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The ABCs Of Dividend Investing: Part I

Posted September 2, 2013 at 10:00 am

By Greg Donaldson

To many people, we are known as “The Dividend Guys.” To those who know us best, we’re known as the “Rising Dividend Guys.” We were given those nicknames because we have been running our Rising Dividend strategy for nearly 20 years and now have nearly $600 million invested almost exclusively in dividend-paying stocks.

The world, economy, and securities markets have seen a lot of changes over the past 20 years. We imagine some folks are wondering why we haven’t changed our strategy along with them. They may wonder if we are a “one trick pony”.

We’ll get back to that question in Part II of this article. For now, it might be helpful to recount how we became the Rising Dividend Guys in the first place.

Our “Eureka Moment”

When we first began investing in dividend-paying companies, it was not because we understood the value of dividends. At the time, we employed a pure earnings-growth investment strategy and paid almost no attention to dividends.

We became dividend investors because after the stock market crash of 1987, one of our clients added substantial new assets to his accounts with the stipulation that we invest the money only in dividend-paying stocks.

The client had been with us for many years and was one of our biggest supporters. However, up to that point our work for him had been almost exclusively in municipal bonds.

Those were the days of double-digit interest rates in all types of bonds, and many of our clients had a greater percentage of their assets in bonds than stocks. In addition, dividend yields, while much higher than today, were still lower than most bond yields; thus, dividend-paying stocks were not in high demand and received little attention in the media.

The client gave us the statement from the brokerage firm that held the assets he was transferring and asked that we study the holdings and make recommendations for changes. He admitted that he did not think the portfolio had done very well over the last five years, and that was one of the reasons he was transferring it to us.

Although we didn’t know it at the time, studying the holdings in that portfolio would change the way we understood investing forever. At first glance, the portfolios looked like they held a bunch of dogs: slow growth or no growth companies. The portfolio was full of utility, energy, and basic industry stocks whose prices had moved up only modestly over the preceding five years compared to the major stock market indices.

As we studied the portfolio, we experienced what we have described over the years as a eureka moment. While the price appreciation for most of the stocks in the portfolio had performed poorly versus the S&P 500, 22 of the 25 stocks in the portfolio had equaled or outperformed the overall market when we added the dividends that each company paid.

The only reason we even saw the total returns for the stocks was because we were using the Value Line Investment Survey to research the companies, and the total return for each stock was prominently displayed in the data.

Normally, we focused primarily on past and future earnings growth when researching companies, and compared the predicted 3-5 year earnings growth to the price-to-earnings ratio to offer a kind of valuation metric.

“Son, Never Invest In A Stock That Doesn’t Pay A Dividend”

ABCs of Dividend Investing

Seeing that company after company in this portfolio of high-dividend yielding, slow growth companies had equaled or outperformed the Dow Jones Industrial Average (DJIA) on a total return basis was not only surprising; it was also arresting. It made us stop in our tracks and try to understand how this phenomenon could have happened, and we be unaware of it.

After several days of research, we found that dividend yields of both the utilities and the energy stocks were highly correlated (nearly 90% in some cases) with long-term interest rates. Since interest rates had fallen sharply over the previous five years, almost all of the stocks in these two sectors had risen in price by approximately the amount of the fall in rates plus one other important consideration.

The second consideration was that most of the companies in the portfolio had raised their dividends nearly every year. On average, the combination of these two factors had caused the price of the Dow Jones Utility Average (DJUA) to rise by about 7.5% annually from November 1982 through November 1987. Excluding dividends, this did not compare well with the 11.7% annual price appreciation of the DJIA during that time.

The shortfall disappeared; however, when we added the dividends. The average dividend yield of the DJIA for the period was near five percent, while the average yield of the DJUA was near nine percent. Including dividends, the DJIA had produced a total return of just over 16.7% compared to the DJUA’s 16.5%. It took several days for us to get our heads around the fact that the slow-poke utilities had performed as well as the faster growing industrials in one of the strongest performing five-year periods in stock market history.

