Income Investing with Dividends

April 26, 2008

At the upcoming Federal Open Market Committee meeting on April 29, the Fed is expected to cut its federal funds rate by another quarter point, to 2%. These days, I can’t even find any 6-month CDs that yield more than 3.5%. In such unyielding times, a safe place to park extra cash may be in dividend-paying stocks.

The basics of dividends were explained in a previous entry. It is not always easy to discern between a risky stock that boasts a high dividend just to attract investors and stock in a company that can genuinely has free cash flow to pay back to investors. Furthermore, decent dividend-paying stocks tend to be larger-cap companies that probably won’t be seeing explosive growth, but pay off in the longer term.

Here are some of my personal picks for attractive dividends, intrinsic value, and stability.

  1. Linear Technology (LLTC)
  2. Southern Copper (PCU)
  3. Alliance Resource Partners, LP (ARLP)
  4. DPL Inc. (DPL)
  5. Diamond Offshore Drilling (DO) – Just declared a special dividend for shareholders as of May 2; I wouldn’t rely on them in the long term.

Dividend reinvestment plans (DRIPs) are offered by companies as a way for shareholders to reinvest their dividends and directly purchase more shares with no commission cost. It is a good way to let a retirement account run on auto-pilot, but discount brokers charge so little for commission these days that if you are an active trader, it may better to direct the dividend investment yourself.


Financial Knowledge

April 24, 2008

A couple weekends ago, the NPR radio program Marketplace had a segment about a financial quiz the Fed gave to high school students to test their financial knowledge. They didn’t discuss the statistics of the results, but rather they wanted to see how their own staff fared considering the focus of the program is on financial literacy. So, how would you do on a quiz of basic financial knowledge the Fed feels is important?

Taken from the Marketplace website, here’s the quiz. You can navigate there to find the answers.

Personal Financial Literacy Quiz:

1. Inflation can cause difficulty in many ways. Which group would have the greatest problem during periods of high inflation that last several years?
a.) Older, working couples saving for retirement.
b.) Older people living on fixed retirement income.
c.) Young couples with no children who both work.
d.) Young working couples with children.

2. Which of the following is true about sales taxes?
a.) The national sales tax percentage rate is 6%.
b.) The federal government will deduct it from your paycheck.
c.) You don’t have to pay the tax if your income is very low.
d.) It makes things more expensive for you to buy.

3. Rebecca has saved $12,000 for her college expenses by working part-time. Her plan is to start college next year and she needs all of the money she saved. Which of the following is the safest place for her college money?
a.) Locked in her closet at home.
b.) Stocks.
c.) Corporate bonds.
d.) A bank savings account.

4. Which of the following types of investment would best protect the purchasing power of a family’s savings in the event of a sudden increase in inflation?
a.) A 10-year bond issued by a corporation.
b.) A certificate of deposit at a bank.
c.) A twenty-five year corporate bond.
d.) A house financed with a fixed-rate mortgage.

5. Under which of the following circumstances would it be financially beneficial to you to borrow money to buy something now and repay it with future income?
a.) When you need to buy a car to get a much better paying job.
b.) When you really need a week vacation.
c.) When some clothes you like go on sale.
d.) When the interest on the loan is greater than the interest you get on your savings.

6. Which of the following statements best describes your right to check your credit history for accuracy?
a.) Your credit record can be checked once a year for free.
.) You cannot see your credit record.
c.) All credit records are the property of the U.S. Government and access is only available to the FBI and Lenders.
d.) You can only check your record for free if you are turned down for credit based on a credit report.

7. Your take home pay from your job is less than the total amount you earn. Which of the following best describes what is taken out of your total pay?
a.) Social security and Medicare contributions.
b.) Federal income tax, property tax, and Medicare and social security contributions.
c.) Federal income tax, social security and Medicare contributions.
d.) Federal income tax, sales tax, and social security contribution.

8. Retirement income paid by a company is called:
a.) 401 (k).
b.) Pension.
c.) Rents and profits.
d.) Social Security.

9. Many people put aside money to take care of unexpected expenses. If Juan and Elva have money put aside for emergencies, in which of the following forms would it be of LEAST benefit to them if they needed it right away?
a.) Invested in a down payment on the house.
b.) Checking account.
c.) Stocks.
d.) Savings account.

10. David just found a job with a take-home pay of $2,000 per month. He must pay $900 for rent and $150 for groceries each month. He also spends $250 per month on transportation. If he budgets $100 each month for clothing, $200 for restaurants and $250 for everything else, how long will it take him to accumulate savings of $600.
a.) 3 months.
b.) 4 months.
c.) 1 month.
d.) 2 months.

