Investing Curiouscatblog

Category: quote

  • Looking for Dividend Stocks in the Current Extremely Low Interest Rate Environment

    My preference is for a lower use of bonds than the normal portfolio balancing strategies use. I just find the risks greater than the benefits. This preference increases as yields decline. Given the historically low interest rates we have been experiencing the last few years (and low yields even for close to a decade) I really believe bonds are not a good investment. Now for someone approaching or in retirement I do think some bonds are probably wise to balance the portfolio (or CDs). But I would limit maturities/duration to 2 or 3 years. And really I would pursue high yielding stocks much more than normal.

    In general I like high yielding stocks for retirement portfolios. Many are very good long term investments overall and I prefer to put a portion of the portfolio others would place in bonds in high yielding stocks. Unfortunately 401(k) [and 403(b)] retirement accounts often don’t offer an option to do this. Luckily IRAs give you the options to invest as you chose and by placing your IRA in a brokerage account you can use this strategy. In a limited investing option retirement account [such as a 401(k)] look for short term bond funds, inflation protected bonds and real estate funds – but you have to evaluate if those funds are good – high expenses will destroy the reasons to invest in bond funds.

    There are actually quite a few attractive high yield stocks now. I would strive for a very large amount of diversity in high yield stocks that are meant to take a portion of the bonds place in a balanced portfolio. In the portion of the portfolio aimed at capital appreciation I think too much emphasis is placed on “risk” (more concentration is fine in my opinion – if you believe you have a good risk reward potential). But truthfully most people are better off being more diversified but those that really spend the time (it takes a lot of time and experience to invest well) can take on more risk.

    A huge advantage of dividends stocks is they often increase the dividend over time. And this is one of the keys to evaluate when selected these stock investments. So you can buy a stock that pays a 4% yield today and 5 years down the road you might be getting 5.5% yield (based on increased dividend payouts and your original purchase price). Look for a track record of increasing dividends historically. And the likelihood of continuing to do so (this is obviously the tricky part). One good value to look at is the dividend payout rate (dividend/earnings). A relatively low payout (for the industry – using an industry benchmark is helpful given the different requirement for investing in the business by industry) gives you protection against downturns (as does the past history of increasing payouts). It also provides the potential for outsized increases in the future.

    There are a number of stocks that look good in this category to me now. ONEOK Partners LP pays a dividend of 5.5% an extremely high rate. They historically have increased the dividend. They are a limited partnership which are a strange beast not quite a corporation and you really need to read up and understand the risks with such investments. ONEOK is involved in the transportation and storage of natural gas. I would limit the exposure of the portfolio to limited partnerships (master limited partnerships). They announced today that the are forecasting a 20% increase in 2012 earnings so the stock will likely go up (and the yield go down – it is up 3.4% in after hours trading).

    Another stock I like in this are is Abbott, a very diversified company in the health care field. This stock yields 3.8% and has good potential to grow. That along with a 3.8% yield (much higher than bond yields, is very attractive).

    My 12 stocks for 10 year portfolio holds a couple investments in this category: Intel, Pfizer and PetroChina. Intel yields 3.9% and has good growth prospects though it also has the risk of deteriorating margins. There margins have remains extremely high for a long time. Maybe it can continue but maybe not. Pfizer yeilds 4.6% today which is a very nice yield. At this time, I think I prefer Abbott but given the desire for more diversification in this portion of the portfolio both would be good holdings. Petro China yields 4% today.

    When invested in a retirement portfolio prior to retirement I would probably just set up automatic reinvesting of the dividends. Once in retirement as income is needed then you can start talking the dividends as cash, to provide income to pay living expenses. I would certainly suggest more than 10 stocks for this portion of a portfolio and an investor needs to to educate themselves evaluate the risks and value of their investments or hire someone who they trust to do so.

    Related: Retirement Savings Allocation for 2010 – S&P 500 Dividend Yield Tops Bond Yield: First Time Since 1958 – 10 Stocks for Income Investors

  • Is the Stock Market Efficient?

