Buy and Hold Forever Dividend Stock Update

After a couple of years I've finally gotten around to updating the Buy and Hold Forever Dividend Portfolio.

To refresh your memory as well as mine, the idea was to find a couple of dividend stocks from most industries, on the basis of familiarity rather than research. That is, the criteria for stocks making it into the portfolio were: the stocks were in the news at the time and/or their products were ubiquitous. Absolutely no research was done other than to make sure that the stocks picked paid a dividend.

The point of this exercise was to see how well a relatively uninformed investor could do if his investment thesis was that buying and holding dividend paying equities forever isn't dead, as most of the talking heads have been telling us since the financial crisis began.

At the time the experiment was initiated, SPY was designated an alternate and benchmark buy and hold forever dividend portfolio.

Changes to the portfolio since the last update

Verizon (VZ) spun off shares of Frontier Communications (FTR) in 2010. These were added with no cost basis.

Berkshire Hathaway bought Burlington Northern (BNI) and inBev bought Anheuser-Busch (BUD). The original cost basis of each acquired stock was rolled into a new holding (UPS replaced BNI and TAP replaced BUD). The realized capital gains were put into cash. However, to track these gains more easily, I instead put them into the Lehman Short Treasury ETF (SHV) at a 0 cost basis (so their gains would show up and not simply count as cash deposits).

Part of the reason (besides my laziness) why it has taken so long to update the portfolio is that keeping track of all the dividends was just too time consuming and boring in the spreadsheet I had created. It left no time for anything else. Improvements to Google Finance, fortunately, now allow dividends to be tracked automatically. So I've changed the spreadsheet to incorporate this. Unfortunately, I haven't figured out how to share a Google Finance portfolio, so we're still left with spreadsheets (which means that I still have to do manual updates).

The Results so Far

Since inception, the buy and hold portfolio is up 29.19%. The original cost basis was around $15,400. That has grown to over $21,600. The dividends received so far total about $1,720, or just over 11% of the original cost basis. That's a yield of about 3.48% per year (3.167 years--November 2008 to January 2012)--nothing to brag about but it will be interesting to see how this grows as time passes.

SPY, on the other hand, is up a little more: 29.61%. The original cost basis of $15,550 has grown to $21,184. Dividends received total around $1,029 or 6.6%, for a yield of about 2.08% per year. This too should grow as companies raise dividends.

The spreadsheet is below and can also be accessed here.

I'll try to update more often, now that it's easier.

Useful Idiots

What do we want? We don't know!
When do we want it? Now!

The way the protestors on Wall Street and around the country are acting, that's pretty much what they're chanting. They're organizing via Facebook and social networks. They're antagonizing the cops and filming themselves getting beaten with their iPhones. They're drinking Starbucks coffee and smoking cigarettes made by Big Tobacco. --All while they're complaining about corporate greed.

In San Francisco protestors aren't really sure why they're protesting:

Organizer Anthony Bondi said he has what he referred to as a “message team” working on the primary goals of the local protests, which he admitted “was kind of vague.”
“That message team will reveal that tomorrow [Friday] morning,” Bondi said.
“So you guys are in the process of forming the reasons why you are here?” asked CBS13 reporter Tony Lopez.
“Exactly correct,” Bondi said.

 In Washington DC people are getting paid to protest, and also don't know what they're protesting because they don't know how to speak English.

Meanwhile Obama, unions, Moveon.org and lots of other liberal fat cats like Michael Moore are attempting to take over. (Oh the irony! The protests, if they are funded by anyone, are funded by Wall Street through the many organizations like Moveon.org attempting to elicit support for Obama and other politicians.) They say it's all the Republicans' fault. It is the Republicans' fault. But it's also the Democrats' fault. It's also the voters' fault for putting these clowns into office for the last half century.

The people legitimately protesting (i.e., those who aren't getting paid to be there) have every right to be angry. But they should also take a look at themselves. Instead of calling for a redistribution of wealth. Instead of crying for the government to clothe, feed, and house them. Instead of trying to break everything to the ground, why don't they create something?

Protestors, out of the thousands of you gathered in anger surely there is someone with a good idea. Maybe there are two or three good ideas, and perhaps dozens. Instead of planning on how to best break a barricade so that the cops can mace and beat you, how about you make a business plan? Sell shares to everyone there. They can forgo a cup of coffee or can of Coke or Pepsi, can't they? Raise some money and start your business. Hire people. Produce things. Use the media that's already there for promotion. It's a golden opportunity. Don't rely on a government that thinks saving money is spending $2 trillion more than it earns rather than $2.01 trillion. And don't keep voting the same liars into office that blame others for their own failed policies.

