Never Stop Asking Questions
When someone is new to investing, it is refreshing when they take notes and ask questions. Even today I take notes when I am at a presentation, listening to a teacher, or listening to a sermon. I find that I remember more when I take that simple step. This also causes me to think, “What will I do with this information? What action should I consider?”
The concept of a dividend can be confusing. There are many pieces to the dividend puzzle. Picking an investment simply because it has a high yield (more than 4-5%) can be a quick way to learn some tough lessons. Just because a company pays a dividend, doesn’t make it a good investment. Data like the payout ratio, and the number of years the company has increased the dividend are very important for the dividend investor to know. It is also prudent to diversify your dividend investments. You might have a favorite, but don’t make it more than a certain percentage of your total. For most investors, investing five percent in a single company is a good cutoff point.
With that as background, here are my granddaughter’s eight questions. I have grouped them into three categories: Companies, ETFs, and Dividends. Let’s start with companies.
The First Three Questions Concern Companies
Is MAIN a good company to buy shares from? My answer is “yes” and “no.”
- The short answer is “yes.” However, there are some things you need to remember when you are buying an investment you already own. You already have 12 shares of MAIN in your UTMA account.
- As a general rule, it is not wise to have more than 5% of your money in any one company. Sometimes you might have more, but that will only happen if you buy something at a good price and it goes up faster than your other investments. I bought MAIN at a good price for your account. I paid $31.32 per share. The shares are worth $41.13 today. That is almost a 32% increase. The shares have gone up almost $10 per share. As a result, your UTMA account has 7.5% of your money invested in MAIN. Therefore, I don’t think you should buy more. If you do, just remember that if the shares go down in value, your total account value will shrink faster than you might want it to.
- The general rule does not apply to ETFs. The reason is simple. An ETF is already diversified. If the ETF has 100 stocks, then you don’t have to worry about the 5% rule. However, you may want to sell some shares of an ETF if they go up significantly in value. I sold some of your FTEC ETF shares because of that very thing. Your FTEC shares are still 10% of your UTMA account. They have gone up 508% since I bought them for you.
Is Verizon a good company to buy shares from? My answer is “there are better choices.”
- Verizon is in the Communication Services sector, and it is a large, established company. You don’t have any communication services companies now, except in your ETFs. For example, you own shares of VZ in your ETF DGRO. You also own shares of VZ in VYM. That isn’t good or bad, but I want you to remember that your ETFs might have the investment you like. VYM also has shares of AT&T (T), which is also a communications services company.
- Some reasons to like VZ include the dividend yield of 4.72%. You cannot get that kind of income from a savings account or a CD. The dividend payout ratio is about 48%, so that is good. That means for every dollar of profit VZ gets, they give you $0.48.
- Another thing to like about VZ is their track record of paying a dividend every quarter. They have been doing that for 20 years. They have increased their dividend for the last 8 years.
- However, the dividend growth rate for VZ is low. The five-year growth rate is 2.12%. It is better to look for a company with a five-year dividend growth rate of 5% or more. For example, drug company Pfizer (PFE) has a 6.47 growth rate, a 38.6% payout ratio, and a 3.42% yield. PFE has increased their dividend for 11 years and have paid dividends every quarter for 32 years.
Finally, Noelle heard me talk about Ford, even though they don’t pay a dividend. So her question was:
Is Ford still a good company for me to buy from if I’m buying x number of shares and they don’t have dividends?
- Because I like dividends, I buy more companies that pay dividends than those that don’t. I have owned shares of Ford (F) for many years. We own more than 5,000 shares. So, the shares are worth more than $65,000 as of today.
- There are three main reasons I like Ford: 1) Ford did not need or take government bailout money like GM and Chrysler did in 2008; 2) We drive Ford Escapes and have owned a total of four of them since 2010. They are reliable and innovative. 3) I think Ford will prosper when the current problems with computer chips are resolved.
- So, Noelle, if you buy shares, I recommend that you don’t buy more than 10 shares because that keeps you at a bit more than 5% of your total investment dollars. Use a buy limit order and set it at about $12.70 per share. Look at the following chart. The shares could go down in the short-term, but I don’t think they will.
The Next Three Questions Focused on ETFs
They are: 1) Do you have any recommendations for some ETFs I could buy? 2) Which ETFs are your favorite? And 3) Is FHLC a good ETF to own?
- My favorite ETFs for my own retirement accounts are VYM, SCHD, DGRO, PFF, PFFD, and VCLT. However, you shouldn’t buy PFF, PFFD, and VCLT. These are preferred shares and bond funds. You should stick to stocks and stock funds at your age.
- I think it is prudent to buy more of DGRO, FHLC, and VYM. You own shares of these in your UTMA account. FHLC is a great health care ETF.
- The top ten companies in FHLC are good investments. I own shares of Johnson & Johnson, Pfizer, UnitedHealth Group, Abbvie, and Eli Lilly and Co, to name a few.
- Although there are almost 500 different companies in this ETF, the top ten make up 40% of the total investment. One of the nice things about this ETF is that the 5-year dividend growth rate is 12.53%. Why so good? Because the health care companies have a good track record of raising their dividends. To get a true picture of the last five years of dividends for an ETF, I use the free resource ETFREPLAY.com.
- If you are interested in branching out into the consumer sector, you might want to consider the Fidelity Covington Trust – Fidelity MSCI Consumer Staples Index ETF. The ticker symbol is FSTA. This ETF includes Proctor & Gamble, Coca-Cola, PepsiCo, Walmart, Costco, Colgate-Palmolive, and Estee Lauder. There are only 103 holdings so the top ten make up 65% of the total in FSTA.
The Last Two Questions Focus on Dividends
Is it good if the dividend is a lot and the payout ratio is really low, less than 70 percent?
- Good question, Noelle. I usually like to buy dividend-paying investments with a payout ratio that is between 20-70%. However, some investments, like utilities (gas, electric, and water) pay more than 70%. Utilities rarely have a dividend that grows as fast as the dividends from healthcare or technology companies.
- If a dividend yield is between 2-3% and the payout ratio is less than 70%, then I am usually interested in looking at the investment more closely. Never buy an investment based on just the dividends. Is the company growing or is it losing customers?
Is a dividend what you get paid every three months?
- Most companies that pay a dividend declare it quarterly. So that means most dividends are paid every three months.
- Many foreign companies, like RIO (a mining company) pay semiannually. Others only pay once each year.
- Some investments pay monthly. This includes some of the investments in your UTMA account: MAIN and GAIN.
- There are also ETFs that pay monthly and quarterly. All of your ETFs pay quarterly. An example of one that pays monthly is QYLD. QYLD is a very specialized ETF that used options trading to earn more money from stocks like Apple, Tesla, Amazon, and Microsoft. I own 300 shares of QYLD. However, you should probably stick to the ETFs I recommended in the ETF section of your questions.
What comes next?
It is far too easy to get overwhelmed by the choices. Rather than trying to pick all of your investments in September, pick one or two, and enter a buy limit order. Be patient. Lately the stock market has been going down, and that means you can buy a few shares this week and perhaps add to them next week. For example, if you want ten shares of Ford, start by buying five shares. If the price drops more, add another five. Do you have any other questions?