Dividend Buyer Beware
A Discount Retailing Winner
Happy Thanksgiving! It's my favorite holiday of the year, partially because I get to see so many of my old friends (who are usually in town), partially because of the food (who doesn't love a holiday that centers around pigging out?) and partially because of football, which goes hand in hand with Thanksgiving.
New England is one of the regions where high schools play their last game of the year on Thanksgiving. As you read this, I've already gone to my school's game, hopefully watched the hometown Warriors win, and then made it back to my parents' house for some family, fun and food (and more football on TV).
What does have to do with stocks? Nothing! I just get excited writing about Thanksgiving!
But I do have some moneymaking and money-saving advice. The first topic concerns gasoline prices. With all the malaise in the stock market, a few of us at the office are able to crack a smile thanks to collapsing gasoline prices--AAA says that the average price for regular unleaded peaked at $4.11 per gallon on July 17, and has dipped under $2 (actually under $1.90) this week. That's a 54% drop in four months!
Which leads me to a question that was recently raised by someone: Wouldn't it be great if we could lock in these gasoline prices, so that we'd be guaranteed to pay less than $2? At first, such a question just brought a chuckle. But then I began to think about it, and I discovered that there is a way to hedge your gasoline consumption.
The instrument you can use is the U.S. Gasoline Fund (UGA), which is an exchange-traded fund that tracks the price of gasoline futures. And my off-the-wall thought is this: If you want to "lock in" the current price of gasoline, you can buy some of UGA. Here's how.
Let's say you drive approximately 14,000 miles a year and your car gets 20 miles per gallon. That means you use about 700 gallons of gasoline per year (14,000 divided by 20 = 700). At the current rate of about $2 per gallon, that means you're spending $1,400 per year for gasoline.
Thus, you could buy $1400 worth of UGA and hold on to it for a year. If gasoline prices rise ... and you end up paying more at the pump ... you'll also end up making money on your UGA shares. For example, let's say the price of gasoline rises 50% next month, and then stays level for all of 2009. (Unlikely, I know, but bear with me.)
That means you won't pay $1,400 for gasoline at the pump, but $2,100 instead. However, it also means the value of your $1,400 of UGA will rise 50% to $2,100. In this scenario, you've "lost" $700 at the pump. But you've made $700 on your UGA shares. The converse is also true. If gasoline prices continue falling, you lose on your UGA shares ... but, of course, you'll "gain" by paying less at the pump.
Of course, it's not that simple. There are commissions and taxes to consider. And, of course, gasoline prices fluctuate all the time. But the overall point is valid--if you invest in UGA, you'll be "hedged" in case prices rise.
Is this a bit too cute? Possibly. I'm not saying I'll rush out to buy UGA tomorrow, even though I do commute a total of 50 miles per day to work; for the average Joe, such a tactic might not be worth it.
But if you have a few family cars that you're footing the gasoline bill for, if your job demands many more miles in commuting, or if you own a small business that operates a fleet automobiles (a small delivery service? A limo service?), it's an option that's available. Just something to consider as you s-l-o-w-l-y digest your Thanksgiving turkey (and mashed potatoes and green beans and squash and ... ).
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Take Advantage of the Stock Market's Bargains
Many great stocks have plunged along with the market and are now selling at bargain prices. But these stocks won't be cheap forever. Smart investors are snapping up these deals every time the market goes down.
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Now on to a more traditional investing topic, investing for dividends. I've written in the past that dividend investments can be a solid piece of your portfolio. I prefer growth stocks, and in that realm, dividends are basically meaningless. However, with more and more stocks, trusts, exchange-traded funds and the like, there are definitely intelligent ways to invest for yield.
Today, however, many investors are looking for certainty in an insanely volatile, uncertain world. And because of that, many people are examining certain financial stocks or trusts that have an indicated dividend yield north of 10% ... sometimes 20% or more! Thus, all you have to do is buy and hold, and you'll get paid a bunch of money ... or so it seems.
As always, when you're putting your money to work, you can't leave your brain at the door. Ask yourself: Why would XYZ company be willing to pay me 10% or 20% per year when everything else on the planet is yielding in the low single digits? The answer: They're not. And in most cases, the companies aren't even pretending they're going to pay you that amount. Let me explain.
