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Smarty_Pants

Smarty_Pants
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  • Equity Investing Or Index Investing [View article]
    "I would also add that you can create a pretty quick amortization table in Excel, then add a column for extra principle paid. It won't be perfect your current balance but in most cases it will take you to within a couple pennies. If you set up the schedule correct you can see how much interest you're paying off and how that trickles down to future payments. The month of payoff shows at hte bottom of the spreadsheet and is pretty fascinating to watch pay down." - ScottU

    I did something very similar. I set up my spreadsheet with each month's amortized balance due, interest, and principle when I was 7 years into my 30 years of payments, and I put an X next to all the payments I had already made.

    Each month after that, I paid the full mortgage payment (X off another row) and then added the principle amount for the following month to my payment (X off the following month too). I highlighted the second month's interest payment so that I could easily see my savings, since I didn't have to pay that amount of interest.

    The interest payment from every other month was thus eliminated. When I got 24 months of extra principle paid off I went back to my regular monthly 30 year payments.

    In addition, the last two years of payments are eliminated completely, which are mostly principle repayments and add up to a great deal more than the extra principle I pre-paid earlier in the loan.

    As an example, for a $100,000 30 year fixed interest loan at 6.125% the monthly payment (principle & interest) is $607.61.

    Starting in year 7 and pre-paying an extra month of principle for two years costs $4,011.43 (that's about $167.15 per month extra).

    The 24 skipped interest payments during those two years total $10,571.21 (immediate savings). The 24 eliminated payments at the end of the loan (loan is paid off in 28 years) total $14,582.64.

    Making the extra $4,011.43 in principle payments saved $25,153.85, or over 25% of the initial loan amount.

    The total interest on the 30 year payment stream is $118,740.15.

    This reduces the total cost of the mortgage nearly 10% from $218,740.15 to $197,597.73 and the loan is paid off in 28 years.
    Dec 23, 2014. 02:23 PM | 3 Likes Like |Link to Comment
  • Update: Gold Resource Leases Second Nevada Property [View article]
    I agree. GORO is a good deal at $3, with a 4% yield and a solid chance of a much higher price, not to mention the potential for a higher dividend if the price of gold rebounds. I doubled up.

    It appears that their Q3 earnings stumble was due to withholding higher grade ore until after they have their new dore poring capability running. That resulted in a hit to revenue in Q3, but will result in cost savings when that ore is processed in Q4. Their cash flow in Q3 seems pretty solid, so a one-off earnings miss due to implementing a process improvement isn't a sign of financial distress to me.

    I'm hoping for an increase to the dividend as a best case, and a rebound up to the $5 to $6 range in price when the earnings miss for Q3 is seen as a non-event by the market. Meanwhile I'll happily DRIP my 4% yield.
    Dec 20, 2014. 03:18 PM | Likes Like |Link to Comment
  • Update: Granite Wash Sale Is No Reason To Buy Linn Energy [View article]
    "Instead, Linn needs to seriously slash its distribution, by at least 50%, to preserve $1 billion in cash over two years, and it also should postpone some growth cap-ex to hoard as much cash as possible" - Author

    I was under the impression that "hoarding cash" is not allowed for MLP entities. They're required to pay out 90% of their income in order to retain their MLP status. If they use the cash generated from cutting the dividend to buy back debt at a discount (which is an interesting concept) they still won't have any more cash 'sitting around' for spending in the out years.

    I'm sure there must be subtleties to the 90% of income rule, but it seems to me that nearly all of any dividend reduction must be spent on something to stay within the 90% bounds. As I understand it, 'hoarding' cash isn't an option beyond 10% of their income (which wouldn't buy very much time after the hedge book fizzles out, presuming that oil stays below $60 per bbl until the end of 2016).

