Jeremy Siegel Interview on CNBC, Key Takeaways

Jeremy Siegel appeared on CNBC this morning and provided his views on where to invest during this time of economic upheaval in Europe and a still unclear environment in the U.S.. He is the famed professor of the Wharton Business School  and former economic advisor for McCain during the 2000 presidential race. He is perhaps best known for his studies of dividend paying stocks which are regarded as gospel as far as dividend research goes. The following are key takeaways from his interview:

Siegel points out that it is crazy to get upset when your dividend payers go up and down when you’re buying them for income when at the same time you’re okay with your bond values going up and down when you’re buying them for income as well. If it’s a long term bet, forget about the market fluctuations.

Siegel is author of “Stocks For The Long Run” and champions a strategy of buying and holding dividend paying securities. However, he said he is not much of a stock picker and prefers to use dividend paying ETFs for his personal portfolio.

Siegel discusses how Gold only has roughly 1% price appreciation less inflation. In other words, it’s not an investment tool. If anything, it is just a hedge against inflation and nothing more.

He suggests that Europe is cheap at 8 to 9 times earnings. The U.S. is also cheap at the moment at slightly higher.

Siegel sees the potential for 15% stock appreciation through the end of 2012 from current levels. He remains bullish on stocks over the long term and dividends as one of the key components of total returns over time.

My take on all of this: Siegel is often typically bullish on equities as it is and though I do not feel stocks are currently at bargain levels, I do enjoy hearing him reiterate his views on dividends for the long haul. Stick with dividends, they work.

Berkshire Hathaway Share Buybacks

Berkshire Hathaway (BRK.B), the holding company operated by billionaire and former richest-man-in-the-world Warren Buffett, has recently announced that it will commence share buybacks on shares of its own company. These purchases are to take place at no more than a 10% premium to the current book-value of the shares at the time of the purchases. Purchases will not be made if those purchases would push Berkshire’s cash and cash equivalents below $20 billion.

What can the astute investor take away from this recent piece of news? Historically, companies have decimated shareholder value by initiating large share buyback programs while their share prices are soaring. Buffett, however, is known to be a bargain hunter. He has been one of the greatest generators of shareholder value in the history of finance. In addition, Berkshire Hathaway just happens to be the one company he would understand from an intrinsic value standpoint better than anyone else and better than any other company he could possibly analyze. He has built it from the ground up alongside his long time partner, Charlie Munger.

There has long been speculation as to whether Berkshire Hathaway would initiate a dividend program at some point and it seems this would answer the question as to what the company will do with its overabundance of cash. I believe it is a prudent move as the company’s share price has fallen over the past while and moves into bargain territory. While some may view this move as Buffett and Munger throwing in the towel as to being able to find attractive investments elsewhere, I think it is simply a smart way to put shareholder money to work in an investment they understand better than any other. I’m always a fan of dividends, but Buffett has a proven track record that dictates he can continue to use the cash stored away as he sees fits. In fact, Berkshire Hathaway is the single company I have been considering purchasing despite its lack of dividend. I think of Berkshire largely as a mutual fund without management fees and it is run by one of history’s greatest investment teams.

Further still, the $20 billion minimum in cash that Berkshire Hathaway will continue to hold as a cushion against an unstable financial climate is an encouraging fact. This is the cash mountain that Buffett has often cited as being what allows him to sleep soundly at night despite the lower returns the company will earn on these funds.

Buffett has been known in the past to state when he feels his company is overvalued, so I am willing to take these repurchase plans at his blessing that the shares are undervalued – or at least they are when at no more than a 10% premium to book-value.

Full Disclosure: No position in BRK.B and no intention to initiate one within the next 72 hours.

Rogers Entering The Financial Services Arena

It has been announced that Rogers intends to enter the financial services industry with various credit offerings including credit cards. The company plans to leverage its already extensive reach amongst consumers to extend its base of product offerings. The proposed banking arm of Rogers would apparently not enter the realm of deposit-taking, but details are not altogether clear at the moment.