Continue reading The ABCs of Dividend Investing…


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You Need to Be in Front of This Trend

Posted August 28, 2013 at 10:00 am

By Simon Black

One of the really great things about being in Italy is that this whole country serves as a constant reminder that wealth and power in the world are constantly shifting.

Two thousand years ago, Italy (Rome specifically) was the pinnacle of civilization, at the forefront of medicine, art, technology, commerce, and military tactics.

You can still see so much of this today; Italy is full of monuments and ancient public works that are still in amazing condition to this day. They put so much care and attention into their craftsmanship, they clearly designed to very high standards and built everything to last.

Everything, of course, except for their political and economic system.

In its later Empire years, totalitarian control of everything– the military, finances, money supply, commercial code, etc. fell to a very tiny elite… in most cases, one man.

And as one Emperor after another bankrupted the treasury through foreign wars, palatial opulence, and unaffordable social welfare programs, Rome gradually changed for the worse.

Desperate to keep the party going, later Emperors debased the currency to the point of hyperinflation. They imposed wage and price controls under penalty of death. They raised taxes so punitively that people simply quit working altogether.

With each successive emperor, Romans would foolishly believe that the ‘new guy will be different’ and that things would improve. Of course, apart from the occasional sage, Rome’s political leadership became more destructive.

By the time foreign barbarians began invading Italian territory, Roman citizens were so fed up that many of them welcomed the marauding hordes with open arms.

What was left of Rome officially fell in 476. But by that time, wealth and power had already shifted.

For more than 1,000 years, other kingdoms and empires assumed the role of the world’s economic and political superpower– from China’s Tang Dynasty to the Mongolians to the Ottoman Empire.

Eventually, though, wealth and power shifted back West… to Italy once again. Venice flourished and became the leading power center in Europe.

Its recipe for success was quite simple: at a time when the vast majority of human beings barely eked out an existence under the feudal system, Venice enshrined economic freedom.

In Venice, people who were born with absolutely nothing could become fabulously wealthy with enough hard work, risk taking, and a little bit of luck.

It sounds a bit like the American Dream… nearly 1,000 years ago.

Continue reading…


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The Benefits of Delaying Social Security

Posted August 26, 2013 at 10:00 am

By Paul Novell

Everyone knows that delaying the starting age of social security increases your benefits. Its right there in your social security statement.

But most people don’t know how big an impact delaying social security can have when looked at in terms of investment returns. If retirees knew how big an impact delaying social security can make they might make different decisions.

I’ll use my situation as an example. I’ve found that the percentage changes are approximately the same for everyone I’ve looked at, mainly family members.

The table below shows the difference in my and my wife’s social security benefits at the age of 62, 67 (our full retirement age), and 70 years old. I’ve adjusted the benefits to $1 for privacy reasons – the percentage change is what matters here.

These numbers we calculated from our actual social security benefit statements. Benefit statements are accessible on-line now.

Delaying Social Security

If we take social security at the first chance we get, 62, we each get $1 in benefits. If we wait until our full retirement age of 67 the $1 in benefits increases to $1.42, and increase of 42%.

If we wait an additional three years to age 70, the age of maximum benefits, the $1.42 in benefits becomes $1.76, and increase of 24%. If you look at delaying social security as a type of investment those incremental benefits are your return for waiting.

Translated into annual returns your looking at returns of about 7.3% for every year you wait. Even more important, those returns are real returns, i.e. after inflation. And guaranteed.

Where can you get 7.3% real returns at that level of safety anywhere?

Continue reading…


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Increasing the Odds of Success With Quantitative Investing

Posted August 13, 2013 at 8:00 am

By Paul Novell

Time for part 3 of my Quantitative Investing posts. Please refer to  the introduction post and the getting started post. In this post I want to discuss portfolio monitoring rules and how to increase the odds of success with quant strategies.

First, lets talk about portfolio monitoring rules. The quant strategies I discuss involve investing in a portfolio of usually 25 (max 50) individual stocks on an equal weight basis and holding for a year. A common question is, ‘do I hold for a year no matter what?’. No there are some basic rules. These rules are for risk reduction, thereby working to increase your odds of success with these strategies. After all significant events can take place to individual names during your one year holding period. Here are the rules from What Works on Wall Street (my go to quant reference). Page 56 if you have the book.