    Can anyone explain the mechanism by which cutting the dividend now will help pay expenses in 2017? The only means I can see are:

    1) maintain or increase growth cap-ex so there is more oil to sell at the lower prices
    2) buy distressed properties from nearly BK oil patch companies at accretive prices
    3) Buy their debt issues in the after-market to retire it at a discount

    What other options exist to stabilize cash flow beyond the expiration of the hedges? The 'savings' gained by cutting the dividend have to go somewhere in the reasonably near term.
    Dec 17, 2014. 06:51 PM | Likes Like |Link to Comment
  • Equity Investing Or Index Investing [View article]
    "you make it sound like stock market investing is risk-free..." - bryan.g.forsyth

    Nothing in life worth having is risk free, but consistent application of sound principles can go a long way toward skewing the risk/reward ratio in the favor of the investor.

    Casinos make a pretty good living by doing just that. Why do so many feel that investing methods and practices for improving an individual's odds of overall success seem unattainable?

    I can't eliminate all risk, but I can partition it into small enough bundles that any one bundle won't ruin my finances. While it is still potentially possible that ALL my high quality DG stocks will fail at the same time, it's not likely and I'm willing to accept that risk in return for the opportunity to participate in those companies' future growth.

    After all, one could say that I'm building my own fund, using my own set of selection and management rules. If, as TR/MPT adherents claim, Indexing is the nirvana of optimizing risk/reward, why doesn't my own private index fund do the same to some extent?
    Dec 6, 2014. 09:22 PM | 2 Likes Like |Link to Comment
  • Equity Investing Or Index Investing [View article]
    I view some of the better run REITs a reasonable substitute for holding bonds. The better REITs have a higher initial yield and many have managed to increase their annual payments over time (better than the fixed payment of an individual bond).

    Brad Thomas has written a lot of detailed articles here on SA about REITS. Be sure to research the idea enough to conclude it will satisfy your needs safely. REITs have risks of their own to manage and may not be what you're looking for.
    Dec 6, 2014. 05:09 PM | Likes Like |Link to Comment
  • Equity Investing Or Index Investing [View article]
    "As you say, managing cash flow is key." - TF17

    Indeed. Through what I can only describe as divine intervention, I was able to reset my mortgage rate to 3.875% (down from 6.125%) while keeping the remaining balance and payment schedule the same. It saved me $165 per month in interest charges and only cost me a one time fee of $400.

    I briefly considered using the extra $165 to pay down the mortgage balance, but decided I was better off using that money to invest in dividend stocks whose yields were above 3.875%. Paying down the mortgage balance took the money out of my control and only saved me 3.875% annually in interest.

    Buying shares of a stock like KMI kept the money in my control, and paid me 4.25% of income annually.

    Deciding to invest instead of pay down the mortgage was a no-brainer, I thought. When you also consider the potential for KMI's 15% dividend growth going forward, it's not even close.
    Dec 6, 2014. 04:19 PM | 3 Likes Like |Link to Comment
  • Equity Investing Or Index Investing [View article]
    "Properly understanding this concept just opened waaaay more doors for me as far as looking at/choosing companies to begin DD on. It's like a giant light just switched on." - Scoschell

    Congratulations, and welcome aboard. In my opinion, if you grasp and understand these concepts you have the knowledge to direct your investments much better than an average investor.

    Based on what others have written here on SA and my own experience I believe you will begin to see your portfolio performance improve going forward. The lightbulb turned on for me about 4 years ago in my late 40s. In only wish it had happened 20 years earlier.
    Dec 6, 2014. 03:25 PM | 5 Likes Like |Link to Comment
  • Equity Investing Or Index Investing [View article]
    "But I look at it and see a dividend of 0.89%. Why would I want to earn 0.89% on my money? You would answer, "Because the stock price is going to go up." And I would say, "But why? Why does ANYONE want to own this stock that pays only 0.89%, even if it has earnings like Apple?"

    I mean, I just don't get that. Essentially, if I bought a stock that paid 0.89%, just because that company was going to earn 10% more next year (but not share much of it with me), I would be looking for a "greater fool" to take that stock off my hands next year (or some time in the future)." - Alexander Alekhine

    What you are overlooking is not the growth of sales or profits, but the dividend itself. Companies that pay a predictable dividend over time will tend (as a generality, not necessarily a certainty) to settle into a band of yield.

