The Sexy World of Dividend Yield Stocks

February 1, 2012

 

Fine, but who's the woman in the back? Is she the Belgian au pair whom Dad will eventually have an affair with?

 

Time to debate the merits of another 2012 investing buzzword. It seems half our personal finance blogger contemporaries are incorporating stocks with high dividend yields into their portfolios. So what’s a dividend yield stock and should I care? Should I be interested? Should I take my money out of T-bills and start investing in dividend yield stocks immediately?

Most blue-chip stocks pay dividends. Yes, you get money just for doing the company the favor of purchasing its stock. If that sounds unduly generous, you’re forgetting that purchasing the stock doesn’t just make you an investor. It makes you an owner of the company. You’re the person in charge, however minimal your particular influence is. En masse, the owners can demand payment – a reward for the company’s success, if you will. Single proprietors and partners enjoy their companies’ profits, so why shouldn’t the person who owns one millionth of Google? Sure, it might make more sense to invest the profits back in the company, but as an investor, that’s not necessarily your concern. Putting money back in the company might, or might not, result in an increased stock price down the road. Paying a dividend will benefit you immediately (or at the end of the quarter, or whenever the company calculates it.)

Dividend yield is just a company’s annual dividend divided by its stock price. A company that pays a quarterly 50¢ dividend and whose stock is trading at $10 has a dividend yield of 20%.

If you think it’s insane to give 20% of the company’s value back to the owners, you’re right. At that rate, assuming static growth, within 5 years the company would evaporate from largesse. As a rule, 3% is considered high.

CPI Corp (NYSE: CPY) (it stands for Consumer Programs Incorporated) is the company that Sears farms out its infamous Portrait Studios to. Walmart, too. If there’s a picture somewhere of you and your siblings smiling awkwardly on a carpeted white stool in front of an anodyne gray background, then there’s a good chance your family has done business with CPI.

You’re not going to believe this, but those department store studios aren’t as successful as they were in the 1980s. Frankly, they were always kind of a holdover from the days of daguerreotypes, back when cameras were luxury items. Today, when any iPhone can capture pictures indistinguishable from the ones Sears Portrait Studio takes with an Olympus E-1, CPI is about to go the way of Borders Books & Music and Solyndra. Which is reflected in the stock price, which fell from $30.48 in December of 2010 to $1.59 today. The company’s market cap is $11.2 million. Just put it out of its misery already.

Yet it still pays a quarterly dividend of 25¢, which means a dividend yield of 63%. Which is like a baseball player with a batting average of .833. Unsustainable. No other company currently has a dividend yield of higher than 20% (That’s American Capital Agency, a real estate investment trust.)

Dividends are a drug, hard for investors to wean themselves off once they’ve become accustomed to a certain dose. A history of quarterly 25¢ payments means that if CPI lowers its dividend, it’ll prompt those few investors who are still around to jump ship and sink the stock price once and for all. The New York Stock Exchange threatened CPI with delisting, unless the price somehow sextuples.
The rationale for buying high dividend yield stocks is that you’ll presumably receive lots of cash per dollar spent on the stock itself. However, it’s easy to forget that just because you can divide one quantity into another, doesn’t mean you should. Look at the opposite situation: if the stock you buy turns out to have a low dividend yield, that means it has a high price, and how is that bad?

Seeing as dividends are cash, that means they derive from cash flow. Which brings us to the least heralded of the major financial statements, the cash flow statement.

Check out total cash flow from operating activities. CPI brought in $39,067,000 via that method last year. And paid out 17% of it as dividends. That’s hardly excessive. Coca-Cola pays out 43%. But it reminds us how stock price – an arbitrary number that represents nothing more than a collective opinion among buyers and sellers in the marketplace – has little to do with the concrete accounting entry that a dividend payment is.

A history of regular dividends is a welcome thing. A history of high dividends relative to stock price means nothing. It can’t mean anything, because a truly high dividend yield can’t last for any length of time.

Update: CPI got sued last week. Class action. The plaintiffs argue that the company was doing worse than management was letting on. CPI had to change the terms under which it borrows money, which means no more dividend, which means its dividend yield has fallen 63 percentage points. Isn’t this fun? 

