In a previous post about dividend reinvestment plans (DRIPs)
, I noted that my investing career started a little more than a decade ago. At that time, I invested in companies that I knew and with which I was a customer. Over time, I expanded my horizons and bought stock in companies with which I had no relation. Whether it’s luck, insight, or a combination of both, those purchases have helped me beat the S&P 500 over that period. However, I’ve made my investment and financial decisions without a strategy, without a financial plan. So my new year’s financial revolution (sorry, I couldn’t resist) is to develop a comprehensive financial plan.
Over the next several weeks, I’ll discuss the process outlined below and the tools I create for the plan.Step 1: Get organizedStep 2: Assess the situationStep 3: Set goals and objectives
Step 4: Develop a plan
Step 5: Implement the plan
Step 6: Assess and improve
Please feel free to share your thoughts as I go along.
For the past few years my wallet has been home to an American Express Blue Cash card (and a lot of lint.) I try to use the card whenever possible to take advantage of the 1.5% rebate (5% on everyday purchases including gas and groceries.) While I've had good luck with the card, some of my largest purchases have been at suppliers that don't take AmEx. As the commercial says, "you can get enough saddle sores to last a lifetime at Pink Flamingo Dude Ranch, but bring your visa card because they don't accept American Express."
I decided to compare cash back credit cards to see if there is a Visa or MC that offers a better return. I've compared eight cards and the winner is... [drumroll] ... American Express Blue Cash. Capital One No Hassle and Citi Dividend Platinum Select come in a far second.
Before I display the results, a few assumptions:
- Monthly spending equals $2,000 per month
- 25% of purchases are "everyday purchase" (e.g., gas, groceries, drug store items)
- No purchases are at warehouse clubs (these sometimes pay a lower rebate)
- Balances are paid in full at the end of each billing cycle (i.e., no interest charges)
- The card must not have an annual fee
|American Express Blue Cash Card||$456.25|
|Citi Dividend Platinum Select Card||$300.00|
|Capital One No Hassle Card||$300.00|
|MBNA Cash Back Platinum Plus MasterCard||$240.00|
|National City Cash Builder Elite Visa||$230.00|
|US Bank Cash Rewards Platinum Visa||$225.00|
|Discover Platinum Card||$221.25|
|CIBC Dividend Card||$221.25|
To be fair, Discover pays a 5% rebate on purchases from select merchants and they will double the value of a rebate if you accept a gift card from a partner merchant (e.g., FTD.com, Hyatt, Blockbuster) instead of a check. Since I don't frequent any of the 5% merchants listed for January to March, I assumed all purchases on Discover received only 1% cash back.
If you have a card that offers a bonus for "everyday" purchases, My Money Blog has an good tip for maximizing rebates:
Many supermarkets and drugstores (like Safeway) sell gift cards to stores like Starbucks, Home Depot, Barnes & Noble, Old Navy, Circuit City, you name it. Buy a gift card at a grocery store with this card, and boom! 5% cash back.
If you want to compare the cards for yourself, download my credit card comparison spreadsheet. Just plug in your total monthly charges and the percent of those charges that are "everyday" purchases and you'll see which card is the best deal for you.
I usually shy away from making predictions, but I'm going to put one forward for the new year... I'll get more junk mail, and so will you. Did you order that nice cashmere sweater for Mom from LL Bean
? Well both you and Mom will soon receive the next LL Bean catalog. How about that fruit basket you received from Harry and David
. Long after the fruit is gone, you'll receive the H&D catalog.
Assuming you don't want the catalogs, what's a person to do? While I usually call the customer service number printed on the catalog and ask to have my name removed from their mailing list, Robert Beken of San Diego provides an interesting alternative: After employees at a computer store assured him the store wouldn't use or sell his personal information for advertising, Beken wrote the following short contract on the back of his check:
Computer City agrees NOT to place Robert Beken on any mailing list or send him any advertisements or mailings. Computer City agrees that a breach of this agreement by Computer City will damage Robert Beken and that these damages may be pursued in court. Further, that these damages for the first breach are $1,000. The deposit of this check for payment is agreement with these terms and conditions.
