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An Example Of Dividend Hors D’oeuvres With Southern Company

Southern Company is a solid example of a utility that more or less plods along over the years. Eventually this leads to a higher share price, but this certainly doesn’t have to happen instantly or on anyone’s schedule. This article looks at the concept of collecting dividends while you wait for the business performance to be reflected. In the income world, there’s a general phrase that goes something like this: “I’m getting paid to wait.” The idea is that stock prices are finicky, especially in the short term, but dividend payments tend to be much more consistent. If you’re primarily focused on the cash stream an investment throws off, you’re apt to be much better prepared to withstand the natural unpredictability of other people’s bids. Whether the share price goes up or down, sideways or shoots to the moon, that dividend payment is there regardless. You get paid for being a part owner of the company. John Neff had a particularly applicable quote in this regard: “As I see it, a superior yield at least lets you snack on hors d’oeuvres while waiting for the main meal.” That’s the sort of sentiment that allows you view business and investment performance rationally. Instead of relying on bids of what other people may or may not be willing to pay, you can focus your attention on being a partner in a successful enterprise. Eventually the main meal (capital appreciation) comes along anyway , but in the interim, it can be useful to see cash coming your way. I’d like to illustrate this notion using Southern Company (NYSE: SO ), a southern electric utility, as an example. On September 9, 2014, shares of Southern Company closed at just under $44. On September 10, 2015, shares closer around $42.50. Now instantly this is a great way to determine whether you happen to have a short-term or long-term investing mindset. For the short-term speculator, this would be pretty bad news. You need things to happen quickly and on your schedule. Seeing a security decrease in price, especially if you want to sell, simply isn’t great news. Your plans for a quick profit have been thwarted. On the other hand, the long-term investor has a few things to cheer. First, let’s think about the income side. Last year you would have been in the middle of collecting a $0.525 quarterly dividend payment, or $2.10 on an annual basis. On a $10,000 investment, for example, this would equate to about $477 in dividend payments. This year you would be collecting a $0.5425 quarterly dividend payment, or $2.17 on an annual basis. Without you doing anything on your part, your income would grow to $493, or an increase of about 3.3%. If you choose to reinvest, you could add 11 or 12 shares, to further increase your income by about $25. In other words, 3.3% per share dividend growth could have turned into 8.6% total income growth . Speaking of reinvesting, you can now do so at a lower valuation and thus higher yield. More than that, you could commit new capital with a better value proposition. Your investment buck now goes a bit further. If an investment is eventually going to be worth much more — which, incidentally, is near certain given increasing earnings and dividends over the long term — I want the opportunity to buy as much as I can at the same or lower price in the interim. If I’m regularly buying gasoline or my favorite cereal, it harms my purchasing ability when prices rise. Higher gas prices take away from funds available to buy cereal and vice versa. That much is plain. The same holds for stocks. With no intention of selling in the short term, and indeed an inclination to buy more, lower prices are what one ought to be rooting for. Receiving and reinvesting a dividend along the way can help illuminate this mindset. You’re regularly buying more. And naturally it isn’t just limited to a one-year timeframe. Share prices do all sorts of things over longer periods of time. In September of 2011, shares of the Southern Company were trading around $41. Today, as noted, this number is closer to $42.50. Once more this looks like rather sour news — four years and barely any price appreciation whatsoever. Yet not all it lost. In fact, it good be good news if you’re looking to accumulate more and increase your overall cash flow. First, you would have also received dividends along the way — to the tune of $8 per share owned. As such, your average compound gain would have been over 5% per year. Certainly nothing to text home about, but clearly quite far from negative returns. Dividends don’t get their fair share in stock charts, but they can certainly be a central component of returns. Just as important is that you get to reinvest at similar prices in an improving business. The share price is about the same, but the underlying earnings power and cash flow generated has increased; thus creating a “springboard” type effect. Here’s a look at the September 9th closing price and subsequent dividends an investor would have received during the past four years: Share Price Dividends 2011 $41.32 $1.93 2012 $45.91 $2.00 2013 $41.23 $2.07 2014 $43.97 $2.14 2015 $42.46 If you looked at a stock chart, you might think that you more or less broke even. If you add in dividends, you’d know you’re well above “breaking even.” For you to see a negative return in nominal terms, you would need the share price to be under $35 — equating to a dividend yield over 6%. This is possible, but less and less likely as the time goes on and the payout continues to increase. Just as important is the idea of reinvesting. With a $10,000 beginning investment, you would start with approximately 242 shares turning out $457 in annual income. This year you would be on your way to collecting $525 in payments, or a 15% increase. This is without any effort on your part and by simply collecting the payments. If you chose to reinvest, those 242 shares could have become 290 shares, generating $630 in annual income or a 38% total income increase. The shares would be worth about $12,300 today. To simply “break even” you would once more need a share price under $35. Moreover, this doesn’t account for the larger income stream to be received. In short, something like the Southern Company is a good example of the concept of dividend hors d’oeuvres . The idea is that an ongoing, stable and increasing dividend allows you to keep focused on the business. You get to snack while the price bounces about. In fact, you get a bit more out of the process when the share price stagnates or even declines. If your time horizon is long enough, eventually it becomes very difficult for a profitable and growing business to not be worth more. As seen above it can go years with a similar share price, but sooner or later investment performance and business performance tend to even out. Further, once you add in dividends and reinvestment, it becomes especially difficult to not get richer over time . Yet before that time comes, a lot of things can happen. By focusing on the appetizer — in this case the dividend — you can stay focused on the long-term success of your partnerships. Disclosure: I am/we are long SO. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Crash Of China Is A Myth

Summary “Crash” of China’s economy is a U.S. headline manufactured myth. What I didn’t see in China this week. China A Share market is still up 35% in past year vs. a decline for S&P 500. Major Emerging Markets ETFs (EEM, IEMG, VWO) are dominated by State Owned Enterprises from the legacy managed economy and part and parcel to failed efforts to manage the stock market. Now is the time to think of buying BABA, BIDU, JD, WUBA, YY and other Ecommerce companies that may be best way to invest in the future of consumption. Before reading please know that I am conflicted. I am the founder of EMQQ The Emerging Markets Internet & Ecommerce Index, which has been licensed as the basis for an ETF (NYSE: EMQQ ). I also have an economic interest in several other China ETFs including NYSE listed YAO, HAO, TAO CQQQ. My Recent Trip to China Tuesday I returned to San Francisco after spending eight days in the Chinese cities of Shanghai, Hangzhou and Nanjing. From the headlines in US newspapers prior to my departure, I might have expected to find a country in turmoil and crisis. Indeed this expectation was reinforced in the week prior to my trip as no less than five “non-investment” people – including my mother – asked me about the “crash” of China. The sensational media coverage seemed to reach a peak the day before my departure as the Wall Street Journal reported that President Xi himself had “botched” the stock market and a CNBC reporter made the quite extraordinary claim that Premier Li Keqiang may “lose his job” because of the stock market declines. Was it possible that the 30 year secular trend of growth in China had reversed since I last visited in April? Here is what I saw: · Shanghai. The city was as frenetic as ever. Tens of thousands crowded the Bund, perhaps hundreds of thousands packed the shopping street Nanjing Road. Restaurants were packed. No signs of a crisis. · Hangzhou. Scenic West Lake, a top tourist attraction in Jiangsu province, welcomed throngs of tourists. Tour buses packed with tourists from around the country clogged the roads and parking lots around the lake. Families strolled the shores, young people took picturesque selfies to post on WeChat. No signs of turmoil. · Nanjing. The city wall and Xuan Wu Gate were also packed with families and tour groups. The constant thumping of construction equipment could be heard in the background constantly as the city continues the work of adding lines to the metro system that serves its 8 million inhabitants. No signs of a collapse. My last day in China I had breakfast with a Shanghai-based Partner at of one of the world’s leading consulting firms. This person has lived in China for 30 years and knows more about the Chinese economy, its businesses and its people than nearly any other expert you can find. While he acknowledged that China continues to struggle with its transitions from a state dominated economy to a private sector economy and from an economy based on manufacturing to an economy based on consumption, his comments reinforced my belief that the “crisis” that populates the headlines of U.S. media is a mirage. It’s not real, it’s not there. The Chinese economy is slowing, but this is not news. The slowing of China’s GDP growth rate has been a fact of life since I first became immersed in China 10 years ago. It’s part of China Economics 101 and is simply the law of large numbers. China will continue to “slow” for the foreseeable future but will still likely grow at a pace 2-3 times that of the developed world for years. Furthermore, should it be required, the Chinese Government has significant tools and resources at its disposal to combat weakness in the “real economy”. The China Stock Market Correction To be sure, China’s stock markets have had a very volatile and negative 12 weeks. The Chinese domestic A Share stock market has undergone a significant correction at best and “crash” at worst. The awkward and clumsy market intervention by the Chinese government was, for good reason, widely criticized and seen as a step backwards in China liberalizing their markets and economy. However, such interventions are not unique to China. In fact, U.S. markets – and many ETFs in particular – were whipsawed only two weeks ago, as regulations and trading curbs instituted by our government in response to the 2010 “flash crash” went awry leaving many ETFs trading at significant discounts to their Net Asset Values (NAVs). And let’s not forget, the China A share market remains up over 30% in the past 12 months vs. a loss for the S&P 500. Even those with a short rear view mirror should see that while the drop was dramatic, it was preceded by a similarly dramatic speculative bubble and is still in positive territory over past year. And let us also acknowledge that there were parties in China warning against the type of speculation that resulted in the spectacular fall. Indeed, the China Securities Regulatory Commission (CSRC) warned investors in December of 2014 that they should “invest rationally, respect the market, fear the market, and bear in mind the risks present.” Buy Fear Most of my friends and colleagues know that while I am active in the ETF marketplace, I am a Warren Buffett groupie at heart. I “pray towards Omaha”. One of my favorite Buffett lines is that “you pay a high price for a cheery consensus”. The opposite of that is that you get your best buys when there is “blood in the streets”. Buy Fear. Sell Greed. Corny yes, but true. By all accounts China “fear” has never been higher with western investors. Buy What? One of the major problems with investing in China and Emerging Markets is that the major indexes and the ETFs that track them are dominated by state owned, legacy, inefficient and often corrupt companies. And it’s not just China that has this problem. Anyone that has followed the PetroBras disaster in Brazil should understand why these companies should be avoided. Yet, a full 30% of the largest Emerging Markets ETFs (VWO &EEM) are invested in State Owned Enterprises (“SOEs”). Many of the Chinese SOEs were part and parcel of the “botched” efforts to prop of the market and instructed to buy their shares or those of other SOEs. Investors seeking to take advantage of the fear that permeates the China investment landscape should look for the parts of the equity markets that will benefit from the long term secular increase in consumption. These sectors include traditional Consumer sectors and also the Ecommerce and Internet sectors that are benefiting both from the increase in consumption and from the spread of smartphones and mobile broadband. While the legacy manufacturing economy is slowing, retail sales posted 10% growth in the most recent quarter. The growth in the Internet and Ecommerce sector remains over 35% today and should remain high even if the broader economy in China slows further. While a year ago investors were clamoring for Alibaba (NYSE: BABA ) it has been kicked to the curb and is, as I write this, trading at near all-time lows. Other Ecommerce names haven’t fared much better as BIDU, JD, WUBA and others have all seen dramatic declines in their share prices. These are the types of companies that investors should be buying now. Unlike the stocks that dominate the indexes, these stocks trade in the U.S. and are not subject to Chinese market interventions or the erratic behavior of mainland China’s retail investors. These companies are also entrepreneurial and much more focused on shareholder returns than SOEs are. In fact, many of these companies including BABA, JD and YY have announced share repurchase programs to take advantage of the dramatic decline in share prices. This may not be the bottom. These stocks could go much lower. However, long term investors seeking exposure to Emerging Markets equities ought to consider these companies or ETFs that track these sectors. Repeat, I am conflicted. I am the founder of EMQQ The Emerging Markets Internet & Ecommerce Index, which has been licensed as the basis for an ETF . I also have an economic interest in several other China ETFs including NYSE listed YAO, HAO, TAO CQQQ. Disclosure: I am/we are long BABA, BIDU, WUBA, YY, JD. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.