One of the obvious advantages to this idea would be the added diversification into a financial services industry that, in Canada, has historically provided very solid returns to those involved. It gives Rogers a chance to branch out and reap some of the profits to be had among others extending credit to consumers.

Among the downsides, this does sound like it may be a case of classic “disworsification”. Rogers does telecommunications very well. One has to wonder whether branching out in this way will simply muddy the waters regarding Rogers’ overall strategy going forward. I am reminded of the GEICO example outlined in Warren Buffett’s 2009 Letter to Shareholders where he states that when GEICO offered credit cards it wound up incurring significant losses before jettisoning the offering outright. The risk is that the wrong type of consumer who has been turned down repeatedly elsewhere winds up trying again, and for the very reasons they were turned down elsewhere to begin with, they end up as a bad debt for their debt holder.

Overall I would prefer to see Rogers not enter this arena as I feel they do tremendously well already in the industry they are in, but I’m definitely going to watch this one play out as an interested observer.

Full Disclosure: No position in RCI.B and no intention to initiate one within the next 72 hours.

Track Records Count

One of the easiest ways to classify companies or stocks in general is to separate them into groupings based on their track records. My preferred method is to focus on companies who have consistently increased their dividend for a minimum of ten years in a row. The reason I demand a track record of dividend increases over at least a decade is because it demonstrates consistency.

When a company is able to show that it can continue to maintain its profitability through stable cash-flow and earnings patterns over a period of a decade or more, this demonstrates that management has a handle on how to weather adverse market conditions. Over any period of a decade, the general economic tide is sure to have risen and fallen at least once in marked fashion. Economies naturally ebb and flow over time, contracting and expanding through the simple market dynamics of supply and demand.

Companies that can continue to increase their dividend payouts for ten years or more consecutively typically produce a product that consumers need and don’t cut back on during rough patches. I’ve absolutely never heard someone say they cut back on tooth paste to weather a recession or loss of a job. Not surprisingly, companies that supply these recession proof or at least recession resistant products tend to have long, prestigious track records. Household names like Johnson & Johnson, Procter and Gamble, Colgate Palmolive, and others are among the most consistently profitable corporate engines in the world for just this reason.

Whenever I hear someone say they were burned in the stock market, the story tends to be the same. They either got their pocket picked on a fast-moving stock in a fast-moving industry with “lots of potential” but no track record, or oftentimes they really didn’t even know what they were invested in to begin with. Know what you own if for no other reason than the companies producing the simplest products tend to make the best investments.

Focus on the track records of the companies you invest in and happy investing.

Full Disclosure: Long JNJ

How To Get Started

The financial markets are incredibly vast. There are virtually limitless ways that a person can invest their money and different places to invest it. Bonds, mutual funds, foreign exchange trading, individual stocks, businesses, real estate, and so on, all offer different ups and downs for an investor. Given this wide range of investment choices, a natural question that comes up is, “How do I get started?”

The best thing to do to get started is to simply start small. Pick one company that produces a product you love and research it. Get to know its line of business from behind the scenes by researching the company website, downloading or ordering the annual report (which you can do for free with most companies through their Investor Relations department or website section), and even asking friends and family what their perceptions are of the company. Find out who the key executives are, what management’s past resume is, and see whether they are net buyers or sellers of the company’s shares.

Once you’re ready, delve a bit deeper into the numbers by learning about the dividend yield, dividend payout ratio (how much of the company’s earnings are given out as dividends to shareholders), p/e (price to earnings) ratio, and other fundamental pieces of data that will help you to value a company. In addition, you can research the company’s price history and compare the current share price or valuation to historical measures.

What you really are looking for in a long term investment is sustainability. You want to be confident through your analysis that the company you are buying is stable and can reasonably be expected to grow its business over the long haul. Steady growth and a long track record is preferable to rocket-fuelled growth over a short period. Companies with 25-years or more of consecutive dividend increases have demonstrated that they can withstand adverse market conditions and ever-changing investor sentiment. This is why the Dividend Aristocrat List published by Standard & Poor’s can represent a good starting place for analysis (emphasis on “starting point”, as past returns are not an indication of future returns since things are always changing).

