Friday, June 23, 2017

Should I Buy Dividend Stocks or Growth Stocks?

You don't have to read investing blogs very long before coming across the idea of investing in dividend growth stocks--stocks that pay a yearly dividend and which have historically increased that dividend on a regular basis.

Those who champion dividend growth investing liken it to planting a money tree--once you have planted it (purchased the stocks), the fruit is there for the picking (dividends are paid regularly) and increases as time goes on.  The stock that pays you a $3.00 dividend this year may pay you $3.10 next year (or it may pay less if business is not good).

Last week I read an blog post (and I wish I had bookmarked it) in which the author eschewed dividend growth investing, stating that generally when dividends were declared, the value of the shares dropped the same amount, giving you a zero-sum game, except that you had to pay taxes on the dividends.  Something about that statement didn't sound right to me, so I did some math.

Disclaimer:  The last time I took a standardized test, my verbal skills were in the 99th percentile, and my math skills, dead average.  Make of it what you will.  

Trying to figure out what WILL happen in the stock market is, at best, an educated guess and it isn't very useful for comparison purposes.

The shares of a particular company pay increase or decrease in price due to factors unique to that company.  In other words, if a company has a great new invention that "everyone" wants to buy, investors may bid up the price of the stock in that company.  In the same way, if something happens so that the company's future prospects look bad, investors may seek to sell off the stock and the and the price per share will drop,

On the other hand, sometimes the price of stocks will change, sometimes substantially, not because of anything good or bad that happened to the company but because the market as a whole has moved and they get caught up in it.

In other words, while the price of a company's stock is, to some extent, a reflection of the current and expected profits of the company, there are times that prices of shares of stock in a particular company may drop for reasons that have little to nothing to do with the company.

Dividends, on the other hand, are a reflection of earnings.  If a company isn't making a profit, the only way it can pay a dividend is to use savings, and no company can do that long-term.

So, back to the question, is it better to own stock in a company that pays a dividend, or a company that does not, assuming the same rate of growth?

I did the following math:

Since I know the average stock market return over the long haul is about 7%, I used to randomize numbers between -10 and 20 to come up with a string of numbers that my eyeball estimate told me averaged close to that.  Actually I ended up with numbers that average a little over 5% and decided to stick with them.

I used those numbers as the percent increase in the stock price in a given year.  I started with 500 shares of stock that cost $100 each.  Each year I assumed the growth rate was my random number and figured out how much I would have at the end of the year.  Here is the chart I got:

YearReturnno of sharesopen price/shareend price per sharetotal value end

I never took any money out of this account and at the end of eight years I had $74,305.06.  But what if this had been a dividend paying stock?  Would it make any difference?  My guess before I did the math, was that it wouldn't make a diffence in the accumulation  phase.  I was almost right.

I used the same return rates on the second chart.  The difference is that I assumed that this stock paid a $3,00 per share dividend on the last day of the year, and that the stock then fell in price by 3.00. In other words, if the stock sold for $98 on the last day of the year, I opened it the next year at $95 rather than $98.  However, I used that $3.00 per share to buy more stock at that opening price.  At the end of the year, I computed the value by multiplying the number of shares from the beginning of the year by the post-dividend price, and then adding the dividends paid.  

YearReturn# of sharesopen price/sharepre-dividend close$3 dividend post div closetotal end value

What About During Withdrawals?

I redid the first chart, only this time, after computing the value on the last day of the year, I withdrew $5,000, which reduced the number of shares with which I started the next year.  Here are my results:

YearReturnno of sharesopen price/shareend price per sharepre-withdrawal valuepost withdrawal value

I then re-did the chart, assuming that after the dividend had been paid, I used it as part of the $5,000 I withdrew.  I thought the dividend payer would come out ahead.

YearReturn# of SharesPrice per sharepre-dividend close$3 dividendpost div closepre-withdrawalpost withdrawal

Well, you can tell I write these posts on the fly because obviously, there is no difference (or at least no significant difference) between getting dividends and having the price of the stock increase, whether you are trying to accumulate more stock or whether you are trying to generate cash to spend.

