## Monday, July 30, 2012

### Dividend and Interest Return

I was thinking what it would take for interest income to match that of increasing dividend income. So, I did this spreadsheet. See my spreadsheet at div_int.htm.

The thing with the 3.5% I earn in dividends is that it grows every year and it grows higher than the inflation rate. The thing with earning interest is that you may get your capital back, but inflation has eaten into it. Also, the basis of return on interest is always based on the same capital value.

In order to get the same long term total income as investing in stock will get, for interest investing you have to get a higher interest rate. You would, of course, start off with a higher income. You could save the excess income to invest for future income, but it is doubtful anyone will. This is the sort of thing people say they will do, but never or very seldom ever do.

I keep good records on what my portfolio is doing. My 5 year median dividend increase is 11%. However, say that dividends were increasing at the rate of 5% per year. (I suspect that on a go forward basis that future increases will be lower.) If you were to be retired for 10 years, you would need to make 4.52% per year in interest return on your capital to end up with the same total income over that period. If you were to be retired for 20 years, you would need to make a 5.95% per year interest on your capital. For 30 years in retirement you would need to earn 8% per year interest on your capital.

The 30 years scenario is not that far off as there are a lot of reasons to suggest that most people will have around 30 years in retirement. Also, this is not considering the lower tax you will receive on dividend income compared to interest income. I am only taking gross income rather than net income or after tax income.

The other thing in dividend investing, your capital tends to increase, over the long term in line with your dividend increases. If this occurred on a \$50,000 initial capital, then 5 years on, capital would be roughly \$81,500.00, and 10 years on, roughly \$132,664.89 and 30 years on roughly \$216,100.00.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

## Wednesday, July 25, 2012

### Price/Earnings Ratios

A lot of stock price changes have to do with the rising and falling of P/E ratios. Or, in other words what people are willing to pay for earnings. When the P/E is 10, people are willing to pay \$10 for each \$1 of earnings.

If you look at the action of the TSX and S&P 500 what you see is changes in P/E. People are constantly changing their mind on what they are willing to pay for earnings based on what they think that the future holds. However, it is not only that. Investors seem to act like a herd or a mob when it comes to valuing stocks.

The P/E ratio changes much more rapidly than any company's earnings reporting. Analysts often change their minds about quarterly earnings estimates also, so this does not help.

I have talked about the long secular bear and bull markets we have. The secular bull markets push the P/E ratios for the market higher. The secular bear markets pull the P/E ratios for the market lower. It is easier to find some statistics for the S&P 500 than the TSX. One paper said the over P/E for the S&P500 in June 2000 was just above 29. Another site said that the 1982 bull market began with the S&P500 trading on 7x earnings and yielding 6.3% and it ended in the tech blow-off at 30x earnings and a 1% yield.

The average P/E for the S&P500 is around 14. The P/E currently is at 15.57. There is a lot of historical data that shows that for a switch from a secular bear market to a secular bull to happen the P/E ratio for the market has to go below 10.

According to TSX site, the TSX P/E ratio is at 14.53 and the dividend yield is 3.17% on July 24th, 2012. To get to a P/E of 10, prices have to decline or earnings have to increase or have a combination of this has to occur. What is obvious is that we are not there yet, so expect more volatility.

Of course the gyrations of stock markets, especially in the short term, have nothing to do with what a company is actually worth. As an investor, you need to keep an eye on what the companies you have invested in are actually doing. How well your company does will, in the very long term, determine the stock price.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

## Monday, July 23, 2012

### Cash Flow Importance

I seem to read a lot lately about how people should be debt free going into retirement. Also, people think that you should not take on debts when retired. I do not agree. I do not think that you need to be debt free at any time. I think what you need is to manage your money so that you have enough cash flow to pay for your lifestyle.

I also read that you should have x amount of money to retire. I disagree on this also. What you need to know is what income you are or will generate from your money.

