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Marc Lichtenfeld
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Marc is a frequent contributor to Investment U and also The Oxford Club’s Income Specialist and Editor of The Oxford Income Letter. He is the author of the best seller "Get Rich with Dividends". His investment career started out at the trading desk of Carlin Equities in San Francisco,... More
My company:
Investment U
My blog:
Get Rich With Dividends
My book:
Get Rich with Dividends: A Proven System for Double Digit Returns
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  • Why You Should NOT Invest In Dividend-Paying Mutual Funds

    It's not breaking news that dividends are hot. With bonds paying next to nothing, income-starved investors are increasingly pouring money into dividend-paying stocks.

    Last year, while $178.2 billion was removed from equity products, $26.8 billion were invested into dividend-focused funds.

    And mutual funds that specialized in dividends saw net inflows (more money invested in than taken out) every week for 44 weeks, according to EPFR Global.

    I'm not a huge fan of mutual funds in general, and especially not those that are dedicated to dividends. You can do much better yourself.

    For example, Columbia Dividend Opportunity I (MUTF:RSOIX) is rated five stars by Morningstar. It has a current yield of 3.79% and an expense ratio of 0.75%. Since March of 2004, $10,000 invested turned into $16,915 versus $13,426 for the S&P 500.

    Those are some pretty solid stats. If I were looking for a mutual fund that invested in dividend payers, this one would be near or at the top of my list. It's beaten the S&P 500 and its peers since its inception, the yield is solid and the expense ratio is reasonable.

    Its largest holdings are Lorillard (NYSE: LO), J.P. Morgan Chase (NYSE: JPM) and Pfizer (NYSE: PFE) - not exactly a low-risk group. Most of the rest of the portfolio are large cap names like Microsoft (NYSE: MSFT), AT&T (NYSE: T) and General Electric (NYSE: GE).

    That's because a $3.9-billion fund has to buy a lot of stock in order for any one position to be meaningful. A large fund is able to go into the market and purchase two million shares of AT&T or Microsoft.

    But if there are better opportunities in smaller names, a mutual fund is going to have a tough time buying enough shares to make a difference.

    For example, if you invested in some of the smaller-cap names that are in The Ultimate Income Letter's Perpetual Income Portfolio, you could do significantly better at an even lower cost.

    For instance, let's say you invested $2,500 each into Community Bank System (NYSE: CBU), Omega Health Investors (NYSE: OHI), Main Street Capital (NYSE: MAIN) and Genuine Parts (NYSE: GPC). During the same eight-year period as the mutual fund's 69% increase, your $10,000 would have become $19,862 - a significant difference over the $16,915 this very good mutual fund returned.

    Community Bank System is not a stock that a mutual fund manager would likely buy. It's a great little bank with a 3.9% yield, but it only trades 200,000 shares a day. It would be hard for a fund to accumulate enough shares to make a difference in the fund's returns. Perhaps more importantly, it would also be tough to sell a lot of shares if the fund manager no longer wanted to hold the stock. Omega Health and Main Street have yields approaching 8% and Genuine Parts' yield is 3.2%, but the company has raised its dividend every year for 56 years.

    All of the stocks mentioned above trade less than one million shares per day, although Genuine Parts has a market cap of over $9 billion.

    And don't forget that 0.75% expense ratio. While that is on the low side for mutual fund fees, your return is still being impacted by that 0.75% every year.

    If you bought the four stocks listed above with a discount broker, it would cost you about $10 per trade or $40. That comes out to 0.4% of your initial investment. However, that's a one-time cost, not an annual expense. The only time you'll incur another fee is when you go to sell. So if you sold it today, you'd have incurred a total expense of 0.8% ($80/$10,000) over eight years rather than 0.75% every year. When you pay that 0.75% every year for eight years, you end up impacting your return by 6%.

    I don't know about you, but I prefer to keep the 6% for me, rather than pay it to a mutual fund manager who can't do as good a job as I can.