That conclusion, of course, assumes that there is no difference in the stocks, which is something that rarely happens.  In general, companies that are profitable and growing at a slow but steady pace, if at all, pay dividends.  Companies that are re-investing everything they have into growing the companies do not pay dividends, but hopefully the price of the stock will increase in the long run.  Of course if they overbuild, then the stock can crash for that reason.

Are you a dividend investor?  If so, has my little exercise made you reconsider your stance?  Why or why not?

Thursday, June 15, 2017

Are Credit Cards Good or Bad?

Guess what?  I teach kids to play with matches.  Yes, I'm a Girl Scout leader and one of the things I teach my Daisies (kindergarten and first grade girls) is to light a match.  I also teach them how to build a fire.

I've been a Girl Scout leader for more years than most, and I'm afraid I don't vary the presentation that much from year to year (but that makes it easy to see who "got" it when they went through it last year).

I always start by asking the girls to raise their hands if they think matches are dangerous.  Of course, they all raise their hands.  Next, I ask them to raise their hands if they think pencils are dangerous.  None (except those who've heard me before and remember) raise their hands.  Then I ask them to raise their hands if they would like me to poke them in the eye with a pencil.  For some reason, none raise their hands.  I then ask again if pencils are dangerous, and with kind of confused look on their faces, most raise their hands.

Finally, I point out that pencils are like matches--both are tools that can be dangerous if misused, but which are very useful and safe if we use them properly.

Matches are not only like pencils, they are like credit cards.

I've read more than one personal finance blog article about work-arounds that make credit cards unnecessary.  I've read that I should turn down that offer to save 10% on the items I've already decided to buy, because to get that discount, I have to get a store credit card.  Dave Ramsey says that "Responsible use of a credit card does not exist."  Is he right?

I don't think so.

Advantages of Credit Cards

  • Credit Cards are not directly linked to your bank account.  One of the most frequently suggested replacements for a credit card is a debit card, which withdraws money from your bank account as soon as it is used.  Frankly, to me that is for more scary than the possibility that I will misuse the card.  I've had my wallet/credit cards lost or stolen and we all know store computers have been hacked.  I've never been asked to pay for something I didn't charge, and I don't have to worry about a fraudulent credit card charge causing havoc with my checking account.  The bank may reverse the charges if a thief uses your debit card, but what about all the people whose checks bounced because of the unauthorized purchase?

  • If cash is stolen or lost, you can kiss it goodbye; if a credit card is lost or stolen, you just cancel it.  I wish I could tell you that my wallet has never been stolen, but I can't. I wish I could tell you that I've never left a credit car lay someplace, but I can't.  I wish I could tell you that neither cash or card had ever seen the inside of my washing machine, but that would be a lie.  The bottom line is that credit card companies rarely hold you responsible for any unauthorized charges, and even if they do, there is a legal limit to your liability.  Cash can be lost or stolen and you have little recourse.

  • Credit card points, discounts, miles etc.  If you can use your credit cards properly, these can build up into tidy sums of money.  Yes, late charges and interest will eat them up in a hurry, but if you pay the card off every month, without fail, on time, this is free money (except for taxes).

  • Credit cards provide a readily available source of easy to access credit, for EMERGENCIES.  As far as I'm concerned, credit cards should be paid off monthly, with no balance carried over until the next month.   You should have some money in the bank available to use for the everyday extra expenses and minor emergencies of life.  In general, using your credit cards to pay for things you can't afford to pay for this month isn't a good idea.  The interest rates are outrageous, and you need to learn to live within your means.  That being said, stuff happens.  People get laid off--and good luck trying to get a loan if that happens.  Credit cards obtained when things are good, and used responsibly can end up with high enough credit limits to carry you through a couple of months.

  • Credit cards can alleviate short-term cash flow problems caused by unexpected bills.  In most families, an un-fixable washing machine must be replaced ASAP.  Yes, you should have sufficient savings to handle things like that, but what if you don't?  Sometimes the time the credit card (or the 90 days same as cash) buys you is enough.

