Can Stocks Help Beat Inflation Over The Long Term?

Posted by on

Inflation is an economic concept that drives prices of goods and services up. The increase occurs over time. Even in capitalist economies such as the U.S. prices of goods and services increase year after year contrary to economic principles like supply and demand. Prices are pushed ever higher by companies for a multitude of reasons the most important of which is to make higher profits. Another reason prices rise is because of the existence of cartel-like systems in most industries in the country which allows companies to legally take price increases as high the market can bear. Despite the presence of ant-trust laws on the books, the state allows oligopoly, duopoly and even monopoly to thrive in many industries. As a result while certain things like a burger may be available at a fast-food joint for dirt-cheap price of $0.99 other products such as prescription drugs, automobiles or services like top quality cell phone plans, cable tv,  health insurance, etc.  cost an arm and a leg.

Since inflation erodes the purchasing power of money it is important to invest in assets that produce returns that beats inflation. For example, if the inflation rate is 10% in a country and bank deposits earn 5% and equities return 20% it does not make sense to save in bank deposits since one would actually lose money in terms of purchasing power.

The chart below shows performance of various asset types over the long-term after inflation:

Click to enlarge

Stocks Beat Inflation

Note: Cash Equivalents grew to $1.80 during the period shown.

Source: Equities Help Protect Purchasing Power, Franklin Templeton Investments

Stocks beat all other asset types over the long-term by a wide margin including gold. The U.S. dollar is one of the hard currencies in the world. But it has lost an astonishing 73% of its value from 1978 thru 2012.

The key takeaway from this post is that since investors cannot control inflation, prices of goods and services, money supply, etc. they can focus on things that are under their control like deciding which asset type to invest in for the long-term.

The Top 10 U.S. Companies By Dividends Paid

Posted by on

The U.S. is home to some of the world’s largest and finest companies. For instance, 148 firms in the Fortune Global 500 for 2014 are based in the USA. From technology to entertainment to consumer goods, American multinationals dominate the global marketplace with companies such as Coca Cola(KO), Starbucks(SBUX), McDonald’s(MCD), Pepsi(PEP), Colgate-Palmolive(CL) becoming household names across the world. Despite some failings, American firms continue to lead in innovation relative to their developed world peers in many sectors. With their leadership positions, they are also able to generate huge profits both in the domestic and overseas markets.

From an investment point of view, the U.S. provides a fertile hunting ground for investors looking for growth and income opportunities. Thousands of companies in the small, medium and large-cap categories trade on the exchanges.

Every quarter companies pay billions of dollars in dividends to their shareholders. In fact, according to one study, a record 415 companies in the S&P 500 index currently pay a dividend. Last year, 339 of the S&P 500 companies raised their dividend payments with an average increase of 15%.

The current dividend yield on the S&P 500 is 2.07%. However investors can find plenty of stocks that have dividend yields higher than this. The table below shows the Top 10 Companies by Total Common and Preferred Dividends Paid on a Trailing Twelve  Months basis as of September 15, 2014:

S.No.CompanyTickerSectorDividends Paid in $ Millions (Trailing Twelve Months)Payout Ratio (Annual)Dividend Yield as of Oct 17, 2014
1Exxon Mobil CorporationXOMEnergy$11,218 33.40%3.03%
2Apple Inc.AAPLInformation Technology$11,066 28.70%1.92%
3AT&T Inc.TTelecom Services$9,550 53.40%5.40%
4Microsoft CorporationMSFTInformation Technology$8,879 40.70%2.84%
5General ElectricGEIndustrials$8,298 54.80%3.55%
6Chevron CorporationCVXEnergy$7,732 35.20%3.83%
7Johnson & JohnsonJNJHealth Care$7,569 53.80%2.84%
8Wells Fargo & CompanyWFCFinancials$7,551 29.60%2.88%
9Procter & GamblePGConsumer Staples$6,911 61.00%3.09%
10JPMorgan Chase & Co.JPMFinancials$6,689 33.10%2.85%
S&P 500-$356,487 31.90%

Source: Dividend Quarterly, September 15, 2014, FactSet

Technology hi-flier Apple(AAPL) started paying a dividend just recently in 2012. However the company also spends billions in share buybacks instead of sharing the mountain of cash it holds in the form of dividends to shareholders. Similarly Exxon Mobil(XOM) is also another company that is conservative with its dividend payouts but does not mind spending billions in buying back its own shares. Exxon has spent billions of dollars in the past few years in share buybacks. Income investors can avoid investing for the long-term in Apple and Microsoft since they are still technology companies that depend on growth. Instead Chevron Corporation, Johnson & Johnson, Procter & Gamble and AT&T are better options for the long-term as they offer a decent dividend and steady growth.