11. Sara and Joshua just had a baby. They received money as baby gifts and want to put it away for the baby’s education. Which of the following tends to have the highest growth over periods of time as long as 18 years?
a.) A checking account.
b.) Stocks.
c.) A U.S. Govt. savings bond.
d.) A savings account.

12. Barbara has just applied for a credit card. She is an 18-year-old high school graduate with few valuable possessions and no credit history. If Barbara is granted a credit card, which of the following is the most likely way that the credit card company will reduce ITS risk?
a.) It will make Barbara’s parents pledge their home to repay Karen’s credit card debt.
b.) It will require Barbara to have both parents co-sign for the card.
c.) It will charge Barbara twice the finance charge rate it charges older cardholders.
d.) It will start Barbara out with a small line of credit to see how she handles the account.

13. Chelsea worked her way through college earning $15,000 per year. After graduation, her first job pays $30,000. The total dollar amount Chelsea will have to pay in Federal Income taxes in her new job will:
a.) Double, at least, from when she was in college.
b.) Go up a little from when she was in college.
c.) Stay the same as when she was in college.
d.) Be lower than when she was in college.

14. Which of the following best describes the primary sources of income for most people age 20-35?
a.) Dividends and interest.
b.) Salaries, wages, tips.
c.) Profits from business.
d.) Rents.

15. If you are behind on your debt payments and go to a responsible credit counseling service such as the Consumer Credit Counseling Services, what help can they give you?
a.) They can cancel and cut up all of your credit cards without your permission.
b.) They can get the federal government to apply your income taxes to pay off your debts.
c.) They can work with those who loaned you money to set up a payment schedule that you can meet.
d.) They can force those who loaned you money to forgive all your debts.

16. Rob and Mary are the same age. At age 25 Mary began saving $2,000 a year while Rob saved nothing. At age 50, Rob realized that he needed money for retirement and started saving $4,000 per year while Mary kept saving her $2,000. Now they are both 75 years old. Who has the most money in his or her retirement account?
a.) They would each have the same amount because they put away exactly the same
b.) Rob, because he saved more each year
c.) Mary, because she has put away more money
d.) Mary, because her money has grown for a longer time at compound interest.

17. Many young people receive health insurance benefits through their parents. Which of the following statements is true about health insurance coverage?
a.) You are covered by your parents’ insurance until you marry, regardless of your age.
b.) If your parents become unemployed, your insurance coverage may stop, regardless of your age.
c.) Young people don’t need health insurance because they are so healthy.
d.) You continue to be covered by your parents’ insurance as long as you live at home, regardless of your age.

18. Don and Bill work together in the finance department of the same company and earn the same pay. Bill spends his free time taking work-related classes to improve his computer skills; while Don spends his free time socializing with friends and working out at a fitness center. After five years, what is likely to be true?
a.) Don will make more because he is more social.
b.) Don will make more because Bill is likely to be laid off.
c.) Bill will make more money because he is more valuable to his company.
d.) Don and Bill will continue to make the same money.

19. If your credit card is stolen and the thief runs up a total debt of $1,000, but you notify the issuer of the card as soon as you discover it is missing, what is the maximum amount that you can be forced to pay according to Federal law?
a.) $500
b.) $1000
c.) Nothing.
d.) $50

20. Which of the following statements is NOT correct about most ATM (Automated Teller Machine.) cards?
a.) You can generally get cash 24 hours-a-day.
b.) You can generally obtain information concerning your bank balance at an ATM machine.
c.) You can get cash anywhere in the world with no fee.
d.) You must have a bank account to have an ATM Card.

21. Matt has a good job on the production line of a factory in his home town. During the past year or two, the state in which Matt lives has been raising taxes on its businesses to the point where they are much higher than in neighboring states. What effect is this likely to have on Matt’s job?
a.) Higher business taxes will cause more businesses to move into Matt’s state, raising wages.
b.) Higher business taxes can’t have any effect on Matt’s job.
c.) Matt’s company may consider moving to a lower-tax state, threatening Matt’s job.
d.) He is likely to get a large raise to offset the effect of higher taxes.

22. If you have caused an accident, which type of automobile insurance would cover damage to your own car?
a.) Comprehensive.
b.) Liability.
c.) Term.
d.) Collision.