  1. If the company fails to verify its numbers as required by Sarbanes-Oxley, we replace the stock in the portfolio. (basically, you’re looking for an accounting scandal, failure to file, etc..)
  2. If a company is charged with fraud by the federal government, we replace the stock in the portfolio.
  3. If a company restates its numbers, such that it would not have qualified at the time of purchase, we replace the stock. (easier than it sounds – you just need to keep an excel spreadsheet of your results)
  4. If a company received a takeover offer from a third party, we replace the stock if the price of the stock moves within 95% of the offer price. (this happened to me this year. OMX received a buy out offer from Staples)
  5. If  a company drops by 50% from the point of purchase and is in the bottom 10% of all stocks for the previous 12 months of price performance, replace the stock. (this acts like a maximum stop loss. For example, with a 25 stock portfolio this would limit the loss to 1% of the total portfolio)
  6. If a stock from a dividend strategy cuts its dividend by 50% or more it is replaced in the portfolio.

That’s it. You don’t make trades otherwise during the 12 month holding period. Note that these rules are meant to reduce the risk from investing in individual names. They do nothing to protect from general market declines.

Continue reading about increasing your odds of success with quantitative investing…


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Can making financial mistakes be deadly?

Posted August 8, 2013 at 11:26 am

By David Lewis

The Unexpected Consequences of Making Financial Mistakes

OK, so it’s no big revelation that you’re not a perfect person. You make mistakes. So do I. Here’s the rub: for every financial mistake we make, there are some really nasty potential consequences.

Let me give you an example: most people believe that senior citizens are among the most savvy and financially intelligent people in civilization. They’re not working anymore, they live on a fixed income, and they absolutely must make that money last. They have no real options for increasing their pay aside from being better investors.

Thus, we think, these people really have their shit together. As a result, children (as they get older) listen to the advice handed down by their parents. Some of it is good advice. Much of it is outdated. Today, we are seeing the results of financial mistakes made decades ago:

financial mistakes


The number of bankruptcies among youngsters is actually down, not up. This may seem shocking that bankruptcies for individuals over 55 is up 40 percent and for individuals over 75 – a whopping 433.3 percent.

Obviously something isn’t right with this picture, but what? Well, here’s one of the problems that many older folks failed to adequately address in their younger years: they failed to consider the impact of rising medical costs.

That doesn’t mean that today’s seniors were lazy in their youth. It means they made at least one miscalculation that eventually snowballed into bankruptcy.

Another mistake that a lot of folks make is not saving enough money when they’re young (which obviously leads to a shortfall in savings later – a shortfall that can destroy you, financially).

According to the Employee Benefit Research Institute, the average retirement savings of people between the ages of 65 – 75 is $56,212. Younger folks aren’t doing so hot either:

  • Between the ages of 55 – 64: $69,127
  • Between the ages of 45 – 54: $43,797
  • Between the ages of 35 – 44: $22,460 and;
  • Between under the age of 35: $6,306

Now, here are a few other facts to consider (continue reading)


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Getting Started With Quantitative Investing

Posted August 6, 2013 at 8:00 am

By Paul Novell

In my last post, I introduced Quantitative Investing as a stock investment strategy with great results and low effort.

Here I want to show you how you can get started getting familiar with the process involved and the basic mechanics of implementing a quant strategy by using value stocks as an example.

First, if you’re seriously interested in quant investing you need to buy yourself the book What Works on Wall Street. The book will give you all the basics on hundreds of quant strategies, how they perform, what their risk is, etc… All the strategies I that I mentioned in the last post and this one are well documented there.

For this post, I will use a pure value strategy as an example. We’ve already seen how value outperforms over time.

Usually, value is measured by Price to Book Value (P/B for short). In other words, stocks with low P/B ratios outperform over time. But nowadays Price to Earnings (P/E) is a more popular measure of stock valuation and just like low P/B stocks, low P/E stocks outperform over time. The table below shows the performance of large low P/E stocks vs the S&P500 overtime. I use the large stock strategy because its the best comparison to the S&P500 which is a large cap index.

quantitative investing

Continue reading on quantitative investing…


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Beating the Market to Maximize Retirement Income

Posted July 30, 2013 at 8:00 am

By Paul Novell

Warning, this is a somewhat geeky technical post!