    The Board of Directors controls the size and growth of the dividend, the "market" controls the stock's price based on expectations of those changes and usually those expectations are formed based on the consistency of past performance.

    So for whatever reason, the market has given ROST a price in the 1-% yield range, which varies a bit over time based on news flow and other emotional reactions to current events.

    Here's the crucial point to understand. That 1-% yield point is relatively consistent over time, for whatever reason (habit perhaps). So when a company like ROST boosts their dividend by 20+%, what do you suppose happens to the stock's price? Generally, it goes up by about 20+% so that the 1-% yield point is maintained!!

    Now the relationship isn't so exact as to be a mathematical certainty, but over long times it is pretty consistent for established, solid, QUALITY businesses. In fact, the Chowder Number is a good estimate for long term Total Return. Yield + Dividend Growth will show a remarkable parallel to a stock's Total Return.

    That's it. Once you grasp that relationship (consistent dividend growth parallels price growth over time) you can put your emotions on the side of making successful decisions that harness the growth of your stocks to your benefit. You can also find better entry points by using that yardstick to find the stock and then determine a favourable price for entry because boosting the initial yield (with a lower price) also tends to boost TR.

    Not only that, but you can tailor your stock selection to your personal needs and goals. Retirees might want a higher yield with slower DG combination than a 20-something, who has the longer time frame and no need for current income to choose a low yield, high DG stock.

    Additionally, populating a portfolio with 20 to 50 stocks having Chowder Numbers exceeding the long term TR of SPY will give you a good chance to outperform "the market" over time. Sure, a few of those stocks might underperform, but others will outperform. In the long run, provided they each continue to grow that dividend consistently, the portfolio as a whole has a very good chance to outperform. There's a reason why a majority of Chowder's stocks have outperformed SPY in TR (and income generation). His methodology winnows out the businesses with the financial wherewithal to do so via the Chowder Number combined with an emphasis on quality.

    Not only that, but monitoring your portfolio now makes more sense. Keep your eye on the dividend growth, and whether there is sufficient earnings growth to maintain that dividend growth. When earnings or dividend growth start lagging more than makes you comfortable you can re-evaluate and possibly replace that holding before the price drops significantly.

    At least that's how I see it and it seems to work pretty well where it is applied consistently, even for those who are just converting to a more DGI approach.
    Dec 6, 2014. 03:10 PM | 6 Likes Like |Link to Comment
  • 3 Reasons I Prefer Dividend Growth Investing [View article]
    lintervvv,

    I concur with the general expressions above. Convert at whatever pace is comfortable for you. I started my DG portfolio nearly four years ago buying one stock per month. Now I have nearly 30 positions.

    The only extra advice I can offer is to look for the sectors that are beaten down and find a DG stalwart to buy from that sector. Currently, (December 2014) oil stocks are beaten up and you can find several DG gems among the pile the market is throwing out the window. Buying great companies at bargain prices is a tremendous way to really boost your long term performance.

    CVX, COP, KMI, and XOM are a few stocks you might want to check out in the energy sector.
    Dec 4, 2014. 03:16 PM | 3 Likes Like |Link to Comment
  • 3 Reasons I Prefer Dividend Growth Investing [View article]
    "I finally got him to stop by telling him that I was "yielding 5.3%, Beta of .68, and a TR of ~9% and all he had to do was match it." - djsulli

    You meant to match it after his fees were subtracted, I hope. :-)
    Dec 4, 2014. 02:52 PM | 3 Likes Like |Link to Comment
  • 3 Reasons I Prefer Dividend Growth Investing [View article]
    Great article DVK. As you correctly point out the general area of friction between DGI types and TR types is in the presumption that TR WILL outperform DGI in the long run.

    In some ways that strikes me as a bit of wishful thinking. Personal experiences shared here on SA and the striking lack of real-time TR portfolios to examine and compare to the real-time DGI portfolios that ARE available seem to be the point where the rubber hits the road.

    I have only one request of TR adherents who claim they WILL outperform DGI.

