Great Article About Dividends At Morningstar.com

Yesterday I was persuing the Yahoo Finance website when I saw a great article about dividends and why they have come back into favor and will become increasingly important in the future.

I highly recommend reading the following article, entitled "Ride the Retiree Wave with Dividends":

It's no secret what's about to crash onto the shores of the American economy. Rather than working for money, the massive baby boom generation expects to have its hard-earned money work for it.

At the same time, another megatrend is rolling through corporate America. Despite all-time record profits, big business isn't investing in new factories, stores, and workers the way it usually does--and the cash is piling up.

If this sounds like a dream scenario for dividend investors, well, it just might be real. We're certainly focusing on these trends in Morningstar DividendInvestor, which I edit. (Click here for more information, including a risk-free trial subscription.) But we can't just buy any dividend-paying stock and expect the newly retired to run it up; a lot of traditional income sectors like real estate investment trusts and utilities are already expensive. If we're going to ride the wave from here, we need an unconventional strategy:

1) Buy dividend potential, not just current yield
2) Look for unconventional sources of income

. . .

Investing In Growth Stocks Is Not For The Faint Of Heart

It seems like everyday we are inundated with stories about the next hot growth stocks. For example, people like Jim Cramer have made careers pontificating about the next high-flying stocks and the hottest industries in which to invest. Wall Street loves growth stocks when they are appreciating. For example, the stock market bubble of the late 90s was primarily due to the appreciation of growth stocks. The bubble was highly concentrated among large company growth stocks in general and technology growth stocks in particular.

I don't doubt that there was a lot of money to be made in growth stocks during the late 90s. However, when the actual growth of the underlying companies slows (which it inevitably will), the growth stocks take a beating. Take Cisco (CSCO), the technology bellwether, for example. In the late 90s there were several years when CSCO's PE ratio exceeded 100! After the bubble burst, however, CSCO's earnings took a hit and CSCO's stock price fell from the upper 70s in April 2000 all the way down to about 8 by October 2002. Its stock price has since recovered to about 21 and its forward PE ratio is about 18 right now. However, it stock price experienced an extreme PE compression once the growth ended in the late 90s and its stockholders have taken a bath even though earnings are much higher now than they ever were during the bubble.

This is precisely why investing in high PE growth stocks is so risky - they often continue their upward ascent until the day arrives when an earning target is missed or earnings growth slows. It is not atypical for these stocks to then lose 20+% almost immediately as the market digests the news. The moral is - if you are going to invest in growth stocks be prepared for volatility and be ready to sell if the market really turns on them.

Robert Kiyosaki Is A Blowhard

I'm sure that just about everyone has heard of Robert Kiyosaki by now. Kiyosaki is the author of the bestselling "Rich Dad, Poor Dad" series of books. These books all contain a plethora of financial advice and can be quite entertaining. However, Kiyosaki's shtick does become tiresome after awhile. I think that he would be more bearable if I actually believed the stories in his book that he claims to have experienced actually happened.

Through his books, he discusses the contrasting financial advice given to him while he was growing up both by his actual father (his "poor" dad, a well-educated but not financially successful man) and by his next-door playmate's father (his "rich" dad, a high school dropout who was very successful). According to Kiyosaki, he once asked his father how to make money when he was a young boy. His father said he had not made much money and did not know how to make it. He suggested that Robert ask the father of his next-door playmate, who became his "rich dad." Kiyosaki supposedly developed a father-son relationship with the neighbor.

That's a great story. It's too bad none of it is true. Kiyosaki fails to ever mention the name of the alleged "rich dad" in any of his books and newspaper reporters in Hawaii, where Kiyosaki grew up, have been unable to locate the identity of this man. John T. Reed, a real estate guru, has an interesting website that exposed Kiyosaki as a fraud. It would be fine with me if Kiyosaki simply referred to his "rich dad" as a straw man in his books. However, the fact that Kiyosaki insists that this man is real destroys his own credibility.