  • Credit cards are an easy way to provide family members with access to funds, without actually giving them money.  My out-of-town college student and my in-town young adult both have credit cards with my name on them.  They also both know what they may and may not use them for (they can use them for medical expenses/emergencies, auto emergencies, school bills and anything I send them to obtain for me).  If you budget your checking account to the penny, having someone use a debit card in those situations can be problematic.

  • Purchasing with a credit card gives you more power if you need to withhold payment or dispute a purchase.  While some debit cards claim to give you purchase protection similar to a credit card, reality is that in any negotiation, the person with the money on his/her side of the table is at an advantage.  With a debit card you are trying to recover money you have paid; with a credit card you are refusing to pay.  

Problems with Credit Cards

  • They make it possible for you to buy things you don't need and can't afford.  

  • The interest is outrageous if you don't pay the bill in full every month

That's it--the problems with credit cards aren't problems with the cards, per se, but rather problems with the user.  If having a credit card will turn you into an irresponsible spender, then by all means, don't get one.  However, I'll admit to rolling my eyes at people who devise and stick to elaborate budgets that give jobs to every dollar every month and who can tell you to the penny what their electric bill was last month without checking their bank statement but who refuse to get a credit card.

Credit cards aren't good or bad.  Credit cards are tools; it is the user who determines whether they are misused or not.  

*Part of Financially Savvy Saturdays on brokeGIRLrich.*

Thursday, June 8, 2017

Review and Giveaway: Stockpile: The Beginner's Broker

Those of you who follow this blog know that I used to invest via Loyal3, a free online brokerage which allowed investors to invest in the stock market at no cost.  The "catches" were that it only offered about seventy stocks, it only traded them once daily and you could not name the price you were willing to pay or accept to buy or sell.  Unfortunately, Loyal3 went out of business, probably because the ways it was trying to monetize did not provide enough revenue.

I was recently approached about writing an article about Stockpile, a new online stock broker. After poking around their website and speaking to a representative, I decided to open an account.

Opening An Account With Stockpile

Opening an account with Stockpile is straight forward, though it is not immediately apparent where to do so.  Here is a screenshot of their homepage:

It is clearly trying to get you to push the "Buy Stock" button, and doing so will eventually get you to sign up for an account, but at first it made me think the only way to buy stock was with a credit or debit card.  Fortunately, that's not true.  If you click on the Log In button it will lead you to register and to link your bank account, if desired.  

Completing the forms was simple and the requiste micro-deposits were in my account in less than 24 hours.  After verifying the amounts, I was all set.  I transferred some money into my account and was told I could do so by debit card ($0.25 fee for most debit cards and funds available right away) or by bank transfer (free but it takes three business days).

Buying Stock at Stockpile

Stockpile offers four different ways to buy stock:
  • With cash:  Transfer money from your bank account to stockpile and use it to purchase stock.  This method costs you $0.99 per trade

  • With a Credit or Debit Card:  If you don't want to link your bank account or if you want some float between the time you purchase the stock and the time you pay for it, you may use your credit or debit card (no float with a debit card). This costs you the $0.99 trading fee plus a 3% debit/credit card fee

  • By Purchasing a Gift Card:  If you want to give stock to someone as a gift, Stockpile offers both conventional and e-gift cards.  You pick both the amount of money you wish to spend and the company in which you would like have the recipient invest.  As the purchaser you would pay the fees which are  $2.99 for the first stock, $0.99 for each additional stock, and 3% credit/debit card fee.  For example if I wanted to give you $50, split between AT&T and Ford, I would pay $5.48 in fees.
  • By Redeeming a Gift Card:  If someone gives me a gift card, I can invest the face value in any stock(s) I want, despite what the giver selected.  I can also redeem it a retailer gift card if I don't want to own stock.  Since the purchaser paid the investing fees, I don't have to pay them.
No matter how you choose to pay for your stock, Stockpile sells it by the dollar, not by the share.  Investors end up with fractional shares, depending on the cost at the time they invest.

Also, Stockpile only transfers stock once per day.  Buyers pay that day's closing price for their shares, and that's what sellers receive.  While this is fine for people who plan to buy and hold, those who day trade or want to be able to sell within  a few minutes will need a different broker.