    I believe in weak stock market efficiency. And recently the market is making me think it is weaker than I believed :-/ I believe that the market does a decent job of factoring in news and conditions but that the “wisdom of crowds” is far from perfect. There are plenty of valuing weaknesses that can lead to inefficient pricing and opportunities for gain. The simplest of those are spotted and then adopted by enough money that they become efficient and don’t allow significant gains.

    And a big problem for investors is that while I think there are plenty of inefficiencies to take advantage of finding them and investing successfully is quite hard. And so most that try do not succeed (do not get a return that justifies their time and risk – overall trying to take advantage of inefficiencies is likely to be more risky). Some Inefficiencies however seem to persist and allow low risk gains – such as investing in boring undervalued stocks. Read Ben Graham’s books for great investing ideas.

    There is also what seems like an increase in manipulation in the market. While it is bad that large organizations can manipulate the market they provide opportunities to those that step in after prices reflect manipulation (rather than efficient markets). It is seriously annoying when regulators allow manipulators to retroactively get out of bad trades (like when there was that huge flash crash and those engaging in high frequency “trading” front-running an manipulation in reality but not called that because it is illegal). Those that were smart enough to buy stocks those high frequency traders sold should have been able to profit from their smart decision. I definitely support a very small transaction tax for investment trades – it would raise revenue and serve reduce non-value added high frequency trading (which just seems to allow a few speculators to siphon of market gains through front running). I am fine with speculation within bounds – I don’t like markets where more than half of the trades are speculators instead of investors.

    Related: Market Inefficiencies and Efficient Market Theory – Lazy Portfolios Seven-year Winning Streak – investing in stocks – Naked Short Selling

  • Economic Consequences Flow from Failing to Follow Real Capitalist Model and Living Beyond Our Means

    The current frustration with economic conditions in the USA and Europe has at its core two main elements. First the anti-capitalist concentration of power in a few monopolistic and oligopolistic corporations (along with the support and encouragement of governments and the governments failure to regulate markets to encourage capitalist practices). And second the consequences of living beyond our means finally becoming much more challenging.

    What we have had has been very questionably capitalist. The largest reason for this “questionable” nature is not related to labor but instead to the inordinate power given to a limited number of large corporations. The corporations are suppose to not have “market power” in real capitalism. They have huge and growing market power. To me the main problem is that power disruption to the functioning of capitalist free markets.

    There is also the problem that we have been living far beyond our means. This has nothing to do with capitalism or not capitalism. It is as simple as you produce 100 units of goods and use 110 that can’t continue forever. The USA started building a surplus in the 1940’s, I imagine Europe did in the 1950’s. Since about the 1980’s both areas have been living far beyond their means. While they were consuming what they saved over the previous decades it wasn’t so bad. While they mortgaged their future to live lavishly today that was worse. We continue to live beyond our means and are beginning to see some consequences but we haven’t come close to accepting the lavish lifestyles we enjoyed (while Europe and the USA lived off past gains and off very advantageous trade with the rest of the world) is not possible any longer. We can’t just have everyone in Europe and the USA live exceeding well and the rest of the world support us. Eventually we have to realize this (or in any event we will experience it, even if we don’t realize it).

    Those 2 factors need to be addressed for our economic future to be as bright as it should be.

    Related: Too big too fail, too big to exist – Using Capitalism in Mali to Create Better Lives – Creating a World Without Poverty

  • Personal Finance Basics: Long Term Disability Insurance

    Most people know living without health insurance is very risky (and shouldn’t be done). But people are much less aware of the importance of long term disability insurance. The census bureau estimates that you have a 20% chance you will be disabled in your lifetime. A disability can decrease your earning power and also can increase your expenses (to cope with your disability). In my opinion your emergency fund is best used for short term disability insurance.

