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No. of Recommendations: 74
In this post...
http://boards.fool.com/Message.asp?mid=27763831
...I did a quick-and-dirty portfolio taken from Berkshire's list of
holdings to come up with a dividend-paying alternative for those who liek
Berkshire's thinking but for whatever reason really do want a dividend.
It's not designed to be the best portfolio in the world, but a demonstration
of the idea that *if* you want dividend income, a list stolen from somebody
good is probably better than a random selection.

However, I decided to put a little more thought into it, based more
on the stocks that I really liked at today's prices, and I added a
few of my own picks notably for international diversification.

So, here it is. Taken from a free newsletter I write from time to time.

======================================================
The Informed Hunch, your free investment rag
"Getting stuff for free is good, but an income is even better"

Let's say for the sake of argument that you don't really think the stock
market prices are going to go up a whole lot in the next decade.
That's what I think. Up and down a lot, sure, but not up and up. I don't
think prices are likely to be a whole lot higher in 5 or 10 years than they are now.

So, if stock prices are going net nowhere, a nice steady income gives
you something to pass the time. Good old dividends. No, they're not as
exciting as a stock that doubles in a month, but they do add up over time.

So, herewith, Uncle Jim's Dividend Portfolio.

Note, I expect that the world economy is going to stay pretty sick for a
large number of years. I expect a lot more cuts in dividends, and I
expect the dividends of the broad US market to be lower than their peak
for a long time, maybe 6-8 years at a guess.

So this set of stocks, like any other, is pretty likely to experience
some dividend cuts. However, it will probably have some increases too,
and I think the stocks in the list are much better than average quality,
so that should help a little too.

How are they picked? Well, I cheated. One of the better ways to get
above-average stocks is to steal the list from somebody smarter than you
are, so that's what I've done. The bulk of this list is made up of
those stocks held by Berkshire Hathaway which also pay reasonable
dividends. So sue me! From that list I picked my favourites for being
both safe long run investments and very undervalued right now.

The stocks are not equally weighted in this portfolio---I have suggested
buying more of those stocks with higher dividends, and there are also
bonus weightings on stocks which are expected by some analysts to have
above-average returns in the next several years. Then I added a few
fudge factors of my own to boost a couple of favourites.

Well, here's the list.
The suggested share counts add up to a portfolio of $200,000. But of
course you can increase or decrease the number of shares proportionally.

Ticker         Company              Industry       Country      FX    Price   Shares  Dollars  Fraction of Portfolio  Dividend Yield
GE General Electric Big machines USA 1 10.71 1290 13816 6.94% 3.73%
STD Santander Spanish/LatAm bank Spain 1 11.34 1140 12928 6.50% 7.86%
WFC Wells Fargo Bank USA 1 22.91 560 12830 6.45% 0.87%
COP Conoco Philips Integrated oil USA 1 39.44 290 11438 5.75% 4.77%
SNY Sanofi-Aventis Europe drugs USA 1 29.44 380 11187 5.62% 4.89%
KFT Kraft Foods Branded food USA 1 25.70 370 9509 4.78% 4.51%
GSK GlaxoSmithKline UK drugs USA 1 34.85 270 9410 4.73% 4.70%
4502:JP Takeda Japan drugs Japan 92.810 3740.00 230 9268 4.66% 4.81%
ETN Eaton Elec & hydraulics USA 1 40.98 220 9016 4.53% 4.88%
IR Ingersoll Rand Industrial machines USA 1 19.85 450 8933 4.49% 3.63%
NSC Norfolk Southern Railway USA 1 36.10 240 8664 4.35% 3.77%
JNJ Johnson & Johnson Health products USA 1 57.08 140 7991 4.02% 3.43%
AXP American Express Charge cards USA 1 22.72 350 7952 4.00% 3.17%
PG Procter & Gamble Household products USA 1 52.64 150 7896 3.97% 3.34%
RY.TO Royal Bank Canada Canadian bank Canada 1.1668 44.99 200 7712 3.88% 4.45%
KO Coca Cola Soft drinks USA 1 48.51 155 7519 3.78% 3.38%
NESN.VX Nestle Candy and foods Swiss 1.0898 41.14 180 6795 3.41% 3.40%
TSCO.L Tesco UK supermarket UK 62.2278 349.20 1210 6790 3.41% 3.23%
CL Colgate Palmolive Toothpaste etc USA 1 73.34 90 6601 3.32% 2.40%
PKX Posco Korean steel USA 1 80.73 80 6458 3.25% 3.12%
DEO Diageo Liquor and beer USA 1 56.56 110 6222 3.13% 2.79%
BNI Burlington Northern Railway USA 1 68.09 80 5447 2.74% 2.35%
TI Toyota Industries Machines & parts Japan 92.810 2260.00 190 4627 2.32% 0.88%

Now, this portfolio as suggested has a current dividend yield of 4.00%.
However, in these trying times, various firms have been cutting their
dividends, and some might be expected to restore them again at
some point, so there are changes which should be noted.

