Create a Dividend Table

A really good way to better understand your portfolio, whether you manage it or an advisor manages it, is to create a dividend table showing when dividends will come in on a security level basis and then derive a weighted average yield for the portfolio.  This become crucial when an investor reaches the decumulation stage when investors need to draw down their nest egg.  Using the rule-of-thumb, that 4% of the nest egg can be drawn down, and a recommended approach to have at least 60% of your income satisfied by dividends and interest requires a yield of at least 2.4% (.04*.6).  Creating a dividend table enables an investor to see the overall yield and to even get ideas on how to bolster yield.

Finding the Dividend Payout For a Security

There are many sites you can go to find dividend payable dates.  Let's start with Yahoo! Finance and with the first security in the portfolio:

Source:Schwab

SCHX is the commission-free Schwab large cap exchange traded fund.  The portfolio shown on the left  holds 4,030 shares.

Step 1 is to go to the Yahoo! Finance link above and put in the symbol SCHX as shown:

Source: Schwab

Click "GET QUOTES."  This takes you to a page with a lot of basic information.  FYI:  It provides real time prices during the trading day. Many sites provide prices on a 15-minute delayed basis.  Also, note that it lists other stocks that viewers have looked at as well as the one you are getting a quote on.  This is a good page for the beginning investor to putter around on.

In getting a quick idea of the dividend payout record, we want to click "Historical Prices" on the left side of the page as shown:

Source Schwab

This takes us to :

Source: Schwab

Click "Dividends Only" and then "Get Prices" and we get the dividend payout record we are after:

Soutce: Schwab

You can quickly see that SCHX pays quarterly and that we can expect approximately .14 * 4,030 (number of shares) = $564 sometime around 9/20.  The actual date can be pinned down, but that is the subject of another post.  In fact, every investor should be aware of ex dates, payable dates, dates of record, etc.  But, as I say, that is a subject of a future post.

So step 1 in creating the table is to do the above for each security and, for each one, create a line item showing the security, # of shares, dividend expected, and date expected.  Eventually we want to get at the weighted yield of the portfolio.

As with many of these procedures, it takes longer to explain than it does to go through it.  It is a great exercise for the DIY investor.  I suggest that "newbies" try their hand at finding the amount of the dividend, etc. for the second issue in the portfolio above.

MLPs

Investors interested in yield (who isn't these days) should consider master limited partnerships (MLPs).  These are a bit tricky, however, and you just can't load up on them in an IRA.

Here is the best article I have read in some time on MLPs by Steven Bavaria entitled "One Thing Jim Cramer Didn't Mention About IRAs."  It explains the "UBIT" - unrelated business taxable income well and tells how to get around it.

Operation Twist

Bernanke

Just when we thought (and hoped) the Federal Reserve might have shot all its bullets (without hitting the target by the way), it turns out  there are plenty left.  The latest to garner attention, after Chairman Bernanke's mention in his much anticipated Jackson Hole speech, is "operation twist," an action last carried out in 1961 during the Kennedy administration.  It lowered longer term rates back then by .15% and raised shorter-term rates marginally.

Doesn't sound like much, but when employment is stalled at zero net job creation and GDP is anemically bouncing along at 1%, the Fed will try anything.

What is "Operation Twist"?

The Fed's usual modus operandi is to manipulate short-term interest rates by controlling the federal funds rate.  Federal funds are borrowed and lent by banks to meet their reserve requirements.  Banks can also buy or sell Treasury securities to meet reserve requirements, and so the Fed's manipulating of the fed funds rates affects other rates as well.

In fact, typically rates all along the maturity spectrum - the so-called yield curve are affected.


"Operation Twist" seeks to carry out this impact directly by changing the composition, instead of  the size, of the Fed's balance sheet.  The plan is to sell shorter maturity Treasury bills and buy longer-term Treasury notes.

The idea is that longer term yields will drop - specifically the rate on 30-year fixed rate mortgages.

Likely Impacts

Markets anticipate.  On Friday, the yield on the 10-year Treasury dropped to below 2% and the yield on the 2-year Treasury note rose 2 basis points.  Dealers and others want to position themselves ahead of the Fed's move.  This is similar to the carry trade that heats up when the Fed announces it will keep short-term rates low.

Secondly, the Fed will likely find itself loaded up with longer term securities at the lowest point in yields. When the inevitable rise comes, it will have on the books significant underwater positions.

Thirdly, this action, like much the Fed does, ramps up uncertainty.  What can I say to a client who asks if now is a good time to take a mortgage?  Very likely, by the Fed's manipulating longer term yields, 30-year mortgage yields could be lower in the near future.  Market observers believe the policy could be formally announced at the 9/21-22 Federal Open Market Committee meeting.  With the uncertainty, it is better to just sit on the sideline and wait.

Finally, this is another slap in the face to those who live off of fixed income.  The already anemic rates on such things as 3- and 5-year CDs will decline further.  But, hey, it's for the good of the bankers and we all have to sacrifice ( I'm getting ready for Obama's speech on Thursday!).


 

Obama's Speech

Adam Smith

I, along with many others across the nation last week, introduced students to the marvels of the free market system.  We discussed how, by allowing individuals to act in their own self-interest, unprecedented wealth has been created over the past 250 years in the Western world and how many nations that had chosen a different economic system have seen the folly of their choice and are moving to the capitalistic, free market system.  Along the way, we mentioned Adam Smith and the Wealth of Nations - written prior to the industrial revolution but fully cognizant of the role of self interest and its influence on our founding fathers. We pointed out that the Wealth of Nations with its emphasis on economic freedom, was published in the same year, 1776, as Jefferson's  Declaration of Independence - the foundation of political freedom.