When a stock's "indicated yield" is cited, it's simply a matter of taking the most recent dividend payment (say, $1 per share), and dividing it by the most recent stock price. Now, three months ago, that stock might have been priced at 100 a share; with a $1 quarterly dividend, that meant a yield of 4%.
But today, after the market's decline, that same stock might only be trading at 40. Thus, since the last dividend was $1, the indicated yield is 10%, assuming the dividend will remain unchanged.
I've heard from a few dozen people who are going nuts over certain securities that are supposedly yielding 15% or more. But the odds are very, very much against you getting any sort of payout like that. If it's a cyclical company, for example, which has been benefiting from rising commodity prices, it's likely to slash its dividend in a big way during the coming months. And, of course, any financial firm with liquidity issues is likely to chop its payout in order to preserve capital.
That's not to say there aren't some great dividend plays out there. I've written about Verizon (VZ) in this Advisory before; I'm not pretending to have done exhaustive research on the company, but earnings are steady (actually rising 5% to 10%), and business isn't going to fall off a cliff because of the economy. Other stalwarts like Johnson & Johnson (JNJ, yield = 3.2%), Coca-Cola (KO, yield = 3.5%) and even Philip Morris International (PM, yield = 5.5%) are likely to keep their payouts roughly the same.
The message here is: Beware of the supposed free lunch on Wall Street, because there is no such thing. Double-check the safety of the dividend before you jump in.
With the economy bad and likely to get a lot worse (the leading economic indicators are all shouting severe recession), retail stocks have been crushed, especially those that offer discretionary (read: expensive) items. Any company selling HDTVs or fancy jewelry or expensive apparel has seen its stocks crushed in recent months.
However, the pain being felt by those companies is benefitting many discount retailers-those that sell basic goods and services at bargain basement prices. One of the best of the bunch is Dollar Tree (DLTR), which was featured in Cabot Top Ten Report on November 3.
"With the economy weak and getting weaker, retailers like Dollar Tree are not only holding their own, they're actually showing accelerating growth as consumers flock for bargains. (Family Dollar Stores (FDO), featured in last week's Cabot Top Ten Report, is in the same sector.) Dollar Tree sells a variety of basic consumables, including gift bags, candy, stationery, housewares, seasonal decorations, toys, party supplies and even beauty products. And as its name suggests, most of the products sell for a buck! The company has 3,500 stores nationwide, so it's pretty much expanded as much as it's going to in the U.S. But solid management and the economic climate have helped push up growth rates--revenues, though up just 13%, marked their fastest growth in five quarters. And earnings are expanding at a 20% clip, and should surprise on the upside going forward."
Adding to the positive vibes was the company's quarterly report, released Tuesday morning. Third quarter sales rose 12% to $1.11 billion (same-store sales actually grew 6.2%), while earnings gained a solid 20% to 47 cents a share, three cents above expectations. CEO Bob Sasser said, "We are gaining new customers and increasing market share. More people are shopping at our stores and they're buying more when they visit."
Dollar Tree is not a great growth company--it's not the next Apple (AAPL) or First Solar (FSLR). But it is in the right place at the right time, and the stock has etched a solid launching pad in the last couple of months. Shares nearly broke to new highs on Tuesday following the report. I believe the stock can bring you profits if the market's bounce can turn into something longer lasting.
All the best,
Editor's Note: Michael Cintolo is the editor of the flagship Cabot Market Letter, which, thanks to both its market timing and stock selection systems, has outperformed in both the bull market of 2007 and the bear market of 2008. (Believe it or not, Cabot Market Letter is up nearly 20% since the start of 2007, while the indexes are down 40%.) In fact, Mike was one of the only advisors that got his subscribers into cash in early September, avoiding the crash since that time. Today, he's still protecting subscribers' capital, but is also honing his Watch List with big-potential stocks that can deliver great profits ... if you get in at the right time. If you'd like to protect your capital during bear markets, and still outperform the market during bull markets, you owe it to yourself to try Cabot Market Letter.