23. Scott and Eric are young men. Each has a good credit history. They work at the same company and make approximately the same salary. Scott has borrowed $6,000 to take a foreign vacation. Eric has borrowed $6,000 to buy a car. Who is likely to pay the lowest finance charge?
a.) Eric will pay less because the car is collateral for the loan.
b.) They will both pay the same because the rate is set by law.
c.) Scott will pay less because people who travel overseas are better risks.
d.) They will both pay the same because they have almost identical financial backgrounds.

24. If you went to college and earned a four-year degree, how much more money could you expect to earn than if you only had a high school diploma?
a.) About 10 times as much.
b.) No more; I would make about the same either way.
c.) A little more; about 20% more.
d.) A lot more; about 70% more.

25. Many savings programs are protected by the Federal government against loss. Which of the following is not?
a.) A U.S. Savings Bond.
b.) A certificate of deposit at the bank.
c.) A bond issued by one of the 50 States.
d.) A U. S. Treasury Bond.

26. If each of the following persons had the same amount of take home pay, who would need the greatest amount of life insurance?
a.) An elderly retired man, with a wife who is also retired.
b.) A young married man without children.
c.) A young single woman with two young children.
d.) A young single woman without children.

27. Which of the following instruments is NOT typically associated with spending?
a.) Debit card.
b.) Certificate of deposit.
c.) Cash.
d.) Credit card.

28. Which of the following credit card users is likely to pay the GREATEST dollar amount in finance charges per year, if they all charge the same amount per year on their cards?
a.) Jessica, who pays at least the minimum amount each month and more, when she has the money.
b.) Vera, who generally pays off her credit card in full but, occasionally, will pay the minimum when she is short of cash
c.) Megan, who always pays off her credit card bill in full shortly after she receives it
d.) Erin, who only pays the minimum amount each month.

29. Which of the following statements is true?
a.) Banks and other lenders share the credit history of their borrowers with each other and are likely to know of any loan payments that you have missed.
b.) People have so many loans it is very unlikely that one bank will know your history with another bank
c.) Your bad loan payment record with one bank will not be considered if you apply to another bank for a loan.
d.) If you missed a payment more than 2 years ago, it cannot be considered in a loan decision.

30. Dan must borrow $12,000 to complete his college education. Which of the following would NOT be likely to reduce the finance charge rate?
a.) If he went to a state college rather than a private college.
b.) If his parents cosigned the loan.
c.) If his parents took out an additional mortgage on their house for the loan.
d.) If the loan was insured by the Federal Government.

31. If you had a savings account at a bank, which of the following would be correct concerning the interest that you would earn on this account?
a.) Earnings from savings account interest may not be taxed.
b.) Income tax may be charged on the interest if your income is high enough.
c.) Sales tax may be charged on the interest that you earn.
d.) You cannot earn interest until you pass your 18th birthday.


Small Cap Talk: Flowtek Industries

April 22, 2008

I usually don’t dwell much into small cap company investments, but one exception is Flowtek Industries (FTK). Flowtek is a supplier of drilling products to the energy and mining sector. Their core business revenue comes from specialty chemicals that they sell to the oil services industry. These specialty chemicals help soften up the hard layers in the earth that prevent oil and gas companies from extracting the most amount of oil out of each oil well. Some of their big name customers include Schlumberger (SLB) and Haliburton (HAL), who uses Flowtek’s drilling products.

The reason for their dropoff from a high attained in October of $55/share to their current valuation of around $17/share is due to two straight quarters of missing analyst expectations. They missed expectations by $0.02 last quarter and $0.05 the previous quarter. Four analyst currently expect a $0.32 per share earnings during their next earnings release and a 39% increase in revenues in the same quarter from the previous year.

With oil prices at an all time high, Flowtek is poised to be able to rebound in the next half a year and should show some promising results as their specialty chemicals are their bread and butter product.

Notable Signs of Rebounding

  • 2 analysts have initiated this stock as a buy in the last 2 months
  • 3 straight years of increasing operating cash flow (note this company has been around since 1983)

What May Keep it Down

  • they have missed earnings two quarters in a row and being a small cap company, may take longer to recover toward beating estimates
  • any negative news hurts small cap companies much more than larger companies

All in all, I believe a lot of downside has been factored in and it’s a good opportunity to make 20-30% easily (especially at entry levels below $15). I have made 30% on Flowtek in the last month and so can you! I currently don’t own shares in Flowtek.


What happened to General Electric?

April 12, 2008

Yesterday, GE’s (GE) shares fell nearly 13% after CEO Jeffrey Immelt announced that quarterly earnings fell for the first time in five years. Even though Immelt had confirmed a positive earnings forecast for 2008 just in December, he blamed the lower earnings report yesterday on the credit market collapse.