Besides accumulating more wealth by working longer there is one very direct way to increase your income in retirement. Beat the market’s return.

Higher returns will lead to higher SWRs (safe withdrawal rates) for the most part. (The other way to increase retirement income is to reduce volatility). Of course, most would say that this is not possible over the long-term. The market is efficient etc…

Thus, most of the standard retirement asset allocation models that give us the 4% rule are based on a market index of stocks, usually the SP500 or a total US stock market index. But this advice is based on a mis-understanding of efficient market theory.

Even efficient market theory says you can beat the market and increase your safe withdrawal rate above the standard 4% by investing in certain classes of stocks. Lets take a look.

I won’t go into the details of efficient market theory lest I bore everyone to tears (see here and here if you’re interested) but modern versions of the theory all agree that there are certain attributes of stocks (called factors) that beat the market over the long term.

The attributes that are well known to beat the market are value, size, and momentum.

Value stocks beat growth stocks usually measured by price to book value. Small stocks beat large stocks measured by market cap, and momentum stocks beat the market measured by last 12 months performance. The market data that shows this goes back to 1927. And the great thing is that you can access all this data for free.

Continue reading on how to maximize retirement income…


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Diversify Into Rare Coins and Collectables

Posted July 29, 2013 at 8:00 am

You won’t believe this deal I got on rare coins

by Simon Black on July 18, 2013

Yesterday afternoon while strolling around Lisbon, I happened upon a row of antique stores.

Like most retail storefronts in the city, the proprietors were in a serious cash crunch and looking to quickly liquidate some inventory.

I found this to be an exciting opportunity given that collectibles are such a unique asset class; just as they say about property, “they ain’t making any more of it.”

In fact, whether you’re talking about rare stamps, coins, watches, or wine, supply is generally fixed… and falling…

Continue reading…


For more information on collectables…

…read our article here:

Investing in Collectable Toys

…or, watch our short presentation here:



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An Introduction to Quantitative Investing

Posted July 23, 2013 at 8:00 am

By Paul Novell

What if I could introduce you to an investment style for equities that can soundly beat the market over time and only requires a few days a year of work? Interested? I thought so.

Today I want to introduce you to Quantitative Investing and why you should consider incorporating it into your investment portfolio. 

Quantitative Investing is a fancy term for systematic, structured investing that automates buy and sell decisions. It represents a combination of passive and active investing. Other terms for it are automatic investing or computerized investing.

Many investors are familiar with some very infamous stories of quantitative investing gone wrong, the most prominent example being the failure of Long Term Capital Management in the late 90s. And there are a slew of hedge funds the run very complicated ‘quant’ strategies.

But, quantitative investing can be quite simple as well, and yet very effective.

In a way, the S&P500 index is an example of a quantitative strategy. The S&P500 is a large cap strategy where the buy and sell decisions are decided for the investor.

The active part here is the specific choice of large cap stocks. Companies are added and deleted every so often by the S&P committee thereby automating buy and sell decisions.

Personal and emotional decisions don’t come into play at all. This simple quant strategy has outperformed over 70% of mutual funds over time. It never panics, has second thoughts, or varies from its core strategy. And there in lies much of its strength and why indexing outperforms most active managers over time.

But there are other simple quantitative strategies that outperform the S&P500.

One famous example is the “Dogs of the Dow” strategy. This is a strategy that buys an equal amount of the 10 highest yielding DOW stocks every year. Pretty simple. From 1928 through 2009 this strategy returned 11.22% per year vs 9.12% for the S&P500.

There are also many other examples of outperforming strategies that take advantage of time tested factors that consistently beat the market over the long term…

Continue reading…


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Auto-Traded Accounts vs. Managed Accounts

Posted July 17, 2013 at 8:36 am


( This article was originally shared on July 2, 2011 )

by Brad Wajnman - Research Director, The Wealth Vault
Insights about Managed Accounts

Anyone who’s done a Google search for information on managed accounts knows that there are an endless array of choices out there.

