Archive for November, 2013

MLP’s In A Dividend Portfolio? What Is Their Future?

By: ispeculatornew | Date posted: 11.27.2013 (3:00 am)
I’ve been working on a high dividend yield portfolio for some time now (it is coming, don’t lose hope!) and one of the recurring themes from the hundreds of investors who have been working on their own solution is the presence of MLP’s (master limited partnerships) in their portfolio. I did send out an email to newsletter subscribers with more info about MLP’s which you might want to check out:
Basically, it is a trending form of company that allows for small/zero corporate taxes to be charged as long as earnings are passed through to investors. The same type of capital structure named “income trusts” started gaining traction a few years ago in Canada. Over thew years, more and more companies started moving to that structure which was great for investors of course.

What Happened? BCE inc.

When BCE inc, one of the largest telecom corporations in Canada announced it would be converting to become an income trust, the Canadian Government felt compelled to act. It could not stand still while all corporations moved to a non-taxable corporate structure so it ended up basically eliminating the fiscal benefits of income trusts (not surprisingly, there are now very few income trusts left in Canada).

Will the Same Happen In The US?

It’s certainly possible but I wouldn’t call it likely. Corporate tax “avoidance” is not exactly a big problem when you look at big corporations such as Google, Facebook and others that barely pay any taxes at all. Assuming that it’s not, what are the consequences for investors such as you and I?

MLP’s Bring Tax Complexity

There are many differences between investing in an MLP and a typical dividend stock. Not only do taxes depend on the investor’s income and what type of account holds the assets but also where that investor is. Depending on the state where you live and where the MLP is located, the taxes will be treated differently. I’m not a fan of complex taxes. Why? Because as a small investor that does not have the time to study all of these rules, I can’t optimize those investments correctly.  That is the biggest reason why I personally try to invest in MLP’s through funds such as ETF’s. Yes, it can still fit into a dividend/passive income portfolio but is it pure dividend investing? No. So if MLP’s continue to grow in size and importance, I will end up having less pure dividend stocks.

Do you agree? Or Do You Hold MLP’s Directly?

My Favorite Follows

By: ispeculatornew | Date posted: 11.22.2013 (3:00 am)

avcToday I wanted to do things in a slightly different manner. Instead of pointing to different posts that I enjoyed, here are my favorite blogs and twitter follows, which may or may not be relevant to this blog:) Hope you enjoy and I’d love to hear about yours:)

Blogs

ZeroHedge: Great financial blog, it’s fairly “negative/end of the world” type of thing but it’s generally well argued making it very interesting

A VC: Fred Wilson is a very well known Tech VC which writes a very interesting blog

AllThingsD: One of the top sources for Tech stock news

Blog Maverick: Mark Cuban owns a NBA team, has made millions in the tech bubble, has interesting views, so his blog is a great follow:)

NathanBerry: Very interesting blog for anyone who runs a website, all about designing sites, products, apps, etc

Seth Godin: Short but powerful thoughts!

Strength Running: Any runners out there? This personal running coach is a great follow and has helped me a great deal

The Art of Non-Conformity: Chris is an amazingly talented guy who runs several businesses and has visited (and blogged about) every country in the world in the past few years, not bad right?

Tim Ferriss Blog: This guys rocks, he’s amazing… !

Twitter Follows

@ThePointsGuy: If you’re into hotel & airline loyalty programs, great follow:)

@Carl_C_Icahn: You know who this guy is…He’s been very interesting since joining Twitter

@ElonMusk: I’ve written about this guy… we need more guys like him with big ideas

@TheMMQB: Great follow for NFL fans out there

@RogerFederer – The greatest tennis player ever.. enough said

@FitBit – I’m a big fan of their tracking devices

@JeffDSachs – I’m more conservative than this guy obviously but he’s got very interesting takes and ideas!

@BostonRob – Any Survivor fans? I sure hope so:)

@BenMezrich – I’ve discussed this guy several times, he’s my favorite author and despite being a Pats fan, seems like a great guy

Passive Income Update – November 2013

By: ispeculatornew | Date posted: 11.20.2013 (3:00 am)

retire_22The reason I post this monthly update is both to keep myself accountable but also have a more public discussion about my plans and how I can become financially independent as quickly as possible.

With both sides of the US government acting like complete fools these days, more than ever I feel like being financially independent is critical, don’t you? So here is how I went about this whole process:

For example, if my base salary is currently 100K, my objective is to make 100K of passive income on an annual basis. This could be done through a variety of methods which I will be exploring of course. A few people tried to figure out how much capital I have by looking at the USDP size. The main issue is that the USDP is only part of my dividend income. I also get income from my ETF holdings, etc.

