“If you want to know everything about the market, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it's coming in, it'll never happen. The market is always right.” --- Sunny J Harris, Author and Professional Trader.
When I’m looking at stock charts with several indicators displayed, one of the indicators I like to see multiple (3) moving averages (MA). Generally my favorite moving averages are the 5, 10 and 20 period moving averages. On a daily chart that would be 5 days, 10 days and 20 days. On a weekly chart that would be 25 days (5 weeks), 50 days (10 weeks), and 100 days (20 weeks). I prefer this orderliness of having the 10 period twice as long as the 5 period, and the 20 period twice as long as the 10 period. It seems balanced and proportional to me and I like how the relationships between these moving averages develop over time. Fortunately the Bollinger Bands includes the 20 period moving average, so by using Bollinger Bands I get both the 20 period moving average as well as the bands themselves.
In a strong up market I’d ideally like to see the stock price above the 5 period MA which would be above the 10 period MA which would be above the 20 period MA. In a strong down market I would like to see just the opposite type of movement. Unfortunately this rarely happens this neatly and the price and the MAs are often in some phase of total disarray. The key is to figure out whether this is simply the volatility of the marketplace, the less than desirable strength/weakness of the underlying equity, or the fact that the equity may be moving from a period of trending into an area of consolidation. This is often not an easy thing to determine.
Being a chart reader rather than a price predictor, I tend to let trends (whether up, down, or sideways) develop on their own first before I make a decision or take a position on whether it’s trending or consolidating. As a result, I get into most of my trades late on purpose. I don’t have a problem with this strategy because I’d rather be late than wrong.
One of my favorite entry points is after a stock’s price has moved down and all of the above three MAs have moved down in the right order along with it. I usually find these situations while looking at charts for an MACDs that are below zero, an MACD Histogram that is moving upward, and an MACD that is about to cross its signal line. When I see this occurring, I look at the stock chart to see if the stock’s price and MAs are doing what is expected of them.
As the MACD Histogram crosses zero and the MACD crosses the signal line I expect to see the price surge through the three MAs. As the price pierces those averages they will begin to twist and turn on each other and hopefully reverse their order completely. As the price moves up I simply hold on for the ride while watching the MACD and the relationship of the three MAs as they interact with each other. (I use just the opposite information to determine exit points).
Two other indicators I usually like to plot along with the ones above are the ADX and the RSI. I use the ADX to let me know the strength of the movement and whether the pressure is coming from the buying or the selling side. I use the RSI to provide me with a heads up on whether the stock is being overbought or oversold. I use these two indicators as confirmation of the first two indications identified above (the MACD and the MA Crossover), and I use the two above as confirmation of the price movement of the stock. Sounds simple, right?
When everything above is moving in the same direction (up, down, or sideways) I invest appropriately. My investing philosophy is based upon probabilities and trends. If a stock price is moving in a direction that is confirmed by all of the indicators above (whether up, down, or sideways) then that stock is moving in a trend. Probability says that the trend will most likely continue for some time. In fact, as dumb as this sounds, the trend will continue until it doesn’t. And I will stay in sync with that trend until the trend changes. If it’s trending up I want to be long. If it’s trending down I want to be short. If it’s trending sideways I want to maintain my position (in or out) until I can determine whether an uptrend or downtrend is being established. When the chart tells me things have changed then I change also to remain in sync with the market.
Here's the reason. Being in sync with the market is how an investor makes money. Being out of sync with the market is how an investor loses money. For me, making money is what investing is all about.
With the Thanksgiving Holiday quickly approaching this week there will be plenty of time to catch up on my reading. Below are a few articles that I have read lately that may be of interest to others interested in dividends and/or retirement investing. I plan on spending a good deal of time eating turkey and reading more articles during this extended weekend.
"Any man who thinks he can be happy and prosperous by letting the Government take care of him had better take a closer look at the American Indian". -- Henry Ford, American Industrialist and Founder of Ford Motor Co.
Henry Ford was exactly right when he spoke these words about the plight of the American Indian. The US Government hasn't been kind to the American Indian and the history of the American Indian is a history of broken promises by the US Government. This couldn’t be any more truer of your retirement as it is during your working years. Relying on the government for your prosperity and retiring early are two of the quickest ways to poverty in your old age. Money doesn’t last forever unless your money is generating money on its own. One successful way of doing this is by owning dividend paying stocks that grow their dividends over time. Another way is by diversifying those investment over several economic sectors and not concentrating in only one area. Different sectors of the economy grow at different times and at different speeds so in order to ensure my success in retirement I need to have my investments represented by as many of those sectors as possible.