The notable ones are:
Wells Fargo cut their dividend a lot. I expect them to restore
it entirely within a couple of years. If they do so, so the dividend
yield will be 5.94% of today's price, not the 0.87% shown in the table.

General Electric has a small chance of blowing up because of stuff in
their financing arm that perhaps nobody understands. But if they don't,
their earnings will carry them away from their troubles, and the
dividend will be restored at some point. If it goes back to where it
is, the yield would be 11.58% rather than the 3.73% shown. If it's
half-restored, that would be 7.66%, a more reasonable medium term goal.

Toyota Industries is shown with a yield of 0.88%. This assumes that
their most recent reduced semiannual dividend becomes the new norm. If
it goes back where it was, this will rise to 2.65%.

If all three of those things happen (we'll assume GE is half-restored),
then the overall yield of the portfolio will be 4.53% rather than 4%.

However, there will probably also be some unforeseen bad news. I'm expecting
the average US company to cut its dividend about 30% in the next couple
of years, so the dividend yield on this portfolio might drop as low as
3% for a while. However, I have done whatever I can to pick extremely
good companies, so I think this set should have cuts which are smaller than typical.

A couple of notes on this portfolio:
Toyota Industries is NOT the well known car maker Toyota Motors. Toyota
Industries is a smaller, older, and more diversified parent company
which just happens to own a huge number of shares of Toyota Motors.
So, for every $100 worth of Toyota Industries shares you buy today, you
are getting $98.65 worth of Toyota Motors shares at today's market
value, but you also get a portion of Toyota Industries' own business
which is only costing you $1.35. Just that portion of the business
costing you only $1.35 earned $11.43 in 2008, made up of $3.98 worth of
dividends from Toyota Motors, and $7.45 in profits from Toyota Industries'
own operations. (they make a lot of weaving looms, car air conditioners,
and car parts). This "leftover" bit of their own business in the parent
company that the market is giving no value to had revenues of $16.5
billion last year, but a market capitalization of $99 million.
So even if they're having a bad year it's a great deal. In short, it's a
"buy one get one free". Plus, in case it's not obvious to everybody,
Toyota Motors is the best-run car company in the world. About the only
disadvantage is that Toyota Industries generally has to be bought on
the Tokyo stock exchange. It's not listed in the US, and the "pink
sheet" for it is almost impossible to trade.

You've probably never heard of Takeda. But it's the largest drug
company in Japan, which is the second largest drug market in the world.

Santanter is the most solid bank in Europe. It's true that they are
likely to have some tense moments because the Spanish economy is in free
fall, but they are actually pretty diversified geographically in Latin
America and have a very strong balance sheet (at least for a European bank!).
I think they will prosper. They will be the last ones standing, at least.

The Royal Bank of Canada might be the most solid bank in the world,
though it's hard to make a single pick. They are the very essence of
"boring". Who wants to be an excited bank shareholder? A big bonus is
that most of their revenue is in Canadian dollars, which will probably
do well in the years to come compared to the US dollar.

Sanofi-Aventis is the largest vaccine maker, the 6th largest over-the-counter
drug maker, a very large prescription drug company, and #1 or #2 in
quite a large number of developing countries. It's very cheap right
now, and they have a fortress of a balance sheet.

What do I recommend doing with these stocks? If you want dividends, I
think you could buy this slate and pretty much forget about them for a
decade. I would not rebalance the portfolio at all---some of these
firms will grow a lot more than others, so you might as well let those
winners grow to a larger fraction of the portfolio over time. Sure,
they will go though periods that they are overvalued or undervalued in
the short term, but it's best and easiest simply to ignore that.