My primary objective remains to generate 100K in passive income on an annual basis as soon as possible, ideally from a few different sources.

November Updates

-The latest update of the USDP was published 2 days ago
-I posted an updated post about the idea of buying real estate to rent it out on sites like AirBnB

How Much Do I Really Need?

I am aiming for an income of 100K or so, before taxes as a first goal. To be clear, I feel like I need significantly less than that. Why? I’ve described how I am living off of significantly less right now (I’m paying taxes, paying my house, saving, etc). I also have the option, as discussed of retiring in a foreign location. I discussed the idea of needing 100K in yearly income here.

Overall, I feel like aiming for the same level of income as I am currently making is very very reasonable and I could easily live with less but why aim lower if I’m confident I can reach that 100K?:)

Why Am I Doing This?

pas

I’m a strong believer in working with clear objectives but also holding myself accountable so writing about these objectives will without any doubt help me reach financial independence more quickly.

Current Passive Income Flows:

5.85% – Dividend/Investing Portfolio: I am currently generating a dividend yield of about 3.40%. This portfolio will be increasing over time. I use a bucket system which I will be writing more about but the main retirement components are a long term dividend portfolio (see the Ultimate Sustainable Dividend Portfolio) and an ETF portfolio (see BuildYourETFPortfolio for more details on how I build mine). I saw a slight increase here thanks to markets rising and a similar yield.

7.48% – Private Investment In My Online Company: I have discussed how my web company has been the best investment of my life so far. I’m happy to say that I was able to slightly increase my monthly income from the company even though it wasn’t expected. I certainly hope that will keep happening.

Total: 13.32%

It’s not spectacular by any means yet. That being said, I am 32 years old and do have a decent base (I could live with less easily).. I will continue to work on getting that total as close as I can do 100%:)

pas2

Passive Income Ideas

0% – Real Estate: I have started writing about adding real estate to my income flows. One aspect that I love about Real Estate Investing is how much of an inflation hedge it will represent for my portfolio. So I started looking into some aspects such as investing into residential or commercial real estate as well as the question of becoming (or not) a landlord. I’ve also looked into the possibility of renting property that I’d own though AirBnB (and an updated post here) and a few other questions I had been wondering about.

0% – P2P Lending – I started exploring the idea and wrote my first post about it here🙂

0% – Annuity – No intention of buying an annuity for the time being

0% – Farming – I know it sounds crazy but I’ve started looking into it as you can see from my post a couple of weeks ago

0% – Other ideas – I could end up starting other businesses or projects will I’ll certainly keep you posted about.

What I Am Not/Will Not Include

Pensions: I do know that the government will be paying me a sum of money once I retire. However, given how poor government finances look like these days, I personally think it’s crazy to count on the government actually fulfilling its promises. It won’t happen. Yes, there will be money, but not anywhere what is currently being promised. Whatever I do end up getting will be a nice surprise.

I feel like I am being extremely conservative here. By not including my government pension and also not including the fact that lower revenues will mean less taxes to be paid, I’m overestimating the amount of passive income that is truly needed. That is more than fine by me. I’d also like to think that my house will be paid by then making my level of spending lower all things being equal.

My Long Term Passive Income Objectives

January 2014: $12,000/year
January 2018: $25,000/year
January 2023: $50,000/year
January 2030: $100,000/year

Things continue to go better than planned but the line isn’t as “upward” as I’d like. Since I get a significant portion of my savings from my year-end bonus, it’s not a big surprise though. I do hope to get some kind of jump in the next month… 🙂

pas3

Do you have any questions or comments? I’d love to hear any ideas or how you’ve been managing on your end as well!

 

Ultimate Sustainable Dividend Portfolio – November 2013 Update – Solid Performance

By: ispeculatornew | Date posted: 11.18.2013 (3:00 am)

investingIn September 2011, I did some in-depth research to find long term sustainable dividend stocks and have been doing updates on this Ultimate Sustainable dividend portfolio since then in the attempt to show how well such a portfolio can perform over the long term. I would personally say that things have been going very well and will certainly continue to evolve. I do have a few more things planned which I will discuss in the near future.

This month turned out very well as the USDP outperformed the S&P500 significantly;)

The USDP is obviously a critical part of my now very public quest to replace my job income with passive income. you can see my most recent update here.