Information Available at Stockpile

Looking at Stockpile's website, I definitely get the impression it is targeting investing beginners, not long-time sophisticated investors.  There are catchy graphics and articles about such topics as "Why Do Stock Prices Go Up and Down?".  The articles are short, easy to read and informative.  I recommend them to anyone who wants a quick easy way to learn about investing in the stock market.

Once you are done learning about the stock market, simply click on "Return to Homepage" to get back to the investing side.

On the investing side, Stockpile offers a little information about all the stocks it sells.  If you click on the name of a stock as if to purchase it, you are shown a diagram of the price of that stock the previous day, week, month, year and for the lifetime of the stock.  You can click to Stats and get information like that shown above.  The News tab links to news articles about the company and About gives a short description of the company and its products.

Advantages of Stockpile:

  1. Stockpile operates on a per dollar basis rather than a per share basis.  This allows the investment of relatively little money in companies with high share prices.  

  2. Fees can be low.  A quick search told me that the average actively managed mutual fund has a yearly expense ratio a little over 1%, and that index funds are about 0.2%.  Those are numbers I keep in mind when considering brokerage fees.  If I pay too much in fees, I don't make money.  If you purchase $100 worth of one stock from Stockpile using cash transferred from your bank account, your expense will be about 1%, which I think is reasonable for a buy and hold investor.  If you purchase significantly less than that, your expense ratio becomes less reasonable.

  3. Website is very visual and organized to make it easy for a beginner to use.  There are limited choices (though not as limited as Loyal3) and the only thing they sell (at this time) is stocks and ETFs.  They do not sell bonds, options etc.

  4. They allow you to set up an account for a child, and allow the child to trade in that account subject to your approval.  

  5. Stockpile makes it easy to give the gift of stock to someone else.

Reasons Stockpile May Not Be For You

  1. Purchases and sales are recorded only once per day, at the closing price.  If you hear the market is dropping and you want to cash out NOW, it isn't going to happen with Stockpile.
  2. They don't offer every stock (though they have a large selection).
  3. They don't offer IRAs
  4. They don't offer margin trading, though they do allow you to use your credit card to purchase stock.

Giveaway:  $5.00 Worth of Stock

Stockpile wants to help people learn about the stock market, and what better way than to have some money involved?  Stockpile is offering all of my readers $5.00 worth of stock.  You never  have to buy another share (or fractional share).  You know there is a stock out there that you have thought about buying but....well here is your chance.  Use Stockpile's money, buy the stock, and if it skyrockets, well, that $5.00 could turn into $50 or $500.  If it crashes, well, it was Stockpile's money, not yours. 

I thought about putting up a Rafflecopter gadget and making you think you had to do all sorts of things for a chance to win this $5.00, but no, it is for everyone, just click here. When you do that, this nice blogger gets paid too.  

If you are a beginner who is looking for a low cost way to dip your toes in the stock market, Stockpile may be the place to start.

Securities offered through Stockpile Investments, Inc. Member FINRA / SIPC

*Part of Financially Savvy Saturdays on brokeGIRLrich.*

Tuesday, June 6, 2017

An Open Letter to My Health Insurer and Physicians

I'm basically a free-market Republican.  My basic philosophy is that the less the government is involved in business the better.  I also believe that it is for more efficient to save insurance for the big bills and not to use it for every routine expense.  That being said, right now, I'm angry.  I feel like I've been scre*** and it is your fault--yes, both of you, and I'll blame the government too.

What happened?  Well, on March 1 I started suffering from what I thought was a rather routine illness.  I called my doctor's office and they sent me to a partner clinic across town.  No problem, I understand that I can't get instant appointments with whomever I wish whenever I wish.

My appointment was with a nurse-practitioner.  Again, no problem.  As far as I knew, this was a routine problem and I just needed someone who could write a prescription.  When I got there, they checked my insurance and collected my co-payment, as expected.  The nurse-practitioner did as expected, ordered the lab tests I expected and wrote me the prescriptions that I expected.  No problem.

Unfortunately, the test results did not come back as expected, which led to questions about what was causing my symptoms (which had resolved promptly when I took the medication).  Sensibly, the NP referred me to a specialist, as the symptoms could have been indicative of something serious.