    One of the most important things you can do is be sure you have disability coverage. In the USA about 50% of the jobs provide coverage. If your job does not you should get insurance yourself. Many companies may not pay for disability insurance but may allow you to pay for it (this often can be the best option as the company can gain a better price than individuals but you have to check out the details). Also social security includes some disability insurance coverage but it is very limited. Relying on social security alone is not wise. For one thing it does not protect you from being unable to do your current job but will only pay benefits if you are unfit to do any job.

    There are numerous factors to consider for disability insurance. Normally a long term disability insurance policy will pay 50-60% of your salary (be sure to check and see, and check if there is any cap). The terms of the policy will also determine how long you will be paid, being paid until at least 65 is what I would suggest – but some only pay for a limited number of years.

    Often policies will offer pro-rated benefits if you earning power is reduced by a disability but you are still able to earn something. So you may have a policy that pay 60% of your original salary but if you make 50% of your previous salary then the payout is reduce to say 20%. So if you originally made $80,000 and now, due to a disability (not just losing your job), you could no longer do your job but could do one that paid less – say $40,000. You would then get your new salary of $40,000 + $16,000 in disability payments or $56,000.

    Another detail you should check is whether the payments you will receive are indexed to inflation. In addition, make sure the policy is guaranteed renewable. You also want to buy from a reputable insurance company (check AM Best, Moody’s, Weiss rating agencies). It doesn’t help to have a guaranteed renewable policy if the insurance company goes out of business.

    Another thing to consider is buying additional disability coverage. For example, if your company provides a 60% coverage policy it is often possible to purchase addition coverage (to provide additional benefits of 10% or 20% or more of your current salary).

    A rough guide is disability insurance will cost 1-2% of the income replaced. For example, a policy replacing $50,000 per year of annual salary would cost about $1,000 per year. Of course, the older or sicker you are the higher the cost. Premiums are based on risk factors, so if you have health risks that will cost more. And, as age is a significant disability factor, the older you are the higher the cost will be.

    Remember if you have disability insurance through work, and lose you job you need to get your own disability insurance. This is yet another reason to have an adequate emergency fund.

    Related: Personal Finance Basics: Long-term Care Insurance – Personal Finance Basics: Health Insurance – How to Protect Your Financial Health – Life Happens: disability insurance

  • Top Countries For Renewable Energy Capacity

    I believe it is wise from an environmental and economic viewpoint to invest in renewable energy projects. I believe the costs of fossil fuel based energy will continue to increase. Renewable energy is continuing to improve and when considering the negative externalities caused by oil, gas and coal and the continuing improvement in wind, solar and geothermal generation investment in renewable energy are going to payoff well for countries.

    Top countries for installed renewable energy capacity
    Rank Country Capacity (GigaWatts)
    1 China 103.4
    2 USA 58.0
    3 Germany 48.9
    4 Spain 27.8
    5 Japan 26.0
    6 India 18.7
    7 Italy 16.7
    8 Brazil 13.8
    9 France 9.6

    The largest increases in renewable energy capacity by country from 2005 to 2010 are: China (up 106%), South Korea (up 88%), Turkey (up 85%), Germany (up 67%), Italy and Japan (up 45%). All the data is from the Pew Clean Engery Program report: Who’s Winning the Clean Energy Race? (pdf).

    In 2010, [China] accounted for almost 50 percent of global clean energy superpower. The nation’s all manufacturing of solar modules and wind ascendance has been steady and steep. In turbines. China’s installation of less than 1 GW of 2005, China attracted less than $3 billion worth of private investments in clean energy. In 2009, solar energy capacity demonstrates that most of its production is for export markets. In contrast, 17 GW of wind energy was installed in China in 2010 helping the nation move quickly toward its 2020 target for installing 150 GW of wind. In fact, China accounted for 47 percent of all wind energy investments globally, with $45 billion tallied. Similarly, China led the world in asset financing, with $47.3 billion in private investments directed toward installation of clean energy generating capacity.
    …
    India is poised to take a leadership role in the solar sector, with a target of deploying 20 GW by 2020. In 2010, the country set about getting its National Solar Mission in place by permitting 0.5 GW worth of large solar thermal capacity and a modest 150 MW worth of photovoltaic (PV) solar.

