Dividends and delay gratification

So much of investing, as so much of life, is a push-pull between the present and the future.

The better you resist the temptation to overeat bad foods now, the healthier you'll be in the future.

Same with exercise -- the more healthy exercise you do now, the better you'll be in the future.

The more money you save now, the more you'll have in the future. If you go into debt, you're really stealing from you're own future.

Yet it's so difficult to follow this through consistently. I've tried to tell young adults that they should start saving money, and they just start giving me excuses. Someday they'll be 50 or 60 and wish they'd taken my advice -- but they won't listen now. They'll have to learn the hard way. They just won't be convinced that if they'd work hard now, save a lot of money and let it grow, they could live like queens and kings in later life.

But "later life" is just not real to them yet. Drinking with their friends tonight is. The latest CD is real. The latest electronic toy. They just don't believe that if they give up those things now, they'll have much more pleasure later.

There's a similar dynamic with income investing. The best long-term income investments are the stocks of good dividend paying companies that consistently raise their annual dividends. Mergent has a list of about 300 companies that had raised their dividends every year for at least 10 years.

Yet, because the current dividend yield is so low, many income investors buy bonds, for the higher yield today. Even though the semi-annual coupon of bonds never goes up.

In 20 years, the dividend-paying stocks will be paying far more for the money they cost than bonds. But it will take 15 years or more to get to that point, and who wants to wait that long?

dividend investments
dividend investments

Inflation and TIPS bonds

One of the biggest risks of income investing is inflation. If you insist on picking stocks and selling them, you'll lose a lot of money that way. Income investors avoid that stupidity, but they still have to deal with the creeping loss of purchasing power. That's one of the discouraging things. Traditionally, income investors have bought bonds, but these are subject to inflation.

One good idea that happened during the Clinton administration was the introduct of Treasury Inflation Protection Securities which are basically zero coupon bonds with the government growing them faster as inflation rises.

How have the elderly traditionally dealt with inflation? Well, before World War 2, it wasn't an issue. If you had enough income from bonds then you continued to have enough income from bonds, although in the long run that could vary somewhat as interest rate levels rose and fell. Still, they didn't do that to extremes.

inflation TIPS bonds
inflation TIPS bonds

France to roll back socialism?

Hell froze over yesterday, which is another way of saying that the conservative candidate in France's presidential elections beat the rear end of the socialist candidate, and one of the first things he says is that France is going to be a friend of the United States from now on.

Plus he's going to make some much needed economic reforms to rollback socialism in France. All of which will be good for investing, since the more financial freedom people have anywhere in the world, the greater the wealth creation within the world. That's good for investors all over the world, whether they invest in stocks, bonds or even money market funds.

We saved Eastern Europe from communism, only to see Western Europe fall to socialism. Hopefully this is a sign that the continent is not totally and hopelessly lost.





French investments
French investments

Immigration and Social Security

I'm a little late, but most of you know that on May 1 various groups advocating changes in immigration law put on rallies in cities around the country.

Immigration is an interesting issue for many reasons, and very complicated. What does it have to do with investing?

First, unless you're savings up a lot of money and investing for income, you probably will depend on Social Security for income in your old age.

Yet all projections show that once us baby boomers start retiring in large numbers, there's going to be a huge gap between what the younger generations are paying into the Social Security trust funds and what the baby boomer retirees will technically be eligible for given their work records of paying into the system while they were employed.

I'm convinced that the reason leaders in both the Republican and Democrat parties don't crack down on illegal immigration and are proposing faster routes for illegal aliens to become citizens is that they're hoping that young immigrants working and paying Social Security taxes will "rescue" the SSA system for us baby boomers.

Yes, it's true that many illegal aliens work for cash. But many have Social Security numbers or use Social Security numbers of other people. This means that FICA taxes are taken out of their paychecks and sent to the Social Security trust funds.

Every year, the Social Security Administration sends every American over the age of 25 an Earnings and Benefit Statement showing their total gross wages for the past years. If the number for a year on your statement is larger than you expect, check your W-2 forms. Maybe an illegal alien is using your number.

Horrors? Hardly -- they're increasing your eventual retirement check. You can go to your local SSA office and have them take the earnings off your earnings record . . . but guess what? The trust fund is not going to return the money to anybody! If you don't keep the credit for those earnings, nobody will -- but the government will keep the money in the trust funds.

In THE FUTURE FOR INVESTORS Dr. Jeremy Siegel states that he believes that retirements for American, European and Japanese baby boomers will be funded by young investors in India, China and other developing countries buying up the stocks and bonds of our companies.