Lastly, the hidden gem of good news: I would speculate that this slate
of stocks will increase in value and price a lot too. I am (foolishly)
forecasting an annual compound return including dividends of over
10%/year for this portfolio in the next decade or so. (in round
numbers, 3-4% dividends and at least 6-7%/year average price growth
rate). The dividends will be a lot steadier than the share prices,
which can be totally ignored. 10% a year might not sound like so much,
but let's look at the S&P index in ten years and see how high a hurdle it was!

As always, I might be wrong. There are sure to be a few duds in this
list, and maybe a couple of explosions. But, I have high hopes.

Happy investing!
Jim
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No. of Recommendations: 0
I forgot to add the numeric ticker for Toyota Industries. It's 6201:JP
You can get a quote here http://www.bloomberg.com/apps/quote?ticker=6201%3AJP

Jim
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No. of Recommendations: 0
Sweet list, thanks.

jan
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Funny, I was going to post something about dividend returning stocks today or tomorrow. As I look out over the past few decades I realize that non dividend paying stocks depend on the "kindness of strangers" for me to realize any gains from all my hard intellectual work. WEB certainly likes free cash flow, why not me? I thing that your post and your research to make the post cements your position in my mind, as to why I read this board. Keep up the good work. PS I like MO for its dividend

Dr. Steve
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No. of Recommendations: 7
Once last thing about Conoco. I was reading the morningstar in it and it seems that they overpaid so much for their assets in the past few years,that they might have to issue more debt in order for them to pay its dividend. I guess that the "owner earnings" might not be there in the future. I like Exxon because the way I figure it, if I keep it long enough I will be the CEO. They buy back about 2-3% of their stock each year and since I have owned it in 1997, the number of shares has decreased by 20%. I figure that after another 100 years I will be the majority stockholder and then can vote myself a great post retirement package.

Dr. Steve
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No. of Recommendations: 0
<<I figure that after another 100 years I will be the majority stockholder and then can vote myself a great post retirement package.>>

By that time, the company may have only one oil well left in a small backyard:)
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No. of Recommendations: 5
I was reading the morningstar in it and it seems that they overpaid so
much for their assets in the past few years,that they might have to issue
more debt in order for them to pay its dividend. I guess that the "owner
earnings" might not be there in the future.


I would need to understand this line of reasoning a whole lot better.

They earn a lot of money as a general rule. Their business requires
a lot of capital, but they could still pay off pretty much all their debt
as it comes due just out of ongoing profits. (e.g., $16.5 billion due
within 5 years would require EPS of only $2.25, but I expect them to
average over twice that). As for dividend coverage, on an ongoing basis
it looks to me like their payout ratio will only have poked its head above
the 50% level for this one year at a guess.

I'm not vouching for the intelligence of management. They might issue
stock at a low price or overpay for something. Lots of buybacks closer to $80,
then program cancelled at $40. And of course things might not go anywhere
for a couple/few years. But I don't see big dangers in the current
situation, and I think someone waiting for $100+ per share exit price
won't have to wait too many years, nor lose much sleep while waiting.
Even if it takes 10 years (which I doubt), that's >11%/year compounded
assuming the dividend stays constant at today's level.
If it takes 4 (not utterly inconceivable), it's 27%/year compounded.

Exxon may well be the better and smarter company. But "cheap" has its
attractions, too--I think ConocoPhilips has a lot more upside.
But I am no expert in evaluating oil companies.

Jim
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No. of Recommendations: 1
Thank you for this excellent post, which is worth 10 of most posts that make the "Best of" list.

Wendy
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No. of Recommendations: 0
Jim,

This is a great list. If you had to reduce it to say... 5 to 8 holdings, which ones would make the grade... in your opinion.

I'm thinking of Charlie Munger's more concentrated approach to a portfolio here...

Thanks,

Jan

:^)
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No. of Recommendations: 12
This is a great list. If you had to reduce it to say... 5 to 8 holdings, which ones would make the grade... in your opinion.

I'm thinking of Charlie Munger's more concentrated approach to a portfolio here...


Fair question.
Personally I would not buy this whole slate, for a variety of reasons.
I started from the premise of an investor seeking a diversified portfolio
with high dividend, which isn't what I'd do myself. (I pay no tax on
capital gains and 30% tax on dividends, for one thing).
The ones I'd have would be picked for a variety of different reasons,
so they may not be in keeping with the idea of the post.