    Show me. Set up a portfolio starting now, and we'll compare it to the many DGI portfolios already available and see what happens when all the cherry picking on either side is removed. Until then, their claims are nothing more than opinions to me.
    Dec 4, 2014. 07:40 AM | 4 Likes Like |Link to Comment
  • 3 Reasons I Prefer Dividend Growth Investing [View article]
    "I was just trying to figure out whether correlation also makes a difference in beta or not. DGI stocks are likely to be correlated more strongly with each other than with the overall market." - TF17

    Only to the extent that the portfolio is concentrated into a small number of sectors, I believe. Given that a significant number of DG stocks are already a part of "the market", most effects of correlation would be present in some degree in both places.

    Utilities won't be any more correlated to consumer staples, financials, industrials, or resource stocks in a DG portfolio than they are in "the market". If the portfolio holds most sectors in reasonable weights then it shouldn't matter too much for estimating Beta.

    Putting numbers to concepts like Beta and Correlation requires some level of simplification and/or assumptions. As you point out, there are sometimes different factors which may skew the estimate based on the specific portfolio holdings.
    Dec 4, 2014. 07:32 AM | 1 Like Like |Link to Comment
  • 3 Reasons I Prefer Dividend Growth Investing [View article]
    "Doesn't the portfolio beta depend on the correlation between the stocks themselves?" - TF17

    Think of it using this example. Let's take 3 stocks A, B, and C, with Betas of 0.1, 0.3, and 3.0 respectively and identical prices of $10.00. Now make two small example portfolios with different $ allocations and see what you think the overall Beta would be:

    Portfolio 1:
    $99.80 in A, $0.10 in B, and $0.10 in C = $100.00 total
    (9.98 shares A, 0.01 shares B, 0.01 shares C)

    Portfolio 2:
    $0.10 in A, $0.10 in B, and $99.80 in C = $100.00 total
    (0.01 shares A, 0.01 shares B, 9.98 shares C)

    Now fast forward one day in the market with price moves that reflect each stock's Beta after a 1% gain in "the market":

    A => $10.01 (gain of 0.1%)
    B => $10.03 (gain of 0.3%)
    C => $10.30 (gain of 3.0%)

    The new value for Portfolio 1 will be
    $10.01*9.98 + $10.03*0.01 + $10.30*0.01 = $100.1031

    The new value for Portfolio 2 will be
    $10.01*0.01 + $10.03*0.01 + $10.30*9.98 = $102.9944

    So ...
    volatility estimate for P1 is about 0.1031
    and
    volatility estimate for P2 is about 2.9944

    Dollar weighting really matters in estimating the portfolio Beta.
    Dec 3, 2014. 11:15 PM | 1 Like Like |Link to Comment
  • 3 Reasons I Prefer Dividend Growth Investing [View article]
    "Question on portfolio Beta - do you just do a simple average (count of sum of betas / stocks) or do you do a dollar weighted average?" - prices1950

    The proper mathematical way to get the portfolio Beta is to use a dollar weighted average of each stock's Beta:

    Portfolio_Beta = (Beta1*$1 + Beta2*$2 + ... + Beta_n*$_n) / $Total

    Of course that's only an estimate and the end result will depend on how the individual stock's Betas are calculated in the first place.
    Dec 3, 2014. 10:29 PM | Likes Like |Link to Comment
  • Will Linn Energy Post A Windfall Profit For Q4? [View article]
    It seems to me that 2015 DCF should have a good chance to remain reasonably stable.

    NG is fully hedged at prices above 2014. Oil is around 57% hedged at 2014 prices (~40,000 bpd hedged of ~70,000 bpd production).

    Therefore, loss in revenue at $70/bbl oil would be roughly:

    $20/bbl * 30,000 bpd * 365 days = $219 million

    Yet I recall an expected savings in cap-ex between $300 - $400 million annually due to the recent asset swaps, which should make up for the reduced revenue with a 50+%-ish margin of safety.

    Seems to me that the DCF should be safe for 2015 so long as oil remains above $63/bbl (which is where the revenue losses reach $300 million and equal the minimum cap-ex savings).

    That's what I get with a back of the envelope estimation anyway.
    Dec 2, 2014. 10:56 PM | 2 Likes Like |Link to Comment
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