Ultimately, the key to investing is to be naturally curious and seek out as much information as you possibly can about your potential investments. You can quantitatively and qualitatively value a company, so every piece of information is useful. Peter Lynch recommends in his book One Up on Wall Street, for instance, to eat at the restaurant you’re thinking about buying. If you don’t like the food, that may be a sufficient reason to stay away from the shares (be sure to consult friends if you’ve got bad taste).

Some people will say, “I don’t have the money to invest right now,” and they don’t do any research. The problem is, when they eventually do get the money to invest they’re simply not prepared. The key is to be researching even when you don’t have the money so that when you do get it, you’ve already identified several good choices for investment and it’s not a scramble to find a home for your hard-earned dollars.

The best investor is the well-informed investor, and that is an ongoing process. The key to getting started is to simply "get started". Take small steps and keep going.

What Is Financial Freedom?

I’ve recently been having more and more discussions with people about what exactly “financial freedom” is. One remark from someone lead me to write on this subject as they said, “I would be too bored to retire.” I believe this is approaching the subject from the wrong direction. Financial freedom isn’t necessarily retirement. Being financially free does not mean you have to quit your job or fundamentally change the way you live your life.

Financial freedom is simply the freedom from worries brought on by the lack of money to live life the way you would like. Financial freedom is the state where an individual has enough positively cash flowing investments that all of their expenses would be covered without them needing to work. The choice to continue working is one that involves other considerations such as whether one likes their job, enjoys the social aspect of working, or simply would like some additional income. Financial freedom is simply having all expenses covered by passive income (income that rolls in whether you are working or not, as by dividends from companies, rental income from real estate, royalties from book or song writing, etc.).

How do you know you’re financially free? If you require $20 000 per year to cover all of your living and daily expenses, including the vacation that you take every year, etc., and you generate $19 999 per year from dividends, you are not financially free yet. The moment you cross over to $20 000 from passive investment income, you can consider yourself financially free. If you require $130 000 and you generate $130 000 from passive investments, then you would be financially free here also. The amount of money you need to generate from passive investments to be financially free depends on your lifestyle. The moment your expenses are covered, you can consider yourself financially free.

Why is financial freedom a good thing? With the amount of people who have lost their jobs over the course of the past few years with the recession, we have seen firsthand the importance of having other streams of income than simply a job. When your sole source of income is your job and you don’t have your money working for you through investments, if you lose that job all income flowing toward you stops dead. In that situation, you need to scramble mightily to find a new job to replace that lost income. If you are financially free, or even part of the way there, you at least have something else to buffer the loss of your primary source of income. While being financially free doesn’t mean you need to quit your job or retire, it certainly helps in the event that your job is taken from you. Financial freedom adds some security to your economic situation.

The key to all of this is to take the first baby steps and get started.

U.S. Credit Rating Downgrade

Friday night after markets were soundly fast asleep, closed for the weekend, the Standard & Poor’s rating agency announced that it would be downgrading the U.S. credit rating from AAA to AA+. Sure enough, this move sparked intense debate as to what the overall impact would be. The question, “If the U.S. is not of the highest quality, who can be?” was bounced around.

Not surprisingly, the stock market tumbled heavily on Monday, opening and remaining lower throughout the session. Tuesday, however, stocks bounced back mightily and closed with a significant portion of the prior day’s losses returned. I expect to experience intense swings like this more and more going forward as trading happens so much faster in our digital age than it ever has in the past. While stock trading will require increasing speed and precision, I still believe there is place for the long term fundamental investor who buys on weakness in the market and holds through the downturns. That’s where I do and will continue to sit.

The credit rating downgrade, for what it’s worth, did not particularly tell us anything we did not already know. The U.S. has debt and spending problems, absolutely. The wording of the downgrade also indicated that the political posturing that prolonged the debt ceiling debate may also have lead to the downgrade. Yes, the U.S. is heavily inundated with political bantering. That said, the United States is a democracy. While the extent of the debate was a bit stifling, I’d be more concerned if there was no debate at all. The best thing we can do is try to take lessons out of what we’ve seen over the past few weeks (and particularly the past two trading sessions) to make ourselves better investors.