There are two broad principles I'd probably apply to adapt the list:

(1) look for the ones with the highest earnings yield at whatever you
estimate the on-trend sustainable current earnings are. To get
the yield up on the suggested portfolio I had to bias in favour of
yield and against earnings yield which I'd normally start with.
A much better but much more tricky approach is simply to sort by the ratio
of your pessimistic estimate of earnings per share in ten years to the current price.
(2) And, if you really want current income, there are probably better deals
in preferred shares than in common stock these days. For example,
even after the huge price run-up, Wells perpetual preferred L are still paying 9.75%.
The reason there weren't any preferreds in my list is that they are all
much more complicated than common stock. (convertible, redeemable,
fixed term, cumulative, blah blah blah). Plus, of course, the "angle"
was using Berkshire's holdings as an imprimatur of quality.


But, from within the things on that list, some thoughts:

Top tier, no footnotes:
WFC because Uncle Warren told me he'd like to own the whole company.
SNY for a great dividend and huge earnings backed by non-US revenues.
COP for the combo of yield, earnings, safety, and future payoff.

Assuming (as I do) that WFC reinstates their old dividend at some
point, these three alone equally weighted have a blended dividend yield
of 5.2% and an average earnings yield around 12%.

Second tier:
- AXP, WEB: "American Express is going to be around forever." 03/2009.
A bit of a run-up already from the lows, but I believe they will have EPS over
$3 again soon enough, which will be an earnings yield of 13% on today's price.
- BNI. Again, Uncle Warren seems to buy everything he can of this,
I think it's his largest purchase ever in absolute terms. But some
folks have doubts about the government's desire to get rid of their
"excessive" profits.
- Royal Bank of Canada: extremly solid and I like the Canadian dollar
revenue, and I believe the drop in earnings is temporary not permanent,
so you're looking at an earnings yield over 9% cyclically adjusted.
There is no bank crisis in Canada, which is a nice outlier.
Obviously this is a bit late to the party---it was a screaming deal in March.
Maybe a good entry on this one will be the silver lining of any new panic sell-off.
- Santander: extraordinary yield, still making money, and the best bank in Europe.
The only question is whether that's good enough! Probably so.
- GE for the big payoff despite lingering risk, if you're willing to
have a very small chance of a big percentage loss. If even a portion
of the dividend is reinstated it will really throw cash at you.
- Toyota Industries because it's the best arbitrage deal of the century,
and adds geographic spread. Despite losing money at the moment,
the look-through earnings yield based on 2008 earnings is over 22%,
so it's a little like USG: screamingly cheap, just a long wait ahead.
It isn't a huge dividend yield, though.

More complicated:
- I like the numbers on Takeda, but I don't know all that much about them yet.
I have only recently started reading about them.
Earnings yield is around 11.2%. Very large dividend by Japanese
standards at 4.88% (180 yen on last night's price of 3690 yen).

A lot of the rest are extremely good firms, often better than those
above, but just perhaps not cheap enough to really grab my greed centre.
JNJ, KFT, KO, PG, CL, Nestle--- there is zero chance of danger in any of
those, even in a depression scenario. Most of them made it through the last one.
There are others I'd add to that list, like WMT.
Probably true of DEO too provided their debt stays under control.

This is all just food or thought. I could just as easily find bad things
to say against these firms, so these are not flat-out recommendations.
Conversely I can usually find something nice to say about even the worst nag.
If you just want good businesses with fantastic yield but for some
reason you don't mind the fact that management pays themselves so much
that they will get all the long run benefit, buy CODI, yield 16.9%!
But that's a big pill to swallow, and who knows how long it will last.
Like buying a race horse with a bad parasite problem.
Note, I own this nag, but I know better and shouldn't.

Jim
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No. of Recommendations: 2
- Toyota Industries because it's the best arbitrage deal of the century,
and adds geographic spread. Despite losing money at the moment,
the look-through earnings yield based on 2008 earnings is over 22%,
so it's a little like USG: screamingly cheap, just a long wait ahead.
It isn't a huge dividend yield, though.



Small nit to pick: although I agree this is a fantastic arbitrage deal, you haven't really pitched the arbitrage, just the Toyota Industries stock by itself. If you want to arbitrage, you have to short some Toyota Motors stock; for this, see previous posts.

