Tuesday, August 17, 2010

August 17, 2010 Saved By The E-Mail


August 17, 2010 Saved By The E-Mail

Tonight, after an 11 hour drive from Utah, I was going to plagiarize Alan Abelson, from Barron’s, Brett Arands from The WSJ and Jim Cramer from Mad Money. That will have to wait for another day, as I was sent a great e-mail today from one of our regular readers and a guy with what Cramer would say has Good Horse Sense. Out of courtesy to them I will not share the e-mail with you, but will share my response:

Thanks for the feedback. You are doing much better than I YTD. The overall market is down about 1.2% so your "net" 5% gain, putting you on target for a 7% year. You should be very proud of that. I took a hit on several stocks on the May 7th flash crash, but I made a couple of bucks as well. My biggest mistake was panicking and not following my own advice in the two weeks after the flash crash. Not counting some nice dividends on bonds, my net losses including dividend receipts (We are talking realized gains and dividend proceeds) is 1.8% that would be a negative 1.8%. My unrealized gains YTD are +5.25%, not including dividends on those holdings.

The “Buy the Dividends” strategy is not WAY DIFFERENT than what I do. Dividends are just one element of the analysis I do. You have read me pontificate about shareholder yield and dividends and dividend yield (Annual total dividend as a percentage of the current market price-for my newbie in Utah) are one of the key elements of the shareholder yield trifecta. You have the application of free cash flow towards paying down or eliminating long term debt, ISSUING DIVIDENDS, and or stock buy backs.

The other elements I check out are the 5 years earnings growth, 5 year revenue growth, 5 year and industry margin comparisons, Return on Equity, and long term debt analysis.

In essence, "buy the dividend" is at the heart of value investing. Just watch the cash flow on stocks that pay a high yield (We consider a high yield as anything above the current 10 year treasury yield, currently at 2.6%) to make sure it is a sustainable dividend and not a sucker bet. A quick check for sustainability would be to look at the payout ratio which compares earnings per share to dividends per share. The lower the better as it is a good indicator that they can continue to pay that dividend. For example one stock you mention is VZ Verizon. If my numbers are correct they are paying a 6.3% dividend yield, but the payout ratio is an obscene 733%. (Please check my numbers). However having been a holder of VZ and VOD, I kind of get the convoluted relationship between Vodafone, Verizon, and Calico (sp) Partnerships. This is a cash rich arrangement. VOD has a nice 5.4% yield and only a 50.6% payout, but the incestuous relationship should cover VZ ability to pay dividends.

Nice year going. You should start your own blog because it sounds like your kickin my backside. I am going to steal some of this for my blog tonight as I just got off the road from an 11 hour drive from Utah. I won't disclose any personal info.

OK now reaching way back into "Fun at the White House":

"Tip I swear, George has got a kid even goofier than he is."

That should buy me some brownie points with those on the left side of the aisle.

Salve Lucrum


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