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I come up with a 42% return, or 8% per year compounded. Still, not bad at all, especially considering the market's return during that time. Now, if you just knew to pick KO before the fact. (Sound familiar? )
Well, you can't just assume that the other 19 will be a wash. If smallcaps had gone up during that period, you'd have to assume there'd be a net gain. Or perhaps the person is an exceptional stock-picker. Also, it's silly to compare investing in a basket of smallcaps to investing in ONE large, dividend-paying stock that happened to do well, just as it's silly to compare investing in a homerun-hitting HANS to a basket of dividend-paying largecaps. The logical way to do it is to compare group vs. group. Turns out that both groups were down over this period--but smallcaps (at least as represented by IWM) outperformed large dividend-payers (DVY) by about 20%.
At the end of 2004, the choice would be between Hansen, a relatively unknown stock pick, and Coca-Cola. Was Coca-Cola an unknown at that time? I don't think so. If KO had been paying uninterrupted dividends since 1893 and had 42 years of continuous dividend increases, it was considered a good dividend player at the end of 2004. In fact, I think that KO was quite on the radar of many people and has been for many years. But you are correct in saying that its stock price has not grown that fast over the past decades. KO has been a Dow 30 component since 1987 so it has been one of the most-followed companies.
I could have picked several other well-known dividend payers instead of Coca-Cola. Here is a list of companies that I invested in 3-4 years ago, and their annual dividend growth rate:
Now, I did not cherry-pick from my portfolio, but included studs (KMB, PG, JNJ, MSFT) and duds (MRK, PCL). Still, MRK and PCL give decent dividend yields relative to bank accounts and bonds, and have the benefit of price appreciation.
Altria (MO) is hard to calculate because I bought 60 shares for almost $4,000 in May 2005. Those 60 shares of MO got me 44 shares of Kraft (KFT) and 67 shares of Philip Morris Int'l (PM) in their spin-offs in 2007 and 2008, respectively. All three have very good dividend yields, and increase them each year. In fact, MO has been the #1 stock to have owned over the past ~100 years (Jeremy Siegel, The Future for Investors). It is said that Ben Bernanke holds only MO shares in his retirement portfolio.
But your point about small-cap stocks beating out large-caps in price appreciation is spot on. The problem is knowing which of the small caps will do well, and which will flounder. Thus, most smart investment advisors recommend using mutual funds or ETFs to hold a basket of small caps. Also, I am not into price appreciation as much as I am dividend growth rate, since I do not plan on trying to sell high, just hold for the dividend income.
Last edited by Teak; 06-29-2009 at 07:46 PM..
Reason: addition
Here's an interesting application of our discussion. Just got back from lunch where I heard a hot stock tip about a company called SolarWinds Inc. (SWI). (Network management software, NOT alternative energy.) They just had their IPO in May at $12.50 and the closing price on Monday was $15.50. Let's see, there has been about six weeks since the IPO, so that represents a total gain of 24%, and annualised at 545%. Wow.
Not much is known about this company. Reuters Research has an Outperform on it, but Standard & Poor's, Argus, Ned Davis, Credit Suisse, and Charles Schwab have no rating on it yet. I haven't gotten any Motley Fool come-ons for this company yet, so it is fairly UNknown.
So, what does a new investor do, today? What if we take our newbie, say that he (or she) has $10,000, and he wants to buy in and forget about his stocks for a while?
Does he put all $10,000 into SWI? It could be the next Hansen (HANS). I mean, who wouldn't want to see 550,000% return?
Personally, I wouldn't touch SWI right now. P/E of 41 + no dividend payment = too risky for my middle-aged status. If my son were interested (22), I would suggest putting in something like $500-1,000 and see what happens over the next five years. It is only earning $0.38 a share right now. That would have to improve dramatically.
Or, does he put it into a Dow component stock, such as KO or MSFT, which have proven track records of paying, and increasing, dividends?
Or does he put it into an ETF or mutual fund that has a basket of small-cap stocks? Or large-cap stocks?
This is the essential gist of our advice to the newbie. What to do? Only hindsight will tell us if SWI becomes the next HANS, or not. Probably not.
Last edited by Teak; 06-30-2009 at 12:38 AM..
Reason: addition
Obviously a new investor shouldn't stick all his dough into one speculative stock. And, IMO, he shouldn't stick it all into one large dividend-payer either, particularly if he's young. I think ETFs are a good option for MANY investors, not just newbies. With $10k, how 'bout half in a smallcap ETF (for growth) and half in a "dividend achiever"-type ETF (for relative stability)? Or maybe split it up into thirds and put some into foreign too?
Here's an interesting application of our discussion. Just got back from lunch where I heard a hot stock tip about a company called SolarWinds Inc. (SWI). (Network management software, NOT alternative energy.) They just had their IPO in May at $12.50 and the closing price on Monday was $15.50. Let's see, there has been about six weeks since the IPO, so that represents a total gain of 24%, and annualised at 545%. Wow.
Not much is known about this company. Reuters Research has an Outperform on it, but Standard & Poor's, Argus, Ned Davis, Credit Suisse, and Charles Schwab have no rating on it yet. I haven't gotten any Motley Fool come-ons for this company yet, so it is fairly UNknown.
So, what does a new investor do, today? What if we take our newbie, say that he (or she) has $10,000, and he wants to buy in and forget about his stocks for a while?