Why do I think this way? It is because I work with is cash flow. I need enough cash flow to pay for my basic needs and other things, or in other words my lifestyle. Because I work on cash flow, I would have no trouble considering buying a condo and getting a mortgage now, when I have basically retired. I would, of course, only go for a mortgage I can pay for with my current cash flow.

It does not matter how you get your cash flow. I get the majority of mine cash flow from dividends. I also get some small pension amounts. About 5% of my portfolio is in cash or MMFs.

What I have found in investing that for dividends and stocks, my dividend income has steadily increased but my capital (value of my shares) has wandered all over the place. Over the long term, my capital has increased.

What I have found in investing for interest with bonds, GICs, MMFs that my interest income has wandered all over the place, but my capital has stayed the same. Bond prices can wander all over the place too, but if you hold them until maturity, you get your money back.

Problem with interest income is that at the moment you are not earnings much. For my MMFs I am projecting earnings of 0.30% per year over the next 5 years. I do not expect that the 1.5% interest I am earning on my ING Account will change much either. This is probably conservative, but if you are planning on living off interest you are not going to be getting much in cash flow unless you are willing to take a lot of risk.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

## Wednesday, July 18, 2012

### Tax Hikes Perversities

Historically, tax hikes do not fare well. They never perform as advertised. They never collect the amount of money they are supposed to. Perversely, governments often collect less physical money after the tax hike than before the tax hike. And, I am not talking about tax hikes made in recessionary times, which by the way is really stupid.

Politicians and others come up with 50M reasons why the tax did not work as advertised. I doubt that any of them know what they are taking about.

Sometimes tax reduction produces more actually tax money. This can happen if there is more commerce activity after the tax reduction than before it.

I have read a lot of economics over the years. It would seem that these sorts of perversities happen after governments are taking more than 30% of the GDP in taxes. Do not forget that governments do not create money, they just move it a round (after taking their cut). If more than 30% is taken then GDP growth slows down.

It would seem that generally people do not mind slower GDP growth if the government provides more social programs. It is a tradeoff. Or, perhaps people do not know this.

However, you can see what a bind the Western world is in. We all have high government debts and our governments are already taking out a high percentage of our GDPs.

Government spending by GDP is not generally easy to find. Here is a site that talks about this. Federal Government spending. Canada comes in at 43.8%. US Federal government spends 23.6% of GDP. Site goes on to say Total US spending of GDP is around 40.6%. The UK comes in at 50.9%.

There was an article in a newsletter I receive which talks about UK scrapping the 50% tax rate on the rich as it was not raising the money that was expected. I looked for a news item on this and found one at Telegraph that basically said the same thing. Not only did tax revenue no rise, tax revenue was actually lower. UK is now scrapping this 50% tax. See article in the guardian. This article reminded me of others such articles I have read over the years.

I get a newsletter from John Maudlin and people can subscribe free at his site. He talked about recent newsletter called Things That Make You Go Hmmm. You can get this from by subscribing from this site. Things that make you go Hmmm talked about a recent UK tax hike on the rich.

## Monday, July 16, 2012

### Solidarity Against Austerity

Love this. Kids who have never worked a day in their lives are trying to give us economic lesson. And, they want free education. I think that we should pay to educate our young, but there needs to be strings attached. That is something like you have to maintain a B- average to get it paid for, but we should also give our kids second chances.

The problem however is that they are asking for money when there is none. We boomers have spent all the money. Not only have we spent all the money, we have run up massive debts. And, Canada is in better relative shape that US, UK and Europe.

One real problem we have is that everyone wants more from the government than they are willing to pay. This is tantamount to getting something for nothing. Do not give me this insane nonsense that the 1% should pay for everything. First of all, once people are getting something for nothing, they just want more and more and more. There is not enough money in the world to satisfy people who get something for nothing.

What people get with a government is less money than they put in. After all, we have to pay for all those politicians and all those government workers.

Unfortunately, we have run up debt to pay for social programs. This is bad debt because it only moves money around, it does not create any.

What else we have done is ignore infrastructure. Good debt for governments is to spend money on need infrastructure. This can help create commerce which could generate more tax revenue to pay off debt and provide extra money for social programs.

