I've been investing a lot lately in high divdend yield stocks as money market yields fall and economic uncertainty weighs on growth stocks. I just wanted to point people to one of these with a dividend yield of around 6%. They have a strong track record and seem to be on track to maintain their dividend. I was also suprised to find that they are just up the 15 freeway in Escondido.
Prosper Raises Loan Servicing Fee
Prosper.com raised their loan servicing fee from 0.5% to 1% on loans with credit grades B or lower.
This change by itself has not caused me to reconsider using Prosper.com but doubling the servicing fee has to figure into my ROI calculations for these higher risk borrowers and will certainly tip a lot of borderline loans into my “do not fund” category.
You can see Prosper’s full fee list here.
In investing it is tempting to chase. Chasing is placing an emotional attachment on an investment that is declining in some way.
A recent experience on Prosper reminded me of this principle. A loan for a borrower with C credit came up and I thought the borrowers profile indicated an improving credit situation and the rate was quite attractive. The rate kept going lower and lower. It finally crossed the point at which some of the solid B loans I participated in were closing. It was clear there was some chasing going on in this loan. I know this feeling. When I first came across the loan it was a great deal with a lot o promise. I have a feeling a lot of people saw that and kept chasing the opportunity long after it stopped being a good opportunity.
The same thing happens in the stock market. We discover a great stock. We invest and feel great, but then something goes wrong. It could be anything: A change in the market, bad management, a butterfly in Japan flapping its wings. The story is different. Our original thinking is no longer valid. Unfortunately the stock is from $70 to $50 and it is such a great deal. Don’t do it. If the story has changed for the worse move on.
You want to put your money in good stories, not continue to invest more and more money I bad stories. Don’t chase.
I dipped my toes into the stock market many years ago. I took the amount of money I set aside and dumped one fifth of it into each of the five stocks I picked. It was a lot of money for me. The next day the stocks were all down. Way down.
This bugged me. A lot.
Over the year as commissions have become smaller I’ve found a method for investing (and selling) that is much more satisfying to me psychologically.
Say I pick a stock that I think I want to have about $2000 dollars worth of in my portfolio. Instead of hitting the buy button and typing in $2000. I might only buy $500-$700 at first. If it tanks the next day and my belief remains the same I call it a super-duper sale and add on some more. If it goes up dramatically over the next 3 months maybe I end up selling for a profit instead of buying more.
This is not a continuous investment strategy as I don’t aim to buy into a stock over a long period of time, but instead be more comfortable that random events will have a little less impact on me.
A few things to take note of:
- Don’t overdo this. Commissions can eat you alive. I target commissions totaling less than 1% of my investment, although I make exceptions up to 2%.
- Some argue that because the market mostly goes up this is approach leaves gains on the table. I have to say I don’t see a clear cut way to prove or disprove this point. I will say that this technique is about making me a happier investor, and for me it works.
Good luck! -Scott
If you watch your mutual funds closely this time of year you might end up with a sinking feeling in your stomach. You might see your mutual funds share price drop precipitously. Last week I had one hit me with a 15% drop.
Why do mutual funds do this? The tax man makes them. The fund has to make distributions to account for the capital gains and dividend income it receives. As with most things governmental it is far from fair. If you buy a fund and it has a distribution the next day you get to pay the tax bill for the last year.
Before you buy a mutual fund check with the fund or your broker on when the distribution date is. If it is within the next month or two consider waiting until after the distribution to invest.
Of course if you do all of this in your tax deferred accounts it will not make a bit of difference.
REIT is an acronym for real estate investments trusts. A REIT is a lot like a mutual fund of real estate. They come in all varieties. Some invest in commercial property, some in residential property, others in malls or even timber lands.
But why would you do this rather than just go buy real estate yourself?
REIT Characteristics
REITs are liquid. If you buy a REIT today it is likely much easier to sell than a house or office building. In this respect they are very much like mutual funds.
REITS are divided into manageable chunks. REITs are sliced into small pieces just like companies and mutual funds allowing everyone to buy a little slice of property. This is great since not everyone can pop for the loan on a ten million dollar property.
REITs are internally diversified. A REIT typically owns more properties than most individual investors could manage.
A REIT does not require you to be a property manager.
REITs are generally big and can take advantage of economies of scale on administrative and maintenance expenses.
Direct Investing Characteristics
Typically more tax advantaged since you don’t have to takes gains every year as REITs force you to do.
Direct investing allows you to directly contribute to your investment and create value with your hard work or creativity.
Direct investing can leverage your personal vision or knowledge to make uncover a pearl of an opportunity. If you think a revitalization project will result in a big increase in property values in a neighborhood it is unlikely that a REIT will help you take advantage of that.
This just scratches the surface of the options available to you. If you want to know more go to your broker’s site or money.msn.com to read the prospectus from a REIT or two.
Dividend yield is a simple way to measure dividends of different priced stocks on a level playing field.
The dividend of a stock is the cash that a company pays its shareholders (maybe you!). Dividends have no guarantee behind them; they can be raised, lowered or eliminated.
The dividend yield is one year of dividends divided by the stock price. This gives us a percentage that allows us to compare the dividends of two differently priced stocks. It is very similar to the rate of return you’d get on a savings account.
For a real world example Wells Fargo(WFC) closed at $35.57. It has dividends over the last 12 months were $1.12 per share. When we divide 1.12 by 35.57 we get 3.15%. Figuring the dividend yield is that easy. Most investing sites will calculate this for you, but it is important to understand what it means.
The dividend yields gives us a rough estimate of what amount of cash we would expect the company to pay us per dollar that we invest.
Dividends can be a very powerful and steady contribution to your overall portfolio performance. More details on this will follow.
Index funds are a valuable tool but they are not the be all, end all of investing. People like them for the low fees. Low fees are great. People enjoy the ease that they bring to investing. I like easy. People point out that many mutual funds don’t perform as well as the many index products (while charging fees). This is both true and shameful.
You should look at any investment by its returns less fees. If an investment has higher total returns that is a good indicator that it is a better investment (even this is not universal, you also need to factor in risk among other things).
Here is an example.
The Vanguard 500 fund (VFINX) is an S&P 500 index fund. It has pretty much matched the S&P with an 11.72% annualized return over the last three years. It has a 0.18% annual fee.
The Janus Contrarian fund (JSVAX) is a large cap fund that is managed. Its annual fee is 0.96%. It has an impressive 22.11% annual return.
As you can see over this time frame the Janus fund wallops the Vanguard fund with returns net of fees 21.15% versus 11.54%.
I don’t own either fund and I’m not recommending either of them. I would say you can clearly achieve better returns than an index fund.
I wish you great returns!