Marc Lichtenfeld's Instablog

Why You Should NOT Invest In Dividend-Paying Mutual Funds

Fri, 15 Jun 2012 10:27:10 -0400

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 (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.

Why I Should Be Named Warren Buffett’s Successor

Mon, 05 Mar 2012 15:32:24 -0500

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.
Sincerely,
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.

When Your Stocks Double, Here's What You Must Do

Thu, 09 Dec 2010 16:49:51 -0500

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.

Stock Market 101: The Timeless Advice That Applies to Any Investor

Thu, 02 Dec 2010 15:53:14 -0500

Source InvestmentU: Stock Market 101: The Timeless Advice That Applies to Any Investor

by Marc Lichtenfeld, Investment U's Senior Analyst Wednesday, December 1, 2010: Issue #1398

"Dad, can you teach me about the stock market? I want to buy a stock."

It was music to my ears, given that my nine-year-old son had never taken much interest in his old man's job before, or asked how the market and stocks work.

It had been a while since I'd given a "Stock Market 101" lesson, but no matter your level of expertise, stock analysis doesn't have to be complicated. Like many things in life, keeping it simple is often the best way. Especially for a novice nine-year-old!

Here are a few timeless tips that apply to all investors in their research...

Stock Market 101: The Only Two Kinds of Analysis You Need

When you buy stocks, there are basically two approaches you can take to your investment research:

Fundamental Analysis: When I research a company's fundamentals, I look at sales and earnings growth, cash flow growth and the balance sheet. I certainly do a lot of digging to confirm or reject my investment thesis, but generally speaking, if a company is financially stable and is growing its earnings and cash flow, then there's a solid chance that the stock will rise over the long-term.
Technical Analysis: The mere mention of this form of research scares some investors, as they picture all kinds of complicated-looking chart patterns and formations. But again, just keep it simple. When I look at stock charts, I look for trendlines, support and resistance, and basic patterns like head-and-shoulders. I don't worry about cycle analysis, Gann Wheels, or other arcane indicators. The reason? Because the simple stuff works. After years of study, I'm not convinced that the more complex indicators are any more reliable than a crystal ball.

When I dug into the basics with my son, I started by asking him to think of a company that he thought was doing well. And without a pause, he said Costco (Nasdaq: COST).

Like Father, Like Son

Now, Junior doesn't read Investment U (although he should), so he had no idea that I wrote a positive review of Costco just one week ago.

His reasoning was that when we go to the store, it's always crammed with people and that there are many different things to buy there. (Plus, he's a huge fan of their hot dogs, which are fantastic, by the way.)

But as I mentioned last week, it's Costco's excellent management team that sets the foundation for the company's success. It maintains tight control over its margins and ensures that its employees are happy - and therefore motivated. Not to mention the fact that Costco offers everyday household products at excellent prices.

We pulled up Costco's five-year stock chart...

To see the chart in its original size, click here.

I asked him what he thought would happen to the stock next. His answer: "No higher than $75." I asked him why and he said, "Because when it gets close, it stops there."

Without realizing it, he'd just noted one of the most basic elements of technical analysis - upward resistance. Simply put, this level acts as a barrier to a stock's continued rise if it hasn't broken through it in the past.

Conversely, support levels work on the downside, providing a "floor" that a stock shouldn't fall through before rebounding higher. (Note to self: Add John Murphy's Fundamentals of Technical Analysis to my son's holiday gift list.)

Tune Out the Crowd

We looked at other successful businesses, including Whole Foods (Nasdaq: WFMI) and Starbucks (Nasdaq: SBUX). But perhaps unsurprisingly, we zeroed in on a company that most kids love - Walt Disney (NYSE: DIS).

In this case, I mentioned the fundamental aspects of the stock to him, including the fact that it pays a small $0.35 per share annual dividend. But given my contrarian nature, I also told him that the analysts aren't overwhelmingly positive on the stock and explained that the best way to make money in the markets is not by following the crowd. Instead, going against analysts that are "late to the party" is often the path to profits.

Then it was on to more speculative stocks, given that I spend much of my time researching them...

If You're Going to Gamble, Make Sure it's Educated Risk

I explained that with these slightly riskier stocks, the research process is more time-consuming, as you need to be much more rigorous with your analysis.

However, since we're only investing a few hundred dollars, he can afford to take a little more risk at his age without worrying about a lifestyle-affecting loss. The rest of his money is invested in various mutual funds, so he'll still go to college!

You never want a loss, of course, but even if one of your speculative, small-cap names takes a dive, make sure you haven't over-extended yourself on the position. It's okay to take an educated gamble as long as most of your money is invested in more stable investments, so you can handle any losses.

All investors - whether new or experienced - need to remember that there's always more to learn about investing. Even if you score a big gain, or enjoy a long winning streak, always stick to disciplined money management.