The only way the government can guarantee your retirement and your healthcare is by paying its bills or obligations. There’s only two ways for the government to do this and that’s to tax the personal income of its population or to continue to print more and more paper money. This means that the government will be either taking your money through taxation or devaluing your money through inflation. There’s no other way to pay theses obligations. If the government is unable to increase its ability to tax its population or they are restricted in their ability to print money, the only alternative left is to reduce its commitment in terms of retirement an healthcare. None of these choices are good and none of them are to your benefit.
I want to be as much in control of my own retirement as I can possibly be. That means I need to establish a retirement based upon investing in stocks that increase their dividends over time by simultaneously increasing their sales and earnings. My personal rough estimate is that I need $10K per year for my normal monthly bills, $10K per year for replacement items that break or wear out over time, $10K for pocket money to cover entertainment, $10K for the cost of replacing and servicing two vehicles and property taxes, and $10K for income taxes. That’s a total of $50K just to break even each year. I’d like to have more just for a cushion but this is the absolute minimum I would need to retire. Other individuals would obviously need more, especially if housing costs are included.
Seems scary, right? Seems like a lot too, but if I really want to maintain my standard of living well into retirement and not resort to peanut butter and jelly sandwiches every day then I’ll need this level of income for years to come. Factor in inflation over a twenty year retirement and the numbers only get higher.
Once you start to think about these things the realization of setting up a self directed retirement system becomes apparent. Luckily there’s plenty of ways to do this through Brokerage Accounts and IRAs, but these accounts need time to be effective. They need years. They need to compound over time to become effective. I’ve learned over the years that an excellent plan for this is dividend growth stocks and I’ve also found that the best place to start looking for these investments is the list of Dividend Aristocrats.
Nothing, not even the list of Dividend Aristocrats, is an absolute sure thing. That’s why I don’t blindly buy these stocks without doing due diligence. I highly recommend that you do the same when researching any stock. I also highly recommend that you start early to allow your investments to grow over a lengthy time period.
I like to be awake before the markets open in the morning so I can check the market update on Yahoo! Finance. It basically tells me what the markets did overnight and lets me know based on the futures markets which direction the market is poised to begin the day. I also like to check the 24 hour news channels to see if anything catastrophic has occurred that may interrupt the orderly flow of orders as the market opening approaches. I also like to check the balance in my accounts to see if any unexpected dividends came in that weren’t on my radar. That balance will become my ammunition for that day.
From there I start to cruise the net for information and research. I have several sites I look at and most of them are listed on the right side of this web page under the title of “Additional Resources”. One of my favorites is StockCharts Voyeur. It’s a stream of stock charts that people all over the country are currently viewing. It just gives me a idea of what others are interested in and allows me to see charts of companies that I probably wouldn’t have looked at on my own. It’s a fascinating and entertaining website and often provides me with new ideas.
At this point it’s time for the opening bell and I’m probably watching CNBC or FBN. The first 30 minutes of the day will usually lay the groundwork for the remainder of the day. For what I do next, please see the article entitled "The First 30 Minutes".
"I don't like stock buybacks. I think if a company has the money to buy their stock back, then they should take that and increase their dividends. Send it back to the stockholder. Let them invest their money again from the dividends." -- T. Boone Pickens, American Businessman, Financier, and Hedge Fund Manager.
Looking for that one great investment idea.
I spend an inordinate amount of my free time researching companies to find just the right dividend growth company to buy stock in. I look at a company's fundamentals over a period of years to ensure that it’s sales, earnings and dividends have increased on a regular basis. That's essential for a healthy growing company. I spend even more time looking at the company’s technicals and its stock chart to determine the point at which I think I can get the best possible price. Finally when I feel that the situation is in my favor I execute the transaction. At this point I am more or less committed to owning the stock for as long as the conditions merit. Hopefully this is for a very long time.
Once I own this dividend growth stock my primary concern becomes the continuation of the dividend well into the future. I understand that the company's sales and earnings may be volatile from quarter to quarter and that earnings estimates may even be missed at times, but I expect the dividend to be maintained and even increased at least once per year or I no longer have a desire to maintain ownership. For the most part the dividend is the reason that I bought the stock in the first place and it’s the continuation and increase of that dividend that tells me to continue to hold that company’s stock. If a company has the ability to continue to raise its dividend, then the stock price will eventually rise and my personal wealth will rise also.
Dividend coverage is also essential for a company to continually increase its dividend. I expect the company's earnings to be consistently greater than the company's dividend so that the payout ratio is less than 100%. In fact, a payout ratio of less than 50% is ideal for any company. At the 50% level there is sufficient retained earnings to grow the company's earnings in future years in order to increase the dividend, which is exactly what I want.
