About.com Investing for Beginners

Dividends for the Long Run

Tue, 17 Nov 2009 03:26:52 +0000

There is a great new article in this month's edition of Fortune called Dividends for the Long Run.� It points out that this past year has proven to be the worst for income investors for more than three generations and that dividend payouts are set to fall by the worst percentage decline since 1938 because companies want to maintain their cash levels just to be safe in case the recession proves longer or more unpleasant than it has already shown itself to be.

The central position of the piece, however, is one that I've been telling you for almost ten years - companies that pay large dividends have consistently outperformed their counterparts for all of recorded history.� Dividend paying stocks also display lower volatility, making the emotional journey of holding them less stressful.� The author quotes Ned Davis Research, which said companies that increase or begin paying dividends have returned 9.5% a year compared to 6.8% for the total S&P 500 since 1972.� That difference of 2.7% may not seem small, but over the 37 years the study covered, the result for someone investing $10,000 a year would be an extra $1,232,982 in wealth due to the power of compounding!� (The S&P investor in the research ended up with $1,423,507 whereas the dividend investor had $2,656,489, or nearly 87% more money.)� The results are even more shocking when you look at investors that only bought non-dividend paying stocks.� After investing $10,000 per year for 36 years, they would have lost money after factoring in inflation!

You can read a lot more about how to profit from dividends in these great resources, articles, and guides:

Why Boring Is Always More Profitable: How the Research of Dr. Jeremy Siegel Proves that Nearly 99% Of After-Inflation Gains Comes from Reinvested Dividends

All About Dividends: Your Complete Guide to Understanding Everything About Dividends and How They Work

Income Investing for Beginners - a 10 Part Guide to Living Off Your Money

Why Dividend Paying Stocks Tend to Fall Less During Bear Markets: The Reasons Stocks with Dividends Are Often More Stable Than Non-Dividend Paying Stocks

The #1 Way to Recover from Big Stock Market Losses: How You Can Combine Cash Dividends with Dollar Cost Averaging to Make Up Losses

Watch Out for the Dividend Trap: When High Dividend Yields Spell Trouble

How to Use Dividend Changes to Generate Big Capital Gains: A Nice Trading Strategy for New Investors

One Trick to Tell If Stocks Are Undervalued: Comparing Dividend Yields to Treasury Bond Yields

Don't Join the Capital Gains Cult: Focusing on Dividends Over Capital Gains Can Lead To Much Bigger Gains in Wealth

Dividends for the Long Run originally appeared on About.com Investing for Beginners on Tuesday, November 17th, 2009 at 03:26:52.

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Deep In the Heart of Texas

Sun, 15 Nov 2009 15:50:10 +0000

For the past few days, I've been speaking with some friends about tax policy.� With health care, the economy, and government deficits exploding, many of my friends who are in the middle class argue that the burden should be carried by the rich.� The problem with the argument, as they present it, is that it doesn't factor in human nature.� There's no better way to understand this than to look at the case of Texas, Florida, and Nevada vs. the Nation.

Several years ago, the people of Texas modified their constitution to severely limit their representatives from passing or using any form of an income tax.� Far from spelling disaster, Texas has been one of the few bright spots as the economy collapsed.� Frankly, it's not hard to see why.� Imagine you had a family that years ago put their savings into a limited partnership.� Over time, that partnership has invested in stocks, bonds, real estate, hotels, restaurants, and private businesses.� Now, imagine that today, that partnership earns $1,000,000 per year in pre-tax profit.� Each Christmas, the members of the family gather around the fireplace and decide how much of their money to reinvest and how much to take in dividends.

Now, imagine that this family lives in St. Louis, Missouri.� For the privilege of living in Missouri, they effectively pay $60,000 in state income tax (this is a gross oversimplification but I'm trying to illustrate the concept).� If, instead, they moved to Houston or Dallas, they would pay $0 in state income tax.� So, the question becomes, "As a family, are we willing to pay a $5,000 monthly fee to continue living in Missouri?"� If the family does, in fact, relocate, then the state of Missouri is going to lose all of the sales tax they generated when they bought new clothes at Nordstrom or Brooks Brothers, furniture for their homes, school supplies for the kids, sports equipment for football practice, etc.� They are also going to lose the property tax they would pay by buying assets and moving them into the state, such as nicer cars.� They are going to lose any jobs that would have been created by new investments near the family's homes, which will now likely be in Texas.

The human condition means that people will do what is most rational for their family.� This is why I think we'd be much better off as a nation abolishing the income tax entirely and passing a flat national sales tax of between 15% and 25% that is constitutionally limited with a provision that the budget must be balanced.� In that case, the government isn't punishing saving, and even drug dealers will be paying taxes when they spend their cash on goods and services.� Otherwise, we're going to continue seeing highly educated and high net worth citizens flee from states like New York and move to places like Las Vegas, Miami, Houston, or Dallas.� They can enjoy most of the same shopping, dining, and business community contacts but keep millions of dollars in their pockets simply because they sleep somewhere else.

