PODCAST 118
1 June 2023 –
SAFE DIVIDEND INVESTING
Greetings to my listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 118, on June 1st of 2023.
My name is Ian Duncan MacDonald. In today’s podcast, I will be answering 3 interesting investment questions, but before I begin, I would like to remind listeners that the purpose of my podcasts and my books is to show those with patience and common sense that they are capable of successfully managing their own investment portfolios. They just need to be shown how easily and safely it can be.
Achieving life-time financial independence, as a self-directed investor, is possible and my objective is to show you how.
I have owned some of my dividend stocks for 20 years and watched the dividend payouts climb along with their ever-rising share prices. It is never a straight-line increase, but over months and years of ups and down it is an increase. The portfolios have grown by several multiples.
The dividend payout increases have kept that income I live on, well ahead of inflation. I
Dividends are paid out of company profits. You are (no matter how few shares you own) an “owner” of that company paying the dividends. You get to vote for the directors of the company and attend their annual meeting.
These directors decide every year on whether a dividend payment is to be made and how much it will be. Like most human beings they are creatures of habit. If they have each year, for the last decade, decided to increase the dividend payouts by 20 cents, do not be surprised to see this year’s dividend payout increase by 20 cents.
If you are living off your generous increasing dividends, would you as an owner want the dividends to stop? If you sold those shares, you must now look for a stock with a better dividend yield percent and a longer record of increasing dividend payouts. It is just too easy to stick with the stock you already own and avoid making a change that could be a mistake.
The longer you hold a financially strong high dividend stock, what becomes irrelevant is its share prices. Even during the market crashes of 2000, 2008 and 2020 the dividends of such companies did not drop while their share prices in some cases dropped by 50%. After going through several crashes, you soon recognize that such share prices will not only recover but rise again to new record highs.
Companies have little influence over share prices which are controlled by optimistic and pessimistic speculators bidding for shares in that great auction vehicle called a stock market. The companies only have control over their revenue and expenses from which profits are realized and dividends paid. A bet on future dividends beats a bet on future share prices.
If you want some deeper insights into dividend investing, go to www.saferbetterdividendinvesting.com.
Question 2 - One of my stocks has had a sudden drop in price. Should I sell it?
Why did you buy the stock and how long have you owned the stock?
Stock prices change constantly because a stock market is an auction vehicle. Optimistic speculators buy stocks that they believe are going to make them “rich”. Pessimistic speculators sell stocks because they believe if they do not sell the stock that they will become poorer.
You cannot sell a stock unless someone is willing to buy it at the selling price you bid. You can offer the stock at any price you want but the buyer controls the price. When you are on-line looking at a stock price, it is already a historical record. It could change in the next minute.
It is very easy to obtain free historical records of share prices. Therefore, before you buy a stock, it is wise to know how the stock has performed over the last 24 years. Why 24 years? So, you can see what has happened to share prices since the years 2000, 2008 and 2020. Those are the years the stock markets crashed. Almost all stocks had sudden drops in price in these crashes.
What you want to see, is how long after each crash did it take the stock to recover and exceed its share price prior to the crash? How much did the stock drop? How do these historical drops compare to what is currently happening to the stock?
The unrealistic fear that inexperienced investors have is that they are going to lose “all” that they have invested in a declining stock. Such a fear becomes unreasonable if you can see the share price rising and falling over 24 years.
Whatever information is causing owners of the stocks to sell is also causing those who see the falling price as an opportunity to buy the stock at a discounted price.
Large public companies do not disappear overnight. It usually takes years for a large company to wind down, fall into insolvency and disappear. If you stick to financially strong companies, who have been around for decades, you protect yourself from catastrophic stock losses.
Do you know how to identify financially strong companies? If you don’t, it is not difficult. The easiest way is to invest in companies who have paid ever rising dividend payouts for the last 24 years, this information is easily obtainable. Dividends are paid from a company’s operating margin. An operating margin is what is left after the expense to generate revenues has been deducted.
Executives of corporations are paid to make the corporations profitable. They are constantly making decisions that will increase sales and lower expenses. They have no control over share prices which are controlled by optimistic and pessimistic speculators.
It is not difficult to find financially strong companies with good profits that continued to pay high dividends during the last 3 market crashes. Their share prices may have dropped by 50% during the crash but the crash had little if any impact on their profits or their dividend payouts.
How is this lack of impact possible? Companies are run by people. People are creatures of habit and follow the path of least resistance.
Large public companies have an established customer base. Sales orders that can take months, even years, to be fulfilled and delivered to the customer. The customers are loathe to change suppliers because of the effort required in finding and evaluating a new supplier. They need to determine if the new supplier being considered is as reliable as the old one being discarded. If a mistake is made in their choice of a new supplier, it can impact sales to their own customers.
There must be a serious screw up on a supplier’s part to cause a change. It is rarely just a difference in price that causes a customer to switch to a new supplier. This built in inertia means a recession or market crash impact can have little immediate impact on profits and the paying of dividends. It may take months or years before a company’s sales are impacted if they are ever impacted at all. The economy may recover during this period.