And please, for the love of individuality, don't turn into mindless zombies:

Amazing Media Hype Over a Tropical Storm

Yes, Irene was (is for people now in it) dangerous. Yes, it resulted in the unfortunate loss of life.

But Irene made landfall as a tropical storm while the media insisted "hurricane! hurricane! hurricane!" It wasn't a hurricane because if you actually looked at the wind measurement data (not the articles or TV and radio reports, but the actual data) there were no sustained hurricane force winds.

As I'm writing, the sun is out in NYC. It's still windy, but it has stopped raining. The forecast on Weather.com says there's a 50% chance of scattered thunderstorms between 12 and 1 PM. But what does the Associated Press say? "Unusually quiet New York waits for Irene's worst," is the headline. The lead paragraphs read like a bad novel instead of a news report:

Waterlogged and silent, New York awaited the worst of Hurricane Irene as an unsettled dawn broke over the city Sunday. Wall Street and the labyrinth of cables and pipes beneath the nerve center of global finance were at risk from cascading seawater.

The storm pushed a 3 1/2-foot surge of water into New York Harbor, and forecasters said the peak could be twice as tall later in the morning.

Irene barely maintained hurricane strength, delivering winds of 75 mph, just above the dividing line for a tropical storm. But it was massive and powerful, forming a giant figure six that covered the Northeast. It was moving at 25 mph, twice as fast as the day before.

Since it'll probably be updated by the time you read this, here's a screenshot.

There were some powerful wind gusts that woke me up at night. There was lots of rainfall. People died. There's no question that it was a big, powerful storm.

But Irene was nowhere near what the media made it out to be. The highest wind forecast I saw, while the media hyperventilated about 75 mph winds was 49 mph.

The media are to blame for any stress related injuries people suffered as result of the storm coverage. The media are also to blame for no one listening in the future when a real hurricane comes through. 

Now will come the experts with their estimates of how many billions of dollars in damage the storm caused (unless it's too low). Mayors, governors, and maybe even the President will tour the most damaged areas for photo-ops. They will pat themselves on the back for a job well done. The worst president in American history might even get an an approval rating bump (it's at oversold levels anyway, in trading parlance) for taking charge at the hurricane command center. But the next time the nanny state and its media lapdogs cry wolf they shouldn't expect people to listen.

A Way to Raise Cash and Still Participate in the Market

Most investors get caught with their pants down when markets top out and crash. As a result, they have little cash to buy the significant dips and have no cash at all when the market finally bottoms.

Here's a way to raise cash without losing out on potential gains if the market suddenly turns around: Sell your stocks. Use a portion of the proceeds to buy deep in the money calls that are at least several months from expiration date. Buy one call for every hundred shares you sold (provided that every call in the security you sold corresponds to 100 shares).

The idea is to get cash into your account (to decrease volatility, pay the bills, take advantage of the higher yields that dividend paying stocks will pay if they fall some more, etc) while still being able to profit if the market turns around and goes up.

Example

Let's say the cash balance in your portfolio is essentially zero. SPY, the ETF that corresponds to the S&P 500, is trading at $116.37 at the time of writing. Let's say you own 200 shares that you bought at $130 ($26,000) earlier this month. You're freaking out and are thinking about dumping your position at a loss.

You know the drill. As always happens when you sell, the market turns around and goes up. And if you don't sell, it'll probably continue falling. Puts now seem too expensive. You curse yourself for not having the strict discipline to have sold the position much sooner. You don't know what to do but would feel a lot better if you had some cash in your portfolio.

Consider this. The ask on the March 2012 70 strike SPY call is 46.93 at the time of writing. Let's say you sell your 200 shares at $116.37 ($23,274) and buy two of the 70 strike calls ($9,386). The result is you put $13,888 in cash (minus commissions) into your account. That's your cash and you can do whatever you want with it.

You still own an interest in SPY (until expiration date). If SPY keeps falling, you'll continue losing money--about as much as if you still owned the shares. If SPY rises, the calls will go up about as much and you'll gain about as much as you would if you still held on to SPY.