What can we learn from this volatility we are experiencing in the market? Capital gains or price appreciation in the stock market is incredibly fickle (not that we didn’t already know this). Judging the market based on the movement of share prices can be maddening as the markets bob and sway based on investor sentiment at any given moment.

While the media focuses on the price of the market going down, a dividend investor can focus instead on the rising yield of the dividends of the underlying companies. Investors and speculators can collectively decide where the share price of a company will go, but the board of directors, basing their judgment on the fundamental health of the company going forward, decides how much of a dividend to pay out to shareholders. A dividend increase represents a vote of confidence on the part of those who have been entrusted to guide a company into the future. A share price increase may or may not be indicative of anything positive a company has done. The share price may just be rising on the tide of the overall market and tell us nothing about the underlying company.

I intend to continue to keep my eye on stock market downturns only insofar as they provide me greater opportunities to buy the companies I want to own more cheaply. As noted previously, a company whose story hasn’t changed over the course of one trading session is simply a better value once its price has fallen during a selloff. Be mindful, be patient, and prosper.

U.S. Debt Ceiling Debate

A lot has been made recently of the current U.S. debt ceiling debate. The idea behind it is that if the debt ceiling was not raised, the U.S. would – in unprecedented fashion – default on some of its debt obligations. At this point a deal seems to have been reached and the debt ceiling will be raised, with spending cuts to come as well over a ten year period among other stipulations.

As far as I can tell, the entire situation has truly been a complete farce. The bottom line is that all along the debt ceiling was going to be raised – the U.S. isn’t going to default any time soon on its obligations – and the banter back and forth between political parties has been nothing but positioning for elections. Political ends truly got in the way of the wellbeing of the U.S. – and the financial stability of the world – as most of the soundbytes over the past few weeks have been suggesting that the U.S. was headed for potential financial Armageddon.

Let us not forget that the way the entire financial system works is through printing money. We live in a world of fiat currency – backed by debt – which can literally be printed into oblivion. Increasing the debt limit and meeting obligations is simply a matter of running the printing presses – or doing so digitally.

As a simple matter of supply and demand, what I am expecting to result from the rampant money printing over time is for greater inflation to creep into the system, leading to higher prices for everyday goods.

What’s my protection against inflation? Very simply, dividends are my safeguard. Companies that provide an ever-increasing source of cash flow through dividends and have a long history of doing so are where I prefer to have my money as I can count on those companies to meet and exceed the rate of inflation through price increases based on their strong brand positions. Ever notice the cost of your favourite toothpaste or soda creeping up a few cents at a time? Those little increases give the companies the power to continue to pay their shareholders larger amounts year after year, in steady fashion. I like to be on the receiving end of those increases.

I figure that regardless of what the politicians do and the games they play, people will still keep drinking their favourite drinks, brushing their teeth, and taking their medicine to manage a cold. I’m willing to bet that those recession resistant companies that provide these products will continue to operate regardless of the political wrangling that goes on.

Holding vs. Buying or Selling

In analyzing stocks, one of the easiest ways to generate new ideas for our own personal portfolios is to sift through the portfolios of the legends of the stock market business. Warren Buffett reveals his stock moves within his company Berkshire Hathaway on a quarterly basis as per SEC (Securities and Exchange Commission) regulations. This provides a slightly lagging window into his stock market activity, though it can provide clues as to which companies he believes hold the best long-term prospects.

Of course, it is never enough to just see what Buffett or any other titan is buying or selling and take the matter at face value. There can be many reasons for buying or selling and the whole story is not always – if ever – available. The onus is on the individual to do their own research, in all cases.

Just because Buffett holds a stock does not indicate a buying signal for anyone else. Many of Buffett’s positions in companies are longstanding and he was able to get in at terrific prices. Now, many years later, he is able to sit back and collect rising dividend streams from these cash cows even if, in his own contemplations, he may view the companies as being too pricy for adding to his position. Coca-Cola (NYSE: KO) is an example of a company where Buffett was able to initiate a position long ago (in the 80s) and now simply holds for the dividends.