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Filed Under: Investments, Making Smart Choices, Math Tagged With: , ,

How To Go Broke In Real Estate

January 18, 2012

One month, she tried to pay in canned goods and STDs

 

Every other post, you guys write about making money through real estate. It’s not that simple. 

We never said it was. If your wealth plan consists of nothing more than buying the cheapest house you can find and then placing an ad on Craig’s List for a renter, of course you’re going to fail. Here are some other handy tips to turn passive income into passive outgo:

 

1. Don’t do your homework. 

If you want to become a residential landlord, it takes 5 minutes to determine how much units are going for in your selected neighborhood. And another 4 minutes to see how much competing landlords are charging. Once you do, you can easily calculate cash-on-cash return on your investment (which is your down payment, divided into the rents you receive less the operating expenses and mortgage payment.)

You really do make your money going in, a truism that applies to most investments. Do the prep work before you get started, and you won’t be in the position that so many failed landlords end up in: a couple months later, losing money every month and not understanding why, then running the numbers and realizing that the only way to make cash flow on the property is to charge 3 times market rent. Which no renter will pay, and which you won’t be able to charge until the lease you made the current renter sign expires anyway.

 

2. Maintain a personal relationship with your renters. We know one gregarious, outgoing guy who built his wealth in the glamorous business of hair removal. When the money started coming in, he began buying houses. His pleasant demeanor is killing him as a landlord. He collects the rent personally: that is, when the renters feel like paying. He admits that at least one renter’s kids call him “Uncle Pete”, which means the battle’s already lost. When we asked if he bought the kids Christmas gifts, he laughed but didn’t answer.

How to fix this? Staying detached isn’t that difficult. Friends are friends. Accounts receivable are accounts receivable. There’s no reason why the twain need to meet. Uncle Pete could have saved himself aggravation if he’d hired a property manager.

We can’t say property managers are worth their weight in gold, because many of them are overweight middle-aged ladies who weren’t adept at selling real estate for commission and thus chose to work on what’s essentially salary. But a good property manager will save you myriad headaches.

Property managers usually charge 8-10%. For that they’ll find you a renter, collect the rent, and deal with all the unforeseen problems that come up so you don’t have to (calling someone to fix the dishwasher, et al.) It’s worth their cut just for you to not have to deal with collecting the rent yourself. Not because collecting rent eats up a lot of time, but tracking down even one late tenant will make you appreciate the value of a property manager.

Say a tenant wants to beg you for an extension, or explain to you that he wants the late fee waived because he needed money to buy his daughter a new pair of crutches for her polio. He can’t do so if he doesn’t know how to contact you (or better yet, doesn’t even know your name.) Instead, everything goes through the property manager and it’s not your problem. She’s experienced at this and knows how to keep the relationship purely business. She can be a good cop and shrug her shoulders when the tenant begs for a break; “I really would love to help you, but the landlord’s being obstinate. You’re right, he’s such a jerk.” Or she can be a bad cop and put her foot down. “These are the rules. You’re welcome to leave in the middle of the night and have us hold onto your security deposit, if you’re that kind of person. Did I mention my daughter’s married to a police captain?”

 

3. Don’t do due diligence. 

In the early 21st century, there’s no excuse for not knowing as much as you possibly can about a person who’s in a position to defraud you. Google a potential renter’s phone number, and you might be able to find his long-dormant MySpace page on which his friends have left posts discussing the awesome strain of Panama Red they recently smoked. A simple name search can lead to the endlessly fascinating WhosArrested.com (WARNING: you can spend hours on there.) Confirming that a renter is clean and responsible – or at the very least, isn’t waving any red flags in your face – isn’t that hard to do.

Ultimately, be cold and antiseptic. Remember, it’s business. Save the wimpiness and the malleability for your child-rearing and your other personal relationships. Ruthlessness isn’t a necessary condition for building wealth. But letting yourself be a doormat is a sufficient condition for losing wealth.