    My guess is that the stimulus packages in several countries contributed greatly to the increases (notably Germany and Italy targeted green investments – as did China to some extent, in Wind Energy). Spain took a hit as debt levels caused the government to cut spending. I would imagine this is likely to happen in Italy (and was expected to happen in Germany – the extent of decreases is less certain after the earthquake in Japan).

    Related: Chart of oil consumption by country from 1990-2009 – Wind Power Capacity Up 170% Worldwide from 2005-2009 – Japan to Add Personal Solar Subsidies (2008) – Chart of Top Nuclear Power Generating Countries from 1985 to 2009 – Wind Power has the Potential to Produce 20% of Electricity Supply by 2030

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  • Consumer and Real Estate Loan Delinquency Rates 2000-2010

    The chart shows the total percent of delinquent loans by commercial banks in the USA.

    chart showing consumer and real estate loan delinquency rates from 2000 to 2010

    The second half of 2010 saw real estate, agricultural, credit card and other loan delinquencies decrease. The rates are still quite high but at least are moving in the right direction. Residential real estate delinquencies decreased 138 basis points in the second half of 2010, to 9.94%, which brought them to just below the rate at the end of 2009. In the second half of 2010, commercial real estate delinquencies decreased 77 basis points to 7.97% (which was also exactly 77 basis points less than at the end of 2009. Agricultural loan delinquencies decreased 76 basis points, to 2.55% (down 53 basis points from the end of 2009). Consumer loan delinquencies decreased, with credit card delinquencies down 90 basis points to 4.17% and other consumer loan delinquencies down 27 basis points to 3.1%. The credit card delinquency rate decreased a very impressive 219 basis points in 210.

    Related: Real Estate and Consumer Loan Delinquency Rates 2000 through June 2010 – Real Estate and Consumer Loan Delinquency Rates 1998-2009 – Bond Rates Remain Low, Little Change in Late 2009 – posts with charts showing economic data
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  • Retirement: Roth IRA Earnings and Contribution Limits

    For 2010 and 2011, the most that an individual can contribute to a traditional IRA or Roth IRA generally is the smaller of: $5,000 ($6,000 if the individual is age 50 or older), or the individual’s taxable compensation for the year. You have until your taxes are due (April 15th, 2011) to add to your IRA for 2010.

    This is the most that can be contributed regardless of whether the contributions are to one or more traditional or Roth IRAs or whether all or part of the contributions are nondeductible. However, other factors may limit or eliminate the ability to contribute to an IRA as follows:

    • An individual who is age 70½ or older cannot make regular contributions to a traditional IRA (just to make things complicated you can add to a Roth IRA) for the year.

      • Contributions to a Roth IRA are limited based on income. The limits are based on modified adjusted gross income (which is before deductions are taken). The Roth IRA earnings limits for 2010 are:

    • Single filers: Up to $105,000; from $105,000 – $120,000 (a partial contribution is allowed)
    • Joint filers: Up to $167,000; from $167,000 – $177,000 (a partial contribution)

    For 2011 the earning limits increase to

    • Single filers: Up to $105,000; from $107,000 – $122,000 (a partial contribution is allowed)
    • Joint filers: Up to $167,000; from $169,000 – $179,000 (a partial contribution)

    More details from the IRS website and earning limits details.

    The income limits do not cap what you can add using a 401(k). So if you were planning on adding to a Roth IRA but cannot due to the income limits you may want to look into increasing your 401(k) contributions.

