Tag Archives: stocks

Choosing a Stock – Part 8: Let’s Practice Scoring

By now, you’re familiar with how we score stocks for our monthly recommendations. In this post we’re going to use General Motors Company to practice scoring so you can see how easy it really is. One of the goals of this blog to empower you to take control of your financial future by investing your money by yourself. It’s really not that scary and, with a few basic rules, pretty safe.

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This is a screen capture from Google Finance on March 14, 2016 (https://www.google.com/finance). To use our system, this is all you need. No need to worry about complicated stock analysis or expensive “hot” stock tip newsletters. Remember, the companies on the S&P 100 are all big, established companies so they’re all pretty safe. All we’re trying to do is pick the best company at the time from a list of great companies. If we do that we’ll also achieve our other goal – to sleep well at night. Let’s use the data from Google Finance to score GM.

The stock is currently trading at 20% below the 52-week high ((38.99-31.18)/38.99). In other words, it’s on sale for 20% off. It’s only fair to point out that lots of other stocks on the S&P 100 were more than 20% off their high but we’re just using GM as an example and sale price is only one of the factors we consider. We give it a score of 3 for being on sale (Choosing a Stock – Part 3: Buy on Sale). The dividend is 4.87% ((0.38 x 4)/31.18). Most online services calculate that automatically for you which saves some paper and pencil work. It earns a score of 4 for the dividend yield (Choosing a stock – Part 2: It’s all about the dividend!). The P/E ratio is 5.19 and the EPS is 6 which get scores of 5 (Choosing a stock – Part 5: Does the company deserve the price?) and 2 (Choosing a stock – Part 6: How much of the value will be mine?), respectively. Those scores add to 14 (3 + 4 + 5 + 2). On it’s own, that score means very little, but with experience you’ll learn that it’s actually really good – usually the top stocks score between 13 and 16. If you did the same for all the stocks on the list, you’d see that, for March, GM tied with three other companies that month – Potash Corporation of Saskatchewan (TSE: POT), Metlife, Inc (NYSE: MET), and Banco Santander (NYSE: SAN). Of those three, we recommended GM because Potash Corp is experiencing continued uncertainty in the price of potash and Santander is a bank in a foreign market – both riskier than we like to suggest. Neither of those is on the S&P 100 either so we don’t recommend those unless you are able to tolerate a little more risk. While Metlife was a little farther off its 52-week high, it paid a dividend of only 3.74% compared to the 5.2% (at that time) GM offered. BTW, GM is up 6% since we recommended it two weeks ago and Metlife is up 7% so you wouldn’t have gone wrong with either of them. Just sayin’.

We’re convinced (and our track record proves it if you check out our portfolio details) that you could do quite well following our simple system. Of course, if you really like this kind of thing and don’t mind spending some more time you can do more in-depth analyses of stocks but we recognize that most of us would simply rather spend our time doing lots of other things we enjoy. The appeal of our method is simplicity. The idea is passive income, after all.

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March’s Pick

It’s time to announce our stock pick for March and there’s a good chance you’ll be happy to hear we’re not suggesting IBM (NYSE: IBM) again. To be clear, if IBM came out on top after assigning the scores, we’d have no problem recommending it for a fourth month in a row – but it’s not. This is about choosing the best stock, not about diversifying for no good reason. Like last month, we’re going to offer some choice. Our pick from the S&P 100 is General Motors Company (NYSE: GM) but we’re also watching Potash Corp of Saskatchewan (TSE: POT) which, while not on the S&P 100, still represents a good opportunity. To be sure, the buyer’s market continues. With markets still a little off, more than 30 companies on the S&P 100 are trading at least 25% below their 52-week high so there are lots of bargains to choose from if you want capital growth.

Let’s look first at GM. This well-known american company is trading 24% below the 52-week high which is a good sale price and makes the $0.38 dividend a 5.15% return. That return is outstanding for a big, blue-chip stock when we compare it to companies such as Apple (2.11%), Wal Mart (3.01%), Johnson and Johnson (2.82%), and McDonald’s (3.00%). With a P/E of 4.92, General Motors represents great value at this time and the $6 EPS indicates strong earnings. We added GM to our portfolio on March 1.