Toyota Industries by itself is maybe a good investment, but personally I would shy away from ANY straight auto industry investment. I tend to think the current slowdown will last a long time, there is a huge glut of auto manufacturing capacity in the world, there are almost no countries (or no countries at all?) who will let their national auto industry fail, so it's hard to see a lot of capacity being taken out, and bankruptcies of competitors like GM and Chrysler (and, IMO, Ford eventually) have gone a long way to fix their balance sheets, making them a tougher match for Toyota.

On another note, why Takeda? Not a Buffett holding, making money in Yen which you think is going to fall, how did it get on the list?

Regards, BP
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No. of Recommendations: 2
on the div yield of BRK:

I gave he-who-must-not-be-named a rec just because I thought it was funny. Please forgive me.
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No. of Recommendations: 6
If you want to arbitrage, you have to short some Toyota Motors stock; for this, see previous posts.

Well, I guess it depends on your point of view and definitions.
I think of it as arbitrage because a large part of the reason for your
purchase is a glaring market mispricing error. The other side of your
arbitrage isn't a short position, but the rest of the market.
Or, one could think of it as a market-neutral arbitrage position long
Toyota Industries' operations and short Toyota Motors (which is good),
plus a separate long Toyota Motors position (also good, I believe).

Two companies for the price of one is kind of like two longs and a short, no? : )

Lastly, quite aside from any other coolly rational argument, the long-TI
short-TM combo position has a negative dividend yield which isn't really
the goal in this slate. (this is true if both restore their dividends
to prior levels, or if neither does)

As it happens, my original intention was to put Toyota Motors in as the
recommended stock, but TI is an irresistibly better way to buy it.

As you say, being long the motor industry does seem silly right now at first blush.
But if not now, then when? If you wait for robins, and all that.
No, carmaking isn't a wonderful business as a general rule, but I really do
expect Toyota and Toyota Industries to make huge amounts of money in
the next 10-15 years. If I really wanted to be a hedgie about it I
would short out a basket of other car firms, not Toyota, which would
take out most of the market exposure at perhaps lower cost. Ford and Fiat maybe?
But I think in this context (buy the whole slate for a decade, clip
coupons and ignore prices), shorting out the industry probably isn't worthwhile.
Now a long term sell-and-hold on airlines---hmmm---that idea might have legs!

In the end, one aspect of this portfolio is liberating. Since you're
focused on the current yield, it's easier to ignore the market
prices for a few years which allows for some patient picks.
If USG had a yield it would definitely be in the list, despite the
fact that I don't see any particular reason to expect the price to
rise much in the next couple/few years. The thought experiment on
that one is, how long till they're again making over $4.50/share even
after the 35% dilution, and what will the P/E be then?
If the answers are 6 years and 6x, that's 20%/year compounded if you buy at $9.
But alas no dividend, so that's for another thread.

On another note, why Takeda? Not a Buffett holding, making money in Yen which you think is going to fall, how did it get on the list?

As noted, several of the picks are not from Berkshire.
I guess I should have had a column pointing out which.

I believe the Japanese stock market as a whole is much more undervalued
than most in the world, so I wanted to include some exposure there.
Sometimes it seems pretty much everyone else but me has given up on it.
I considered a Japanese dividend fund, but it kind of stuck out like
a sore thumb in a table of individual equities, and any broad fund
must contain some dross. (incidentally, I kicked out DEB for Europe on
the same basis, though it otherwise looks pretty good, EY 9.4% and DY 6.6%)
So, I started searching for a company that would be hard to kill, with
a very high earnings yield even in a bad year and high (by Japanese
standards) dividend yield, well positioned in a business very unlikely
to go away. As for hard to kill, Takeda has a debt/capital ratio of 0.01%.
On a more macro note, doesn't rely on the Great Japanese Export Engine
for survival like so many others, so weakness in other major economies
won't make much difference to them. It appears that a lot of Japanese
folks really like pills. Not coincidentally, the overexposed
exporters (Sony, Canon, Panasonic...) tend to be the names we're familiar
with, explaining how something obscure (to us) like Takeda got suggested.
As for the currency, yes, I expect the yen to fall and Takeda has
almost all their revenue in yen. If I were doing it myself I'd perhaps
sell a yen futures contract against something firm like CAD* or even NOK
to back out the exposure, but that's probably gilding the lily if it's
only 2% of the portfolio. Plus, my weakening-yen opinion has a definite
shelf life whereas this slate of picks is intended to be more lasting.
And there's much to be said for KISS. Buy some good companies and forget 'em.

