Investing is and should be individual and measured by our needs -either for income, total return or capital gains. If you have short term methods using options or trading that is also a personal choice.
The biggest and most common goal is to MAKE MONEY and NOT to lose it. I want us all to be winners. However, most all investors do both and the BEST ones make more money more often than lose it. That is the driving desire or no one would even try it. In a casino, many go there for entertainment and expect to loose, and always hope for a jackpot from the long armed bandit.
The real pros do not expect to lose and try to know what they are dealing with, pun intended. They play the game they are familiar with, know the odds and how the cards will play out.
In investing you need to know how to read your cards, how to play them, when to exit (or fold) and when to hold. You want to play the best knowledgeable game possible. It can always be a learning experience but we should all start with knowing the main cards or the metrics to measure success.
are knowing the TYPES of Investments involved in the game.
Here are a few basics:
- Common Stock- available with or without dividends. You get voting rights. Most are C-corps-meaning the corporations themselves are taxed. Growth stocks have no yield or low yield and rely primarily on capital appreciation for your return on investment. The ideal common stock has growth in one or both of those metrics of stock price or dividend yield.
-Preferred Stock- offers a higher set dividend yield than the common shares, but offer no dividend raises or voting rights. They also get the dividend paid to them first as well and in the case of default those shares are paid off first.
- S-corps are not taxed at the corporate level, they are required to pass 90% of profits or losses on to the shareholder. They can also be known as RICs.
These are acronyms you should know in order to invest:
- RICs = Regulated Investment Companies include Mutual Funds, most REITs, BDCs and MLPs and LPs.
REITs= Real Estate Investment Trusts which can be equity, mortgage or a mixture of both (hybrid).
Most of these are Mid-High Yield Investments. Equity REITs are considered safer and have generally lower dividend yields than the other types.
BDCs= Business Development Companies -These are considered HY or High Yield Investments.
MLPs= Master Limited Partnerships- these involve K-1 tax forms and are usually HY. They offer tax shielding and many suggest keeping them in taxable accounts. UBTI or Unrelated Business Taxable Income enters the picture and complicates it even more. I learned if you have <$1000 in UBTI, it is not a tax issue. These reports often arrive late in the tax season and can mean filing later tax returns.
Most of these above RICs have non-qualified dividends and must be reported at your own tax rate.
Depending on that tax rate, they are best held in an IRA or Roth for higher income investors. I keep mine in a Roth.
Bonds and Mutual Funds are best left to an expert to discuss, which I will not do here.
I hope this will lead you to continue to investigate and learn and do due diligence, especially with the tax consequences.
Only start to play when you know what peculiar rules those investments exhibit. Such as: how they make their money, how they are taxed and how you will be taxed. It does differ.
I can fully attest to finding this out the hard way. My parents did tell me it is the best way to learn by experience, but I do disagree in this case. It would have been much easier to do my homework before venturing into this casino of investing. I have just touched the surface, but want to make sure you are aware there are differences.
KINGS Rule and they represent the SECTORS in which your stocks dwell:
Currently there are 10, but by Sept 15th the newest will be playing in the game: equity REITs, considered by some to be Real Estate.
Below is a chart showing the Sectors and the % suggested by Fidelity for May 2016.
I show my sectors and the # of stocks I own in each along with the % portfolio value for Fidelity, Rose and Rose Income.
The ** sectors are the ones I consider Defensive.
|# Stocks||Sector||% Fidelity||% Rose||%R Income|
The Financial Sector right now includes all REITs and BDCs.
I separate out my Healthcare REITs and have them under healthcare, cheating I suppose.
I do want more pure and simple healthcare stocks, and I am working towards that goal this year.
That will hopefully be another article.
The defensive sectors are considered by most and myself as: Consumer Staples, Healthcare, Utilities, and Telecom.
From the chart above you will see:
Fidelity total is only 30.81% by Value for these 4 defensive sectors.
I have 51% and 57.6% including my HC Reits of 6.6%.
and 45.6% of my Income coming from defense which totals 55.3% with the HC REITs being 9.7%.
I do my investing differently and want more defense.
The sectors each have their own peculiarities and can be very cyclical, especially Industrial, Commodities (Materials) and Energy.
Technology and Financial can and have experienced the same movements of that roller coaster and actually are the ones that are down the most now and some buys might be found in that sector.
I am showing this list from M* that tracks the sector movement with 1 meaning Fair Value.