So what’s happening with Potash Corp? Since we mentioned them back on January 29, the price has moved up 8% which is a decent gain for a month if you had purchased them then and sold them now. That’s great for a quick fix but our strategy is to buy value and hold it. Despite that recent gain, they’re still 49% off the 52-week high which is a significant sale. The 11.17 P/E is attractive but the $2.05 EPS is less than ideal (in fact, an EPS that low doesn’t even score on our system) but the depressed worldwide potash price is to blame for that. The company is still profitable and continues to pay that juicy 6.1% dividend. If you’re comfortable straying a little from our core system, POT is a great buy!

Finally, we wouldn’t feel right if we didn’t at least give a little update on IBM. To be fair, it’s still an attractive stock. They’re trading 24% below the 52-week high which is a good sale. With a P/E of 9.82 and EPS of over $13 they are very well-priced for their earnings. The dividend yield is not outstanding but 3.89% is nothing to scoff at. If you previously purchased IBM and are looking to increase your position, it’s still a good time.

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February’s Pick

If you’re trying to pick a stock to purchase in February, just throw a dart at a list of the S&P 100 and you’ll likely do well. More than 50 of the companies on the index are currently trading at more than 20% off their 52 week high and another 40 or so are at least 10% off that mark. If capital growth is your goal, it’s hard to go wrong. But we want more. While it might sound like a broken record, we are, for the third month in a row, recommending International Business Machines Corp. (NYSE: IBM). Before we get to the reasons, let’s look at three other front-runners.

When all the scores had been assigned, Potash Corporation of Saskatchewan Inc. was in our top 3. It’s 55% off the 52 week high with a low P/E of 10.05 and they’re still profitable despite the collapse of potash prices. That collapse, however brings with it some uncertainty about their future price and we’d rather buy them on their way up than down. There are also some rumors about them cutting their jaw-dropping 10% dividend. Mind you, even if they slashed it by half you’d still earn a respectable 5%. If that dividend outweighs the price risk for you, buy them!

National Oilwell Varco (NYSE: NOV) is also a good-looking stock. They are 49% off the 52 week high with P/E of 10.57 and EPS of 3.29. This company designs and builds equipment for oil and gas drilling so they enjoy some protection from the oil price market. Still, the current uncertainty in oil prices makes this stock a little uncertain also. Of course, we all know that oil prices will recover and that means drilling will continue and eventually expand also. Their 6.2% dividend certainly makes them rewarding in the meantime.

Finally, Caterpillar (NYSE: CAT). This company was on our radar back in December but was nudged out by IBM. Well, they still look good. At 35% off the 52 week high, and with a P/E of 14.39 and EPS of 4.82 they continue to offer a juicy dividend of 5.3%. Caterpillar has its work cut out for it as low oil prices and sagging commodity prices mean less demand for their equipment. Nevertheless, they are a profitable company at a good price. Again, we prefer to buy on the way up but that dividend might make them attractive for some investors in the meantime.

To be honest, we’d be happy buying and holding any of these three, but we’re settling on IBM again. There are some mixed reviews about the near future of the company and time will undoubtedly prove half of those analysts right. For us, we want a solid company at a good price that pays a nice dividend. This month, that’s IBM. They are 31% below the 52 week high and, while they are still losing ground, we’re willing to ignore that and increase our position because the P/E and EPS are both so great at 9.5 and 14.8, respectively. They have a long history of rewarding investors with a steady (and growing) dividend which is currently at 4.3%.

Seems like the current market has something for every investor so you should find it relatively easy to pick a stock this month. We thought we’d give you a few options because, while the scores say one thing, it never hurts to consider some outside factors that influence prices. Remember, the name of the game here is buy and hold so no matter which of the four you go with, a few years from now you won’t have any regrets.

Choosing a stock – Part 5: Does the company deserve the price?