Things continue to go very well for the USDP which I’m thrilled to see. Very exciting stuff and I’m thrilled with how things have gone so far. I have done a couple of trades and continue to work on optimizing it, if ever you would like to receive those types of updates, please join, it’s free:

Keep in mind that this portfolio was built by selecting 20 stocks out of thousands. The goal is not to pick the best dividend stocks but rather to pick a diversified, high quality portfolio that will keep dividends increasing over time.

Here are the holdings as of last night to start off:

TickerNameSharesNov 15 2013 PriceNov 15 2013 Values
OMCOmnicom Group Inc29$69.95 $2,028.55
MSFTMicrosoft Corp71$37.84 $2,686.71
JCIJohnson Controls Inc39$49.45 $1,928.55
PEPPepsiCo Inc/NC27$86.03 $2,322.81
ETNEaton Corp31$72.30 $2,241.30
DOVDover Corp23$93.30 $2,145.90
ITWIllinois Tool Works Inc27$79.65 $2,150.55
XLNXXilinx Inc37$43.66 $1,615.42
SJMJM Smucker Co/The19$109.35 $2,077.65
BLKBlackRock Inc10$303.19 $3,031.90
TROWT Rowe Price Group Inc28$79.99 $2,239.72
OXYOccidental Petroleum Corp21$97.54 $2,048.34
COPConocoPhillips25$73.30 $1,832.50
XOMExxon Mobil Corp19$95.27 $1,810.13
ADIAnalog Devices Inc43$50.69 $2,179.67
HASHasbro Inc31$52.73 $1,634.63
MATMattel Inc42$46.18 $1,939.56
INTCIntel Corp53$24.52 $1,299.56
AFLAflac28$67.48 $1,889.44
BAXBaxter International23$68.66 $1,579.18
IVZInvesco Ltd67$33.84 $2,267.28
VWOVanguard FTSE Emerging Markets28$41.61 $1,165.08
BNDVanguard Total Bond Market13$80.95 $1,052.35
Cash$375.02
USDP $45,541.80
SPX13.80378067 $3,217.11 $44,408.22

Dividends Received

November turned out very well as you can see as the portfolio generated $111, which is 40% more than the same month last year.  Take a look at the progress:

usdp2

Ultimate Sustainable Dividend Portfolio News

Nothing to report in terms of increased dividend which is a shame. A significant piece of news is the fact that Berkshire announced it now held a stake in Exxon (XOM) which is obviously great news and already pushed up the stock.

Returns

It was certainly a great month for the USDP as I gained a slightly bigger edge over the S&P500 (total return). As I continue to add exposure to alternative asset classes, I do expect returns to be less correlated with the S&P500, hopefully doing better.  Here are the top and worst performers:

Top Performers
Hasbro (HAS) +18,19%
Johnson Controls Inc. (JCI) +17,32%
Exxon Mobile (XOM) +15,18%

Worst Performer
XLinx Inc. (XLNK) -4,38%

usdp

Trades

If you remember, last month I started adding positions in 2 ETF’s, Emerging Markets (VWO) and Bonds (BND) to add diversified income. I did a bit more of that this month as I added about $400 into each one. I’ll need to do that a few more times to get closer to the target weight.

Weekend Readings – What Is The Extent Of The NSA’s Reach?

By: ispeculatornew | Date posted: 11.15.2013 (3:00 am)

NSAAs I continue to read about the NSA and everything it’s been up to in the past few months, it certainly makes me wonder about many different things… what are your thoughts on it? In this era where our info is all stored electronically, seems like they have access to everything!! In the meantime, here are a few interesting readings:)

General Readings

Hedge funds cutting bets on gold @ Bloomberg

Dividend & Passive Income Readings

Johnson & Johson – Time to wait? @ DividendMonk

Tech Stock Readings

Snapchat refusing a $3B offer from Facebook (FB) @ NYT
Will Google (GOOG) docs kill Microsoft Office? @ CNN
Amazon (AMZN) strikes deal with USPS @ NYT
A note on the high end @ Ben-Evans

Shorting stocks through options

By: ispeculatornew | Date posted: 11.13.2013 (5:00 am)

Through my long and short technology stocks, I very frequently end up shorting tech stocks. For various reasons, many investors cannot or prefer to not short the stocks. Why? There are several possible reasons:

Account Type Does Not Permit it: If you have a retirement account a cash account, you are likely unable to short stocks.