Note: Dividend yields noted above are as of Oct 17, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions

Another Take On Why Timing The Market Does Not Work

Posted by on

Investors should invest in stocks for the long-term and not engage in shot-term trading.Long-term is measured in years and can be considered as at least five years. Trying to time the market is not a good idea for the majority of investors. There are not many people in the world who have successfully predicted the future movement of markets. For most retail investors the saying that it is the time in the market and not timing the market that is important still holds true today. Often quoted phrases like “Sell in May and Go Away”, October is the worst month for stocks,  etc. do not mean anything and we should ignore them.

I recently across an interesting article in The Wall Street Journal by Morgan Housel on the mistakes investors make. He discussed the following three mistakes made by investors:

  1. Incorrectly predicting your future emotions.
  2. Failing to realize how common volatility is.
  3. Trying to forecast what stocks will do next.

Click to enlarge

Timing the market chart

Source: Three Mistakes Investors Keep Making Again and Again, The Wall Street Journal, Sept 12, 2014

Other than factors beyond one’s control, it is fear and greed that determine individual investors’ returns.Studies have proven over and over again that mutual fund investors’ return is usually lesser than the fund returns. This is because a fund return is calculated for a specific period from start to end such as a 5-year period but an individual investor’s return is based on when they get in and when they get out.So during the same 5-year period of the fund return an investor can get in and out many times and that will usually have an adverse impact on their returns.

The S&P 500 plunged to below 700 during the global financial crisis of 2008-09. Since then the index has more than doubled and closed at 1,886 on Friday. Those who completely sold out their holdings in early 2009 and moved to cash missed out on the strong rally.

So the main point is keep one’s emotion in check at all times and not let deviate from long-term goals during extreme volatility in markets.

Five large-cap stocks from developed Europe that investors can consider holding for the long-term are listed below for consideration:

1.Company: Total SA (TOT)
Current Dividend Yield: 4.80%
Sector:Oil, Gas & Consumable Fuels
Country: France

2.Company: Anheuser-Busch InBev SA (BUD)
Current Dividend Yield: 1.88%
Sector: Beverages
Country: Belgium

3.Company: Novo Nordisk A/S (NVO)
Current Dividend Yield: 1.87%
Sector: Pharmaceuticals
Country: Denmark

4.Company:BASF SE (BASFY)
Current Dividend Yield: 3.24%
Sector: Chemicals
Country: Germany

5.Company: Novartis AG (NVS)
Current Dividend Yield: 2.05%
Sector: Pharmaceuticals
Country: Switzerland

 Note: Dividend yields noted above are as of Oct 17, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions

Ten Foreign Stocks With No Dividend Withholding Tax To Consider

Posted by on

One of the important factors that U.S. investors investing in foreign stocks have to consider is the withholding tax on dividends levied by the country where the foreign company is based. Governments charge this tax on dividends paid out to foreigners in order to generate additional tax revenues.However there are a few countries which do not levy this tax on US investors. So investors hunting for foreign dividend stocks can consider investing in some of the companies from these countries.

Investing in foreign stocks should not be avoided just because of the dividend withholding tax.This is because generally US investors can recover the dividends they paid to foreign governments in the form of a tax credit when they file their tax returns each year. But this credit is easy to claim only when the amount claimed is under a certain limit such as $600 for joint filers.If an investor paid a much higher amount like for example $10,000 in dividend withholding taxes to foreign governments and wants to apply for credit, then they have to file the complex IRSForm 1116.

The number of countries that have no dividend withholding tax for US investors continues to decline as more and more governments are looking to ding foreigners with this tax. India, Singapore and UK are three countries that do not charge this tax for American investors. Ten ADRs from these three countries are listed below with their current dividend yields. Dividends paid out by only UK corporations have a withholding tax rate of 0% . Dividends paid by UK REITs have a 20% tax.

