance of differentiating between investors and speculators is to be able to understand how these two business personalities can affect the price of stock. The investor usually evens out the market. One can deduce that an investor will usually be buying when a speculator is selling and will be selling when a speculator is buying.

That being the case, the investor balances out the price on the market. The speculator however, is usually the driver who drives stock prices to extremes. It would have been nice if everyone who traded on the stock market was an investor, rather than a speculator. This means that he prices by the value of the businesses, and no other ulterior motives. Stock markets would be a much more rational place. Probably less noisy too. However, that is not the case. Instead, the two exist but in the long run, one balances the other out.

In conclusion, Why do Stock Prices Fluctuate

Why do Stock Prices Fluctuate is simply following the forces of supply and demand regulated within the stock markets. To learn more about investing follow us on Facebook

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Value Investing

The Truth About Stocks

the truth about stocks i invested blog
the truth about stocks i invested blog

There are several notions as to how stock trade operates. Here is the truth about stocks i invested in. Many know what stocks are however they are not quite sure about the behavior of stocks and how they can either be your gateway to a new life, or your complete downfall. In this article we will enlighten you on that facts about stock that we are sure every potential investor should know.

What is stock?

Stock is a partial ownership of a company that is acquired in the form of shares. With share one becomes entitled to a portion of the assets, earnings, trademarks, and patents of the company. The buying and selling of stocks happen on a stock exchange market where brokers either bring buyers and sellers together, or they partake in the entire transaction. 

Facts about stock.

There are two types of stock.

In most cases, there exist who types of stocks; that is common stocks and preferred stocks. Common stock are the most common, and they come with voting rights at annual meetings. Preferred stocks rarely come with voting rights, however they receive regular dividend payments.

There are stock sectors within the stock market

Stock are bought and sold on a stock market. The stock markets can be physical or virtual. Brokers facilitate the transactions by either bringing buyers or sellers together, or they may conclude the whole transaction on behalf of their client.

Dividend are one way for investors to make money

Preferred stocks receive dividend payments. This is one assured long term way in which an investor can make money off of the purchase of shares. Dividends may either be accumulative or non-accumulative.

Stock splits are aimed at lowering the price of stocks

In order to lower the price of their shares, companies may split their shares. This would then make the share in actual fact, cheaper. The most common known share split is a 2-1 split.

Common stocks come with voting rights

Common stocks bear the advantage of voting rights. In most cases, one share will equal one vote. If the company intends to hold the voting rights at a certain level, they will create classes within the common shares, of which one class of shares will have more voting rights than another.

Common stocks are highly liquid

It is fairly simple to buy and sell common stock. They are considered highly fluid. In order to achieve short term profitability, an investor may buy common stocks when they are low priced and quickly sell them when their value goes up.

Preferred stocks receive preferential treatment

In the event of bankruptcy, preferred stocks are the ones that are paid off first, after bond repayments have been cleared. Also, in terms of dividends, preferred stockholders receive their dividends first, before common stockholders get theirs. It is thus I some cases considered best to have preferred stock over common stock, however in other instances such as liquidity, common stocks are often the better choice.

Finally, the truth about stocks

It is not that hard to learn about finance. The best way to learn about investing is to read a lot about the subject and educate yourself. Follow us on Facebook to keep yourself up to date with our articles.