Does he put all $10,000 into SWI? It could be the next Hansen (HANS). I mean, who wouldn't want to see 550,000% return?
Personally, I wouldn't touch SWI right now. P/E of 41 + no dividend payment = too risky for my middle-aged status. If my son were interested (22), I would suggest putting in something like $500-1,000 and see what happens over the next five years. It is only earning $0.38 a share right now. That would have to improve dramatically.
Or, does he put it into a Dow component stock, such as KO or MSFT, which have proven track records of paying, and increasing, dividends?
Or does he put it into an ETF or mutual fund that has a basket of small-cap stocks? Or large-cap stocks?
This is the essential gist of our advice to the newbie. What to do? Only hindsight will tell us if SWI becomes the next HANS, or not. Probably not.
Unless you get in at the IPO you are just chasing a price with no guarantees. The price will eventually settle. An investor though would watch, track and analyze the company over time. Some, if not most IPO's fizzle out. The good run for profit comes at IPO. This company has a name grabber which, given the cap & trade bill is up for a vote, sounds enticing to many.."gotta get in on the ground floor" so called investors.
For me, I'm on the sidelines right now..cash, MM and CD's. Don't care about "making money" more than I care about "keeping my money".
That said though I'm following a few stocks. I thought more gov't money would go into rail but it hasn't (CSX).
Food is always needed but do I want the big multinational conglomerates ? No.following Smuckers (SJM).
Healthcare is a hot topic. Actually bought some BAX at $48 and following JNJ.
Commodities - especially ag related. Again, I think food will always be needed, even in bad times.
But I'm not a commodity investor so I look at Index Funds (DBC and MOO)
I'm going to irritate the dividend-lovers here and say that dividends are over-rated, IMO. The receiving, reinvesting and compounding of dividends themselves doesn't actually make you any richer than stock splits do. It's the compounding of DOLLARS, not shares, that creates wealth. And the fact is, when dividends are paid, you lose the same amount in the share price, meaning the end result is a wash. What matters is TOTAL RETURN, whether that return is in the form of dividends or price appreciation or both. Larger, established companies that pay dividends generally have less potential for growth than smaller, non-dividend-paying companies.
Let's look at a dividend stock mentioned above, Coca-Cola. If you had invested $10,000 in KO 10 years ago, you'd have about $9,600 now. Yep, you'd have less than you started with, even with all those years of wonderful reinvested dividends. Now that's an investment to get excited about, huh? OTOH, if you had invested $10,000 in a small, up-and-coming beverage company like Hansen, you'd currently be sitting on $550,000. And you probably wouldn't be TOO upset about the fact that you didn't receive even one dividend during that time.
Sure, that's just one example, and there are dividend stocks that have outperformed growth stocks, yada, yada, yada. I actually have nothing against dividend stocks--they serve a purpose and there are some legitimate reasons for investing in them. But I cringe when I hear the dividend-lovers talk like dividends are all that matter. The goal (for most investors) should be making money, not collecting dividends, and the two don't necessarily go hand-in-hand.
Thank you mate. I mean if you want a fixed income investment you have bonds for that. But anyway at this stage in time high dividend stocks will be more attractive since earnings will not be looking good for a long time. But you know in my books normally I try to find stock with a good balance between retained earnings and dividend yields. I do not believe in high dividend. You must retain a portion of earnings in order to have larger capital for high turn over, unless a company does not seek growth. When I buy a security or invest in a company, I invest in a stock or company whose income will rapidly rise in the future, hence I may be prepared to have little income now, but it is the future income and its rate of growth that decides how valuable the stock is.
Hi. I'm new to this whole investing thing, I'm thinking of going to a full-service broker soon and investing in my first portfolio with stocks/mutual funds. I'm just wondering, what is the minimum amount of money required to open a portfolio?
I have a portfolio with old mutual, I ve had it for years now. 80% of my capital guaranteed by them. You can also have 100% of your capital guaranteed. But obviously the high the guarantee the lower the risk and that means the lower the returns. They manage everything, I do not even know what stocks they buy. They invest my money in an investment fund. So there's an option for you. But I just like everyone here would recommend that you learn the basics in investing. That is how scams like madof have their way into billions of american dollars. I recommend mutual funds, and even better etf's, due to low cost and I love the undivided interest. But please please please deal with a well known investment institution.
Obviously a new investor shouldn't stick all his dough into one speculative stock. And, IMO, he shouldn't stick it all into one large dividend-payer either, particularly if he's young. I think ETFs are a good option for MANY investors, not just newbies. With $10k, how 'bout half in a smallcap ETF (for growth) and half in a "dividend achiever"-type ETF (for relative stability)? Or maybe split it up into thirds and put some into foreign too?
Sounds good to me. Advice depends upon the age of the investor. For foreign exposure, ETFs (e.g., EWZ) and closed-end mutual funds (e.g., IFN) work quite well and they have distribution yield like dividends. Rep it up.
Unless you get in at the IPO you are just chasing a price with no guarantees. The price will eventually settle. An investor though would watch, track and analyze the company over time. Some, if not most IPO's fizzle out. The good run for profit comes at IPO. This company has a name grabber which, given the cap & trade bill is up for a vote, sounds enticing to many.."gotta get in on the ground floor" so called investors.
Where you really make the money is getting in before the IPO as a private placement. I did one buying the shares at 25c each. However, it is very high risk and the possibility of losing all your equity is very high.
Still, imagine buying the shares at 25c and the IPO happening at $12.50
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