"Dividends Used To Buy More Stock "The corporation in which you own stock may have a dividend reinvestment plan. This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. If you are a member of this type of plan and you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income."
Sanofi-Aventis: Quite Suitable for My Defensive Portfolio [View article]
We don't disagree. I have been retired for only four months. I still remember how business works. There are three ways to run a successful business. First, product excellence. Second, operation efficiency. Third, customer intimacy.
Branded drugs are examples of excellence.
Once patents expire, the product becomes commoditized. Then the only ways to make money are to be the most efficient producer and/or to develop such close relationships with customers. Making pills to go in nondescript bottles is a process easily replicated by many players. For a manufacturer to differentiate itself from its competition is difficult to impossible. Another dimension is that there are only two and a half major drug chains and, I think, only about as many PBM's. Therefore, there is little chance of a manufacturer developing customer intimacy. This is not unique to pharmaceuticals. In most things we buy, there are only two or three retail outlets to choose from. However, this gives all the leverage to the retailers who demand nothing but the lowest prices and for the manufacturer to carry sufficient stock so that the retailer does not have to invest anything in inventory.
What you call a "bloated" structure may not be bloated, but a different model. In drugs, an R&D effort must be sustained. Once a drug has been developed, there must be a marketing effort to convince physicians that the company's drug is what they should prescribe. Companies like MRK and PFE will have higher SG&A than generic companies for legitimate reasons.
Since you introduced computers into the discussion, IBM was the innovator of computer hardware. Other companies made computers that were as good or better. However, computers, in the 1960's and 1970's were complex. IBM's level of support was far superior to that of its competition. They prevailed by combining excellence and customer intimacy. When the PC arrived in the1980's, IBM made the best PC's until Compac made better ones. Then, the product became commoditized. Over a dozen manufacturers emerged. Dell prevailed by supply chain management (operational efficiency) and customer support (intimacy). And I'll leave off here before try to analyze the fall of Dell and the ascendancy of HP.
I would not invest in a PBM as I think they may be subservient to insurance companies. I have not invested in pharmacies although WAG and CVS seem to be well-run machines. They give customers reasons to go to their stores even though every supermarket and mass merchant has a pharmacy counter.
You are correct. I believe most participants in this thread are of sufficient years whereby 25 years is more than necessary insofar as assigning a relevant range. Please note that I stated most, not all. I redid my calculations and, to my surprise, the result did not change. It still took twenty-five years for the cumulative dividends on the stock with the lower starting point and higher growth to pass those of the stock with the higher starting yield and lower growth.
What also surprised me was that, after twenty-five years, the stock with the higher growth rate really started to pull ahead. At the same time, a capital project with a life of twenty-five years may be a bit more than what is relevant. Especially one that is as flexible as managing a portfolio of marketable securities.
Besides, at age 64, I am not interested in pursuing a superior strategy where its superiority can only be demonstrated mathematically after twenty-five years of execution.
David, you are quite correct insofar as YOC in any year is concerned. However, cumulative dividends on a stock with an initial yield of 3% increasing at 10% will, as a practical matter, never catch up with the cumulative dividends on a stock that starts will a 6% yield and increases at 5% per year. Theoretically, it will if you have twenty-five years to wait and don't compound the higher dividends in earlier years.
Sanofi-Aventis: Quite Suitable for My Defensive Portfolio [View article]
Indulge me in the luxury of further clarification. To pick one product, Zocor, under patent, was MRK's proprietary product. Once the patent expired, the generic equivalent (simvastatin) became a commodity that could be supplied by any drug company. Then the franchise shifted to the retailers and PBM's. In my businesses career, among the worst things to say was that a product had become commoditized. I thought that my usage was universally understood.
I agree with you on exposure to PIIGS. However, I believe that the stronger economies, only for fear of contagion, will see to it that there is no collapse. Greece is a case that proves that there is a limit to "other people's money" to pay for wasteful spending.