Some nice info here
http://markets.ft.com/tearsheets/financialsSummary.asp?s=jp%...

Jim

* In case anybody wants to check back in a year or three to see if
my expectation was useful, the JPY/CAD rate right now is exactly 80.0.
Though my goals are more modest, it's not impossible for that to hit 120.
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If I really wanted to be a hedgie about it I
would short out a basket of other car firms, not Toyota, which would
take out most of the market exposure at perhaps lower cost. Ford and Fiat maybe?


I agree, and I split the difference: half-short Toyota, half-short Ford. (Don't know much about Fiat, but that sounds like a good idea too.)

So, I started searching for a company that would be hard to kill, with
a very high earnings yield even in a bad year and high (by Japanese
standards) dividend yield, well positioned in a business very unlikely
to go away. As for hard to kill, Takeda has a debt/capital ratio of 0.01%.
On a more macro note, doesn't rely on the Great Japanese Export Engine
for survival like so many others, so weakness in other major economies
won't make much difference to them.


You're sounding like Berkowitz! (compliment intended). Nice idea.

Regards, BP
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No. of Recommendations: 1
Jim,

I have never "gotten" American Express. Why is it so special? The traveler's checks gave it a huge edge when "you didn't leave home without them"... but after the advent of plastic... well where is their moat?

jan

:^)
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No. of Recommendations: 6
I have never "gotten" American Express. Why is it so special? The
traveler's checks gave it a huge edge when "you didn't leave home without
them"... but after the advent of plastic... well where is their moat?


One thought: Merchant fees.
They charge twice what any other card does, have done so for around 50
years, and the gap hasn't closed. This isn't iron-clad proof, but
it's certainly prima facie evidence of a moat. A good
definition is "an above-average return on tangible capital employed
that can not be eroded by the entry of new competitors".

What else? They make a lot of money, and they have all the best clients.
(sure, they were dumb enough to pick up some bad clients too recently
but I don't think that's a fatal error).

Another simple approach: despite a 60% selloff from their high, they
have had a total return of 17.4%/year since late 1984 (52 times your money).
If they were back at their high tomorrow, it would be 19.9%/year compounded.
Sure it's less lately, but it's still very sweet.

Less compelling reason:
Depending which lineage you check, both Amex and Wells Fargo were founded
by the same two guys around the same time 150 years ago.

Jim
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No. of Recommendations: 0
Jim,

Thanks for the Amex explanation. You are right they do charge higher fees to merchants and consequently, not every merchant accepts Amex... (that has improved over time) or at the least you may be asked to NOT use your American Express card, due to higher fees etc., explains the clerk, but to use the other card they see when you open your wallet. I see MC, Visa and Discover used and cheerfully accepted so much more.



thanks,

jan

:^)
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No. of Recommendations: 2
An interesting reaction from a smart bond guy on another board to your post. I hope he follows through.

http://boards.fool.com/Message.asp?mid=27800626

Hockeypop
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No. of Recommendations: 1
Hockeypop,

Thanks for the rec. Give me a better idea of what would be useful for you to see from me, and I'll try to see what I can come up with.

I found the work Jim did hugely inspiring. In a disciplined manner, he tried to work out the consequences of an idea. My thought is that a similar approach could be done for bonds, especially for a combo of stocks and bonds. It's the same underlying company, and I can't believe that there aren't times when either the debt or the common departs from a "risk-adjusted paired value" and should be bought.

The idea isn't new. It's standard Marty Whitman stuff, but very few investors act on the idea. But pairs trading --which is what one would be doing across asset classes, rather than just within an asset class-- is well understood. So the theoretical work is available. And these days, getting the needed historical data for bonds isn't that hard. (Tedious to format, but not impossible to obtain the way it once was.)

Like I said, I'm just exploring. So if you have a clear idea of where the exploring might go, suggest away.

Charlie
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No. of Recommendations: 1
An interesting reaction from a smart bond guy on another board to your post. I hope he follows through.
...
My thought is that a similar approach could be done for bonds


I think this is a very fruitful direction, (though as I mentioned I think
perhaps some preferred shares might be a sweet spot right now).

However, there is one occasional disadvantage with bonds: sometimes the
very best companies are the ones perpetually drowning in cash, and there
simply isn't any debt outstanding that you can buy. And of course
it's a shame not to build your portfolio from the very best you can afford.

