Category Archives: Investments

Using Dividend Stocks For Extra Spending Money

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I would like to buy some dividend paying stocks so I can use the dividend for Extra Spending Money instead of using money from earned income.

First let me say that each month I thought I only spent $250 as my personal Extra Spending Money, but I was wrong!  I spend well over $300.  While I’m going to use $300 as my basis for the calculations below, I want to go back to the $200 to $250 that I use to consume someday.

My current formula for using money for my “Extra Spending Money” is a more of a consumption based model.  This is where once the money is gone, it’s gone!  Here are my simplified steps:

  • The money I have allocated for spending, all gets spent
  • I have zero dollars left at the end of the month.

My future formula for using my “Extra Spending Money” will be a investing-spending hybrid model.  I envision it as the following steps:

  • I save $200 of the $300 that I have allocated.
  • $100 of the $300 is for spending.
  • Invest the savings into a stock that provides a 5% dividend.
  • After year 1use the dividends to help supplement the $100…
  • Eventually as the dividend become big enough, stop spending the $100 and have it go into the dividend stock.

This process will be similar to my Free Lunch Experiment, but this experiment require much more money invested and time than the Lunch experiment.  So I’ll have to do it gradually over years, unless I come up with a way to speed up the investment contribution.

For example, just to generate a monthly $50 from the stock, I’d have to have $12,000 lump sum at an interest rate of at least 5%.  So that would mean some far off future day, to get up to the minimum $200 level, I would need to save at least $48,000 to $50,000 at a similar 5% interest rate.  and this isn’t even taking into account taxes and inflation!  I could envision the true amount that I would need for the month $200 payout being more in the range between $80,000 to $100,000.

I will provide more details in the future, thanks!

-MR

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Hidden Value In Owning Dividend Paying Stocks

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With non-dividend yielding stocks, you have to sole depend on capital appreciation of the stock price to get ahead.  Admittedly, you could latch onto a great stock and ride it up to the moon, but more than likely, this will not be the case.

So today, I’m going to talk about the advantages of stocks that do yield a dividend.  Perhaps a good example would be McDonalds (MCD), it has a decent yield (3.3%) and a chance for stock price appreciation to boot.

In Volatile Markets

When there is scandal or a major concern in the country (or world), stock prices get pummeled.  This can create stress and even temporarily depress investors.  Currently, there is instability in Egypt that has caused the stock market to decline by 166 points this past Friday.  While I’m very concerned about this, having dividend yielding stock takes some of the edge off of the stress about the stock market.

Why, you might ask?

Because for the most part, dividends that stocks pay out aren’t determined by current events.  Temporary drops in the stock market do not affect the dividend payout by the companies that elect to pay a dividend.  Mainly profits and executive decisions are what determine what the company will pay out as a dividend (at least at the better companies).  Some companies (like REITs) are required to pay out around 90% of their profits for the year to be classified as a REIT (Real Estate Investment Trusts).

Since most dividends are paid out quarterly, current news is immaterial and may have resolved by the time that the dividend payout amount is determined.

Another positive value is that fact that the dividend payouts reduce the downward action of the dividend yielding, stocks price.  People are less apt to give up the juicy dividend, so the decline of the price of the stock moves slowly.  The reason for the slow downward movement of the stock price is because if there is a drop in the stock price, the dividend yield become more appealing because the payout percentage will be higher.  This naturally motivates people to jump in and grab hold of that great percentage yield before the stock price starts to go up again!

Caveat!

Just because a stock pays a dividend, doesn’t mean that they are still viable!  Do the proper research to make sure that the dividend paying stock is a solid investment (don’t by any typewriter stocks!).

As an alternative to purchasing individual dividend paying stocks, Nicole at “Grumpy Rumblings of the Untenured” suggests and go out and buy a mutual fund that is oriented towards paying out a dividend or actually only purchases dividend paying stocks (watch out for high fees though).  This way you reap the rewards while a professional manages your dividend portfolio.

-MR

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Disclosure, I do own a very small position in McDonalds stock.

Paying Allowances From Dividend Stocks

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Paying Allowances From Dividend Stocks:

First let me start by saying that I wish I had thought of this 10+ years ago!  The following is an idea that I would have liked to pursue for my kids, and while it’s still possible, the upfront investment for such a dividend stream is a bit steep for me right now.  So instead, I will introduce the idea to see if others may find value in such simple idea.

What I wish I would have done was buy some solid, reliable dividend stocks each year and have the dividend payout from the stock go to my kids as an allowance instead of me paying for their allowance out of my wallet each and every week.  Of course, the earlier years of the dividend payout would go directly back into the dividend paying stock during the ages when the child was too young to receive such an allowance.

I might even have the kids receive the payout once a quarter, just to get them use to quarterly payouts instead of weekly ones.

The following chart calculation is a very simplified table that will give a ballpark number.