Will High Dividend Stocks Help You Retire Comfortably? [View article]
jstratt:
You are correct. My interpretation of the 4% rule is that the portfolio should yield more than 4% to support withdrawals without having to liquidate holding. Simply put, there are two components. Those that will yield considerably more than 4%. This can be composed of Preferred stocks, MLP's, and telecoms. It would also include bonds although there are some (whose opinions I respect) who would say "no" to bonds. The second component would be stocks with rising dividends. They would provide a two-fold hedge against inflation: rising dividends and rising values. Insofar as specific holdings are concerned, I agree with those you mentioned.
Sanofi-Aventis: Quite Suitable for My Defensive Portfolio [View article]
That's not what I said. There are companies whose brands, rather than the retailers' shelf space, are the franchise. PG and JNJ sell to Wal-Mart. If Tide or Johnson's Baby Shampoo are not on the shelf, the consumer will go elsewhere. Costco tried to muscle KO and KO cut them off.
My point is selling private label merchandise or generic drugs is not profitable. Retailers will shop the company with the lowest prices. This is even the case with second tier brands. They owe it to the retailers and the retailers will stick it to them every time.
If you sold JNJ due to uncertainly about the regulatory environment, why hold MRK? They are far more of a pure-play pharmaceutical giving them far more exposure to the environment.
Thanks for your response. I re-read your article and applied my own methodology to it. I used two hypotheticals.
First, a stock yielding 3% with annual increases of 10%, yielded on cost 9.42% and 10.36% at the end of years thirteen and fourteen, respectively.
Second, a stock yielding 6% with annual increases of 3%, yielded 10.26% at the end of year twelve.
So far, I believe I have come to the same conclusions that you have. However, my point is to take this to the next level, which is the cumulative distribution.
Let's assume two initial investments of $10,000.00. When the first stock has exceeded an annual yield on cost of 10% following the fourteenth year, it will have paid cumulative distributions of $8,392.50. At the end of the fourteenth year, the investment in a stock with a 6% initial yield and annual increases of 3% will have paid distributions of $11,759.18.
I ran the numbers to twenty (20) years. The stock that started at 3% will have a yield on cost of 18.35%, which far exceeds the yield on cost of the stock that started at 6% of only 15.16%. However, the stock with the YOC of 18.35% will have paid out $17,182.50, cumulatively. The stock with the 15.16% YOC after twenty years will have paid cumulative dividends of $19,839.57.
Because I'm curious, I had to see this thru to the end. It would take twenty-five (25) years for the cumulative distributions on the stock with a 3% starting point to pass the cumulative distributions on stock that started at 6%. But, I will add that all of this was with simple interest. Had I used compounding, it would have been more than twenty-five years.
My point is that stocks yielding less than a certain level are not "dividend stocks" as a practical matter for the income-oriented investor who is in or approaching retirement.
Sanofi-Aventis: Quite Suitable for My Defensive Portfolio [View article]
buyitcheap:
I would not buy any pharma on the "strength" of its generic business. I would not invest in any company whose business is selling a commodity product to dominant retailers. There is no opportunity for a company to differentiate itself. The sale is on price only. The retailers and PBM's own the franchise and the manufacturers are franchisees.
Will High Dividend Stocks Help You Retire Comfortably? [View article]
There are risks to your strategy. If you are in a junk bond fund yielding 7%, it must have a portfolio that is riskier than other junk bond funds. I say this as Fidelity's (FAGIX) fund yields 5.43% and, for what it's worth, Morningstar gives the fund four (4) stars.
Those risks include default and interest increases. To get the yield of 7% the fund would need lower credit quality and longer maturities. In a junk bond fund, longer maturities are a double risk as the stability and staying power of the debtors is not there. The risk with a fund is that if circumstances call for redemptions by investors stampeding for the door, those who stay in the fund will absorb the realized losses.
I would not say to avoid junk bonds all together. But to place all reliance or even substantial reliance on the model you present, is reckless.