It's possible that SPY will continue falling. Who knows, maybe it'll go to 0. If it does, you'll still have the cash. That's some piece of mind. (Although if SPY is 0, chances are you won't have electricity to check stock prices anyway. Not that you would have time for that, seeing as how you'd be busy fending off roving gangs of hungry people.) Your losses on the calls will decrease as compared to owning the stock as SPY approaches and goes under $70 per share.

This is not some magical way to make money. It's a way to have cash in your portfolio without significantly altering your exposure to the market.

As nothing in this world is free, switching your shares for cash and calls will cost you. In our example above, the cost is 56 cents a share ($112) plus commissions. That's not too bad. We can make it better if we cap your potential gains.

At the time of writing, the 140 strike March 2012 SPY call had a bid of $0.86. If you sell one of these against each one of your long calls (sell two 140 strikes because you bought two 70 strikes), your exchange of SPY shares for cash and calls will be for free. (Actually, you would take in an extra $60 minus commissions.)

If you buy the 70 strike calls and sell the 140 strike calls, you'll have a call spread the gains of which are capped if SPY trades over $140 a share by expiration. That is to say, if SPY turns around and goes up, the most you can make (if you sell the 140 strike calls) in the example is $10 per share (because you bought SPY at $130). The most you can lose through March 2012 is the amount you paid for the calls (in this example $46.93 per call plus commissions plus whatever dividends you miss out on).

If SPY ends up somewhere above $70 per share before expiration and you don't want to buy the stock back, you might want to sell these calls and buy similar ones that expire farther in the future.

There are risks with everything. Holding calls is different from holding stock. Calls on a dividend paying stock, for example, don't pay dividends. Shares don't expire. Options do--and when they do they are worthless. There are many other risks associated with options, particularly deep in the money options. These usually have pretty terrible bid/ask spreads. You may not always get the best price when buying or selling these.

If the strategy above seems interesting, do some research before implementing it.

Disclosure: At the time of writing I owned no securities mentioned in the article.

Complete and Utter Failure

Congress is getting ready to vote on the raising the debt ceiling after Obama and leaders in Congress agreed on a deal that will cut the deficit by $1 trillion over the next ten years. This would be laughable if it weren't so sad.

First, the trillion dollar figure depends on a rosy picture of economic growth. If we have a recession in the next ten years, which is very likely, the trillion will be reduced to billions. If interest rates rise, the cuts will be reduced even more.

Second, even if all of the government's optimistic projections come true, they are only cutting the deficit by $100 billion a year. This year's budget deficit is estimated at $1.5 trillion. Next year's budget deficit is estimated at $1.1 trillion. So, if they start cutting the deficit right away by $100 billion per year, the national debt will increase by $2.4 trillion by 2013 instead of $2.6 trillion. Wow! Congress is saving us a lot of money! Not. Why do they even bother?

Third, it is important not to confuse cutting the deficit with lowering the national debt. On a lot of message boards I see people making this mistake. They think that the $1 trillion in cuts means that in ten years the national debt, which is $14.5 trillion at the time of writing, will decrease by a trillion to $13.5 trillion. No! That is wrong. By 2020, America's national debt is projected to be from $20 trillion to $26 trillion. So if everything goes according to plan, America's national debt will be $19 trillion to $25 trillion by 2020.

Obama is happy, because the next debt ceiling debate will be in 2013 if the latest plan passes. That's after the election, which is all he cares about. If he and congressional leaders had a spine they would address the incredible waste. For example, I read recently in Fortune that the government spends around $80 billion a year on internet servers, 93% of which are idle. No one uses them. There are hundreds if not thousands of government programs that are just as wasteful. They have to be eliminated.

If they had spines, our leaders would address the incentive structure. Departments that go over budget are given bigger budgets the following year. Departments that spend less have their budgets reduced. Our leaders should put an end to the incentive to spend more.


Everyone would be better off if 2/3 or more of government workers were told not to come back to work. We could even pay them their full salary. Just stay home and don't cause any trouble. Think of the money that would be saved on electricity, furniture, fuel, and equipment. Since most of these people don't do anything all day, government output would remain essentially the same.

None of this will ever happen. We'll hear the same empty slogans and promises for change until the ship finally sinks. Have your own lifeboat ready. Don't rely on the government to give you one.