I have to admit that the metrics we discussed in the previous three posts (the dividend return, whether  the stock is on sale, and the percentage above the 52 week low) are the most important for me and, of those three,  the first two are the most important. When I’m buying my piece of camping gear, I want a trustworthy company that offers a good-quality product and I want to buy it on sale. On sale or not, I also want to know whether the value of the product warrants the price. To help me make the best decision, I routinely read customer reviews online. What better way to judge the quality of something than to read the opinion of others who have purchased the same item. If the item seems a little pricey (even on sale) but lots of people have reviewed it favorably, I might go ahead and spend the money. If, on the other hand, the reviews are positive but only a few people have written a review, I might think twice. Some people might purchase the product at that inflated price based on a handful of positive reviews but, sooner or later, the supplier will realize that shoppers think the item is over-priced for what they’re getting and they’ll have to drop the price.

choosing a stock 5How do we figure this out when it comes to buying stocks? Shareholders don’t write reviews after buying shares but there is a way they indirectly tell us what they think of the value of the company – it’s the price-to-earnings ratio (or P/E). This is the ratio of the company’s share price to its earnings per share. In other words, it’s a way of comparing the ability of the company to earn money (certainly an important way of determining value) to how much people are willing to pay for a share. To calculate the P/E, we take the current stock price and divide by its earnings per share (or EPS). The P/E allows us to evaluate what people are willing to pay for one dollar of the company’s earnings. In the Telus example, the P/E is 15.4 which means you’re paying $15.40 for every dollar of earnings the company generates. We can think of the P/E as a way of asking “does the company make enough money to warrant the price of the stock?” A low P/E is like a product with lots of positive reviews – it’s good quality at a good price.  A high P/E means the stock price could be out of whack with the earnings of the company and, eventually, people will realize that and the price will experience a correction – possibly a major one.

Sometimes share prices are affected by speculation on events which might happen in the company’s future. Maybe they’re releasing a hot new product that is expected to do well and their share price takes off as investors drive it up in anticipation. What if that hot new product turns out to be a dud? We want to avoid buying that stock at an inflated price and then suffering through the correction. Of course, lots of people have made lots of money speculating on future prices but we aren’t interested in risking our money. It`s easy to find headlines online like “5 Stocks Set to Double This Year” or “Stock Secrets Insiders Don’t Want You to Know.” Don’t be fooled – nobody can predict what a share price will do. We want to play it safe by making purchases to hold for the long term and then sleeping well at night. As with the other factors, I assign a score to each stock on the S&P 100 based on the P/E. Remember that a low P/E is good so high scores are awarded to stocks with low ratios.

My strategy makes it unlikely to get fooled by a temporary volatility in a stock price because I’ve already considered the 52 week high and low so we know how the price has behaved recently. Still, it is possible that a stock price was dramatically inflated sometime over the last year (thereby increasing the 52 week high) while being currently well below that (thereby seeming to be on sale) and still be overvalued (i.e., has a high P/E). There are lots of companies on the S&P 100 so why take a chance?

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January’s Pick

This month International Business Machines (NYSE: IBM) came out in the top spot with a score of 13, so we’re increasing our position in them after also recommending it last month. It’s currently trading at 21.6% below the 52-week high, representing a good sale, and offers a dividend of 3.8%.january_pick

The ratios are also still strong with a P/E of 9.49 and EPS of 14.57. Let’s not forget that Buffett still likes them. Works for us! Remember, too, that while our overall goal is to grow dividend income, capital appreciation of the share price is an important way to build wealth. IBM doesn’t have the highest dividend rate but it offers potential for share price improvement and is a safe bet overall. Last month we mentioned keeping an eye on Williams Companies (NYSE: WMB). This month they placed in the top ten but are too risky for us to recommend it. They are currently 60% below their 52-week high becausethey gave up some ground in the last month meaning their share price continues to slide. Sure, their dividend rate is now over 10% but that might not be sustainable and the slipping share price could still offset that return. We’ll keep waiting on that one.

Choosing a stock – Part 3: Buy on sale.

In the last entry we talked about the second factor to consider when buying a stock – the dividend rate. My overall goal is to develop a stream of income from my portfolio and collecting regular dividend payments is one way to do that. I buy companies on the S&P 100 which pay the highest dividend rate. In this entry we’ll move on to step 3.

Let’s go back to our analogy. I’m trying to buy a new piece of camping gear and I’ve decided to go with a well-known supplier. I’ve chosen a good quality piece of equipment (companies on the S&P 100) that will last and add value to my hiking experience (companies that pay the highest regular dividend). Being a frugal person (some friends would say ‘cheap’) I’m going to wait until the item I want is on sale. Why pay more than I have to right? If I wait for a sale I can get the same item for less!

walmart_priceWhen choosing a stock, I apply the same principle. The good news is, with so many companies on the S&P 100, there’s nearly always something on sale. You might be wondering what on earth I’m talking about when I say a company is on sale. Let me explain. I figure a good way to estimate the value of something is to see what people are willing to pay for it. This is true of camping equipment and stocks alike. It’s easy to see what people are willing to pay for a stock because that’s what the current trading price is. We can see from the image above that Walmart was trading at $61.30 per share on December 31, 2015.