    Related: Add to Your Roth IRA – Add to Your 401(k) and IRA – 401(k)s are a Great Way to Save for Retirement

  • Nuclear Power Production by Country from 1985-2009

    chart of nuclear power production: 10 largest countries 1985-2009The chart shows the leading nuclear power producing countries from 1985-2009. The chart created by Curious Cat Investing and Economics Blog may be used with attribution. Data from US Department of Energy.

    ___________________

    Nuclear power provided 14% of the world’s electricity in 2009. Wind power capacity increased 170% Worldwide from 2005-2009, to a total of 2% of electricity used (38,025 Megawatts of capacity). The USA produced nearly twice as much electricity using nuclear power than any other country, which surprised me.

    Another view of data on nuclear power shows which of the leading nuclear producing countries have the largest percentages of their electrical generating capacity provided by nuclear power plants (as of 2009). France has 75% of all electricity generated from nuclear power. Ukraine had the second largest percentage at 49%, then Sweden at 37% and South Korea at 35%. Japan is at 28% compared to 20% for the USA (I am surprised these are so close _ would have thought France and Japan would be much closer). Russia is at 18% and China was at just 2%. As of January 2011, 29 countries worldwide are operating 442 nuclear reactors for electricity generation and 65 new nuclear plants are under construction in 15 countries. Source, Nuclear Energy Institute.

    From 1985 to 2009, USA production increased 108%, France 84% and Japan up 77%. South Korea is up 550% (from a very low starting point). Globally nuclear power production increased 80% from 1985 to 2009. From 2000-2009 production increased 5% in the USA and decreased by 1% in France and 13% in Japan. China was up 318% (from a very low level) from 2000-2009 (they did not have nuclear power capacity prior to 1995.

    The global capacity of nuclear power was scheduled to increase more rapidly in the future before the earthquake in Japan and the crisis at the Kashiwazaki-Kariwa Nuclear Power Plant. China was going to add a great deal of capacity and is likely to over the next few years (nuclear power plants take many year to bring online so those coming online in the next few years have already had hundreds of millions invested in building them). Several European countries have already announced temporary closing of some plants (especially some plants nearing the end of their originally scheduled lives – which those countries had been in the process of extending).

    As a comparison global oil production increased by 10.5% from 1999-2009, while nuclear global production increased by 5% from 2000-2009. From 1999-2009 USA oil production decreased 7%. Russia increased production 62% in the decade, moving it into first place ahead of Saudi Arabia that increased production 10%.

    Related: Oil Production by Country 1999-2009 – Oil Consumption by Country 1990-2009 – Japan to Add Personal Solar Subsidies – Solar Thermal in Desert, to Beat Coal by 2020

  • Warren Buffett’s 2010 Letter to Shareholders

    Warren Buffett has published his always excellent annual shareholder letter. It is a pleasure to read them every year, when they are published, and re-read them at other times of the year.

    Yearly figures, it should be noted, are neither to be ignored nor viewed as all-important. The pace of the earth’s movement around the sun is not synchronized with the time required for either investment ideas or operating decisions to bear fruit. At GEICO, for example, we enthusiastically spent $900 million last year on advertising to obtain policyholders who deliver us no immediate profits. If we could spend twice that amount productively, we would happily do so though short-term results would be further penalized. Many large investments at our railroad and utility operations are also made with an eye to payoffs well down the road.
    …
    At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years and call me when they wish.
    …
    From a standing start in 1985, Ajit has created an insurance business with float of $30 billion and significant underwriting profits, a feat that no CEO of any other insurer has come close to matching. By his accomplishments, he has added a great many billions of dollars to the value of Berkshire.
    …
    At bottom, a sound insurance operation requires four disciplines… (4) The willingness to walk away if the appropriate premium can’t be obtained. Many insurers pass the first three tests and flunk the fourth. The urgings of Wall Street, pressures from the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has led too many insurers to write business at inadequate prices. “The other guy is doing it so we must as well” spells trouble in any business, but none more so than insurance.
    …
    a few have very poor returns, a result of some serious mistakes I have made in my job of capital allocation. These errors came about because I misjudged either the competitive strength of the business I was purchasing or the future economics of the industry in which it operated. I try to look out ten or twenty years when making an acquisition, but sometimes my eyesight has been poor.
    …
    It’s easy to identify many investment managers with great recent records. But past results, though important, do not suffice when prospective performance is being judged. How the record has been achieved is crucial, as is the manager’s understanding of – and sensitivity to – risk (which in no way should be measured by beta, the choice of too many academics). In respect to the risk criterion, we were looking for someone with a hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed. Finally, we wanted someone who would regard working for Berkshire as far more than a job.

