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chaloobi
SFN Regular
1620 Posts |
 Posted - 09/22/2004 : 05:44:16
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Since someone brought up investing, and since this place seems to have some excellent critical thinkers, I thought I'd run this idea by you. It's a very simple 'mechanical' investment plan I heard about on a radio personal finance program. I works like this:
1. You take a sum of money, say $10k, and invest in the 10 stocks from the DOW that currently have the highest dividend yeild.
2. You sit on them for 12 months, regardless of what happens. You take the dividend payouts as cash, not reinvesting them.
3. After 12 months, you sell the stocks that are no longer in the top 10 for dividend yeild and buy those that have replaced them. Invest the accumulated dividends in the new stock purchases. Repeat annually.
This seems like a great plan to me. First of all you make good income off the dividend. Second, you never sell any stock until the short term capital gain period passes, thus minimizing your tax burden. Third, there's two ways the dividend yeild can drop: 1. If the stock price rises and 2. If the company cuts the dividend. In either case, you'll do well to sell. Fourth, there's two ways the dividend yeild can rise: 1. If the stock price falls. 2. If the company raises the dividend. In either case it's probably a good idea to hold onto the stock. Fifth, if you follow the plan strictly it takes any emotion out of the decision making process - it'll automatically cut your losses, lock in your gains, and insulate you from any high risk stocks or any 'bubble' type situations.
Question: Have I missed anything here? What about this is not a good investment plan?
Note: I used Yahoo's stock filter to pull up the DOW's highest dividend yeilders and I got spooked a bit. I was expecting stocks in the range of a 5-10% dividend yeild at max. I found stocks in the 20-30% range! Holy crap! That seems WAY too good to be true! They were some odd stocks I didn't recognize (the two top ones had Isreal in their name-not a region of the world I'd call stable) - that and all manner of fossil energy stocks... Can you imagine a 20% annual gain from dividend alone? Something's got to be extremely risky with that - too good to be true.
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-Chaloobi
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Valiant Dancer
Forum Goalie
USA
4826 Posts |
Posted - 09/22/2004 : 07:25:46 [Permalink]
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quote:
Originally posted by chaloobi
Since someone brought up investing, and since this place seems to have some excellent critical thinkers, I thought I'd run this idea by you. It's a very simple 'mechanical' investment plan I heard about on a radio personal finance program. I works like this:
1. You take a sum of money, say $10k, and invest in the 10 stocks from the DOW that currently have the highest dividend yeild.
2. You sit on them for 12 months, regardless of what happens. You take the dividend payouts as cash, not reinvesting them.
3. After 12 months, you sell the stocks that are no longer in the top 10 for dividend yeild and buy those that have replaced them. Invest the accumulated dividends in the new stock purchases. Repeat annually.
This seems like a great plan to me. First of all you make good income off the dividend. Second, you never sell any stock until the short term capital gain period passes, thus minimizing your tax burden. Third, there's two ways the dividend yeild can drop: 1. If the stock price rises and 2. If the company cuts the dividend. In either case, you'll do well to sell. Fourth, there's two ways the dividend yeild can rise: 1. If the stock price falls. 2. If the company raises the dividend. In either case it's probably a good idea to hold onto the stock. Fifth, if you follow the plan strictly it takes any emotion out of the decision making process - it'll automatically cut your losses, lock in your gains, and insulate you from any high risk stocks or any 'bubble' type situations.
Question: Have I missed anything here? What about this is not a good investment plan?
Note: I used Yahoo's stock filter to pull up the DOW's highest dividend yeilders and I got spooked a bit. I was expecting stocks in the range of a 5-10% dividend yeild at max. I found stocks in the 20-30% range! Holy crap! That seems WAY too good to be true! They were some odd stocks I didn't recognize (the two top ones had Isreal in their name-not a region of the world I'd call stable) - that and all manner of fossil energy stocks... Can you imagine a 20% annual gain from dividend alone? Something's got to be extremely risky with that - too good to be true.
With any stock, the higher the risk the higher the potential gain/loss. My personal portfolio through my company's 403(b) is divided up amongst some moderate risk (growth), some low risk (bonds), some inflation linked (mostly foreign holdings), and some real-estate. Dividends are linked to how well the company does. If they are able to pay 20% annual gain, you have a volitile stock which may go tits up on you.
There is no such thing as making a quick buck on the stock exchange without a lot of risk. The question is how much risk are you willing to take.
I have always seen that going with a stock for the long haul (not selling immediately after a dividend gets cut/price shifts down) usually normalized out. The stock market bumps up and down all the time. Sometimes it trends up for a long period, sometimes it trends down for a long period.
I have a moderate threshhold for risk, so my diversified holdings gets me some pretty stable rates (although not large) from the bonds and real estate, I get some higher rates from the stock holdings and foreign holdings but these are quite a bit less stable. What I'm hoping for is a chance to buy stock in Ballard Power Systems of Canada. But that's because I like their business model and like the product they are developing. I know full well that this will be the most risky venture as the company may fail, but I don't think so based on the plan the company has and the partnerships it has with the automotive industry. |
Cthulhu/Asmodeus when you're tired of voting for the lesser of two evils
Brother Cutlass of Reasoned Discussion |
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BigPapaSmurf
SFN Die Hard
3192 Posts |
Posted - 09/22/2004 : 07:37:13 [Permalink]
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Biggest problem I see is that most of the time the dividend change wont be enough to offset a poor performing stock.
