Monday, February 29, 2016
This means that if I could theoretically double the size of my investment portfolio, and have it yield close to what my portfolio yields today, I could achieve financial independence right away. In other words, if I were to borrow an amount that is equivalent to the value of my portfolio at low interest rates, and have it yield more than my cost of capital, I could achieve my dividend crossover point much faster. I researched the margin rates for online brokers in the US and found out that Interactive Brokers has the lowest rates for using margin.
Currently, an account with a margin balance between $100,000 and $1,000,000 can borrow at 1.38%/year. The rate on the first $100,000 in margin is 1.88%. Let’s assume that an Interactive Brokers customer invests $500,000 in dividend paying stocks yielding 4%. This portfolio would be expected to generate $20,000 in annual dividend income/year. If this investor borrows an additional $250,000 from their broker, they will pay an annual interest of 1.58%/year. If they invest the rest in dividend paying stocks yielding 4%, they would theoretically increase their dividend income to $30,000, or a cool 50% increase. The investor will incur an interest charge of $3,950/year, which brings the net dividend income to a little over $26,000, which is still 30% more than before. Given the fact that many dividend growth stocks typically increase distributions every year, this investor would be able to reach the desired level of dividend income much faster.
Thursday, November 6, 2008
Still there are some brave souls out there who are either keeping their retirement contributions or even increasing them.
With the stock market charts drawing steep vertical declines for September and October, and the VIX reaching multi-decade highs many investors are wondering if we have reached a bottom. Fundamentals might be deteriorating in the near term; however that shouldn’t mean that the stock market should keep going lower. When the stock market hit its all time highs in early October 2007 almost everyone was bullish on stocks. Furthermore the financial crisis was still in its infancy as few investors had the vision to foretell the complete meltdown of the system including failures at Lehman, Bear Stearns, AIG or Fannie and Freddie. So what are the charts saying?
During bear markets there usually are several bear market rallies which cause major market indexes to rise significantly off their recent bear market lows. Another feature of most bear markets is analysts trying to time to bottom at the expense of investors. I did try doing exactly the same in March as well. The thing is that as long as the market keeps making lower highs and lower lows, then the technical picture is bearish. If the market breaks the pattern of lower highs and lower lows, it could then start charting a bullish picture for equities.
Levels to watch on the upside include 105.53, which was a reaction high straight from October lows and is close to a 50% retracement of the last leg of the bear market from the August lows. Other levels to watch on the upside include 113.15 as well as the 120-124 area. I see the 120-124 area as the toughest to break out of as it previously marked 3 intermediate term bottoms in 2008.
Full Disclosure: Long S&P 500
Thursday, February 21, 2008
I was researching alternative assets classes that not only could perform as well as the stock market but also provide good diversification opportunities as well as passive income possibility. One asset class which seems a little overlooked is timber.
According to several websites that I found, investing in timber has beaten the stock market by 4 percentage points from 1973-2003.
There are several advantages of investing in timber:
- Timber is uncorrelated to stocks
- The price of timber has consistently beaten inflation by 3.3% over the past decades
- Unlike other commodities, trees grow every year by 4% - 10% and as they age their wood becomes more valuable
- Even if prices decline, you can decide not to cut your trees in a given period. Your trees would be growing no matter what you decide to do with them.
- You get certain tax breaks – your profit is taxed as a capital gain. On top of that, as timber is cut, another tax break called a depletion allowance kicks in.
- You could invest in timber REIT’s, like PCL and RYN, which are publicly traded on NYSE
- The Food and Agricultural Organization of the United Nations forecasts that world demand for wood will nearly double by the middle of this century.
- The USDA-Forest Service projects that demand for U.S. forest products will reach 25 billion cubic feet annually by 2050, up from nearly 18 billion in the 1990s.
There are several disadvantages of investing in timber as well though
- Most direct timber investment is limited to wealthy individuals who can chip in at least $1,000,000 to $5,000,000.
- Timber Investment Management Organizations typically require a ten year lock up period to their investors
- Timber Investment Management Organizations typically charge hedge fund like fees of 1% on all the assets invested plus 20% of the annual profits. It seems like you do need some managing of your forests in order to maintain them.
- Trees could be subject to fires. 0.5% of all trees suffer from this
- Trees could suffer from disease’s, so one should spread their timberland holdings across the globe
- Timber investments have soared form 1 billion in 1989 to more than 20 billion by 2005. Seems like the market is getting crowded.
- Even though timber investments have provided investors with 22% annual returns on average form 1987-1996, the returns have dropped to 8 % over the past decade
- Demand for timber is subject to cyclical swings in the economy. If housing starts plummet or manufacturers need less cardboard, then prices could plummet.
You could find more information about investing in timber under the following links below:
My financial resources are still less than 1 to 5 million in order to invest directly in timber. For diversification purposes though, I am considering investing in RYN or PCL. Stay tuned for my analysis of these two companies.
Saturday, February 2, 2008
Friday, February 1, 2008
On December 31, 2007 the E-mini futures closed at 1477.25, while the S&P 500 index closed at 1468.36. The dividends during 1Q 2008 are expected to be around 7 points. Thus investors would have to achieve around 16 points in interest income just to break even. In order to achieve 16 points from interest, you need to have interest income of around 1.08% per quarter, which is an APY of 4.37%. Any yield that the investor can achieve above 4.37 % APY would result in him/her outperforming the index. In today’s environment of rapidly declining interest rates though, it might not be possible to outperform the market using S&P 500 futures. Using the interest rates from this website https://www.bankmw.com/Rates.aspx i was able to construct the following ladder ( on your left).
Tomorrow I would post my ideas on outperforming the market using an enhanced strategy.
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