Avoiding Excessive Risk: If you have ever considered shorting stocks, you would probably know that the potential loss on such a trade is basically unlimited. In reality, no stock will go to infinity overnight but it still gives you a good idea that such a trade can end up going awfully wrong.

Expensive or Impossible Borrow: A reader had emailed me a few weeks ago saying that some of the stocks that I was shorting were basically impossible to borrow with his broker. In some cases, while the borrow is possible, the costs are so excessive that it’s not something you’d really consider doing.

What Can Be Done?

If someone is trying to do a trade such as Long Apple (AAPL) and short Microsoft (MSFT) but cannot or will not short Microsoft, one alternative would be to trade the options. There are two different bets that will give you a positive return if Microsoft does not increase as much.

Short Call: If you sell calls on Microsoft, you will end up making money if the stock price does not increase much. Here is the chart of profits and loss on selling calls:

payoff-short-call-option-microsoft

However, shorting a call will help on the borrowing side of the equation but not so much with the unlimited loss… depending on the reason why you’re looking to trade options, this might or might not work.

Long Put: If you buy a put option, you are basically buying the to sell the stock at some later date. The return chart is much more similar to shorting the stock as you can see here:

long-put

The main disadvantage here is that since you are buying the stock (Google) and the put option, this trade requires more capital. When you a do buy and sell, the trade does not require much if any capital at the start.

The Dangers

1-One of the dangers of using options instead of stocks is that options do not always react in the same way as stocks. They have a different “delta”. For different reasons, options will end up moving differently. The best way to ensure that the options does move in the same or very similar way is to trade options that have a delta of 1 or so.

What is an option that has a delta of 1?

An option that is well in the money which means that it is almost certain to be exercised at expiry will have a delta of nearly 1 which means that it will move like the underlying stock.

2-A second danger is buying illiquid options and get a poor execution price. The best way to avoid this is to only buy stocks that have a very tight bid-ask spread, ideally of $0.10 or less.

Have You Ever Tried It?

Have you ever shorted a stock through options instead of stocks?

Consumer Debt Continues To Increase…WTF?

By: ispeculatornew | Date posted: 11.12.2013 (5:00 am)

I understand many of the arguments behind it. The economy is fragile, many households have at least 1 unemployed person. Real estate has risen so much in the past few decades that consumers have been forced to take higher mortgages. I also understand that as a general rule, we are much more into spending to get the latest Apple product, that brand new car, etc. All of those things have clearly created a situation where not only local, state and national governments are taking on excessive debt but so are households.

The last time I checked, getting out of debt was much more complicated for consumers. They generally cannot simply raise their income as governments do with theirs (through taxes and others), have limited ability to get more credit, etc.

What Has Caused This?

I guess many different elements could be blamed. I would blame marketing firms for finding our weak spots by creating the new, hot products that we’ve gotta buy. Having that iPhone from a few years ago has became so “lame”. We always try to get the most recent tech gadgets even if we cannot really afford them.

Critical Flaw

Another point is that they have figured out one critical human flaw. We are very poor judges of the future value of money. Many consumers would never pay $3000 for that brand new tv even if they had the money available. Give them possibility of paying $50 per month over 5 years though and they’ll jump all over it. It’s crazy but true. Using credit has made it so much easier for consumers to buy things without feeling like they were actually spending that money. Many studies have proved exactly that. Similar stories exist in the investing world of course. All investors hate to lose money but for some reason they feel better about it if they keep their position, knowing that they can make it all back (never mind the fact that they could lose even more).

The Impact:

A picture is worth 1000 words….

HouseholdDebtPercentGDPQ42009

As If Things Weren’t Bad Enough…

Individuals are also investing a lot less than they used to:

The overall impact of course is that households are now poorer, especially when you adjust for inflation….

But doesn’t it all come down to one simple equation?

Earn > Spend

And ideally, do not take on more debt than you would if you were paying right away. What are your thoughts on this?

Facebook ($FB) A Much Better Value Than Twitter ($TWTR)

By: ispeculatornew | Date posted: 11.11.2013 (3:00 am)

$TWTRI had mentioned that I’d be very reluctant to short a stock like Twitter (TWTR). I do stand by that statement and doubt I’d short it anytime soon. There is too much risk involved in betting against a stock that has so much potential, an incredibly volatile stock, etc. That being said, as much as I was tempted to buy Facebook right after the IPO, I’m not getting that feeling when I look at Twitter. It looks incredibly expensive to me.  There is certainly a possibility that Twitter will be one of those stocks like Amazon (AMZN) and LinkedIn (LNKD) that ends up getting away. I am willing to take that risk though as I feel like here are stocks with higher upside risk with less risk. The obvious comparison to Twitter is Facebook of course. Why?