As for my son's first stock pick... he wasn't interested in airlines, pharmaceuticals, or automakers, so we're still on the prowl. (Perhaps I have a perma-bear in the making.) Your suggestions are welcome in the "Comments" section below. If we use your idea, while I can't give you a cut of the profits, I can promise that when he starts his hedge fund, you'll be first on the list. However, he'll only return client calls after he finishes his homework.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld

Disclosure: No Position

Activist Investors: Follow the Smart Money And Grab an Extra 21% Per Year

Fri, 22 Oct 2010 09:10:08 -0400

Source InvestmentU: Activist Investors: Follow the Smart Money And Grab an Extra 21% Per Year

by Marc Lichtenfeld, Investment U's Senior Analyst Wednesday, October 20, 2010: Issue #1370

Every year, a tiny group of investors quietly outperform the stock market by more than 20 percentage points.

They're tough, direct, no-nonsense guys - and are arguably the best people to have fighting for everyday investors like you and me.

They're called activist investors.

So who are these guys? What do they do? And more importantly, what can they do for you?

"Activists" by Name... And by Nature

An activist investor is someone who owns a stake of 5% or more in a certain company and wants to make changes. They're required to file a 13D document with the SEC, outlining the demands they're making from management.

Those demands often include...

The sale of the company or certain assets.
Instituting a share buyback or special dividend.
Firing the CEO or replacing members on the board of directors.
Reining in executive compensation.

You can see why they're called "activists!" But these demands all have one goal in mind: to unlock shareholder value - i.e. make the share price rise.

So who are the big activist players?

Activist Investors Hit Headlines

Last week, one of the most prominent activist investors hit the headlines, as hedge fund manager Bill Ackman took large new positions in J. C. Penney (NYSE: JCP) and Fortune Brands (NYSE: FO).

And Ackman has overseen several other notable activist campaigns, too.

For example, he got Wendy's (NYSE: WEN) to spin off its Tim Hortons (NYSE: THI) unit. And investors who followed him into McDonald's (NYSE: MCD) have seen their shares double. However, Target (NYSE: TGT) was a famously disastrous position for Ackman and his investors. Having put all his fund's capital into Target options, the fund lost 90% of its value.

As for the other heavy-hitters...

Successful Activist Investors To Watch

Extremely successful activists that I keep a close eye on include Dan Loeb of Third Point, Barry Rosenstein of Jana Partners and Carl Icahn.

And they're all similar to Ackman in that they're incredibly smart, driven and opinionated (as most activists are).

For example, Loeb has notched up many victories, but he's perhaps better known for his scathing letters to ineffective CEOs. (These letters are submitted as part of the 13D filings.)

For example, he once wrote to former Star Gas Partners (NYSE: SGU) CEO Irik Sevin and lashed out: "Do what you do best: Retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites." Sevin did in fact retreat. He resigned a short time later.

And Loeb once said of his own company: "I suppose if Third Point were to have a website, rather than the feel-good background of two shaking hands, we would likely depict a well-worn boot colliding with the backside of an incompetent manager."

Over at Rosenstein's Jana Partners, the firm recently recorded a win when it forced Charles River Laboratories (NYSE: CRL) to withdraw from its high-priced acquisition of WuXi Pharmatech (NYSE: WX) and instead institute a stock buyback.

And the legendary Carl Icahn is known for many activist investing successes. One of the biggest was when he bought up shares of ImClone Systems below $30 and promptly took control of the board of directors. He ultimately ended up selling the company to Eli Lilly (NYSE: LLY) for $70 per share.

So as an everyday investor, the takeaway from this is simple: You should follow what activist investors are doing because it works. The numbers back it up, too...

When Activist Investors Get Tough, You Bag An Extra 21%

According to a study published in The Journal of Finance, the stocks that activist investors target end up outperforming the market by an impressive 21.6 percentage points annually.

What does this mean in dollar terms?

Using historical averages, you'll see that $100,000 invested in the S&P 500 would be worth $131,000 in three years and $247,000 in 10 years.

But if your portfolio outperforms the S&P by 21.6 percentage points annually, that $100,000 grows to $225,000 in three years and $1.5 million in 10 years.

Following activist investors is similar to following insiders in that you're placing your bets with the "smart money."

Why it Pays to Follow Activist Investors

Remember that activist investors need to own 5% of a particular stock before they can start demanding changes. So you can be certain that they've thrown a lot of resources into research and due diligence. These guys simply aren't going to risk millions, tens of millions, or even hundreds of millions unless they're sure that the shares are heading higher (often with their help).

Now here's the thing: Activists target less than 1% of all stocks out there, which makes activists-fueled shares somewhat rare. So the key to making money is to know which activists to follow. Do that and this strategy can be extremely lucrative.