There is a marked difference between buying shares and holding shares. At times, it is the case that we have a position in a company and, while we are able to collect dividends by holding, we view the company as overpriced and as such do not add to the position. It seems contradictory to say, but even though at times we may view securities we own as overpriced, that is not necessarily a signal to sell. Holding is oftentimes the more prudent path. Action through inaction can yield results, particularly with solid dividend achievers.

Patience is often the greatest virtue for a dividend investor. Having the fortitude to hold through bad times, accumulate more shares, and then hold rather than selling even when markets appear to be overblown saves on taxes, commissions, and general unrest. I prefer to take a relaxed approach to investing whereby I let the markets ebb and flow while I take a long term view, preferring to just stick to solid brick and mortar companies that generate rising profits over time. Holding has rather than selling has proven fruitful for me. So long as the story hasn’t changed, an increased stock price is no reason to pull the trigger and sell.

Full Disclosure: Long Coca-Cola (KO)

Cost and Value 101

The words we use shape our outlook on the world. As such, I feel it is incredibly important to be careful in our word selection.  Given the amount of economic turbulence we have all experienced over the past few years, I feel it would be useful to revisit two words that often get used – mistakenly – interchangeably; cost and value.

Cost is easy to observe. It is one of the first things any of us pay attention to when considering a purchase. It is the sound bite that commercials on television bombard us with. The cost of a thing is quite simply its price tag.

Value, on the other hand, is a much trickier term. It is hard to pin down what exactly is the value of a thing. It isn’t announced or boldly placed on display. Value is the true worth of a thing. Value goes beyond the price tag and asks, “Is this thing really worth the advertised price?”

One of the most interesting observations I’ve seen is that any person would agree that it is better to buy a new jacket for $25 rather than $50, and in fact that same any person would jump at the opportunity to cash in on such a sale, but yet fails to take the same measures in their investing life. The financial herd who convinced themselves to buy at $50 manage to convince themselves to sell at $25 rather than to buy more of a given company’s stock even when the story or investment thesis is unchanged. The same person who sees more value in the $25 jacket somehow manages to fail to see the same value proposition when it comes to the investment marketplace.

The reason for the above is rather simple, I believe. While people are able to inherently understand that paying $25 is favourable to $50 for any given item, investing isn’t so black and white because it is also an emotional endeavour. The reason the masses fail to capitalize on opportunities like this while investing is because fear overtakes their inclination to snag a basement bargain price. For this reason, investing is as much – or likely far more – about taming your emotions than a matter of intellect.

Beyond the emotional aspect is the fact that to get past the cost to see the value of a thing requires actually digging down and studying. After careful deliberation, after all of the facts have been weighed and the fundamental and technical data has been analyzed, it is time to make a judgment and trust that judgment to be the right one. Given the volatility in the market, this requires fortitude through trying times. This can be a very good thing from a true investor’s perspective because the less others are able to identify the value of investments and act on them, the longer they sit on the table for the astute student of the game.

Dividends

Dividends, at their most basic, are simply the money that companies pay their shareholders. It is customary for a company which is able to generate excess earnings beyond what it needs to reinvest in itself for growth to pay out that excess to its loyal shareholders.

One of the great benefits of owning shares of companies that pay dividends is that the owner never needs to separate him/herself from the company, i.e., by selling shares to raise capital. Shares of dividend paying companies can theoretically be held forever – assuming the dividend is not cut – and the owner can continue to generate an income for as long as the stock is held.

Why are dividends relevant? Dividends from reliable companies represent one of the steadiest ways to work toward financial freedom. Building a strong portfolio of dividend paying stocks can also be incredibly painless and, if done well, exceedingly hands-off.

My personal goal is to acquire enough shares of dividend paying companies to achieve financial freedom by the time I turn 35. I am currently 24. This gives me around 11 years to chart my course and document the process.

First Post

Welcome to The Dividend Titan Blog. This blog is intended to be educational and informative. It will track my journey on the way to financial freedom. I invite you to contact me directly at Info@RyanLaming.com for information either about myself or this blog. I intend to update this blog regularly, so be sure to check back. Thanks.

The Dividend Titan