Kiyosaki also writes a semi-monthly column for Yahoo Finance. In his columns he typically mentions how the U.S. dollar has serious problems going forward and that he bought up lots of oil and gold in the late 90s when everyone else was purchasing technology stocks. I, along with a large portion of Wall Street, happen to agree that the U.S. dollar has some serious problems going forward. However, I don't remember hearing him tell everyone to dump technology stocks, buy commodities, or short the dollar back in the late 90s. If what he says is true, he should provide some documented proof of such. Otherwise, he looks like the type of know-it-all blowhard we've all met who lies about his investment returns to make himself appear smarter than he really is.

Think Twice Before Investing In Companies That Manufacture Memory Devices Or Other Electronic "Commodities"

SanDisk (symbol: SNDK), the market leader in the manufacture of flash memory market, has performed very well over the past year or so. Since July 2005, SNDK has risen from the low 20s to the mid-50s today. One of my friends was recently touting this stock to me and telling me I should pick up some shares. However, I had to caution him. Although I have no doubt that SanDisk is a good company and has been performing well recently, I am of the opinion that an investment in a memory manufacturer must be made only after careful consideration because the stock performance of such companies has been historically extremely volatile.

Another of my college friends invested in Micron Technology (symbol: MU), another big memory manufacturer, back in 1995 after it had fallen from a high of about $90 to a price of about $60 (these prices do not account for the 2:1 split that took place in 2000). My college friend was convinced that this was just a temporary dip that provided a good investing opportunity. My college friend, however, could not have been more wrong. Within months, the bottom fell out for MU as it steadily fell, eventually down past $20. The stock eventually recovered toward the end of 1996 and he sold at about $30, taking a 50% loss on his position.

What neither my current friend nor my college friend fully appreciated is that the business outlook for memory manufacturers can dramatically change in the blink of an eye. There are many different companies that manufacture memory and as far as consumers are concerned, the products of all of these companies are pretty much the same. In other words, there really isn't much brand loyalty (there is, of course, some degree of loyalty, but not much) among consumers when it comes to the purchase of memory products. As such, I consider memory products to be a kind of electronic "commodity." That is, as far as consumers are concerned, there's no major difference between the products manufactured by any of the memory manufactures - consumers primarily will purchase memory products based on price alone.

Therefore, it is extremely difficult and almost impossible to maintain a sustainable competitive advantage over any competitor companies in this field. As a consequence, if one of the memory manufacturers decides to cut prices in order to gain market share, all of the other players are forced to cut their prices as well. These inevitable price wars absolutely kill profit margins.

The point of this post is not to belittle people for investing in memory manufacturers. I have no doubt that there's a lot of money to made in them from time to time - if you look at the historical stock charts for SNDK and MU, you'll see some terrific periods of time where these stocks went up hundreds of percentage points during a short time span. However, there are also some horrible stretches where the bottom fell out of the stock prices. I don't claim to be an expert investor - I've certainly made my own mistakes as well. Although I've never directly invested in a memory manufacturer, I have invested in stocks in the disk drive sector, which experiences analogous problems. I owned shares of Applied Magnetics, a disk drive component manufacturer, back in the late 1990s and lost my complete position when it went bankrupt.

So the moral is that you should perform extra diligence before investing in any memory manufacturer (or any company that produces an electronic commodity).

The Nasdaq 100 ETF Can Now Be Purchased Without Paying A Commission

Nasdaq Global Funds has instituted an investment program entited "QQQDirect" which allows individual investors to directly purchase shares of the Nasdaq 100 index tracking ETF, QQQQ. To sign up for this program, go to this website: http://qqqdirect.com/. According to the Nasdaq Global Funds, participants will be able to purchase shares of QQQQ once a month without having to pay any commissions. The minimum monthly investment is $10, and additional purchases will be either $3.99 or less if the participant signs up for a pre-selected investment program. The great thing about this is that there are no account setup, minimum balance, or inactivity fees. The main applicable fee is a $12.99 commission to be paid when the participant sells shares through the plan.