Ok, now we know what the current price of a stock is but how do we tell if that’s a sale price or not? Easy! I look at the maximum price people were willing to pay over the last year (called the 52 week high) and compare that to the current price. Pretty simple, right?! Again, I find that price for every company on the S&P 100 and calculate how far below the 52 week high the current price is. Let’s look at an example.

picking_a_stock_part_3Basically, people were willing to pay $66.36 for this stock within the last year and I can now buy it for $33.49 – a discount of 49.5%. This is a solid company on the S&P 100 so, chances are, it’ll be back to that high within a year or so and I will have realized a 98.1% return. Oh yeah, and collected my 5.49% dividend in the meantime. Sweet! Would you be excited to buy something you think is valuable at that kind of discount? Of course, you would!

Just like with the dividend rate, I assign a score to each stock depending on how far below the 52 week high it’s trading. In other words, I look to see which stocks are really on sale. That score is added to the score the stock earned from its dividend and I’m one step closer to making a decision.

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Choosing a stock – Part 1: Stick to the S&P 100

A few years ago I realized that I had to change my investment strategy. Until that time I had been playing pretty fast and loose with my investment dollars. I was choosing risky stocks and riding the excitement of the big wins while mostly pretending the big losses didn’t happen. Sure, I was coming ahead overall but I knew one big loser could wipe out my capital. As I got older I recognized that I had less time to take advantage of compound growth to accumulate wealth and I had to start looking for a safer alternative.

stock_marketThat’s when I started working on my own strategy for choosing stocks. I have to disclose that I have no formal education or training in stock investing or financial advice but I do know that nobody cares more about my money than I do! I took it upon myself to start learning everything I could about the stock market and evaluating a stock. Let’s just say that didn’t go well. There were all kinds of factors to consider: beta, price/book ratio, return on equity, net profit margin, EBITDA, blah, blah, blah. When I wasn’t falling asleep reading about all that stuff I was worried about being in over my head and that it would never make sense to me. I quickly realized as an amateur I was going to have to dramatically simplify things so I began trying to figure out what the most important things were.

Maybe I could think about choosing a stock like making any other purchase. What are the factors I consider when buying other things? A car, a TV, a mobile phone, whatever. I like to go backcountry camping whenever I can and that hobby requires some special gear which I’ve slowly acquired over the years. I wondered, when I’m thinking about a new piece of gear, what things do I consider when reaching a decision? First, I want to buy from a company with an established reputation I can trust. I want a company that has proved its longevity and is going to be there if I have a problem. I’m likely going to stick with suppliers like Cabella’s, MEC, or REI and manufacturers such as Patagonia, Marmot, or Arc’teryx.

In the world of stock market investing, we’re talking about the companies on the S&P 100. Companies on that list represent a variety of sectors and account for about 57% of the market capitalization of the S&P 500 (a similar index containing a greater number of companies) and almost 45% of the entire market capitalization of the U.S. equity markets. The stocks in the S&P 100 tend to be the largest and most established companies in the S&P 500. These companies have proven themselves worthy of inclusion on that list and that makes me very comfortable buying them. They’re companies we’ve all heard of. They are Coca Cola, Wal-Mart, Microsoft, AT&T and 3M. Take a look at the list and you’ll recognize many of them. Do I occasionally find a deal so great that I stray from a really well-known camping equipment company and take a chance? Of course! But mostly, I’m sticking with the big guys. That’s also true of picking a stock. Once I gained a little confidence – acquired from seeing the performance of my portfolio – I started to occasionally branch out into companies that aren’t on the S&P 100 if I thought they presented an opportunity. More about that in a later post.

So that’s Step 1. Stick to well-known companies that are listed on the S&P 100. They’re solid, safe, blue chip stocks that have a proven track record.