1.Company: DBS Group Holdings Ltd (DBSDY)
Current Dividend Yield: 4.80%
Sector: Banking
Country: Singapore

2.Company: United Overseas Bank Ltd (UOVEY)
Current Dividend Yield: 1.84%
Sector: Banking
Country: Singapore

3.Company: Singapore Telecom (SGAPY)
Current Dividend Yield: 7.37%
Sector: Telecom
Country: Singapore

4. Company:Keppel Corp (KPELY)
Current Dividend Yield: 4.49%
Sector:  Industrial Conglomerate
Country: Singapore

5.Company: HDFC Bank Ltd (HDB)
Current Dividend Yield: 0.70%
Sector: Banking
Country: India

6.Company: ICICI Bank Ltd(IBN)
Current Dividend Yield: 0.68%
Sector: Banking
Country: India

7.Company:Diageo PLC (DEO)
Current Dividend Yield: 2.99%
Sector: Beverages
Country: UK

8.Company: AstraZeneca PLC (AZN)
Current Dividend Yield: 4.09%
Sector: Pharmaceuticals
Country: UK

9.Company: Vodafone Group PLC (VOD)
Current Dividend Yield: 4.06%
Sector: Wireless Telecom
Country: UK

10.Company: British American Tobacco PLC (BTI)
Current Dividend Yield: 4.34%
Sector:Tobacco
Country: UK

Note: Dividend yields noted above are as of Oct 17, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions

Which Sectors Are Best For Dividends Among U.S. Stocks?

Posted by on

The U.S. equity market is one of the largest and most liquid markets in the world. An investor looking to invest in US stocks is faced with a huge universe of companies trading on many markets with the main exchanges being the NYSE and NASDAQ.  The NYSE is home to 1,519 U.S. companies according to the latest NYSE data and another couple of thousand trade on the NASDAQ.

One way for investors to hunt for dividend stocks is to use the S&P 500 Index which is considered as the barometer of the U.S. economy. The index provides 500 companies from many sectors to choose from. Some sectors are traditionally preferred for dividends over others. For example, income investors go with utility stocks then technology stocks for the obvious reason that utility sector is stable and is known to offer steady dividends and slow growth. On the other hand most companies in the technology sector do not even pay dividends as they focus on growth.

The current yield on the S&P 500 is 2.07%. Investors searching for dividend stocks can consider stocks in the telecom, utility and consumer staples sector.The two charts below from a FactSet research report published last month show that they have higher dividend yields than the S&P 500. The telecom sector has a dividend yield of over 4.0%. The three sectors also have higher payout ratios than that of the S&P 500.

From the report:

Dividend yield is calculated by dividing the trailing twelve-month dividends per share figure by yesterday’s closing price. Ten-year average figures compute the average based on the dividend yield at the quarter-end.

a) Dividend Yield by Sector – Most Recent Quarter

Click to enlarge


 Dividend Yields by S&P 500 Sector

 

b) Dividend Payout Ratio (Earnings based) – Trailing Twelve Months

Dividend Payout Ratio by S&P 500 Sectors

The Top Ten Companies identified in the FactSet report are listed below with their current dividend yields:

1.Company:Transocean Ltd. (RIG)
Current Dividend Yield: 10.42%
Sector:Energy

2.Company:AT&T Inc. (T)
Current Dividend Yield: 5.40%
Sector: Telecom Services

3.Company:TECO Energy, Inc. (TE)
Current Dividend Yield: 4.81%
Sector:Utilities

4.Company:Noble Corporation PLC (NE)
Current Dividend Yield: 7.69%
Sector: Energy

5.Company: Southern Company (SO)
Current Dividend Yield: 4.54%
Sector:Utilities

6.Company:Reynolds American Inc. (RAI)
Current Dividend Yield: 4.50%
Sector:Consumer Staples

7.Company: Philip Morris (PM)
Current Dividend Yield: 4.65%
Sector:Consumer Staples

8.Company:Altria Group, Inc.(MO)
Current Dividend Yield: 4.56%
Sector:Consumer Staples

9.Company: Consolidated Edison, Inc. (ED)
Current Dividend Yield: 4.15%
Sector: Utilities

10.Company: Entergy Corporation (ETR)
Current Dividend Yield: 4.19%
Sector:Utilities

Note: Dividend yields noted above are as of Oct 17, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions

Source: Dividend Quarterly, September 15, 2014, FactSet