Deep In the Heart of Texas originally appeared on About.com Investing for Beginners on Sunday, November 15th, 2009 at 15:50:10.

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10 Secrets of the Capitalist Class - An In-Depth Look Into America's Richest Investors and How They Got That Way

Tue, 10 Nov 2009 06:56:40 +0000

As part of this week's series of articles on household income and wealth in the United States, we are taking an in-depth look at the richest 0.9% of Americans, how they got that way given that 90%+ didn't inherit any of their wealth, and how you can use those same traits to increase your own net worth.� Put in an easy step-by-step format, you'll definitely want to print each step and read it on your lunch break or the next chance you have to take a moment for yourself.

10 Secrets of the Capitalist Class - An In-Depth Look Into America's Richest Investors and How They Got That Way originally appeared on About.com Investing for Beginners on Tuesday, November 10th, 2009 at 06:56:40.

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Don't Join the Capital Gains Cult

Sun, 08 Nov 2009 04:29:24 +0000

Imagine you own a stock that hasn't increased in value in several years; it's a terrible investment, right?� The reality is not so simple.� Research has shown that more than 99% of real, inflation-adjusted wealth is the result of reinvested dividends in boring, profitable companies.� That means that when you look at a stock chart, you are literally seeing a meaningless squiggly line on a piece of graph paper.� The result is that new investors (and sometimes even experienced investors) draw wrong conclusions and bypass great potential investments because they are looking at the wrong data.� To understand why this is the case, and more importantly why it should matter to you, read Don't Join the Capital Gains Cult - Why You Should Focus on Dividends and Total Return - Not Capital Gains.

Don't Join the Capital Gains Cult originally appeared on About.com Investing for Beginners on Sunday, November 8th, 2009 at 04:29:24.

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Household Income in the United States

Fri, 06 Nov 2009 03:40:12 +0000

I decided to expand on yesterday's article about class in the United States and go further into the breakdown of household income.� We're going to look at the demographic drivers that make some households wealthier than others.� We'll look at the top 5% of earners in detail (the richest 5% of Americans, for instance, consists of married couples, both of whom worked, and earned a combined $157,176.� They own their own home and are overwhelmingly Caucasian).

Household Income in the United States originally appeared on About.com Investing for Beginners on Friday, November 6th, 2009 at 03:40:12.

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Class in the United States - Where Do You Fit?

Thu, 05 Nov 2009 01:12:05 +0000

Have you ever wondered what is considered wealthy? How about where you and your family fall in total household income? Today, we're going to be looking at the research of Leonard Beeghley and examining class levels in the United States. By finding out where you are in the spectrum of household income and class, you can better determine if your inability to invest really is due to a lack of income or whether you don't have a handle on your finances when compared to your neighbors.� You'll also learn the purpose of investing, and the three most common ways to make money.

Go ahead - you know you want to find out where you fall in the economic spectrum compared to your neighbors, friends, and family.

Class in the United States - Where Do You Fit? originally appeared on About.com Investing for Beginners on Thursday, November 5th, 2009 at 01:12:05.

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Berkshire Hathaway Class B Shares to Split 50-1

Tue, 03 Nov 2009 14:30:32 +0000

As part of the $44 billion acquisition of Burlington Northern Santa Fe, Berkshire Hathaway announced that it is splitting its Class B shares 50-1, making the $3,200 or $3,300 B shares a much more affordable $65.30 per share.� The Class A shares will retain their $100,000+ price tag.� If you don't understand how stock splits work, you can read What are Stock Splits?

I've been able to teach you a lot about how investing works thanks to the lessons Buffett teaches at the annual shareholder meeting.� Take a few moments to read through some of this content to see how useful it can be for new investors:

(Disclosure: As long-term readers know, I have a big investment in Berkshire Hathaway both personally and through my companies.)

Berkshire Hathaway Class B Shares to Split 50-1 originally appeared on About.com Investing for Beginners on Tuesday, November 3rd, 2009 at 14:30:32.

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Why Aren't We Seeing Inflation Despite the Government Printing So Much Money?

Sat, 31 Oct 2009 17:18:52 +0000

A new investor wrote to ask me a great question: Why, with all of the money the government is printing, haven't we seen inflation? I thought I would share the answer with you to help you understand what's going on with your pocket book right now.

The Short Answer: The amount of money the government has printed has not yet exceeded the money that was created by banks during periods of record low interest rates.