Not long after the store cashed his check, Beken received several advertisements from the store. He wrote complaint letters that went unanswered so he took the store to court. A Small Claims Court judge agreed that the check was a contract and awarded Beken $1,000 plus court costs of $21.
Now if only I could figure out how to do this with my credit card...Additional Resources:
highlights ten tips
to keep track of your investments. Here are some of the more useful tips:
- Read and keep all documents that you receive from your broker, mutual fund or investment adviser.
- Keep good notes of communications with your broker or adviser.
- Get all confirmations and account statements sent directly to you. If you don't get account statements or confirmations, follow up.
- Conduct independent research on your investments.
- Periodically review your portfolio and rebalance.
They all seem like good common sense actions to take.
The US Census Bureau recently released the Statistical Abstract of the United States - 2006. The book provides a wealth of information about our lifestyles. The numbers can provide some possible ideas for investing. Here are a few interesting tidbits, but I leave the relevance to your portfolio for you to decide:
- In 2004, almost 698 million passengers boarded planes in the U.S., up from 666 million in 2000. While there were more passengers, revenue per passenger mile declined from 13.5 cents in 2000 to 11.7 cents in 2004.
- By 2003, Americans doubled their consumption of broccoli from 1980 levels.
- 36% of American households have at least one dog, 32% have at least one cat. Higher income households have more cats and dogs than the average, but fewer birds than the average (4.2% vs. 4.6%).
- American households spent a yearly average of $40,820 - $13,430 for housing, $7,780 for transportation, $5,340 for food, and $391 for alcohol.
- Participation in almost every recreational sport declined, but attendance at sporting events increased.
- Nearly 30 million people said they worked out at a health club.
- 30% of Americans bought artwork in 2003 (perhaps it's time to replace my velvet Elvis.)
The abstract provides an interesting glimpse into American life. Now I just have to find that next trend that will make me rich...
This weeks carnivals are out. My very first post - my experience with dividend reinvestment plans
- is mentioned in this week's Carnival of the Capitalists
hosted by Multiple Mentality
. The recent post about creative accounting
is highlighted in this week's Carnival of Investing
hosted by All Things Financial
. And finally, my post about companies going private
is featured in this week's Carnival of Personal Finance
hosted by Mighty Bargain Hunter
Thanks for all the encouragement. Please feel free to leave comments.
In the last five years we've seen several instances of
creative accounting - Enron, WorldCom, Tyco, Fannie Mae, Global Crossing, Adelphia, and the list goes on. I was fortunate to have either passed on or sold stock in Enron and Tyco before their implosion. I was not, however, so lucky with Fannie Mae. The signs of trouble brewing were there, but I and many others chose to ignore them. There are, however, some simple things investors can look for that might indicate financial shenanigans.
The first alert is a decoupling of cash flow from operations
and net income
. Charting cash flow from operations (found on the statement of cash flows) and net income (found on the income statement) over several periods can help identify the relationship between the two values. If the two track nicely for several periods but then cash flow from operations starts a downward trend while net income grows at a healthy rate, it might be a sign to head for the exit. This might happen because of operational deterioration - receivables are being paid more slowly or inventory is being sold at reduced prices. Another possibility is that a company is recording expenses as assets (e.g., advertising costs to build a brand.)
The second sign is excessive or out-of-the-ordinary related-party transactions
. There is a section in the proxy statement (or footnotes to annual statements) where companies list these transactions. If there are a number of transactions with executives and/or their families, it might indicate some serious conflicts of interest or even ways to conceal profits or losses. In a research paper
on these transactions, Mark Kohlbeck and Brian Mayhew of UW-Madison found that "[Related-party] transactions provide a more liquid source of compensation... and may make it easier for the CEO and directors to engage in transactions that favor themselves individually rather than benefiting the firm." Sarbanes-Oxley has banned the use of some more egregious transactions, but a RateFinancials study
indicates that related-party transactions are still common.