Incidentally,
As another example of potentially attractive preferreds, rather than
buying Royal Bank of Canada stock with its 4.1% dividend yield, you
could buy RBC preferred series AX whcih has a current yield of 5.55%,
with of course virtually no other upside if the common stock price
rises and considerably less downside if things tank again.
Also these are a little harder to understand---they have a term,
and even the rate is kind of complicated (after 5 years and each
5 years thereafter, they reset to pay the Govt of Canada 5-year
zero-coupon yield + 4.13%). http://www.rbc.com/investorrelations/pdf/SeriesAX.pdf
One nice thing about preferred shares is that they tend to be easier to
buy: exchange listed with visible bid/ask spreads and available
through most brokers, unlike a typical bond purchase experience
which is often more like buying common shares was in the 1950's.

Jim
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There was a saying back during the last oil boom, back when oil first hit $40 a barrel.

Boy, would I like to own the last barrel of oil. Think what it would be worth!

No me I want to own the next to last. The last barrel goes into a museum; you could sell the next to last barrel.


glh
A bit of history. Oil researves have always been on a decline. We were supposed to run out in 1980, then 1990, then... You get the picture. There is active conjecture that there is more undiscovered oil than we have ever produced in total. Probably right, but harder and more expensive to get all the time.
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There is active conjecture that there is more undiscovered oil than we
have ever produced in total. Probably right, but harder and more expensive to get all the time.


Makes perfect sense.
Oil will never run out---it will simply get more and more expensive, albeit chaotically and nonlinearly.
There was never an energy crisis, just a cheap energy crisis.

As Charlie Munger has pointed out, it's a waste to burn any oil.
There are wonderful things you can make out of oil that can't [as] easily
be made other ways (chemical feedstocks, fertilizer, plastics...) but
there are other ways to relocate energy.

Jim
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Hi Jim - you wrote:
What do I recommend doing with these stocks? If you want dividends, I
think you could buy this slate and pretty much forget about them for a
decade. I would not rebalance the portfolio at all---some of these
firms will grow a lot more than others, so you might as well let those
winners grow to a larger fraction of the portfolio over time. Sure,
they will go though periods that they are overvalued or undervalued in
the short term, but it's best and easiest simply to ignore that.


So is your thinking that this type of portfolio would not be a good candidate for a dollar cost averaging scheme (rebalanced in, say a Foliofn account), such as discussed here;
http://boards.fool.com/Message.asp?mid=26530276
and here:
http://boards.fool.com/Message.asp?mid=27356112&sort=who...

What am I missing? Are these not volatile enough?

Thanks a bunch for your thoughts!
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What am I missing? Are these not volatile enough?

Rebalancing is a winning strategy when a rise in the price of a component signals it will go down and a fall in the component price signals it will go up.

If there are winners and losers, however, winners going up "signals" they will go up mroe and losers going down "signals" they will go down more. In this case rebalancing just makes sure you sell winners before they win all the way in order to purchase losers on their way down.

Volatility is a loaded term that suggests price motions will revert to some mean. But that ain't necessarily the case.

R:
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Jim Mungo's dividend portfolio resembles Berkshire Hathaway in avoiding high-tech companies. I recently started building a dividend portfolio with about 35% of our assets and am still working on it. I have not yet bought, but will probably do so shortly, any Microsoft, as it promises to be a remarkable dividend payer. So is IBM. Banks have been, and in theory should continue to be, dependable dividend payers, but I don't know how soon their problems in the USA and western Europe will be amenable to treatment.

My investment objective is to create an income stream which, after taxes and devaluation of the currency, will support a steady or possibly steadily improving living standard. Berkshire Hathaway does not have a place in such a portfolio, except as a source of funds.

G H U
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Just a follow up on this old post of mine from mid 2009

If you just want good businesses with fantastic yield but for some
reason you don't mind the fact that management pays themselves so much
that they will get all the long run benefit, buy CODI, yield 16.9%!
But that's a big pill to swallow, and who knows how long it will last.
Like buying a race horse with a bad parasite problem.
Note, I own this nag, but I know better and shouldn't.


Return since then has been 21.9%/year compounded, assuming dividends reinvested with no tax hit.
Roughly 5.7%/year better than the S&P, depending on the precise start date.
Whoda thunk it?

Of course, a lot of the price run-up was in the last year, so it was relatively ho hum (though very high income) until lately.

Jim
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