Trading time for money
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Trading time for money

A few years ago we realized the wealth we could create would always be limited if we continued trying to build it in the traditional way. By ‘traditional,’ we mean the way our parents taught us and their parents taught them. There’s a good chance it’s the way your parents taught you, too: trading time for money. Essentially, trading time for money means you go to work for several hours most days and  someone pays you for the time you spend there. Because we all have only 24 hours every day, we’re all limited in the amount of money we can earn using that model.

We wanted more.

Trading time for moneyWe began to talk about ways to build wealth while on vacation, or watching a movie, or hanging out with friends, or… asleep. Early on in this journey (and it really is a journey), we learned there was a term for what we were looking for – “passive income.” While there are lots of ways to earn passive income, the one that appealed to us most was buying stocks that pay dividends. To be honest, some of the early appeal was that we both had experience investing in the stock market so it didn’t seem scary to us. In this blog, we hope to narrate our journey to share what we’ve learned with anyone who might want to do the same. Remember, writing a book, selling a product online, affiliate marketing, real estate (though that one isn’t completely passive), and lots of others are all ways to earn passive income. We would never claim that investing in dividend-paying stocks is the best method, it’s just the option we chose. We happen to think they’re the most passive as well.

A dividend is a payment a company makes to shareholders as a way to distribute a portion of its earnings. Dividends can be paid as cash payments or in additional shares of stock. Start-ups and other companies that want to grow quickly rarely offer dividends because they reinvest their profits to finance their growth. Larger, established companies tend to pay regular dividends as a way to attract and keep shareholders. These are the companies we want to own.

You would be forgiven for asking how a company’s decision to pay a dividend can affect the share price. Basically, shareholders are less certain of receiving the benefits of future growth that might result from reinvesting profits than they are of receiving current dividend payments. Investors place a higher value on having a dollar in their pocket today than on a dollar which may (or may not) be paid some time in the future. It stands to reason, then, that they are willing to pay more for a share of the company.

When you combine the stability of large, blue chip companies with the near-certain income stream of regular dividends, you get a recipe for a money-making machine you can use to build your financial independence. If building a stream of dividend income is something that interests you, we hope you’ll find our blog helpful.

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Building a money-making machine

The Passive Dividend Income Blog is our way of sharing our interest in investing (pardon the pun). Investing is really a hobby for us, but more than that, successful investing transcends the need or want for money, and really gets to our core value of having more choices in life and creating multi-generational wealth. For us, wealth is freedom. Freedom to have more leisure time, freedom from worry about bills, freedom to enjoy hobbies.

Money-making machine

In this blog, you will hear two “voices.”  We aren’t Chartered Financial Analysts; we’re not licensed to sell investment products. All we offer are our investment ideas in a 100% transparent way. We are two high school teachers excited about the possibility investing offers, who exchange ideas during our once-per-week corridor duty at our school. We thought we’d share our ideas with the world and see where it takes us.

Let’s talk about building a money-making machine. If a machine existed that could produce the income you want or need, would you build or buy one? We would! Luckily, such a machine exists and the blueprint is very simple: invest money. If you invest $1000, and it earns 5% annually, that $1000 is a money-making machine that produces $50 of income every year. FOREVER!  Talk about multi-generational wealth!  It really is that simple.

Many investment blogs and ‘gurus’ will tell you how to realize growth by talking about risk and capital appreciation. They’ll have hot stock tips and ‘guaranteed’ spectacular returns if you act right away! Nearly all of them offer their “insiders” newsletter for a modest price (how can you afford to say no?). While there is some truth to some of these claims (unless they use words like ‘guarantee’), the bottom line is that money needs to be invested to grow and you don’t need to pay a broker to do it. We hope by reading our blog you’ll learn that you can invest money on your own.

For us, dividend income is a great way to build a money-making machine. By investing in the stock market, we are giving money to businesses that earn money. If we choose companies that are profitable and pay dividends, then we are sharing in their profits. These companies will give us a portion of their profits every single quarter. The potential capital appreciation of the stock is not the only consideration for investing in a company, although companies that are profitable will also appreciate in value. What we look for is a strong company that pays reliable dividends.

Our plan is to share our progress as well as everything we’ve learned along the way so that you, too, can build your own money-making machine. Welcome to the PDI (Passive Dividend Income) Blog. Thanks for reading and happy investing!

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