I like to go a step further with my class and think back, to say 1750, and suppose that we were able to get the 25 smartest people in the world in one room.  And suppose we pointed out that the world is on the verge of an industrial revolution - that it will be moving from an industrial society to one of factories, specialization, and unprecedented division of labor.  People will leave farms and move to the cities.  The smartest people would then be asked how best should economic activity be managed.

I think we can imagine that there would be considerable interest and excitement over this clearly very important problem.  I imagine that all sorts of plans would be forthcoming about setting up planning boards, how far plans have to go in the future, how to find the appropriate people for the jobs that need to be filled.  After all, how would the economy be assured that there are enough teachers, doctors, farmers, etc.?  What a great problem!

But wait...in the back of the room a hand is up.  "What if we just let the economy organize itself?  What if we just set the ground rules and then let individuals act in their own self interest?"

The response would likely have been incredulous.  How in the world could this possibly work?  For one thing, the brains of the world's smartest people wouldn't be needed.  Throw all the elaborate plans into the trash cans.  This would have been, undoubtedly, taken as an insult by many.

This, of course, is the debate raging today.  Many very smart people cannot fathom that the economy would be better off without their elaborate plans.  As a result, planning has increased to an unprecedented level.  Last night I saw a pundit ask how we (think "the government") can create demand, that is, the willing consumer?  Huh?  They discussed the president potentially proposing an infrastructure bank.  Other stimulus will be proposed in the president's speech on Thursday.

Interestingly, a comment was forcefully made, by the pundit planners, to the effect that our employment problems are the result of uncertainty holding back consumers and businesses.  I held my breath - would they get that their incessant schemes are what creates this uncertainty?  Didn't happen.

I, for one, would like to see the president say that the government is backing away from managing the economy--that it recognizes that prices are out of whack because of ill-advised programs, that the free market system needs room to breathe, and that the process, though painful, will lead to an adjustment that will legitimately create jobs and enable the economy to move forward in the  information age.  He should state unambiguously that artificially manipulating the economy hasn't worked and has run up an enormous bill that will be a drag for decades even under the best of outcomes.

There are a lot of problems in Washington - not just the nuts at the ideological extremes.

Maybe its time to listen to that voice in the back of the room.

Quote on Indexed Investing

One of the 3 or 4 books I recommend to those serious about learning investing is Your Money and Your Brain by Jason Zweig.  This is a book that will change the way you look at investing.  It is the single best intro to leading-edge research on the field of "neroeconomics" which carries out experimental research to understand how financial decisions are made.  It came to mind after reading the quote by Jason Zweig presented below.  I sheepishly discovered that I had not listed the book in my bookstore (link to the right) but have since added it.

I came across the quote when reading a piece entitled "How to Manage Your Investment Anxiety" by MarketRiders, an online portfolio management service.  The service is well worth considering for DIY investors and offers excellent free educational materials.

This is what Jason Zweig said about indexed investing:

Indexing enables you to say seven magic words: “I don’t know, and I don’t care.”
Will value stocks do better than growth stocks? I don’t know, and I don’t care – my index fund owns both. Will health care stocks be the best bet for the next 20 years? I don’t know, and I don’t care – my index fund owns them. What’s the next Microsoft? I don’t know, and I don’t care – as soon as it’s big enough to own, my index fund will have it, and I’ll go along for the ride.
Indexing enables me to say, “I don’t know, and I don’t care,” liberating me from the feeling that I need to forecast what the market is about to do. That gives me more time and mental energy for the important things in life, like playing with my kids and working in my garden.

MarketRiders goes on to point out that you can control the allocation of assets but not how the overall market will perform or how individual sectors will perform.  Focusing on what can be controlled frees up the investor from anxiety over what can't be controlled.

Well worth thinking about as we navigate today's volatile markets.

The First Economist

This cartoon made me think of the Fed Chairman and the Treasury Secretary.

CLICK TO ENLARGE From Greg Mankiw's blog (former head of Council of Economic Advisors to the President) and author of the best-selling undergraduate micro and macro economics texts.

Ponzi Scheme Gets Teachers

Charles Ponzi

Have you heard of James D. Risher and Daniel Sebastian?  They apparently defrauded teachers and retirees in a $22 million Ponzi scheme.  Teachers!  Teachers are at the forefront in many parts of the country teaching financial literacy! 

The men are said to have promised returns of 124% annually, according to the Securities Exchange Commission.  The M.O. appears to be boringly the usual, including false statements, getting suckers (sorry - I have to call it as I see it) to cash in annuities and participate in their "...sophisticated trading strategies."  One of the perps used his list of insurance clients.

All of this after Madoff?  You can warn people about smoking, driving without a seatbelt, investing with individuals who take custody of assets, and running in the opposite direction when performance is promised - especially when it is ridiculous.  Hopefully it gets through to some.

Obviously that's the best one can hope for.  These cases always get questions circulating through my brain for days.  Did the perps (love that word) think their scheme wouldn't come to an end?  Why 124%? Didn't the friends of the scammed laugh them out of the room when they told them what they had put their money into?  Imagine telling your next door neighbor you invested in a private equity fund that's going to get you 124%!

You try to feel sorry for people whose lives have been ruined, but sometimes it isn't easy.