I mentioned some of my favorite activists a moment ago, but take a look at the 13D filings to see which ones make sense to you. You can access them for free on the SEC's website.

But if you don't have time for that and want me to do the work for you in digging out the best activist ideas, feel free to check out my new service, The Activist Trader.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld

Disclosure: no position

Medicare Fraud, Healthcare Waste and the Companies Helping to Solve It

Wed, 13 Oct 2010 17:02:08 -0400

Source Investment U: Medicare Fraud, Healthcare Waste and the Companies Helping to Solve It

by Marc Lichtenfeld, Healthcare Expert Wednesday, October 13, 2010: Issue #1365

It was one year ago that television show 60 Minutes broadcast an in-depth report into Medicare fraud. The incredible conclusion was just how easy it is for criminals to rip off taxpayers. (I don't recommend watching it unless you have your blood pressure medicine handy.)

In fact, Medicare fraud alone costs roughly $68 billion per year - more than the federal government's entire education budget.

Here in Florida, you can imagine that Medicare is always a hot topic, regardless of politics. But it's especially fiery now considering that one of the leading candidates for governor orchestrated the largest fraud in Medicare history when he ran a hospital chain (and then did it again with a second company).

So what's is being done to tackle this massive problem?

Stemming the Tsunami-Like Tide of Medicare Fraud

On the face of it, the U.S. government is taking steps to stem the tsunami-like tide of Medicare fraud. The Feds have hired more agents and are employing tougher screening methods for medical suppliers. And the 2009 stimulus package calls for all medical records to be electronic by 2014, which will cut down on errors.

But the reality is that the new healthcare reform bill does little to address fraud or other unnecessary costs.

So forget the outcome of November's mid-term elections and whether or not healthcare reform is implemented as written or gets repealed. The high cost of healthcare will persist. And not only will that continue to squeeze consumers, it will also cost the government even more in waste and fraud.

But help is at hand...

This Successful Business Model Ain't Rocket Science

Despite the strain on the healthcare sector, some companies are working hard to appease the situation and remove some of the bloated costs from the system.

And the opportunity is particularly strong for those companies that can do so without negatively impacting patient care. In fact, the level of care actually increases in some cases.

Hmm... better patient care, coupled with lower costs. You don't need an MBA to figure out that there are few ways to make your customers happier than by giving them good service and helping them save money.

In turn, that likely results in successful businesses. And here are three of them...

The Healthcare Holy Grail: Better Care... Lower Cost

In the coming years, it's clear that the healthcare companies who can help improve patient care while cutting costs are going to be big winners - for both consumers and investors alike. Get a headstart on your research with these ones...

Allscripts Health Solutions (Nasdaq: MDRX)

Allscripts' mission is to "improve clinical and financial outcomes" for physician practices and health clinics. It does this by managing electronic health records, providing clinical and office management software, as well as computer systems for large healthcare networks.

There's $20 billion worth of stimulus money earmarked for digitizing America's medical records - and companies like Allscripts that are involved in electronic health records should benefit.

Arcadia Resources (AMEX: KAD)

Arcadia is a prescription management company that helps patients on multiple medications manage their prescriptions and ensures that they take their medicine at the appropriate time.

This is important because insurance companies and Medicare pay millions per year for patients who are admitted to hospitals because of prescription errors and non-compliance (i.e. they don't take their medicine as prescribed).

But with Arcadia's DailyMed program, patients stay healthier and insurers lower their costs. A word of warning, though: Arcadia has a very small market cap (just $68.6 million) and its shares can be quite volatile.

AthenaHealth (Nasdaq: ATHN)

Earlier this year, an accounting scandal stung Athena. But the company (and its stock) has since rebounded - and for one simple reason…

The provider of Internet-based services for physicians, Athena offers athenaCollector - a web-based system that aids the payment process for doctors' offices. The service manages revenue, claims and reimbursement, which helps eliminate billing errors and ensures that doctors are paid faster.

The beauty of its business model means that doctors don’t pay anything upfront or have any software to install and upgrade. Everything is web-based and doctors simply pay a percentage of collections.

Athena also offers athenaClinicals, which manages patients' medical records digitally. No wonder doctors and their office managers love Athena’s services.

In an area where efficient healthcare can be patchy - and costs, fraud and errors are high - there are plenty of companies whose products aim to boost patients' health, save money and eliminate mistakes.

And you can bet that a lot of money will find its way to those who can provide these kinds of services. I'll continue to look for the best ones and will be writing about them here, as well as making specific recommendations in The Oxford Communiqué.

Hoping your longs go up and your shorts go down.

Marc Lichtenfeld

Disclosure: No Disclosure

Disclosure: no disclosure