I saw the specialist who ordered more tests, tests that I thought were very reasonable considering the possible causes of my symptoms.

I returned a few weeks later for the tests.  They were negative.  Most likely, the doctor said, the symptoms were caused by some germ that didn't show up on the first test, and that nothing was wrong.  However to be sure, we should do some more tests.  She'd get her office to get insurance company approval.

A week or so later her office called to schedule the appointment for the tests, and I agreed.  The day before the tests the patient accounts office called and told me the cost for the tests would be over $800.  When I asked for an explanation I was told that this test came under my deductible, not my co-pay.  Our local paper had just published a piece on medical prices, so I asked for the codes for the test I needed and I checked online.  The Medicare price for this procedure was $425.  I called several facilities around town and asked for the cash price for this procedure and most of them wanted about $800; one only wanted $750.  I told my doctor's office to send the orders over there, but when I called to schedule the procedure, they wanted over $800 because the orders listed my insurance.

Then the bills started coming.  It seems that my insurance had changed--and I knew that, sort of.  I knew the deductible and co-pays had increased (along with the premiums) but until this year, my co-pay covered everything that happened at the doctor's office that day, in other words, it covered the shots and the labwork.  Well, not anymore.  You'd think a change like that would have been pointed out to us.

I read medical bills for a living but I still couldn't make enough sense out of the bills I got to determine what they were charging me for and why.  All I know is that I paid the doctor's office over $200 last month and today I got a bill for another $300.  I got an EOB that said something was non-covered and I may owe the provider.

I don't live paycheck to paycheck.  Our income allows us to handle bills like this.  Even if I end up paying all of this out of pocket, we will still have dinner tomorrow, and no one is going to turn our lights off.  Still, I have a very nasty taste in my mouth.  It is nasty tastes like this that make people think that "someone" ought to "fix" the problem.  If you (doctor and insurance company) want to know why so many people are agitating for change in the way we pay for medical treatment, an experience like this is a big reason why.

First of all, I had no clue these bills were coming (except for the $800 bill).  Secondly, when I got the bill, it just gave a date of service and an amount.  There was no clue what it was for.  The EOB had more information, but even it wasn't complete.  The EOB showed a huge charge, a "discount", the amount the insurance company paid and the amount owed.  It did not explain why I owed that much, to get that information I had to call.  Medical math has to be the most complicated PhD level math course there is, and since I'm not a math person, I don't get it.

Finally, the bills do seem outrageous compared to the amount of time I was there, the complexity of the problem etc.  Maybe I'm wrong about that, maybe they really do need for me to pay that much in order for them to maintain the business and pay the employees decently--but back to that $800 charge for a test that would have cost Medicare $425--why should I pay more than Medicare?  The nice lady at the doctor's office said they could send me a financial aid packet if I needed one, and if I have to pay a little more so the poor can get treatment, I'm ok with that, but I don't see why I should pay more than the biggest payer.

With everything else I buy I am told the price before I incur the charges.  Even the mechanic gives me an estimate before he fixes the car.  Just trying to get prices over the phone requires more sophistication about medical billing that what most people have.  A friend of mine just posted on facebook that she went to an in-network ER for what was truly an emergency and was sent into surgery.  However, it seems that the assistant surgeon (who she never saw) was out-of-network and the insurance company wouldn't pay, so she was supposed to.

Folks, business as you are now running it is only going to make people madder as the current trend promoted by both Obamacare and Turmp is for more individual responsibility for medical bills (up to a point) in the form of deductibles and co-pays and taxes on plans that pay "too much".  All this in-network, out-of-network foolishness with those huge "discounts" was fine when we knew that at the end of the day we could easily find doctors who were "on the list" and that we were going to pay $50 for the doctor's visit.  However, if you are going to make me page huge insurance premiums and then get stuck with big medical bills too, I'm going to feel taken advantage of and people who feel taken advantage of aren't going to be happy with the status quo--and I'll give you a heads up, I'm not looking for more ways to put money in your pocket. *Part of Financially Savvy Saturdays on brokeGIRLrich.*