The earnings report came as a shock, as GE had been reputable for consistently following its estimates.

What is GE?

GE consists of six divisions: GE Infrastructure, GE Industrial, GE Commercial Financial Services, NBC Universal, GE Healthcare, and GE Consumer Finance. The infrastructure division is the area where GE sees the greatest demand, consisting of energy, oil, rail, gas, and water.

Over half of GE’s revenue is derived from its financial services, which explains the dependence of their earnings on the credit market. Last quarter, the company was forced to write down the value of loans and Chinese securities it held, and was unable to follow through with the planned sale of its US credit card and Japanese consumer finance divisions.

However, the financial services division is not the only area with problems. The industrial division, which accounts for about 10% of overall revenue, also reported a 16% drop in first-quarter profit, which the company blamed on slowing consumer spending and a drop in housing starts in the US.

The only divisions to actually report profit growth were NBC Universal, whose profit rose 3%, and the energy-producing infrastructure division, whose profit rose 17%.

GE, the market barometer

Because GE is such a diversified industrial manufacturer, its performance is often viewed as an indicator of the state of the general economy. The DOW fell 2% Friday following GE’s lead.

Earnings season is just beginning. GE’s poor performance is likely just a preview of many disappointing reports ahead. Many corporations, like GE, delivered optimistic forecasts for 2008 late last year without realizing just how significant an impact the current economic weakness will have on all sectors.

Despite yesterday’s beatdown, GE has a strong track record of weathering decades of fluctuating economic conditions. GE CFO Keith Sherni has already reported that GE will lighten up on US exposure, heading back on track to sell its US private label credit card business. The drop in share price was mostly a shock response, and probably far harsher than deserved.

If GE continues to strengthen its infrastructure division and take advantage of growing worldwide demand for energy, it should soon be back on track to the consistent growth rate it has been known for.


Blockbuster Losing Fight with Netflix

April 10, 2008

Blockbuster (BBI) has been getting crushed and dominated by Netflix (NFLX). In the last year alone, Blockbuster is down over 50% while Netflix has risen 47%. They both offer movie subscriptions at just about the same but their stocks are heading in different directions. At last count, Netflix held a lead with a bit over 8 million total subscribers to Blockbuster online’s 3 million total subscribers. If you think Blockbuster is oversold and deserves to be bought at the current $3.25 value, then think again because Blockbuster is just trying to stay afloat.

They even came out with their Total Access program that allows users to rent movies online and bring them into stores to exchange for a free rental. On paper, the Total Access program sounds like a really good idea but when factoring the costs to keep the Blockbuster stores open and that people are just using Blockbuster stores as exchange locations rather than a place to pay for movie rentals, this seems like a losing formula for Blockbuster.

Signs that Blockbuster won’t keep up with Netflix:

  1. I tried out their Total Access a couple years ago, got a free month trial and canceled shortly thereafter because Netflix had superior shipping times to my location and had more availability of movies. Just recently I received an e-mail from Blockbuster asking me to rejoin the Total Access program (one movie at a time) and I would receive one month free of charge. If Blockbuster is trying to attract new customers and bring back old customers by offering them free movies, something must be going sour.
  2. A local Blockbuster just recently shut down and was situated next to Bristol Farms, Baskin Robbins, a US post office, and luxury apartments that houses many young professionals and UCSD students. The location is not a terrible location and has plenty of foot traffic that goes through, but when you can’t sell a product, you have to shut down regardless of the territory.
  3. With a slowing economy and higher gas prices, customers will be less willing to drive far distances (remember you have to drive to get the movie and then return it) to exchange a movie at Blockbuster. Cutbacks will also need to be made in people’s spending habits, and if people don’t care about the Total Access program, their 1, 2, and 3 movie at a time plans are identical in price to Netflix.
  4. Netflix has a library of over 90,000 movie titles and claims that 95% of their subscribers are in locations that are able to receive movies within one business day.
  5. I remember just a couple years ago when I had the Total Access program, I had to return new releases within 2 days, but now they’re allowing new releases to go 5 days. Blockbuster doesn’t even have leverage on new releases anymore.

Don’t even try to get onto the Blockbuster ship because it’s not currently sinking, it has already sunk.


Cashing in on the Digital TV switchover

April 6, 2008

For more information visit www.dtv.gov.

If you haven’t been watching TV, you may not know about the digital TV switchover. If you have been watching TV, you may still not know what the digital switch over is or why it is important. On February 19, 2009 TV stations will longer broadcast analog TV, which people have been using these last decades. All the TV stations will switch to digital broadcasting.