But there’s another kind of ‘hands-free’ trading option that’s available to savvy investors seeking passive returns, called auto-trading.

On the surface, an auto-traded account may appear to be very similar to a managed account, however there are several distinct differences between the two that set them apart from each other.

In both cases, managed and auto-traded accounts each give investors the ability to piggyback off the skills and expertise of an experienced trader and have their money traded for them on complete ‘auto-pilot.’

In other words, there’s no need to sit in front of your computer and watch the market hour to hour, or manually place trades yourself, etc. All of that’s handled for you. But when you look a little deeper, you’ll soon find out that this is pretty much where the similarities between these two Investment Vehicles (IVs) end.

Since this is topic related to a similar discussion I had the other day with Ron, an Auto-Pilot ROI subscriber (our managed trading account report), I thought I’d post some of the insights that I shared with him here.

So let’s dive in…

How Does a Managed Account Work?

Simply put, a managed account allows you, the investor, to have your funds actively managed by a professional trader / money manager instead of doing the actual trading yourself.

You’re required to sing a Limited Power of Attorney (LPOA) agreement, which authorizes the trader to execute trades on your behalf.

Only you have deposit or withdrawal authorization and read-only access to your own segregated account. This allows you to track your account equity in real-time whenever you want.

In the managed accounts arena, you’ll find two predominant financial markets being traded:

Forex: Trades U.S. and foreign currencies – money you use and need every day, and currency used globally; a $4 trillion dollar a day market.

Futures and Commodities: Trades items you use and consume every day – orange juice, sugar, cocoa, flour, coffee, meat (pork, beef), grains (rice, soybeans, wheat, corn), gold, silver, cotton, lumber, etc.

The main distinguishing factor with managed accounts is that they’re performance-based investments. Meaning you share a portion of your profits with the trading firm who’s actively managing your account.

Managed account performance fees typically range between 20% – 35% of your gross monthly profits. It’s a fair trade off because they only make money if you do.

How Does an Auto-Traded Account Work?

Auto-Trading is generally associated with the automatic execution of trading signals that are sent to individual client accounts by way of a centralized auto-trading platform.

With an auto-traded account, you choose the provider(s) you want to receive signals from, sign a Letter of Direction, and then the associated broker automatically executes and disperses new trades into your account via the trader’s master account.

While the vast majority of internationally available managed accounts trade in forex and futures, auto-traded accounts on the other hand, mainly trade in these markets:

Options: Trades the right (option) to purchase underlying assets of value at a future price and time. Examples of underlying assets are stocks and futures contracts.

ETFs: Trades Exchange Traded Funds. An ETF is an Investment Vehicle (IV) traded on worldwide stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day.

Like managed accounts, auto-traded accounts provide you with full transparency, which includes 24/7 read-only access to your account.

The primary difference with an auto-traded account is that you pay a monthly or annual subscription fee rather than a percentage of the profits. With this kind of arrangement, you get to keep 100% of your profits (minus broker commissions).

But there’s still the issue of account minimums. Most money managers in the industry will require a minimum of $5,000 – $10,000 in starting capital for either a managed forex or a managed futures account, and upwards of $50,000 to $100,000 for a high-end managed options account (which is a less popular choice for many investors).

The average minimum capital requirement for auto-traded options and ETF accounts is between $5,000 and $20,000.

Obviously, finding cream-of-the-crop managed and auto-traded accounts requires a lot of detective work, and doing proper due diligence can be extremely time consuming (even when you know what to look for).

One convenient (and very affordable) around this is by becoming a member of The Wealth Vault. You’ll get immediate access to an ever-growing list of the world’s best researched and vetted auto-traded and managed accounts.

We identify these accounts, develop relationships with the fund managers, and lobby each provider for the best terms for you, the investor. In some cases we’ve been able to negotiate lower entry minimums (as low as $1,000).

If you just want to learn more about generating passive income from managed accounts and what criteria to look for, our no-fluff investigative report, Auto-Pilot ROI would be a great place to start. Click here to see a video of what’s covered.


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