It all depends on the level of service from a broker. It used to be that, if I held a stock with a DRIP, I would have to enter each re-investment in TurboTax. Now, all information is uploaded from Fidelity to TurboTax.
Will High Dividend Stocks Help You Retire Comfortably? [View article]
notbob:
You're right on both counts. However, I was not the only one to see my dividends on GE, C, and BAC common evaporate. Their preferred stocks, which I own as well, continued to pay distributions.
Security is a concern with bonds. It takes as much research to formulate a strategy and pick bonds as it does stocks. Recently, I purchased a BB+ (technically "junk") issue because I thought it a better risk/reward than most municipals.
My Six Favorite Dividend Stocks [View article]
"Dividends Used To Buy More Stock
"The corporation in which you own stock may have a dividend reinvestment plan. This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. If you are a member of this type of plan and you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income."
Am I missing some other provision in tax law?
Sanofi-Aventis: Quite Suitable for My Defensive Portfolio [View article]
Branded drugs are examples of excellence.
Once patents expire, the product becomes commoditized. Then the only ways to make money are to be the most efficient producer and/or to develop such close relationships with customers. Making pills to go in nondescript bottles is a process easily replicated by many players. For a manufacturer to differentiate itself from its competition is difficult to impossible. Another dimension is that there are only two and a half major drug chains and, I think, only about as many PBM's. Therefore, there is little chance of a manufacturer developing customer intimacy. This is not unique to pharmaceuticals. In most things we buy, there are only two or three retail outlets to choose from. However, this gives all the leverage to the retailers who demand nothing but the lowest prices and for the manufacturer to carry sufficient stock so that the retailer does not have to invest anything in inventory.
What you call a "bloated" structure may not be bloated, but a different model. In drugs, an R&D effort must be sustained. Once a drug has been developed, there must be a marketing effort to convince physicians that the company's drug is what they should prescribe. Companies like MRK and PFE will have higher SG&A than generic companies for legitimate reasons.
Since you introduced computers into the discussion, IBM was the innovator of computer hardware. Other companies made computers that were as good or better. However, computers, in the 1960's and 1970's were complex. IBM's level of support was far superior to that of its competition. They prevailed by combining excellence and customer intimacy. When the PC arrived in the1980's, IBM made the best PC's until Compac made better ones. Then, the product became commoditized. Over a dozen manufacturers emerged. Dell prevailed by supply chain management (operational efficiency) and customer support (intimacy). And I'll leave off here before try to analyze the fall of Dell and the ascendancy of HP.
I would not invest in a PBM as I think they may be subservient to insurance companies. I have not invested in pharmacies although WAG and CVS seem to be well-run machines. They give customers reasons to go to their stores even though every supermarket and mass merchant has a pharmacy counter.
My Six Favorite Dividend Stocks [View article]
You are correct. I believe most participants in this thread are of sufficient years whereby 25 years is more than necessary insofar as assigning a relevant range. Please note that I stated most, not all. I redid my calculations and, to my surprise, the result did not change. It still took twenty-five years for the cumulative dividends on the stock with the lower starting point and higher growth to pass those of the stock with the higher starting yield and lower growth.
What also surprised me was that, after twenty-five years, the stock with the higher growth rate really started to pull ahead. At the same time, a capital project with a life of twenty-five years may be a bit more than what is relevant. Especially one that is as flexible as managing a portfolio of marketable securities.
Besides, at age 64, I am not interested in pursuing a superior strategy where its superiority can only be demonstrated mathematically after twenty-five years of execution.
My Six Favorite Dividend Stocks [View article]
Sanofi-Aventis: Quite Suitable for My Defensive Portfolio [View article]
I agree with you on exposure to PIIGS. However, I believe that the stronger economies, only for fear of contagion, will see to it that there is no collapse. Greece is a case that proves that there is a limit to "other people's money" to pay for wasteful spending.