    It's not that the fund managers aren't smart. They are. But the size of their funds limits their flexibility. As an individual investor, you can use that flexibility to your advantage by owning smaller cap stocks that have higher yields and better growth potential.

    Stay invested in dividend paying stocks. They're the best way that I know of to grow your wealth and generate increasing amounts of income over the long term. But do it yourself. With just a little bit of work, you'll make more money and pay less in fees than you would with even the best mutual funds. Because this is one area where the little guy has the advantage.

    Good Investing,

    Marc Lichtenfeld

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: T
    Jun 15 10:27 AM | Link | 3 Comments
  • Why I Should Be Named Warren Buffett’s Successor
    Dear Investment U,

    Although it was a very difficult decision to make, I am leaving Investment U to take over for Warren Buffett at Berkshire Hathaway. Thank you for everything.


    Marc Lichtenfeld

    P.S. Can you keep my Investment U Plus user id and password active? I'm really going to need some great investing ideas…

    There. The resignation letter is ready to go. Now, all I need is the call from Warren's people and it's a done deal. I'm expecting the call any day now.

    As you may have heard, in Berkshire Hathaway's (NYSE: BRK.A) (NYSE: BRK.B) most recent annual letter to shareholders, the Oracle of Omaha said that he has a successor picked out.

    Interesting that he picked me without having ever actually spoken to me. But I guess he's read how I've been pounding the table on dividend-paying stocks. You see, Warren loves dividends and as he has said in the past, his preferred holding period is "forever."

    That makes two of us.

    According to Forbes, out of 33 publicly held stocks in Berkshire Hathaway's portfolio, 27 of them pay dividends. Berkshire will collect well over $100 million in dividends each from American Express (NYSE: AXP), Coca-Cola (NYSE: KO), IBM (NYSE: IBM), Kraft Foods (NYSE: KFT), Procter & Gamble (NYSE: PG) and Wells Fargo (NYSE: WFC). In Coca-Cola's case, it will be well over $300 million.

    Like Warren Buffett, I also like stocks that pay robust dividends and prefer to hold on to them forever.

    You see, one of the sure ways to increase your wealth and stay ahead of inflation is to buy stocks that grow their dividend at a healthy clip every year.

    Coca-Cola currently pays a 3% dividend yield. If the company continues to grow the dividend at an average of 10% per year as it has done over the past 10 years, in 2022, the yield would be a juicy 7.7%. In 15 years it would be 11.5%, and in 20 years a whopping 18.7%.

    It's not that hard to think that you could own a stock like Coca-Cola in your portfolio for 20 years if you don't panic and sell anytime the stock or the market heads lower.

    And in any interest rate environment, 18.7% is going to be pretty good.

    If you don't need the income right now, you're better off reinvesting the dividend.

    An investor who bought $10,000 worth of Coca-Cola shares at the end of 2001 and reinvested the dividend wound up with $19,204 at the end of 2011. Not bad considering the S&P 500 barely budged in those 10 years.

    If you bought $10,000 worth in 1991, it turned into $51,080 - for a return of over 400%.

    From 1981 on - your $10,000 became worth a startling $999,554.

    Yes, 30 years is a long time. But buying great companies with decent starting dividend yields, that are growing those dividends every year is the best way that I know of to save for retirement, a college education, or just a rainy day. Other than getting lucky and hitting a home run by being early on a stock like Microsoft (Nasdaq: MSFT), I don't know of any other investments that would have turned returned 100 times your money in that period of time.

    You need to have patience so that you can let the dividends compound over time. That's what will create the real wealth. When you reinvest dividends, each quarter you receive more of a payout as you own more and more shares. As the years go by, it starts to add up in a hurry.

    And if you need the income today, buying stocks that raise their dividends every year ensures you have more income each year and stay ahead of inflation.

    Warren Buffett understands that. So do I.

    It's why I'm sitting by the phone, waiting. Warren, call me.