The previous standard NTSC is capable of 1525 lines at 29.97 frames per second, while the new standard, ATSC is capable of up to 1080 lines at 60 frames per second. This means the pictures are more detailed with more fluid motion. Also, the information is digitally encoded, so you’re either going to see a clear picture or no picture at all if you can’t get a signal. Fortunately this means that most of us will get a clear picture. I have personally bought a TV converter box and it is definitely an improvement. You may also ask why 29.97 frames per second. The answer is because they didn’t know about color when they made the standard. Television has been long overdue for an update.

Where do I get a digital converter box?

You can get a digital converter box for your old TV at any electronics store, but you should take advantage of a government program that provides $40 vouchers for converter boxes. I was surprised when the BestBuy (BBY) employee there asked me where I got my coupon. She asked for the website, but I did not know it off hand. My receipt however had the website printed on it. You can get up to 2 coupons per household at www.dtv2009.gov. The converter box I purchased was $60, so it was $20 + tax out of pocket expense.

What is spectrum?

Electromagnetic waves come in many frequencies ranging from gamma rays to radio waves with visible light (red, orange, yellow, green, blue, indigo, violet aka ROYGBIV) sitting in the middle. The government regulates and licenses certain ranges of frequencies, so you don’t have different people interfering with each other. Since the analog television frequency band is no longer in use, the government auctioned it off with Verizon Wireless (VZ) and AT&T (T) among the winning bidders. One use of the extra bandwidth is to provide more wireless data services, which has also garnered the interest of Google (GOOG). This will advance the trend of mobile devices using more data services like the iPhone from Apple (AAPL).

How do I invest in the digital TV switchover?

Instead of buying a converter box, a significant amount of people will finally make the switch by buying a new HDTV. Television manufacturers are sure to sell many new televisions in the near future. A quick look at BestBuy and you’ll see television sets from Sony (SNE), Samsung (005930.KS, 005935.KS), Sharp (SHCAY.PK), LG (LPL), Insignia and others. All of these different HDTVs share some common components such as the digital TV tuner and decoder chips from Microtune (TUNE), Texas Instruments (TXN), Maxim Integrated (MXIM.PK) and Analog (ADI). Looking at a technological standpoint, Texas Instruments also provides its DLP technology in affordable rear projection screens and high end digital projectors.

There are many ways to invest in the digital television switchover, but it is hard to see who will come out ahead since there are so many players in the game


Tax Preparation Software

April 2, 2008

Why should one use a tax preparation software?

People can make minor math errors that may cost them money on a return or cause a visit by the IRS. The tax software automatically does all the calculations if you input the correct values. Not only are calculations done for you, you can also easily update your tax return if you find out you have an extra deduction without going through all the drudgery of recalculating due to the changes. The number one reason I like to do my taxes with a software program is liability. If I do everything in my power to do my taxes correctly and the software makes an error, the liability is less on me and more on the software program. If millions of people are also affect by errors in the software program, then they cannot all be at fault. Tax preparation software also checks for red flags that might bring an IRS visit.

Is doing taxes on my computer safe?

The information is transmitted to the IRS electronic through e-filing. This information is protected by encryption. No information is 100% safe forever. Information is only safe for a period of time. The only unbreakable encryption is single photon quantum cryptography used by banks. Unless someone builds a quantum computer, your information will be safe for millions and millions of years. You’re more likely to have your information compromised at the starting and ending points than during transit. If a person steals your computer, then you can possibily lose your tax return. At the IRS, your tax return is going to wind up on a computer anyway, since they have to calculate your taxes and check it for discrepancies. You’re more likely to have your information spread around by the IRS losing a hard drive in the mail than through the tax preparation software. You can use tax preparation software with confidence.

What are the software options?

The federal government provides freefile for those with incomes less than $54,000 in 2007. If your income is greater there are many commercial options. The most popular ones are TaxAct, TaxCut and TurboTax from Intuit (INTU). For each of these three, you can fill out your information on their website or download a program to use on your computer. If you download the program, make sure to keep it updated with the latest software patches. My favorite is TaxAct, because it is free for federal taxes. They make their money on the deluxe version of their federal and state taxes.

What about state taxes?

Tax preparation software also do state taxes for an extra fee. California has a free CalFile service if your tax return is simple.

What if I need help?

The tax preparation companies provide phone support if you pay for their services.

What are my options if I don’t want to use software?

If your income is less than $40,000, elderly, don’t speak English well or are part of military, you can get assistance on your taxes from volunteers. See more information HERE.