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"...things I have neither seen nor experienced nor heard tell of from anybody else; things, what is more, that do not in fact exist and could not ever exist at all. So my readers must not believe a word I say." -Lucian on his book True History
"...They accept such things on faith alone, without any evidence. So if a fraudulent and cunning person who knows how to take advantage of a situation comes among them, he can make himself rich in a short time." -Lucian critical of early Christians c.166 AD From his book, De Morte Peregrini |
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chaloobi
SFN Regular
1620 Posts |
Posted - 09/22/2004 : 07:53:56 [Permalink]
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quote:
Originally posted by BigPapaSmurf
Biggest problem I see is that most of the time the dividend change wont be enough to offset a poor performing stock.
I'm not sure what you mean. |
-Chaloobi
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chaloobi
SFN Regular
1620 Posts |
Posted - 09/23/2004 : 12:01:05 [Permalink]
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quote:
Originally posted by chaloobi
quote:
Originally posted by BigPapaSmurf
Biggest problem I see is that most of the time the dividend change wont be enough to offset a poor performing stock.
I'm not sure what you mean.
I still don't know what you mean. |
-Chaloobi
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BigPapaSmurf
SFN Die Hard
3192 Posts |
Posted - 09/23/2004 : 12:05:58 [Permalink]
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Just saying that say if I held some K-mart stock two years ago, a 20% rise in dividend wouldnt have helped me.
Your plan doesnt account for stocks which become worthless (or relativly worthless)overnight.
Thats what I mean.
Edit: Also as stated above, the high dividend stocks are more volitile and thus more likely to tank. |
"...things I have neither seen nor experienced nor heard tell of from anybody else; things, what is more, that do not in fact exist and could not ever exist at all. So my readers must not believe a word I say." -Lucian on his book True History
"...They accept such things on faith alone, without any evidence. So if a fraudulent and cunning person who knows how to take advantage of a situation comes among them, he can make himself rich in a short time." -Lucian critical of early Christians c.166 AD From his book, De Morte Peregrini |
| Edited by - BigPapaSmurf on 09/23/2004 12:15:45 |
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beskeptigal
SFN Die Hard
USA
3834 Posts |
Posted - 09/28/2004 : 03:47:30 [Permalink]
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Well since I posted in the other investment scheme thread, I thought I'd look at this one.
At first glance, I'd say you might be selling low and buying high if you follow your plan. The guys that make the real money, (not me so what do I know), manage to sell high and buy low by going opposite of one's instinct.
If you diversify, history has been that you will always make money in the long run. Even after the 1929 crash, stocks had recovered within a few years.
I suggest you invest and leave it alone. If you want to buy and sell do it on company research and teach yourself about the market rather than using that formula. In the mean time, test your formula over a year or so and see how it did on paper.
I have my stock money in a mutual fund. That way someone with more experience does the research and buying and selling. If I had the time, I'd do it myself. But I make more at my job because that is what I am good at. When I retire, maybe I'll teach myself about the market. |
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chaloobi
SFN Regular
1620 Posts |
Posted - 09/29/2004 : 11:50:07 [Permalink]
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quote:
Originally posted by beskeptigal
<snip>At first glance, I'd say you might be selling low and buying high if you follow your plan.
Well, it should do the opposite. If the stock price goes up, but the dividend stays the same, then the dividend [i]yield[/] will drop, and in the system, you would sell. Similarly, if the stock price drops, then the dividend yeild goes up, meaning you'll hold the stock. If the dividend drops but the stock price stays the same, then the dividend yeild will drop and you would sell. This would be good because if the company is cutting it's dividend, it probably isn't doing as well as it was when you bought it. And in any case, for the entire year you hold the stock, you're bringing in pretty good dividend money so even if you sell it without the price going way up or even dropping a little, your loss would be offset by the dividend payments.
quote:
I suggest you invest and leave it alone. If you want to buy and sell do it on company research and teach yourself about the market rather than using that formula. In the mean time, test your formula over a year or so and see how it did on paper.
I think you'd be crazy to do the system without researching a bit about the companies first. So maybe it'd be the top ten that are decent companies. . . .
quote:
I have my stock money in a mutual fund. That way someone with more experience does the research and buying and selling. If I had the time, I'd do it myself. But I make more at my job because that is what I am good at. When I retire, maybe I'll teach myself about the market.
I've got money in various mutual funds and index funds. I also have money in about a dozen stocks and in some index tracking stocks. I do the 'buy and leave it alone' thing with my 401k. My online brokerage account is where I meddle a lot. I think I will test this system out with a limited quanity of money, or just on paper, and see what happens. It's interesting enough to tinker with. |
-Chaloobi
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