-Facebook was the last big tech stock to go public
-They are both part of the new “social web”
-The both had many question regarding their profitability
-etc

Comparisons Stop There

Yes, the Twitter IPO has certainly gone much smoother. There were no technical glitches, the stock had that expected IPO bump (from a $26 IPO to trading above $40), etc. It has been a smoother ride and in a way, Twitter did indeed avoid many of the mistakes made by Zuckerberg & Co. Where does Twitter now stand? The company is currently valued at $23B or so (20% of Facebook’s value).

What does Twitter currently have to show? It recently doubled its annual revenues to $534M (about 10% of Facebook’s).

So basically, you end up paying twice as much in terms of value/revenues.  It gets worse though. In terms of earnings per share, Facebook was profitable a few years before going public. For Twitter? Analysts expect Twitter to have a profitable quarter for the first time in Q4 2014!! Analysts expect a profit of $0.01/share for Twitter then compared with a $0.34 profit for Facebook (34x less).

One of the main arguments is that Twitter is going public at a much earlier stage than Facebook. I’d agree with that. But I do still think the upside for Facebook remains much higher as it can go well beyond advertising. It’s also possible for Twitter but certainly not as obvious. Do I expect Twitter to grow revenues faster than Facebook? Yes maybe for 1-2 years. But I can’t imagine that trend keeping up.

For those buying Twitter, what is the basis of your purchase? I love the product but just think the valuation is inflated.

Weekend Readings – Tesla Or Pinterest?

By: ispeculatornew | Date posted: 11.08.2013 (3:00 am)

muskLoved this tweet… I understand why of course (low margins in making cars, long odds, etc) but it still seems a bit silly, doesn’t it?:)

General Readings

The greatest trader who ever lived @ CrossingWallStreet
Rich families hoarding cash @ CNBC
The 2 and 20 era is over @ FocusOnFunds
Reduce the noise level in your investment process @ Washington Post

Dividend & Passive Income Readings

Top 5 Things To Do When The Market Overheats @ TheDividendGuyBlog

Tech Stock Readings

Should I buy Twitter ($TWTR)? @ TheAtlantic
What is Twitter ($TWTR) worth? @ BusinessInsider

Buying Property To Rent Out (AirBnB style): Getting Easier And More Complex?

By: ispeculatornew | Date posted: 11.06.2013 (3:00 am)

airbnbI’ve written a few times about my desire to start generating some of my future passive income through real estate. I’ve looked into:

I also looked into the idea of buying real estate like a condo for example and then renting it out through short term rentals thanks to sites like AirBnB. One of my biggest fears was the time that would be involved, especially needing to meet those renting to give them the keys, etc. Since then, I’ve continued to do my own research and did stumble into a few different things:

Lockitron: I’m not associated with this business but think it’s brilliant. Basically, it’s a way to open a door through a smartphone. This would be very helpful because I could own a condo in another city and not have to manage the key part. Basically, the renter could simply call me (or anyone else I decided) to have us open the door remotely. Once that’s done, the person could simply get the key inside the condo, stay there for a few days and then leave the key inside (I could lock the condo remotely as well). This simplifies things significantly. I would then only need to have someone to do cleaning between visitors, etc. Yes, there might be a few instances where I’d need more but in 95% of cases, I could do everything remotely which is a big difference.

Legal Complexity: While one issue is getting easier, others are not. AirBnB, which is the biggest “short term rental” player has been facing an increasing number of legal challenges. Both in Quebec and in New York State for example, those renting through sites like AirBnB have been acting illegally. That is also the case in many other places around the world. Why? Partially because the government wants to keep control of such activities so it wants to issue licences, charge taxes, etc. Another part of the problem is that hotels are increasingly seeing this type of activity as a threat to their business model so they are lobbying very hard to limit the growth.
Even in places where it’s currently happening, it’s usually unclear if it the government will come out with specific legislation to address this which makes it very difficult to invest money and counting on these returns to keep up. There are still some very successful stories coming out, here is one great example:

Clearly, this strategy has been working very well for several real estate investors and does end up providing decent income. It does require some organization, especially at the start but I get the feeling that once it’s set up correctly, it can become a solid source of income.

I’ve also heard from a few readers who’ve had success making me increasingly tempted to try this out. What about all of you?