             
        Div Payout Div Interest  
  Year 1 Contribs. Principle Percent Amount  
  1 1200 $1,200 0.05 $60  
  2 1200 $2,460 0.05 $123  
  3 1200 $3,783 0.05 $189  
  4 1200 $5,172 0.05 $259  
  5 1200 $6,631 0.05 $332  
  6 1200 $8,162 0.05 $408  
  7 1200 $9,770 0.05 $489  
  8 1200 $11,459 0.05 $573  
  9 1200 $13,232 0.05 $662  
  10 1200 $15,093 0.05 $755  
             
          52  
          $14.51  
             

So using the table above, the payout in a childs 10th year could be $14 dollar based on a 5% dividend payout rate.  The table above doesn’t take into account taxes, so the actual dividend payout will be a bit lower that the number suggested in the table, but not enough to discount the value of the information!

Yet Another Stealth Emergency Fund:

Recently, I wrote about my stealth emergency fund, and these stocks could be used as yet another form of an emergency fund.  Would I be tempted to use these dividend stocks for an emergency first?  No, only after the regular savings from an emergency fund has been depleted would I consider these stocks.  That said, it’s still definitely a consideration!

Conclusion:

I was considering trying this idea, but after writing about it, I think I may have missed the boat on the implementation of this concept.  It would have be easier to implement the idea earlier while your kids are very young!  So while I really like this idea, I will put my money in dividend yielding stock for other purposes than and allowance fund.  If I have the other ideas fully funded, I make come back to this one and give it a try.

Have you consider creating such an idea for your kid allowance needs?  It’s kind of a win-win if you think about it.  You get to pay your kids an allowance, and at the same time you have a portfolio of dividend stocks that may continue to grow!

-MR

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Long-Term Value-Investors Can Always Benefit from a Trader Mentality

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Long-Term Value-Investors Can Always Benefit from a Trader Mentality

Today’s guest post is by Michael Trinkle.

Long-term value-investors may be quite content to eke out small returns in the short-term because they know from experience that the compounding of small returns can lead to significant gains over longer periods of time. However, this past year, as well as the past decade, has been a long-term sideways “ranging” market where traditional long-term returns of 10% are anything but the norm.

No one is suggesting that all investors discard time-honored investment principles in favor of a trader’s mentality, but a sideways ranging market has generally been the province of traders that enter and exit the market at will, always searching for short-term profit opportunities. However, there are a number of technical skills that could benefit fundamentalists, if they only chose to investigate another investment discipline where active trading predominates.

One sad fact in our society is that very little investment training is provided in our hallowed halls of academia. Except for a small minority, the majority of us learn from reading books or attending special seminars on the topic, a real hit-and-miss approach. For this reason, we rarely get a fully-rounded comprehensive understanding of the art of investing, its many alternative forms, or the many tools designed after of years of study to assist an investor in the process.

It certainly does not require a lot of money, but a modicum of time is required that will pay dividends to any investor that is willing to make that investment. Commodities, futures and foreign currencies are the markets where active trading proliferates. Risks are high, and specialized training is a necessity, along with experience and emotional control, to be successful in these areas. One does not need to trade in the forex market to learn from it. Brokers will provide you with a free forex demo account and “virtual” cash to learn the basics and hone your skills. The key points to follow when actively trading are as follows:

  • Always have a plan for entering and exiting a position before it is opened;
  • Always place stop-loss orders below your entry point to mitigate risk;
  • Always cut your losers off, and let your winners run with trailing stop-loss orders to lock in your gains;
  • Use technical indicators to optimize entry and exit points.

These rules are very similar to longer-term investing techniques, with the exception of the last bulleted item. Many long-term investors have never learned the basics of technical analysis or have heard the process demeaned by critics. Technical indicators were never intended to be perfect. They can give false signals, but their consistency may provide an “edge” when an “edge” is all that is needed to execute and profit from a winning strategy.

The following chart provides an example to illustrate these points. In 2010, a value-investor would have heard much about precious metals being a “safe haven” when the debt problems surfaced in Europe and created a crisis felt the world over.

 

Forex Chart

Market Chart

If the long-term investor had invested in Silver in late August, the rapid upward trend may have caused him to gulp hard. The RSI, a popular momentum/leading indicator, in combination with the MACD crossover, would have signaled an overbought condition. The insertion of a trailing stop-loss order would have locked in his gain.

Timing in sideways markets is critical, and learning how to read technical signals can optimize timing considerations and lock in ”paper” gains. Time spent learning the nuances of technical indicators can provide valuable benefits in ranging as well as trending markets. Always remember that “paper gains” are not real until realized and cannot be compared with a real trading experience in any way. And of course, historical and past performance is not in any way a guarantee of the future events and results.

Thanks Michael, for an insightful article!

Readers, What say you?  Do you agree with Michael’s approach?

I do see value in what Michael is saying about sideways markets (I which I had played it more this year)…

-MR