I think this is a great program for small investors who want to invest in QQQQ via dollar-cost averaging. Hopefully the S&P 500 (symbol: SPY) or S&P Midcap (symbol: MDY) ETFs will follow suit with similar plans.

The 6-Year Anniversary of the Nasdaq Composite's All-Time High Close

On March 10, 2000, the Nasdaq composite index closed at an all-time high of 5048.62. Shortly thereafter, the stock market bubble burst, dropping the Nasdaq composite down to an intra-day low of 1108.49 on October 10, 2002, a drop of about 78% in just over two years. In the subsequent rally through today's close of 2262.04, the Nasdaq composite index has risen about 104% from its 2002 low. However, it still remains about 55% below its all-time high closing value.

CNN.com has a nice article about the 6-year anniversary of the Nasdaq composite's all-time high close.

The Templeton Russia & East European Fund Closed-End Fund Has Been Dropping Like A Rock

As I have previously mentioned, Russia is projected to be one of the fastest growing economies over the next several decades. According to a 2003 Goldman Sachs report, Russia's economy is projected to grow much faster than the U.S.'s from now until 2050, and its currency exchange rate is projected to strengthen by 200+%. Russia therefore presents an exciting investing opportunity and assuming Russia maintains a stable political system, should be an excellent market in which to invest over the next several decades. However, the Russian stock market is not for the faint of heart. The Templeton Russia & East European Fund Closed-End Fund (TRF), one of the best-performing funds investing solely in Russia, has dropped from $79.12 at Monday's market close down to $69.99 as of today's market close, a drop of 11.5% in just two days! However, the fund is still up 28.1% so far in 2006. Despite its overall impressive returns, the volatility can be somewhat unsettling.

About Me

For those of you who are interested, I work in the legal profession and have been following and investing in the stock market for over 10 years. I invest almost half of my after-tax income in the stock market every month. I do have some money in individual stocks, but am currently concentrating on building up my long-term portfolio. FYI, my long-term portfolio is the same as the hypothetical portfolio I have been tracking this year. However, unlike the hypothetical portfolio, I do not yet currently own shares of each of the 10 holdings of the long-term portfolio. Instead, to keep my trading commissions at a minimum, I have been purchasing shares of one additional holding in my long-term portfolio each month in an effort to match the percentage holdings my model portfolio dictates.

The reason why I invest this way is because I used to invest primarily in the S&P 500 when I had the deluded belief that I was "buying the market" and that this was the safest way to invest. Accordingly, my portfolio is substantially overweighted with shares of the S&P 500 index. (I also started purchasing shares of Vanguard's Midcap fund several years ago and am also overweighted in that fund. However, that's not such a bad thing, as the Midcap index has performed very well since 2003.)

Given the passage of time since the bubble burst in 2000, I have definitely learned some powerful lessons about the markets. I now appreciate how cyclical different styles of stocks can be, regardless of the underlying fundamentals of the representative companies. For example, the S&P 500 index is primarily a large cap index and has been pretty much flat for the past 5 years even though the earnings of the S&P 500 constituent companies have increased by somewhere around 60+%.

It seems to me that any reasonable portfolio should include midcap and small cap (especially small cap value) index funds, as they outperform their larger peers over time. Also, I now realize that given the massive U.S. trade deficit, it is a good idea to own foreign stocks, because they should outperform when the U.S. dollar inevitably weakens against foreign currencies.

I also have some additional money that I occasionally invest in individual stocks. When investing in individual stocks, I am very selective and will invest in only one or two (or maybe three) stocks at a time, but I like to make big bets. I get my ideas from the Value Line, an invaluable resource. I tend to invest in retailers and semiconductors when I do invest in individual stocks. Instead of trying to invest in the next "hot" sector, I tend to follow these same sectors (i.e., retailing and semiconductors) and buy when good stocks in those industries are being dumped. I realize that other people can do very well by investing in hot industries, but I think I personally perform my best by concentrating my bets of just a couple industries while following those industries closely, learning all that I can.