Over time individual stocks as well as whole stock sectors can become out of favor with investors. This often is the result of news articles, rumors, earnings reports, brokerage house projections, the overall economy in general, or any of a number of reasons. The result is that the company’s stock price can temporarily decrease with absolutely no relationship to the company's actual sales and earnings. The company's earnings are coming in and increasing and the dividend is increasing, but the stock price is falling. The result is that the Price per Earnings Ratio (P/E) is falling and the PEG (Price per Earnings relative to Growth) may even fall below 1. This condition results in a buying opportunity for the wise investor.
This decreased stock price results in an obvious increase in yield for the stock. The increase in yield results in an increase in income for me. In the end this is exactly what I am trying to do -- increase my income to a sufficient level prior to retirement such that a comfortable retirement is possible. If the company is able to increase its dividend at a rate faster than inflation my standard of living will actually increase during retirement. This is the situation that all investors want to eventually find themselves in.
The key to becoming an investor is simply to invest. Sounds axiomatic or redundant, right? But the reality is, the minute you invest you become in fact an investor. And until you actually invest, you’re simply not an investor. So if you want to be an investor and begin down that road to financial success and freedom, you have to take that first step. Find a stock that’s priced right and buy a few shares. Instantly you’re an investor and simultaneously you’re on the road to a lifetime of enjoyment, frustration, and success.
Read a few of my articles and you’ll start to understand the methods that I’ve used in the past. These have been beneficial to me but they may or may not be the methods you want to use in your investing. They will, however, begin to get you thinking about investing. And they'll start to get you interested in reading about investing. And what could be wrong with that?
"Do you know the only thing that gives me pleasure? It's to see my dividends coming in." -- John D. Rockefeller
When determining which stocks to invest in I usually look to invest in stocks that grow their dividends over time. I like dividends and I like stocks that increase their dividends over time quite a bit. In fact that’s exactly where I start when looking for stocks to buy. Sure, occasionally and in special cases I like to buy stocks that pay a large stagnant dividend and occasionally I like to invest using the options market, but the core of my investing is looking for stocks that both pay a dividend and increase that dividend over time. Usually it’s stocks that increase their dividend over an extended period of time.
Stocks that do this are hard to find unless you know where to look. There are lists of stocks that have increased their dividends at least once per year for ten, twenty five and even fifty years and are usually referred to as Dividend Contenders, Dividend Aristocrats and Dividend Kings. As I’ve mentioned many times before I’m personally interested in the list of stocks that have increased their dividends each year for at least twenty five years. That list is called the Dividend Aristocrats. I also have a hot button at the top of this page that will take you to another page on my site which lists the current companies on the Dividend Aristocrats List. Each one of the companies on that list is a hot spot that will take you to Yahoo! Finance if you want to do further research on that company. These Dividend Aristocrat stocks generally don’t pay out large dividends when they’re first purchased but over time the dividend increases and obviously the yield on the original purchase increases also.
All this is well and good, but in order for companies to increase their dividends over time they obviously have to increase their earnings, since dividends are paid out of a company’s earnings. Likewise I would expect that if earnings and dividends are increasing, then sales should be increasing also. These three things together tell me whether a company is financially healthy or not and whether I should continue to hold these equities in my portfolio. For the most part sales will generally be more volatile than earnings and earnings will be more volatile than dividends, but all three should generally be moving in the same direction -- up. If they’re not, then sales will eventually affect earnings and dividends so I try to track all three of these things so I’m not surprised when and if dividends are ever stagnant or, even worse, reduced.
I prefer to receive dividends in the form of cash deposited into my account rather than immediately buying additional shares of the company simply because the price at the time the dividend is paid may not be the best time to buy that stock. I prefer to base my decisions on buying stock on a price chart which includes a few momentum indicators I like to use. More often than not the timing is better on a different stock so I use the dividends to buy something other than the stock that paid the dividend. At times, it's a new position altogether.
Eventually I hope to have sufficient dividend income to supplement whatever retirement I may get from my working career. And hopefully that income will continue to increase over time so that my purchasing power can be retained or increased over time. If done properly I believe this is an excellent investing plan.
While I’m always interested in Dividend Growth stocks that produce a combination of both dividends and growth, sometimes I wish I was receiving a little more dividend and a little less growth. That may seem odd at first but since I don’t have an unlimited amount of funds available to me I feel I have a limited capability to buy into all the new ideas that I continually find. I’d like to take new positions in these new ideas but I just don’t have enough cash to take advantage of them.
As I’m researching lists of stocks for new ideas, my first concern is for stocks that have a total return of at least 8% annually. Occasionally I find a company that pays out most of its earnings in the form of dividends with very little retained for growth. The dividend it pays out comes in handy for buying additional shares of the same company or for taking advantage of those many new opportunities. In the past I’ve mentioned one such company that has captured my interest - Prospect Capital Corporation (PSEC). This is a great company and is organized as a Business Development Company (BDC).