I don't know if that's true. Or whether it's desireable if true. But I believe the government's response to the immigration situation comes from the hope that illegal aliens will eventually fund the Social Security trusts.

immigration and Social Security
immigration and Social Security

Beware of mutual fund charges

If you have money in mutual funds, I hope you're doing it the smart way. Readers of my blog are too smart to invest their money in load mutual funds, right? You wouldn't put your money in a mutual fund that charges you a front end load, right? Please say you know better than that.

That front end load is 2-8% of your money that you lose right off the top, as your immediate "reward" for choosing that particular mutual fund out of the only 8000 or more that you could have chosen. That load goes into the pockets of the mutual fund company and is split with the broker or financial planner who conned you into sending your money there.

Studies have proven -- mutual funds that charge a load don't perform any better than no-load funds, no matter what that broker or financial planner who wants to get a commission from you claims.

Also beware of mutual funds that charge you a rear-end load -- that's a charge to withdraw your money. However, I admit I can sympathize with that one somewhat, since I believe that once you invest in something like volatile like stocks, you should be keeping your money in for the long haul.

What many people don't realize, however, is that even no-load mutual funds can charge 12b-1 fees to pay for all the advertisements they place in financial magazines. Also, they do charge management fees.

Management fees are legitimate, of course -- they aren't running the mutual fund for free. However, many funds take out an amount that's so large it dramatically affects your long-term performance.

That's why if I were going to invest in a mutual fund, I'd almost certainly pick Vanguard, which has notoriously low expenses. There're not the only ones, but they're a safe bet.

But personally I'd rather not invest in mutual funds. Their only advantage over owning individual stocks is diversification, and you can obtain that with exchange traded funds.

"Expert" management is often touted as an advantage of mutual funds, but since numerous studies have shown that actively managed mutual funds underperform the market in the long run, this to me is a disadvantage, not a benefit.



beware mutual funds
beware mutual funds

Baby boomer retirements hanging over our heads

It's inevitable that my thinking about investing and investments also be tied up with the concept of retirement. That's because I'm facing retirement in the not too distant future. Also, because so are about 78 million of my fellow baby boomers.

It's very unlikely that we'll treat old age the same as our parents.

Based on the expectation that baby boomers will begin selling stocks at age 65 to meet their retirement expenses, a lot of people expect stocks to go into a long bear market starting roughly 2009 or 2010. I'm not so sure the moment will be a dramatic, for several reasons.

It's unlikely every baby boomer who turns 65 will immediately sell all their stocks and go into bonds.

Not all baby boomers will turn 65 at the same time. When the first bunch hit 65, there'll still be many millions of us who are not yet 65, and still buying up stocks for our retirement funds.

From what I read, people who want their resources to last for the rest of their life, should not sell off more 4% of their assets in a year. Baby boomers following that advice will not immediately sell everything right away.

Many baby boomers will simply switch jobs and careers to something they enjoy doing, and so will delay having to live on investments.

A few of us plan to hang on to income-generating investments for the rest of our lives. Why sell stocks that are paying out good dividends? I don't want to live on the total yield generated by selling off shares of stock. Then I'd have to pay too much money to the government in capital gains taxes. I want to live dividends that keep growing every year



baby boomer retirement
baby boomer retirement

Dow breaks 50-year old streak record

The Dow's best winning streak since 1955!

That's the latest news from the stock market. It's risen 21 out of the last 24 trading sessions -- total gain 7.4%. It's closed at a record high five out of the last six trading sessions.

Am I cheering? Hardly. But I admit that I'm glad that one cause is higher corporate earnings and the other is lower oil prices.

Higher corporate earnings is the backbone of corporate health, enabling companies to pay out more money in dividends, which is good for income investors.

I like lower oil prices as a consumer, though local gasoline prices are rising at the pump -- hitting $3 a gallon for the first time since late 2005.

High stock prices mean that companies that pay out dividends have a lower dividend yield, because their stock price is higher. So it costs more to buy that stream of dividends.

Here's the link to the details:

Dow Jones winning streak

It appears that the second leg of the bubble boom predicted by Harry Dent has begun. According to him, the real strength behind this stock market is the buying of baby boomers. Eventually boomers will start selling (because of retirement) and then the stock market will go into a long bear market.

I don't know if that will happen, but I do know that the long run never arrives, and these figures are not permanently etched in stone. They can go up more. They can go down.



Dow records
Dow records