    Good Investing,

    Marc Lichtenfeld

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Mar 05 3:32 PM | Link | Comment!
  • When Your Stocks Double, Here's What You Must Do
    Source InvestmentU: When Your Stocks Double, Here's What You Must Do

    by Marc Lichtenfeld, Investment U's Senior Analyst Wednesday, December 8, 2010: Issue #1403

    "What no books, no schools, no brokers will teach you."

    That's the Investment U motto. And the motto I'm about to share with you today attests to that. How so?

    Because the most valuable and profound investment lessons often don't come from reading stuffy textbooks; they come from experience.

    In short, learning the easy way - and the hard way.

    And take it from my experience, here's one of the best approaches you can take when it comes to selling your stocks - both for your portfolio and your sanity...

    Grab Your Profits... Play With House Money... Get Peace of Mind

    A friend of mine once worked in the sales department for Polycom (Nasdaq: PLCM) - the maker of video conferencing products and the ubiquitous three-pronged speaker-phones that seem to be in every conference room in America.

    As the company was going public, my friend suggested that I buy the stock. I bought a few shares at a split-adjusted price of about $4.

    A few months later, I bought more shares, based on my buddy's upbeat report. While he never gave me specifics, he continued to tell me that things were going well, so I was also able to stay patient while I held the stock. That patience was rewarded as the price climbed.

    And here's the crucial part: When it surged to over $10, I sold half my position, taking my original investment off the table, plus a decent profit - what I call partial profit taking.

    The result was that I was then playing with the house's money. In turn, I no longer agonized over every tick of the share price because I knew that no matter what happened, I couldn't lose a dime.

    When the stock hit $25, I sold half of the remaining position, before finally cashing out the last of my holdings at over $40 per share.

    Without taking this approach and grabbing profits when the stock doubled, I can say with absolute certainty that I wouldn't have had the patience to hold the shares all the way to $40.

    But by removing all the risk, I was able to ride the uptrend free and clear. In the end, I actually made more money by selling half after it doubled than if I'd held onto the entire position.

    That's the "do" part of my advice. Now for the "don't" portion. Whatever you do, don't repeat this painful lesson...

    Next Stop: The Basement

    I was always skeptical of the dotcom boom... even as everyone else was plowing headlong into the frenzy.

    After all, I was right in the heart of it, speaking with the CEOs and CFOs of some of the largest and most revolutionary high-tech companies.

    One such company was Quokka, which broadcast niche sports on the web. I had a good relationship with the executives and some other employees, but despite the fact that most people didn't have broadband access at the time (which was required to watch the videos), the CEO believed his company was destined for greatness.

    Throughout the period, I repeatedly challenged CEOs about how they were going to make money. But I was consistently told that I "didn't understand the new paradigm."

    However, when Quokka landed a major deal to cover the 2000 Olympics, broadcasting events that weren't being shown on TV, I bought the stock. I figured that with Internet stocks going crazy, once the Olympics took place and Quokka started getting press, the stock would take off.

    I was right. After buying shares around $7, the stock climbed steadily. When it hit $15, I told my wife I was going to sell half of the shares and take our risk off the table.

    But she argued that we should let it ride. At the time, we were in a cramped one-bedroom apartment and had dreams of buying a house. The exchange went something like this:

    "If it keeps rising, it could be our down-payment," she insisted.

    "I'll sleep a lot better if we take our original investment off the table," I responded.

    After going back and forth for a while, she resorted to challenging my manhood.

    So I did the manly thing and gave in.

    The stock started to drop. To $12... then $10... and all the way back to my $7 buy price. When it hit $5, I promised myself I'd sell it if it got back to $7. But it didn't. Instead, it slumped all the way to zero, as the firm eventually went bankrupt - and I rode down with it.

    The lesson here?

    Sell half of your position whenever a stock doubles in price.

    That way, no matter what happens, you can't lose any money.

    Hoping your longs go up and your shorts go down,

    Marc Lichtenfeld

    P.S: In case you're wondering... yes, I do still listen to my wife. In fact, that was the last time she was wrong... or so she tells me.
    Tags: PLCM
    Dec 09 4:49 PM | Link | Comment!
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