For tax reasons BDCs pay out most of its income in the form of a dividend to its shareholders. This type of investment has worked out well for me because although the stock really doesn’t increase in value over time, it throws off a lot of cash to it’s shareholders. I’ve used these dividends to buy into those new investments rather than using my hard earned money to finance new buys.
Prospect Capital Corp (PSEC)
Vanguard Natural Resources (VNR)
Another company I’ve been watching for some time is a company named Vanguard Natural Resources (VNR). VNR, through its subsidiaries, engages in the acquisition and development of oil and natural gas properties in the United States.
VNR also pays out most of it’s earnings in dividends. At its current price of $28.85 it has paid out an annualized dividend of $2.49 this year (see downloadable pdf below) which is an APR of a little more than 8.6%. Based on its chart above you can see that the company’s stock price has had a very slight increase in it’s share price over the last few years. The share price itself is not what interests me but it is a nice little bonus. It’s the dividend and the dividend’s ability to help me fund additional investing ideas. I don’t want a lot of these types of investments because I’m still interested in a certain level of growth in my portfolio, but a couple of these types of investments have been beneficial to my ability to accumulate additional shares in other companies.
Both of these companies pay their dividends on a monthly basis (see below) which makes it more advantageous to me because it provides me with the ability to add to my investments on a monthly basis. I find that ability to be very appealing as a special purpose investment vehicle and similar to the specialized purpose I find in selling covered calls and puts. In moderation these investments have been very beneficial to my accounts.
Below you can download a pdf file containing the dividend history of Prospect Capital Corporation. Information was gathered from the company website.
Below you can download a pdf file containing the dividend history of Vanguard Natural Resources. Information was gathered from the company website.
The Average True Range (ATR) in a volatility indicator developed by J Welles Wilder in his book “New Concepts in Technical Trading Systems”. The true range is calculated as the greatest of the following three calculated differences: (1) The current high less the current low, (2) the absolute value of the current high less the previous close, and (3) the absolute value of the current low less the previous close. The average true range is calculated as a moving average of the individual true ranges and is generally calculated over a span of 14 periods.
The whole purpose of determining the ATR is to try to understand the average amount of variability is to be expected during an individual period. For instance, if the ATR for a particular stock that is priced at $20 is $4, then the average range of that stock would be between $18 and $22. There are a lot of uses for this type of information. If a stock is stuck within a trading range for an extended period of time the ATR will generally decrease in value. If a stock begins to break out of a sideways movement either to the upside or downside the ATR will begin to increase (it’s an absolute number and therefore does not determine direction). This increase in the ATR can signal a breakout for a stock.
The ATR can also be used to determine position size when buying into a new stock. As we’ve discussed in other articles, any time I begin buying a stock to create an equity position in my portfolio, I am risking my hard earned money. I always try to control the amount of risk I am willing to assume which I feel is prudent for my portfolio. As an example, suppose I have a portfolio worth $10,000. I hate to risk more than 5% of my portfolio on any individual investment. For me that means $500. If I’m looking at a stock priced at $20 and the ATR is $4 (as in the example above) then there’s a possibility that the stock will waiver between $18 and $22, on average, during whatever period I’m tracking. In essence there’s a pretty good possibility that I could lose $2 per share ($20-$18 = $2). Knowing that and the fact that the most I’m willing to lose on any one trade is the $500 identified above, I’m willing to buy 250 shares of stock of the company I’m interested in. This limits my risk and limits the amount of drawdown of my account to the amount determined before I enter the trade.
My personal preference for using the ATR is the weekly ATR. As mentioned before I am not a day trader and by using the weekly version of this indicator I’m using a greater ATR and hence this reduces my position size and allows me more maneuver room before I have to close out a position. This limits my downside by simultaneously limiting my upside but if the stock starts acting correctly I can always increase my holdings as the stock moves up. This way I am actually following a developing trend and increasing my likelihood of success.
J Welles Wilder developed a number of technical indicators in his book “New Concepts in Technical Trading Systems” to include the Parabolic SAR, the RSI and the Directional Movement Concept (ADX). Each of these were developed and used by Mr Wilder long before the computer age but even with all of today’s computing power these indicators still hold up their effectiveness.
I am an Individual Investor with specific interest in long term growth and then enhancing my returns with income from dividends and derivatives. I don't recommend stocks to anyone (it's a good way to lose friends) and no one reading this should misinterpret my blog as a recommendation for any type of investment. I am writing this solely for myself and my kids.
DISCLAIMER I am not a licensed investment adviser, and I am not providing investment advise for you on this site. Please consult with an investment professional before you invest your money. Any opinion expressed here should not be treated as investment advice. I am not liable for any losses suffered by any party because of data or information published on this blog. Past performance is not a guarantee of future performance. Unless your investments are FDIC insured, they may decline in value.
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