The third sign is declines in balance-sheet ratios including total-asset turnover
, inventory turnover
, and accounts receivable turnover
. If a company tinkers with the income statement, they often add things to the balance sheet to hide them. If these numbers are decreasing (i.e., fewer turns per year), it may be a sign that the books are being cooked.
The fourth sign - heavy insider selling - has less to do with accounting and more to do with greed. While insiders may have legitimate reasons to sell unrelated to the performance of the company (think buying that villa in Tuscany
), it could be a sign of rough seas ahead. Insider selling alone may not be a reason "pull the trigger", but it should prompt an investor to dig deeper to see if there's other troubling information. You can find insider sale information from the stock quotes on Yahoo!
Any one of the four signs above may happen for a number of legitimate reasons, but they could be an indicator that the company is the next Enron. Therefore, if a company exhibits one or more of these signs it may be time to dig deeper before investing in the company.Additional Resources:
While we're on the subject of taxes, Branden at Blueprint for Financial Security
has a good explanation of selling losing stocks to offset winners
IRS Publication 526
provides an explanation of when you can deduct various charitable contributions:
You can deduct your contributions only in the year you actually make them in cash or other property (or in a succeeding carryover year). This applies whether you use the cash or an accrual method of accounting.
Checks. A check that you mail to a charity is considered delivered on the date you mail it.
Credit card. Contributions charged on your bank credit card are deductible in the year you make the charge.
Pay-by-phone account. If you use a pay-by-phone account, the date you make a contribution is the date the financial institution pays the amount. This date should be shown on the statement the financial institution sends to you.
Stock certificate. The gift to a charity of a properly endorsed stock certificate is completed on the date of mailing or other delivery to the charity or to the charity's agent. However, if you give a stock certificate to your agent or to the issuing corporation for transfer to the name of the charity, your gift is not completed until the date the stock is transferred on the books of the corporation.
Promissory note. If you issue and deliver a promissory note to a charitable organization as a contribution, it is not a contribution until you make the note payments.
Option. If you grant an option to buy real property at a bargain price to a charitable organization, you cannot take a deduction until the organization exercises the option.
Borrowed funds. If you make a contribution with borrowed funds, you can deduct the contribution in the year you make it, regardless of when you repay the loan.
Conditional gift. If your contribution is a conditional gift that depends on a future act or event that may not take place, you cannot take a deduction. But if there is only a negligible chance that the act or event will not take place, you can take a deduction.
About this time every year, the personal finance magazines provide a number of tips on how to reduce your taxes. One of the tips that is often mentioned is donating appreciated assets. Basically, it works like this:
You bought 100 shares of ABC Corp in 2004 for $15 each ($1,500). The stock is now at $20 ($2,000). If you were planning to make a contribution to a charity, you can simply transfer some or all of the shares to the charity and, if you transferred all shares, take a $2,000 deduction without paying capital gains taxes.
While this is a great way to help out a charity, the magazines fail to tell you that this only applies to long-term capital gains. According to IRS Publication 526
, any appreciated assets held less than a year are valued at the cost basis (i.e., you can't deduct the appreciation of the asset.)
While this is a useful strategy to help charities do their work and for you to cut your taxes, please be sure you understand the rules before making this move for tax reasons.
For some useful year-end tax tips:
Mutual funds are big business! E*Trade offers almost 6,000 different funds to its customers, Ameritrade more than 11,000. This leads to a logical question: with so many mutual funds to choose from, am I better off with a mutual fund or a portfolio of individual stocks? Unfortunately, there is no easy answer to that question. The answer will depend on a number of factors, including:
- Time Commitment: It takes time to research stocks and build a well-diversified portfolio. If you buy a mutual fund, you are paying the fund managers to do the work for you.
- Funds Available: Most mutual funds can be purchased with a small nest egg - about $1,000. Even with a brokerage like ShareBuilder ($4 commissions), it would be difficult and expensive to build a portfolio for $1,000.
- Moral Convictions: There are a growing number of boutique funds that cater to different beliefs, including religion, environmental protection, and/or labor relations. In general, however, funds are still very broad and may hold investments that you don't want to own.