A Question for the Raise the Debt Ceiling Folks

Just to get it out of the way, let me note that I think of course they're going to raise the debt ceiling. Whether all the wrangling is scripted or not, our elected representatives want everyone to see how hard they are working.

In the end, whether Congress passes a bill and Obama signs it or if the President invokes a clause in the 14th Amendment (which had to do with Civil War debt and nothing to do with the President being able to borrow--remember that Congress has the power of the purse and this power is one of Congress' most important tools in checking and balancing the power of the President), we'll end up with the worst possible law, as always. That's just how the government works.

Now to my question for everyone who says that we must raise the debt ceiling. Senator Al Franken, of Saturday Night Live fame (I think the funniest moment of his career was when people actually voted for him), has listed what the government can and can't pay if the debt ceiling isn't raised.


Franken Floor Charts

As you can see, the government can afford its interest payments. I don't think, therefore, that it's appropriate to call it a default. Yeah, we won't have enough money to pay for all that other stuff (a lot of which is a total waste of money, in my opinion) apart from debt interest, Social Security, Medicare, and unemployment benefits. There are many who argue that we should get rid of these programs. Rather than agreeing or disagreeing with this sentiment, I just want to note that most of the recipients of these funds have paid into the system. Since they paid, they deserve their money back. Anything above that can be cut.*

My question is, what happens after the debt ceiling is raised? As soon as the government has that money, they're going to put it in their pockets and the pockets of their cronies. Whatever is left over will go to useless programs.

All of the new borrowed money will be spent. That is a guarantee. In a couple of years we'll be back to the same place. We'll again be faced with the choice of raising the debt ceiling or not being able to pay for things.

At that time, tax revenues will probably be the same. Maybe they'll be lower if the economy gets worse, but it's unlikely that they will be much higher. The reason for this is that

Unemployment has remained above 9% for 21 straight months, and economists and policymakers, including Fed Chairman Ben Bernanke, have repeatedly said it's likely to remain high through the next several years.  (CNN)

Unless there's some new invention that revitalizes our economy like the internet did in the 1990s, it's unlikely that the economic picture will improve. The government can raise taxes, of course, but that doesn't necessarily translate into higher revenues. Instead of starting a business or investing here people will choose to do so elsewhere. (And if the government institutes capital controls to prevent this, that will be the last nail in the coffin.)

So, while the money coming into the treasury will either stay the same or diminish, the money going out will increase. The interest on the government's debt will be higher, for example, because we will have borrowed more money.

So, Al Franken and everyone else who wants to raise the debt ceiling, aren't you just postponing the inevitable? We cannot raise the debt ceiling indefinitely. You know that, right?

The Republicans and Democrats are talking about cutting the deficit, but when has any one of these bozos ever saved us money? Remember a few months ago when members of Congress showed us how hard they worked to cut $38 billion, which was a laughable 1% of the budget? It turns out that the real savings was $352 million, less than 1% of the purported savings!

And the congressmen and senators are working hard right now! They talk about trillions in cuts. How much will those cuts really amount to? They're all based on projections of how fast the economy will grow and a number of other factors that they're just making up. They're not cutting anything.

After the debt ceiling is raised and we're back in a similar but worse position in a couple of years, what are we going to do then?

*Budget idea off the top of my head: Pay interest on the debt, Social Security, Medicare, and unemployment insurance. Pay federal workers, but make massive cuts to the federal workforce. (I know a number of people who work for the government and they watch Youtube all day. It's partly due to laziness but mostly due to the fact that they have no work to do.) Pay our veterans. Pay our soldiers, but stop all our wars and close down most of our foreign bases. Cut everything else. If you're worried about the Pentagon, it has plenty of money. If it wants to pay defense contractors for fancy new gizmos, it should be able to find billions in its couch cushions. Think about how much smaller our budget would be (or how many more programs we could fund or how much less our taxes could be) if there were even half as much theft going on as there is now.

Here's an idea to save money

Corporations have been outsourcing American jobs for decades now. The reason is simple. Foreign workers are willing to work for less and there are no minimum wage laws to worry about.

So why don't we US taxpayers try to save a small bundle by outsourcing Congress, the Judiciary, the Executive Branch, and the rest of the government?

I'm sure people in China and India will do the same horrible job we've come to expect. They'll be just as corrupt and incompetent. And we'll have pretty much the same dumb freedom and wallet robbing legislation.

But they'll do it for less.