The customers are billed on the delivery of their order which creates an account receivable. The account receivables are often billed with net 30-day payment terms. However, on average a supplier takes about 55 days to pay bills which mutes the immediate impact of a market crash. Buying and selling does not cease just because share prices drop on the stock market.
What you will find is that weak, unprofitable companies will often be weeded out in a market crash, while strong companies can become stronger because they absorb the customers of the companies who failed.
Some of those weak stocks that got weeded out appealed to speculators who bought the stock because “everybody” was buying that “hot stock”. It was making early investors rich.
Speculators are often so intent on not missing out on a supposed chance at wealth that they do not look at the history of the stock’s share prices. Whether the company was profitable or not was never considered.
If you are one of these speculators who blindly bought a stock “with potential and no profits”, whose share price has suddenly dropped, you may have a serious problem. You could lose all you have invested.
Speculators can be victims of schemes engineered by those in the investment industry to create the illusion that a new unprofitable company has the “potential” to realize incredible profits. They will assure you that the share prices could soar by many multiple. You are advised to buy now or you will miss the opportunity of a life time.
Bernie Madoff’s hedge fund, the Brex gold mine and Investor’s Overseas mutual funds are just a few speculative offerings that wiped out thousands of investors blinded by the unrealistic expectations of sudden riches.
If you have patience and common sense you can over several years acquire wealth in the stock market and achieve financial independence. You do not need to pay an investment advisor a percentage of your portfolio every year to hold your hand. You do not need an MBA or an accounting background. You just need to carefully select historically strong companies paying high dividends.
There are tools available to help you “score” the strength of a stock. In some cases, stock scoring software is supplied free with investment books, some can be bought, as e-books, for less than $10. You can learn more about the scoring software I use at www.saferbetterdividend investing.com.
There is no reason for not knowing the strength of a company you are about to buy shares in.
Question 3 - Have you ever been unable to purchase a stock until you checked a box that stated you knew you were buying a high-risk stock?
I have never encountered a situation where I would be required to acknowledge that my purchase of a stock was a high risk. Furthermore, the financial data for this stock seems to indicate that it is far from being a high risk.
After scoring a stock and looking at its history of share prices and dividend payouts, I always recommend doing a Google search before buying any stock. When I did one on this stock, using the company name, followed by the words “complaints and legal issues” the following appeared (which I summarize and remove any information that would identify the stock):
A nationally acclaimed investor rights law firm, reminds investors of the deadline to file a lead plaintiff motion in a securities class action lawsuit that has been filed on behalf of investors who purchased or acquired the common shares of the stock. It alleges violations of the Securities Exchange Act of 1934.
The Plaintiff alleges that Defendants made false and/or misleading statements and/or failed to disclose that: the company had inadequate internal controls and procedures to prevent contractors from engaging in illegal conduct that caused severe pollution. The company continually downplayed its potential civil liabilities foreseeably likely to subject it to increased governmental scrutiny and enforcement, as well as increased reputational and financial harm, and would also materially impact its financial results.
As a result of this news, the price of their stock declined 4.6% over two trading days
In 2021, a publicly issued Order To Show Cause And Notice of Proposed Penalty, for $40 million fine. On this news, the share price declined 2.8% over the course of two trading days,
If you wish to serve as lead plaintiff, you must move the Court A lead plaintiff is a representative party acting on behalf of other class members in directing the litigation. Your ability to share in any recovery doesn’t require that you serve as lead plaintiff. If you choose to take no action, you may remain an absent class member.
The law firm has recovered over $3.5 billion for its clients. In addition to representing individual investors, the Firm has been retained by some of the largest public and private pension funds in the country to monitor their assets and pursue litigation on their behalf.
This legal action probably explains why you must check a box which would inhibit you from commencing any future litigation regarding the purchase of this stock The stockbroker through whom you were buying this investment may be a defendant in the legal suit and may be trying to minimize any future exposure to liabilities.
Class action suits can take years to settle. Who knows what impact it will have on the stock. It does expose your investment to a risk that you normally do not encounter.
I scored the stock using the IDM stock scoring software supplied with my books. It scored a 57. This is on the good side. I avoid stocks scoring under 50. Out of thousands of stocks I have scored the highest I have encountered was a 78. The lowest was 8. Most North American stocks score under 50.
Its dividend yield percent is close to 10% and has been increasing steadily for the almost 20 years that the stock has been available. It is interesting that the dividend payout is now back up over 25 cents a share after dropping down to about half that amount for the last few years. You would wonder why it has increased and whether it is temporary.
Buying this stock is a judgment call. I have owned stocks in this industry for a decade or more that are not as strong as this one and pay much lower dividend yields.
Although most analysts seem to be right only 50% of the time, it is interesting that 8 analysts are promoting it as a buy and think it will gain at least 20%.
With its shares traded volumes approaching 10 million it is certainly appealing to large numbers of investors. I would wonder if the financial institution they are buying their shares through forces them to check a box confirming they are buying a high-risk stock.
The company’s book value is just a little below its share price, which indicates its share price is not inflated. The operating margin of about 10% is on the low side compared to other stocks I own in that industry. Its price to earnings ratio of 9.3 indicates financial strength.
Without this threatened legal action, it would not be a difficult buy decision for this stock.
The End