    Warren Buffett packs in great lessons all throughout the letter. Read it and take them to heart.

    Related: Buffett Calls on Bank CEOs and Boards to be Held Responsible – Warren Buffett’s Q&A With Shareholders 2009 – The Greatest Wall Street Danger of All: You – Warren Buffet Webcast to MBAs – Warren Buffett’s 2007 Letter to Shareholders – Warren Buffett’s Annual Report
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  • USA Spends Record $2.5 Trillion, $8,086 per person 17.6% of GDP on Health Care in 2009

    U.S. health care spending increased yet again in 2009, increasing 4%. Total health expenditures reached $2.5 trillion, which translates to $8,086 per person or 17.6% of the nation’s Gross Domestic Product (GDP). This represents yet another record high percentage of GDP taken by health care – for decades, year after year, health care takes more and more of the economic resources of the country. The broken USA health care system costs twice as much as other rich countries for worse results. And those are just the direct accounting costs – not the costs of millions without preventative health care, sleepness nights worrying about caring for sick children without health coverage, millions of hours spent on completing forms to try and comply with the requirements of the health care system’s endless demand for paperwork, lives crippled by health care bankruptcies…

    Medicare spending grew 7.9% in 2009 to $502.3 billion. The senior citizen and health care lobbies have continued to increase spending on medicare. Too bad they can’t work on improvement instead of increased spending. Spending for fee-for-service (FFS) Medicare accelerated in 2009, increasing 5.5%. Medicare Advantage (MA) spending increased 15.8% in 2009 following 21.4% growth in 2008 and was primarily attributable to a continuation of significant increases in MA enrollment. Total Part D spending (which includes spending for benefits, government administration, and the net cost of health insurance) increased 9.3% to $54.5 billion in 2009.

    Medicaid (which is a line item for the cost of medical treatment for the un-insured, though far from the only cost): Total Medicaid spending grew 9.0% in 2009 to $373.9 billion was driven by a 7.4% increase in Medicaid enrollment. Federal Medicaid expenditures increased 22%, while state Medicaid expenditures declined 9.8%. This difference in growth is due to a significant increase in the Federal Medical Assistance Percentages (FMAP) used to determine federal Medicaid payments to states—a provision of the American Recovery and Reinvestment Act of 2009 (ARRA). Essentially the federal government funded the spending since the states were almost all out of money.

    Private Health Insurance: Private health insurance premiums grew 1.3% in 2009 (actually a pretty great figure by itself – unfortunately one lone good piece of data is not enough). Benefit payment growth increased 2.8% in 2009. These trends were heavily influenced by the recession, which resulted in private health insurance enrollment declines (which reminds you why looking at 1 piece of data isn’t a good idea). In 2009, spending for benefits increased faster than premiums, and as a result, the net cost of private health insurance (or the difference between premiums and benefits) fell to an 11.1% share of total private health insurance spending.

    The burden of the large costs of the health care system in the USA are financed by businesses (21%), households (28%), governments (44%), and other private sponsors [foundations, charities and the like] (7%).

    Read the complete National Health Expenditure Data report.

    Related: USA Spends Record $2.3 trillion ($7,681 Per Person) on Health Care in 2008 – USA Heath Care System Needs Reform – Resources to Help Improve the Health Care System – CEOs Want Health-Care Reform