Diversification “allocating capital over a selection of instruments that are responsive to widely differet economic events = diversification over different income drivers.
“I recommend a 20% allocation to high-dividend income securities tied to the price of natural resources, energy and other natural resources.”
Canadia oil and gas trusts (PWE, PVX, PWI, ERF) paying out double digit dividends.
Metallurgical coal = fording Canadian coal.
Copper, FDG, Southern Copper (PCU)
Unless prices fall substantially, the dividend pay outs above make them worth holding through a down draft.
Canadian Energy and Royalty Trusts
Double-digit, tax-advantaged yields
In US: a royalty trust is a tax-exempt entity that holds the extraction rights for natural resources but does not hold the property itself. Most common are oil and gas trusts, but also timber and coal trusts exist. As the oil and gas are extracted, the revenues are poured out to the trustholders, usually monthly. You hold the rights to the extraction of a proven reserve of resources and because the trust cannot acquire new reserves by issuing more debt equity, the value of your investment is constantly declining. For this reason, a portion of each year’s distribution is considered a return of capital and its not subject to any federal income tax and is a reduction of your cost basis in the shares you hold.
Canadian Energy trusts are more attractive both tax and income wise.
1) Income is usually eligible for the 15% dividend tax treatment rather than being fully taxable as a U.S. based trust.
2) The 15% Canadian tax paid on dividends can be used to offset your US income tax. Hence, the monthly cash dividends are essentially tax free in the US.
3) The dividends amount to 9-14% a year.
4) If energy prices drop, so will the dividend = a negative.
5) But they are risk diversified away from interest rate-sensitive investments.
Listed on Canadian exchanges and sold OTC in US.
Yields >= 10%
Pine West Energy
Penn West Energy
Provident Energy Trust
PWE, PVX, PWI, ERF
____________________________________________________________
Closed end funds are also ETFs.
ETFs are the best investment idea to come along in the past generation = basket of securities representing a cross-section of a particular market.
ETFs
Representative of an index – basket of shares that track a popular stock index, a geographic sector, and industry sector or a commodity. ETFs are similar to an index mutual fund except that they trade continuously. The two most popular ETFs are the Standard and Poor’s depository receipt (SPDR), which tracks the S & P stock index and the Nasdaq 100 Index track stock (QQQQ), which tracks the Nasdaq 100 Index.
There is a minimal management fee, minimal trades, minimal intellectual input, minimal administrative requirements.
There are no 12b-1 fees for distribution costs, advertising or trailing commissions to selling brokers.
There is a minimum of capital gains distribution hence, no unexpected year end tax consequences.
No cash reserves, its all working for you.
No cost for the portfolio turnover nor do you share the costs in buying and selling holdings to accommodate new investors or those who are liquidating.
Your cost basis in the fund is what you pay for your shares. You don’t inherit unrealized gains and losses accumulated from prior years or prior holders and distributed to those who hold the shares at year-end.
Shares can be bought and sold anytime of the day during trading hours.
You are not exposed to the trading styles or personal agendas and human fallibility of the fund manager.
ETF shares can be bought and sold anytime with limit stop and market if touched orders.
Many ETFs have put and call options, as well as being able to be bought on margin and sold short. This allows you to hedge exposure in a fund.
You always know what the fund holds.
Closed End Preferred Funds
“The attraction of these funds is the high level of monthly cash income that they generate.
They can offer these returns in part because preferred yields are trationally 100 to 150 basis points higher than bonds.
These funds also magnify returns by using leverage. – they are taking advantage of the very low s-t interest rates to borrow and invest in longer term higher rate issues.
The difference: open-end funds must change investment strategies in reaction to investors cashing out when rates start to rise, the closed-ended funds are under no such pressure.
Invest primarily in investment grade securities, the range of investments includes bonds, trust preferreds, foreign bonds and REIT shares.
The Future for Investors
Dividends Magnify Effect
The power of basic principle of investor return is magnified when the stock pays a dividend.
Lynch “find the long term growth rate, add the dividend yield and divide by the P/E ratio. Less than a 1 is poor, 1.5 okay, 2 = great.”
Top Twenty Survivors
“I recommend a 20% allocation to high-dividend income securities tied to the price of natural resources, energy and other natural resources.”
Canadia oil and gas trusts (PWE, PVX, PWI, ERF) paying out double digit dividends.