Let's start by exploring some of the benefits of owning mutual funds:
- Mutual funds offer greater diversification than the average investor can manage. Most mutual funds own fifty or more different securities. This helps reduce the risk of loss because the portfolio is not dependent on the performance of one to ten stocks. On the other hand, this level of diversification also reduces the opportunity for big gains (see the first benefit under stocks.)
- Funds provide a cheap and easy method for reinvesting dividends. Note that some brokerages offer free dividend reinvestment plans for individual stocks.
- When you buy a fund you are hiring a professional to manage your money. That professional is (presumably) monitoring the economy and the markets to adjust the fund's holdings appropriately.
Now let's explore some of the benefits of owning individual stocks:
- Stocks offer more potential profit (and loss). It's essentially the opposite of the diversification issue: If you own just one stock and it doubles, you are up 100%. If a mutual fund owns 50 stocks equally and one doubles, it is up 2%.
- Stocks don't charge a management fee every year. Mutual funds often charge between 1% and 3% per year and some even have a purchase fee (load).
- You can buy and sell when you want and manage your tax liability. Mutual funds may sell shares throughout the year and you pay taxes on the capital gains whether you see the cash distribution or not.
- You can write options on your stocks.
- You can structure your portfolio differently from any existing mutual fund portfolio.
- You can buy smaller cap stocks which aren't suitable for mutual funds to invest in (including going private transactions.)
In the end, the answer is probably not one or the other. Most investors may find it useful to own both mutual funds and individual stocks. For example, I own bond funds because I don't want to buy and manage individual bonds. For stocks outside of my 401k, I built my own portfolio.
My advice: If you're starting out and have a small amount of money to invest, buy a good Index fund. As you build up more money, if you have the time and interest, invest those funds in individual stocks. You could also consider some of the excellent dividend reinvestment plans, or DRIPs, available directly through companies (see The Power of a DRIP.) These programs often require small initial investments and your dividends are automatically reinvested.
I'm an Excel fanatic and alway appreciate finding interesting and useful spreadsheets. Professor Damodaran
of NYU provides a wealth of information and tools for financial analysis. I particularly appreciate the spreadsheets
section where Dr. D includes several spreadsheets to calculate a company's value.
As my father used to say, "If it's free, I'll take three!"Categories: [Deals & Offers] [Investing] [Miscellaneous]
In 2002, following the Enron and WorldCom accounting scandals, Congress passed the Sarbanes-Oxley Act to renew investor confidence by improving corporate disclosure and financial reporting. One consequence of the Act was that some small companies found the added burden greater than the benefits of being a publicly-traded company. Thanks to the 1934 Securities Act, these companies can avoid the reporting requirements by "going private
In order to go private, a company must reduce the number of shareholders to fewer than 300. This can be done through a tender offer to buy shares, a merger or a reverse stock split - creating 1 new share for every X old shares while paying off owners of fractional shares. These transactions offer small investors a good opportunity to boost returns.
I've done several of these transactions over the past year:
- Brookstone - bought 200 shares at $19.15, received $20.00 (reduced from original offer of $20.50) in 11 weeks (4.4% return less commission)
- Color Imaging - bought 1,200 shares at $0.90, received $1.10 in 4 weeks (22.2% return less commission)
- Community Investor Bancorp - bought 250 shares at $14.00, received $15.00 and $0.095 dividend in 10 weeks (7.8% return less commission)
- Home Loan Financial Corp - bought 599 shares at $19.00, received $20.75 in 11 weeks (9.2% return less commission)
My newest transaction is Collins Industries (COLL). I purchased 250 shares at $6.20. If the going private transaction goes through, I should receive $7.70 per share (24.2% return less commission.) [Update: The Collins transaction is now complete. See Update on Going Private Transaction.]
Each of these deals has provided attractive returns considering the short-term nature of the investment, but there aren't many that generate more than $350. Bill Mann from the Motley Fool had this to say about these transactions:
Now, $350 is not retirement money... Scoring $350 by simply reading The Wall Street Journal (where I find many of the "going private" announcements) and then taking a position in a company and filling out some paperwork doesn't seem too onerous to me.