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Filed Under: Making Smart Choices, Real Estate, Rental Property Tagged With: , , ,

2011 Man of the Year

January 4, 2012

This photo was taken 146,000 “Yes honey, I was wrong”s ago

 

Every year we choose an honoree who embodies the Control Your Cash principles. For instance, here’s last year’s. The award itself is nothing physical, just a commendation here on CYC. Winning doesn’t even guarantee you notoriety; the 2010 winner appears to have fallen off the face of the Earth. This year’s winner is erstwhile presidential candidate Herman Cain.

This is not an endorsement of his political candidacy. And the preceding sentence doesn’t mean that we reject his candidacy, either. Moot point, anyway. For the record, our guy is Ron Paul, the most principled candidate since Calvin Coolidge. But Paul’s story doesn’t illustrate our point as well as our Man of the Year’s does.

It’s an easy mindset to get into, that building wealth is restricted to the moneyed class, the bluebloods, the politicians and their scions, what the filthy people who appear to have finally removed themselves from Zucotti Park called “the 1%”. No, this is America. Believe it or not, complaining about The Man wasn’t always our national pastime.

We can agree that 130 years ago, being born into a poor family was a far greater obstacle than it is today. Let’s split the difference and look at whether being born into modest circumstances 65 years ago would result in a life of want and need.

Our previous Men of the Year have been relatively obscure; just regular folk who buy assets, sell liabilities, and enjoy the inevitable wealth that accrues. In 2011, class warfare became such an overriding theme of life in America that we had to look for a Man of the Year whose story proves that growing up modestly is neither a necessary nor a sufficient condition for staying that way. There are millions of people like that, but our winner was easy to find biographical information on.

Here’s a man who ran for the office of most powerful person in the world, and whose parents were a housekeeper and a barber/janitor. He grew up black in the 1940s and 1950s in Memphis and Atlanta, which is similar to growing up Jewish in the 2010s in Damascus and Aleppo.

Again, read what his parents did for a living. Their collars were bluer than Lake Tahoe. Young Herman studied hard in school, and applied to the University of Georgia. As a black man. In 1963. You’re not going to believe this, but they didn’t allow him in.

So Herman turned to a life of recreational drug use and folk songs. Just kidding, he attended historically black Morehouse College instead and earned a degree in women’s studies. Alright, more kidding. Women’s studies didn’t exist at the time. Math, on the other hand, did and always will. He majored in that, and followed it up with a master’s in computer science.

This didn’t guarantee him a life of riches, but it helped immensely. It almost certainly guaranteed him a job. Civilian ballistics analyst for the Navy, if that sounds like something worth aspiring to.

From there, you’re probably somewhat familiar with the story. But advancing from computer systems analyst to CEO of a major corporate subsidiary to director (and then chairman) of a regional Federal Reserve Bank was just gravy. What got Herman Cain the Control Your Cash Man of the Year award was his ability to make sound decisions that lesser people just refuse to make.

Yes, he bought some assets and sold some liabilities along the way, financial ones. But he applied the same principles to hugely important non-financial decisions, too. Living the right way (or not living stupidly) is a hell of a lot more crucial than remembering to rebalance your 401(k) with the recommended asset classes. Here’s an example.

Herman Cain’s family creation plan, in chronological order:

  1. Get married
  2. Have one kid
  3. Have another
  4. STOP.

There are some intermediate steps, e.g., look at your net worth and cash flow and determine if you can create another mouth to feed, but what we’ve given you there is the gist of it.

Your average poor person’s family creation plan, also in chronological order:

  1. Get pregnant/impregnate someone.
  2. Weigh having the kid versus sucking it out with a vacuum tube.
  3. Collect welfare either way.
  4. Get pregnant/impregnate someone again, not necessarily the person in Step 1.
  5. Repeat Step 4.
  6. Remain unmarried. Or get married, for no better reason than you’re already in too deep.
  7. Divorce. Somewhere along the way, introduce substances to assuage the self-inflicted pain.

Your average poor person’s education plan has fewer steps than the family creation plan, but they’re just as stupid. And none of them involve the hard sciences.

Public disclosure forms estimate Cain’s wealth at between $2.9 million and $6.6 million. If you grew up miles and decades from the nearest lynching and/or cross-burning, what’s your excuse for your net worth?

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Filed Under: Making Smart Choices, Man of the Year, Math, Role Model Tagged With: , , ,
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