Metallurgical coal = fording Canadian coal.
Copper, FDG, Southern Copper (PCU)
Unless prices fall substantially, the dividend pay outs above make them worth holding through a down draft.
Canadian Energy and Royalty Trusts
Double-digit, tax-advantaged yields
In US: a royalty trust is a tax-exempt entity that holds the extraction rights for natural resources but does not hold the property itself. Most common are oil and gas trusts, but also timber and coal trusts exist. As the oil and gas are extracted, the revenues are poured out to the trustholders, usually monthly. You hold the rights to the extraction of a proven reserve of resources and because the trust cannot acquire new reserves by issuing more debt equity, the value of your investment is constantly declining. For this reason, a portion of each year’s distribution is considered a return of capital and its not subject to any federal income tax and is a reduction of your cost basis in the shares you hold.
Canadian Energy trusts are more attractive both tax and income wise.
1) Income is usually eligible for the 15% dividend tax treatment rather than being fully taxable as a U.S. based trust.
2) The 15% Canadian tax paid on dividends can be used to offset your US income tax. Hence, the monthly cash dividends are essentially tax free in the US.
3) The dividends amount to 9-14% a year.
4) If energy prices drop, so will the dividend = a negative.
5) But they are risk diversified away from interest rate-sensitive investments.
Listed on Canadian exchanges and sold OTC in US.
Yields >= 10%
Pine West Energy
Penn West Energy
Provident Energy Trust
PWE, PVX, PWI, ERF
____________________________________________________________
Closed end funds are also ETFs.
ETFs are the best investment idea to come along in the past generation = basket of securities representing a cross-section of a particular market.
ETFs
Representative of an index – basket of shares that track a popular stock index, a geographic sector, and industry sector or a commodity. ETFs are similar to an index mutual fund except that they trade continuously. The two most popular ETFs are the Standard and Poor’s depository receipt (SPDR), which tracks the S & P stock index and the Nasdaq 100 Index track stock (QQQQ), which tracks the Nasdaq 100 Index.
There is a minimal management fee, minimal trades, minimal intellectual input, minimal administrative requirements.
There are no 12b-1 fees for distribution costs, advertising or trailing commissions to selling brokers.
There is a minimum of capital gains distribution hence, no unexpected year end tax consequences.
No cash reserves, its all working for you.
No cost for the portfolio turnover nor do you share the costs in buying and selling holdings to accommodate new investors or those who are liquidating.
Your cost basis in the fund is what you pay for your shares. You don’t inherit unrealized gains and losses accumulated from prior years or prior holders and distributed to those who hold the shares at year-end.
Shares can be bought and sold anytime of the day during trading hours.
You are not exposed to the trading styles or personal agendas and human fallibility of the fund manager.
ETF shares can be bought and sold anytime with limit stop and market if touched orders.
Many ETFs have put and call options, as well as being able to be bought on margin and sold short. This allows you to hedge exposure in a fund.
You always know what the fund holds.
Closed End Preferred Funds
“The attraction of these funds is the high level of monthly cash income that they generate.
They can offer these returns in part because preferred yields are trationally 100 to 150 basis points higher than bonds.
These funds also magnify returns by using leverage. – they are taking advantage of the very low s-t interest rates to borrow and invest in longer term higher rate issues.
The difference: open-end funds must change investment strategies in reaction to investors cashing out when rates start to rise, the closed-ended funds are under no such pressure.
Invest primarily in investment grade securities, the range of investments includes bonds, trust preferreds, foreign bonds and REIT shares.
The Future for Investors
Dividends Magnify Effect
The power of basic principle of investor return is magnified when the stock pays a dividend.
Lynch “find the long term growth rate, add the dividend yield and divide by the P/E ratio. Less than a 1 is poor, 1.5 okay, 2 = great.”
Top Twenty Survivors
The best performing firms have been those with strong brand names in the consumer staples and pharmaceutical industries.
Warren Buffett: “The products of services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”
“The familiar brand-name firms that have achieved said superior returns for their shareholders are what I call the triumph of the tried and true.” Jeremy Siegel.
The stakeholder reutnrs are driven by the difference between actual and expected earnings growth and the imipact of this difference is magnified by dividends = not expected to grow could have better reutn.
Portfolios invested in the lowest P/E stocks far outperformed those with higher valuations and expectations.
