IBM: Analyzing The Downside Of Dividend Investing

I have previously said that if you purchase a large-cap stock with a history of raising dividends, and then hold on for five years, the odds of you suffering significant harm is quite limited. It is my contention that most investors get into trouble because they consider two to three years to be super long term—it feels like it to them–when really it is not a long enough time for business results to accumulate and tilt the odds in your favor against the vagaries of Mr. Market.

From time to time, I like to revisit investments that meet some of my criteria and don’t work out as initially hoped. It is the only clear way to fairly evaluate a strategy. If I am going to trumpet the success stories, then it is important to include the downside of an investment plan otherwise my partial disclosures would really be a disservice to the people that are trying to make up their minds regarding what to do with the surplus they accumulate from their labor.

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Abercrombie & Fitch’s 5% Dividend Yield

After I poked at Abercrombie & Fitch (ANF) in my article on Snapchat–using it as my example of permanent capital destruction following a period of high investor sentiment–I wanted to make sure that I wasn’t take an underserved shot at the company so I reviewed it for the first time in a few years.

Usually, when a stock falls from the $80 to $15 range and is still earnings a profit, the fair follow-up question is: “Has this stock fallen so far that it is now a value pick?”

But I don’t that type of thinking applies here.

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Snapchat IPO? Don’t Buy

Snapchat, which prefers to go by the name of its parent company Snap Inc. in the investment context, is preparing for a $25 billion IPO in the second quarter of 2017. You already know my opinion on things like this, but I’ll go ahead and complete the formalities: People that buy into IPOs like Snapchat are engaging in the greater fool theory that was typical in the 1990s because they are speculating when they purchase an ownership share in a business that has no relationship between profits and earnings.

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My Interview With USA Investments

Mike Jefferson puts out a free investment pamphlet every month from his firm USA Investments that is aimed to increase investor literacy. These pamphlets appear in the Dallas area at business locations—auto-repair stores, dentist offices, law firms, coffee shops, and the like. Normally one of my articles is syndicated in each edition. For the November 1, 2016 edition, however, I get interviewed.

I include the transcript below:

1. Tim, how do you view the stock market right now?

The past two years or so has been the first instance in my adult life in which I thought that buying an S&P 500 index fund wasn’t a great deal. When you have a P/E ratio that will take away two percentage points a year from P/E compression, earnings per share growth around six percentage points, and dividends around two percentage points, you are really setting yourself up for six percent annual returns. I think 6% annually is going to be the center of gravity for indexers during the 2016-2026 stretch.

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Wells Fargo CEO John Stumpf Resigns

If you ever occupy a figurehead position for an organization, you will find yourself being judged unfairly for things that are outside the scope of your direct and even indirect control. Sometimes this unfairness will harm your general reputation. If you are an operating officer at Alcoa, you will often be criticized for things that are endemic to the slumping global business model which you cannot singlehandedly change. And sometimes the unfairness will help your general reputation. If you are the head of a sales department at Nike, you will be praised for lofty growth that really got set in motion by the marketing decisions of past generations that did things like hire Michael Jordan to build up the brand–your main contribution was not messing it up.

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