## Friday, July 13, 2012

### Why I Put My Stuff Online

What I am putting online is the stuff I was doing. I have been analyzing stocks in spreadsheets a quite a few years. So, I am not really doing anything that I was not already doing.

The reason to go online was twofold. In 1999 I was laid off from work. Since I did not need another job, I decided to stay at home. It was sort of an early retirement I suppose. When you say anything about not working or retirement, people expect you would be doing some charity work.

I look at a number of options in charity work and none appealed to me. I had been an analyst for some time in IT and this is what I am good at. I am not good at the types of jobs you can get as a volunteer.

So, it appeared to me I could do something in giving back to the community (i.e. like charity) and still do what I love and what I am suited for. I also thought that putting my thoughts out there I would help me think more critically about the stocks I follow and therefore become a better investor.

I know that a number of people are trying to making money via blogging and the internet and I have not done this. I know all about theories that you should have different streams of income. I do have a diversified portfolio. However, if the market is such that I cannot make money from it, would anyone want to read my blog? The other thing is that it is in the market that I am making money, and so I am putting my energy there.

## Wednesday, July 11, 2012

This link was pointed out on StockTwits by tsxsmallcaps. See The sad end of saving and investing. which also has a link to a G&M article called The sad end of saving and investing. This guy is talking about not experiencing any net growth in my 'Couch Potato' portfolio over the past five years.

What he needs to do is to find a few good companies that are earning money and invest in them. Get companies that pay dividends and earn a decent return while you are waiting for better times. If you are going to do no work and be an investing 'Couch Potato' then perhaps you deserve the recent lousy returns that seem to be coming lately in indexing investing.

We are in a secular bear market and nothing is going to change for a while. In such markets you do get within them cyclical bear and bull markets. There are always companies that are doing well in any sort of market, like one of my current favourites Computer Modelling Group (TSX-CMG).

In a secular bear market you can make money in capital gains by buying and selling fast moving rising companies. Or, if you are lazy like me, you can make money in dividends. Where you are not going to make money is in long term ETFs on indexes.

The whole market is not going anywhere until we move to the next secular bull market. We will not move to the next secular bull market until the overall market gets hammered some more. The S&P500 and the TSX will need, at the minimum, an average P/E of 10 or less.

This all is, of course, my personal opinion. However, I am not the only one to think we are in a secular bear market.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

## Thursday, July 5, 2012

### Updating Stock Info

When I talk about how well I have done in a stock, I am usually quoting information up to the end of the previous month. For example, when I talked about how well I was doing in Saputo (TSX-SAP) on June 27th, I was using the end of May figures. Unless sometime unusual has happened, I see no reason to quote how that stock is doing to the exact day.

I had started my review of Saputo as “I first bought this stock in 2006 and then some more, twice in 2007. To the end of May 2012, I have a return of 17.5%, with 2.24% coming from dividends and 15.26% coming from capital gain. Some 12.8% of my return is from dividends.”

I only update my stock information once a month. I use my monthly statements to update Quicken with dividend paid information and new stock prices. I find updating it more is a waste of time in the long run. Yes, valuation can fluctuate a lot, but they generally do not have a long term effect. I think you could go crazy my reviewing your investments too often.

I updated my spreadsheets on a stock just once a year, unless something happens that causes me to do otherwise. If a stock I follow is reported in the news as doing something usual for that particular stock, I might take another look.

I do take a look at what the TSX is doing every day. It least I try too. What I value is the TSX chart over the past year.

My point is that there was a 351 point drop or 2.99% drop in the market on Thursday, June 21st, 2012. Do you really think that the companies you invested in did something to cause this? Or, was this just caused by cranky investors on that day and it had nothing at all to do with the companies on the TSX.

## Tuesday, July 3, 2012

### Interview by The Loonie Bin

The Lonnie Bin blogger interviewed me for a blog entry on his site. See The Loonie Bin blog.

He also asked me if I could have a super power, what would it be? I guess he did not like either of my answers.