Bubbles: Oil and Technology
A rush on spending on Y2K and excitement about the internet sent tech stocks sharply higher in the late 90s.
Oil and Tech (separate bubbles) hit their peak just over 30% of the total value of the total value of the S & P 500.
If a sector surges to a higher, outlandish level of the S & P makeup (from 15% to 30%), this could indicate a sector bubble.
“One clear indication of a bubble is the rapidity of the price rise. Although there are occasions when sharp increases in the price of individual stocks are justified, this has never been ture of market sectors” Fundamentals do not change rapidly enough to justify the sudden increase in the mkt share of major sectors.
Staples: refers to products described as necessities, whose sales are less prone to economic cycles and include food, beverages, tobacco, soap, toiletries and groceries.
The consumer staples sector has been marked by unusual stability. Most of the largest firsm in this sector have been around for fifty years or more and provided investors with superb returns.
Coke
Phillip Morris
Procter & Gamble
Pepsico
In contrast, the consumer discretionary sector has been marked by tulmult.
GM
Ford
Chrysler
Firestone
Sears
J.C. Penney
Sector Strategies:
Three sectors emerge as long-term winners
Health care, consumer staples and energy
1) Rapid sector growth does no necessarily mean good investor returns. The financials and technology sectors expended greatly over the past years yet gave mediocre to poor returns.
2) Over the long run, less than 1/3 of sector returns can be attributed to expansion or contraction of that sector: This means > 2/3 can be attributed to other factors such as new firms and dividends.
3) Two bubbles: energy and info tech. Both popped when sector weightings reached 30% of the value of the S & P.
High Dividend Yield Investment Strategies
14.43% - Dow 10
Dogs of the Dow – the 10 highest yielding stocks in the DOW 30
15.69% S&P 500 10 = 10 highest yielding out of the 100 largest.
15.68% S&P Core 10 – the 10 highest yielding S & P out of those that have not reduced dividend in 15 years.
The Top Twenty Survivor Firms
The “Global” Portfolio
Weightings
Foreign-based holdings 40%
Global Index Fund
VGTSX = Vanguard’s Total Int. Stock Index Fund
EAFE – Morgan Stanley: Europe, Australia, Far East
EFA – Morgan Stanley ETF
EEM – emerging markets ETF
U.S. Index
Dow Jones Wilshire Total Stock Market Index:
Cap weighted index contains all stocks
Vanguards Total Stock Market Fund:
Tracks the Wilshire .19%
VIPERs – VTI
SPDRs QQQ
__________________________________________________________________
The DIV directives
Dividends: Buy stocks that have sustainable cash flows and return these cash flows to the shareholders as dividends.
International: Recognize the forces that will swing the balance of economic power away from the United States, Europe and Japan toward China, India and the rest of the developing world.
Valuation: Accumulate shares in firms with reasonable valuations relative to their expected growth and award IPOs, hot stocks or other firms or industries that the consensus believes are must have investments.
Dividends
The primary function of mgt. should be to maximize current and future cashflows to shareholders
“The payment of dividends has provided management with that discipline throughout most of the stock market’s history and I believe that stocks that pay good dividends will yield superior returns in the future.”
An important reason why these high-dividend strategies work so well is because of the basic principle of investor return.
“Stock returns are based not on earnings growth alone but on growth relative to expectations. For many of these dividend paying stocks, investors became overly pessimistic at a dip in earnings growth, leading to lower than justified valuations and higher than average returns for stocks paying a dividend, these lower valuations led to higher dividend yields and investors were able to accumulate more shares at discounted prices.”
S&P Strategies – 2004 Companies
Allocation of Equity Funds
Equity Holdings 100%
World Index Funds 50%
U.S. – Based Stocks 30%
Non-US Based Stocks 20%
Return-Enhancing Strategies 50% (10% to 15% each)
High Dividend Strategies
Highest-yielding div-paying stocks
Dow 10, S&P 10, Dow & S&P Core, 10 Strategies
Real Estate Investment Trusts
Global Funds
S&P Global 100
Dow Jones Global Titans
Diversified multinational equity firms
Sector strategies
Oil and natural resources
Pharmaceuticals
Brand-name consumer staples
Low Price Relative to Growth
Lowest price-to-earnings ratio
Top survivors (growth relative to exposure)
Berkshire Hathaway
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