There are a few reasons why this works. These are tiny companies, and they don't get much attention, even as they make their denouement from the ranks of public companies. Big funds are not going to bother, nor are institutions, for a few hundred bucks. And when the going private transaction is announced, it creates its own selling pressure. Imagine [a shareholder who owns 1,000 shares in a company doing a 1:600 reverse stock split.] She may not be that excited to own a non-public, non-reporting company, so what's she going to do? Sell at least 401 shares, that's what.
There are, of course, some caveats with these transactions:
- Many of the stocks have low daily volumes and wide spreads - the ideal situation to set a limit price.
- These transactions are best implemented in a tax-advantage account (IRAs, CESAs) that has low commissions.
- On occassion these transactions will be cancelled (and the stock price generally falls following the announcement.)
- Some transactions are based on stockholders of record (most shares in a brokerage account are in street name.) Therefore, it's important to read the fine print in the filings with the SEC.
Tracking down these deals is simple but time consuming. Every company that plans to conduct a going private transaction must first file a SC 13e3 from with the SEC. Recent filings can be found on the SEC site. Alternatively, George at Fat Pitch Financials has a list of current going private transactions ($5/month or $50/year for access).
has a post about an IRS phishing scheme
in which a person/group from Italy sends a convincing-looking email alerting you to a new on-line service from the IRS to track the status of your tax refund. The problem of course is that it's a fake! If you go to the fake web site you are asked to provide your name, social security number and credit card info.
As FCN points out, the timing seems a bit strange, but I'm sure this email will be quite common in April and May '06.
Take some time and learn how to limit your risk of identity theft:
While you're at it, why don't you protect your postal carrier's back, save some trees and reduce your risk of identity theft by asking the credit reporting companies to stop selling your name and the Direct Marketing Association to take your name off the junkmail lists.Categories: [Miscellaneous]
A little over a decade ago I made my first foray into investing in individual stocks. Those first investments were made through dividend reinvestment plans (DRIPs). A number of companies offer these plans to their shareholders. As the name implies, dividends paid by the company are automatically reinvested in more shares of the company's stock. Some companies even provide a discount on the new shares.
Many of the plans also offer investors the opportunity to purchase additional shares directly at no-cost or for minimal fees. This was the perfect tool for my entry into the investor class. It allowed me to put an extra $100 a month into the stocks, much like I did with my mutual funds.
After reading Peter Lynch's One Up on Wall Street, I decided to follow his instructions and focus on what I knew. In 1995 with $2,000 in my pocket, I purchased stock in Home Depot (HD) and my local gas company - Piedmont Natural Gas (PNY) - through their DRIPs. Both turned out to be very good investment not only because of price appreciation, but also because of the DRIP. Take PNY as an example: not only did the stock pay a 9% dividend at the time I purchased it, PNY offered a 5% discount on all shares purchased with reinvested dividends! An investment of $1,000 in PNY's DRIP in January 1996 would be worth $6,793 today, nearly $1,800 more than if dividends were not reinvested (see table.)
The non-DRIP results don't include the potential return from the dividends, but the table offers a sense of the power of DRIPs.
There is another benefit of this approach: the reinvested dividends buy more shares that then earn dividends. That initial $1,000 investment would now generate $253 in dividends a year (vs. $144 w/out reinvestment.)
Home Depot on the other hand had only a 0.5% yield. As a result, $1,000 invested in HD's DRIP in January 1996 would now be worth $4,508, only $62 more than if if dividends were not reinvested in the stock.
The lesson I learned is that DRIPs, especially those from companies that pay a decent dividend, are a great way to get started investing in individual companies. As an added bonus, it's a great way to save on brokerage fees if you invest a relatively small amount on a regular basis.
A couple years after making those first investments (and landing a job!), I graduated to a full-fledged brokerage account and forgot about the power of DRIPs. Recently, however, I noticed that my brokerage will automatically reinvest dividends in any common stock at no cost. I called the next morning and enrolled. Now I just need to wait for the next dividend season!
Categories: [Dividends] [Investing]