In other words, when you deposit money into a bank, they are allowed to keep only a fraction of that on reserve. They can lend far more money out than the amount you deposit. Here's a gross oversimplification: If reserve requirements are low (set by the Federal Reserve), and you deposit $100,000 into your bank, the bank may only need to keep $10,000 on hand. They can then lend $90,000 out to someone, who goes and deposits it another bank. This bank can then use the money to lend out $89,000. This cycle repeats until your original $100,000 is much, much more "money" in the system. In our case alone, your deposit plus two business loans resulted in $279,000!

The government, economists, and financiers track the amount of money in the system by the type. These are often called M1, M2, or M3 money supplies. They way, they can see how much of the "money" in a nation comes from paper dollars, how much comes from bank credit, etc.

So much "money" was created when interest rates fell and consumers borrowed record amounts that when the banks shut off the lending to try and rebuild their balance sheet, that money was sucked out of the economy. Had the Federal Reserve not printed money, we would have gone into a Great Depression deflation - your house and assets would have lost value but your mortgage would have stayed the same. In other words, if you had any debt at all, you would have been totally and completely screwed.

The government turned on the printing presses to attempt to replace the bank created money, with the hope that they could take it out of the system over the next 5 to 10 years slowly, a little at a time.

This was a perfectly rational and wise response. The problem is that many people wonder whether or not Congress can control its spending. The moment the printed money starts to exceed our old money supply (printed money + bank created money), inflation begins. With the current projected deficit of $9+ trillion over the coming 10 years, that would happen and that is why people said inflation may be coming.

If Congress stops spending 1-2 years from now, inflation won't happen despite the money we've printed because of the factors I've already described. If, however, Congress continues to spend money, inflation could destroy the value of the dollar. As I've posted earlier and elsewhere, if you know how to take advantage of this situation, that can be good for you, just as it will be for companies such as Coca-Cola, General Electric, or Johnson & Johnson, which make a lot of their money overseas in non-dollar countries.

Put simply, the problem isn't the money the government has printed over the past two years. It's the money that most investors think the government is going to print over the coming ten years that is the problem. As you can see from the chart below, actual paper money is a tiny, tiny percentage of the total "money" a nation has created at any given time. As a result of credit getting cut off, the government couldn't print money fast enough to replace the M2 and M3 money supplies (this chart shows you up until 2005, how M2 and M3 were getting to be a larger and larger percentage of the total "money").

Why Aren't We Seeing Inflation Despite the Government Printing So Much Money? originally appeared on About.com Investing for Beginners on Saturday, October 31st, 2009 at 17:18:52.

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80 Year Anniversary of Black Tuesday

Thu, 29 Oct 2009 04:23:19 +0000

It's hard to believe, but it's been 80 years ago today that the Great Depression began, marking the worst economic down turn in more than 600 years.� The stock market slide that began, and didn't end until the bottom of the market during 1932-1933, wiped out the savings of millions of Americans and was exasperated by the fact that you could leverage stock positions 10-1 on margin in the days before the Federal Reserve kept margin at 2-1 or 3-1.� Although we've currently been in a recession that marks the worst period since the depression, it still pales in comparison to the havoc wrecked on our parents, grandparents, and great-grandparents generation.

The truth is that despite the fall in asset prices, those who paid cash for their purchases instead of borrowed money, spent less than they make, and continued to fully fund their 401(k) and Roth IRA, have emerged unscathed as long as they are at least ten years away from retirement.� The benefits of dollar cost averaging mean that investments made since the March low have nearly doubled.� With dividends reinvested, this helped lower your cost basis even further.� Of course, most critics of long-term investing ignore the fact that dividends aren't included in any charts, failing to realize the important research done by Dr. Jeremy Siegel that shows virtually 90% to 100% of real, after-inflation gains come from the power of reinvested dividends.

As you learned in Is It Better or Worse to Start Investing During a Recession, the market may go up, the market may go down, but there are always intelligent things to do.

80 Year Anniversary of Black Tuesday originally appeared on About.com Investing for Beginners on Thursday, October 29th, 2009 at 04:23:19.

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It Finally Happened!

Wed, 28 Oct 2009 02:07:18 +0000

"Many analysts expect the economy returned to growth in the July-September quarter, expanding at a pace of 3.3 percent. If they are right, it would end the streak of four straight quarters of contraction, the first time that's happened on records dating to 1947." - Associated Press

Job losses are still mounting, but that is to be expected because jobs have been, and will always remain, a lagging indicator (businesses don't want to hire until they are certain everything has stabilized).� A year from now, short of some unforeseen disaster, debt levels should be much lower, real estate prices much firmer, and investors much calmer.� Even though most of the gain was from the Cash for Clunkers program (the estimate is that without it, growth would have been an anemic 0.8% or less), the fact that the economy still would have grown, even in tiny terms, is a huge improvement.

It Finally Happened! originally appeared on About.com Investing for Beginners on Wednesday, October 28th, 2009 at 02:07:18.

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