The stars represent the sector STARS for current undervaluation.
|Sector||M* May||M* March||Movement||*|
I took this information from an exceptional newsletter for June called "The Guiding Mast". It was provided to me by George Fisher, a writer on SA who specializes in the Energy sector. A sample or subscription can be obtained by contacting him.
George in his article here in 2015, directed many to CNP, a very wise purchase I made back then.
He continues to offer many warnings about the overpriced stocks in this sector presently.
QUEENS also rule but over earnings or your winnings of income or dividends.
I present the following terms that should help lead you to success with understanding earnings.
P/E= Price/Earnings for most Common and Preferred Stock. The most common P/E is 15. Each stock and also every sector has a common average P/E associated with it. I would suggest learning those as well. The energy stocks are around 10-12.
I did find this list of current PEs for the sectors from March 2016 offered by Josh Brown.
I would think they have changed since then, but it is interesting to note the Financials still remain somewhat underpriced and Energy has rotated upwards and is almost overpriced in many instances.
Here are the terms used most often for REITs and BDCs
FFO= Funds From Operations and AFFO= Adjusted FFO. This goes with GAAP which is General Accepted Accounting Principles. Most Equity REITs are measured by these metrics and not P/E.
The metric of P/FFO is a valuable pricing gauge for eREIT valuations.
CFL= Cash Flows. More recently I have seen NOI or Net Operating Income in reference to REITs.
I look at CFL for all stocks and I continue to learn about Balance sheets and Key Statistics. That is another bigger and deeper topic.
Ray Merola does an excellent job in his recent article here on how to read a balance sheet.
BDCs seem pretty unique and diluted earnings often can be used. NAV ( Net Asset Value or Book Value) or NII (Net Investment/ Interest Income) are used primarily for mREITs and BDCs.
Some or most are bought at a discount to NAV, but the internally managed BDCs seem to sell over it. (NYSE:MAIN) is such an example.
The JACKs of all trades are your research resources.
DVK just wrote an article on how to research your stocks. He lists his top 10. I agree especially on the top 5 and #9. I hope you get to read it. Many of them are about knowing the dividend and if they are safe, but I just want to mention the dividend ex-date.
Dividend Ex-Date is a date to know and always watch carefully.
Surprise: If you buy a stock on the Ex-Date you will not get the current scheduled dividend. You will have to wait for the next payment date. Now sometimes the stock price falls on that date and you can get it cheaper at least by the amount of the dividend and then some, but you must watch closely and might even get a good buy but without the dividend. On the front side of that date, the stock price can creep up by the amount of the dividend. I like to avoid those dates unless the stock price is trending down and not up.
The REST of The Deck is what you play with. Let's try to play the game now.
Mike Nadel had a panel of contributors pick stocks. Part III, found here, sums up all the choices and adds Mike's to the mix.
I chose Target (NYSE:TGT), Boeing (NYSE:BA)and Coca-Cola (NYSE:KO), but I did have some other very excellent stocks I would now like to share with you. I show sectors, S&P credit rating, ValueLine (VL) rating along with current yield, P/E or FFO. If no rating, and most of the REITs do not have them, I show the Debt/Cap %.
DGR or Dividend Growth Rate is for the longest period of time I could find up to 5 years.
Some stocks have not been paying that long yet.
The Chowder # is the 5 DGR added to the yield. To qualify for purchase Utilities and Tele-Coms must reach #8 and LY stocks 15 and stocks with 3% or better yield must reach the #12.
I have also included PEG #, Price to Earnings Growth, for most of the growth stocks, the lower the better. I like to stay under a PEG of 2 for sure. It is generally not used for MY-HY stocks.
|Stock||Sector||VL||CR||M* FV||Nasdaq||S&P IQ||Curr P/E||10 yr P/E||5yr DGR||Yield||C#||PEG|
I hope you can now understand and consider these offerings and play a more knowledgeable game.
Due Diligence in all matters and especially taxes is advised.
I still like BA, DEO (Diageo), TGT, Harley (NYSE:HOG), Starbucks (NASDAQ:SBUX), Nike (NYSE:NKE), Visa (NYSE:V), Wells Fargo (NYSE:WFC), Valero (NYSE:VLO), Amgen (NASDAQ:AMGN), Cisco (NASDAQ:CSCO), Ares (AARC), and Chatham (NYSE:CLDT).
WP Glimcher (NYSE:WPG) mentioned by me in a previous article
here, might merge and the price has taken a jump. It could get interesting. I also discuss ARCC in the article, a new purchase of mine.
Be Happy Investing and WIN !
Disclosure: I am/we are long ALL STOCKS MENTIONED.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.