Will High Dividend Stocks Help You Retire Comfortably? [View article]
You are correct. My interpretation of the 4% rule is that the portfolio should yield more than 4% to support withdrawals without having to liquidate holding. Simply put, there are two components. Those that will yield considerably more than 4%. This can be composed of Preferred stocks, MLP's, and telecoms. It would also include bonds although there are some (whose opinions I respect) who would say "no" to bonds. The second component would be stocks with rising dividends. They would provide a two-fold hedge against inflation: rising dividends and rising values. Insofar as specific holdings are concerned, I agree with those you mentioned.
Sanofi-Aventis: Quite Suitable for My Defensive Portfolio [View article]
Sanofi-Aventis: Quite Suitable for My Defensive Portfolio [View article]
My point is selling private label merchandise or generic drugs is not profitable. Retailers will shop the company with the lowest prices. This is even the case with second tier brands. They owe it to the retailers and the retailers will stick it to them every time.
Long: JNJ, KO, PG
Sanofi-Aventis: Quite Suitable for My Defensive Portfolio [View article]
"...it would seem that the generics have the better angle on this whole sector."
I see nothing wrong with a branded pharma having a generics business. I just would not invest in a company with generics as a principal business.
My Six Favorite Dividend Stocks [View article]
My Six Favorite Dividend Stocks [View article]
Thanks for your response. I re-read your article and applied my own methodology to it. I used two hypotheticals.
First, a stock yielding 3% with annual increases of 10%, yielded on cost 9.42% and 10.36% at the end of years thirteen and fourteen, respectively.
Second, a stock yielding 6% with annual increases of 3%, yielded 10.26% at the end of year twelve.
So far, I believe I have come to the same conclusions that you have. However, my point is to take this to the next level, which is the cumulative distribution.
Let's assume two initial investments of $10,000.00. When the first stock has exceeded an annual yield on cost of 10% following the fourteenth year, it will have paid cumulative distributions of $8,392.50. At the end of the fourteenth year, the investment in a stock with a 6% initial yield and annual increases of 3% will have paid distributions of $11,759.18.
I ran the numbers to twenty (20) years. The stock that started at 3% will have a yield on cost of 18.35%, which far exceeds the yield on cost of the stock that started at 6% of only 15.16%. However, the stock with the YOC of 18.35% will have paid out $17,182.50, cumulatively. The stock with the 15.16% YOC after twenty years will have paid cumulative dividends of $19,839.57.
Because I'm curious, I had to see this thru to the end. It would take twenty-five (25) years for the cumulative distributions on the stock with a 3% starting point to pass the cumulative distributions on stock that started at 6%. But, I will add that all of this was with simple interest. Had I used compounding, it would have been more than twenty-five years.
My point is that stocks yielding less than a certain level are not "dividend stocks" as a practical matter for the income-oriented investor who is in or approaching retirement.
Sanofi-Aventis: Quite Suitable for My Defensive Portfolio [View article]
I would not buy any pharma on the "strength" of its generic business. I would not invest in any company whose business is selling a commodity product to dominant retailers. There is no opportunity for a company to differentiate itself. The sale is on price only. The retailers and PBM's own the franchise and the manufacturers are franchisees.
Will High Dividend Stocks Help You Retire Comfortably? [View article]
Those risks include default and interest increases. To get the yield of 7% the fund would need lower credit quality and longer maturities. In a junk bond fund, longer maturities are a double risk as the stability and staying power of the debtors is not there. The risk with a fund is that if circumstances call for redemptions by investors stampeding for the door, those who stay in the fund will absorb the realized losses.
I would not say to avoid junk bonds all together. But to place all reliance or even substantial reliance on the model you present, is reckless.
My Six Favorite Dividend Stocks [View article]
Will High Dividend Stocks Help You Retire Comfortably? [View article]
You're right on both counts. However, I was not the only one to see my dividends on GE, C, and BAC common evaporate. Their preferred stocks, which I own as well, continued to pay distributions.
Security is a concern with bonds. It takes as much research to formulate a strategy and pick bonds as it does stocks. Recently, I purchased a BB+ (technically "junk") issue because I thought it a better risk/reward than most municipals.