Market Place Blinders

January 5, 2015

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My bride and I are basically retired and living off a combination of income streams. We both have small pensions and collect social security. Since we have no major debts, we could probably make do on that.

However, we both saved in company sponsored 401K programs while we were working and did some other investing as well. The dividends of those savings are adding to our retirement income and providing the money we need to continue to live more comfortably. We can buy gifts for our children and grandchildren and we can travel. We’re far from living in the lap of luxury, but we have enough. (More people should learn to be happy with ‘enough’!)

Our investment plan has been fairly simple. We bought stocks, bonds, and mutual funds that all pay quarterly dividends. Until we fully retired, we let the money grow through dividend re-investment programs. From a psychological standpoint, it made following the market rather interesting. It’s always comforting to see the value of your investments going up. But, come quarterly dividend time, it’s fun to see the value go down – that means your re-investment will result in a greater number of new shares. Thus, your next dividend payment will be that much larger!

We continued to let things grow until we no longer had regular paychecks. Then we quit the re-investment programs and now have the dividends automatically deposited in our bank account. So far, it is working great! And that bothered me.

It bothered me because none of the experts I follow, nor the publications I read, recommend doing such a thing. In fact, while they are saying that bonds are not a good investment at this time, people our age should be moving more of our assets into bonds. Go figure! They have all sorts of fancy formulas, but none of them make sense. Why should I put 50 to 60% of our retirement nest egg into something that the experts are saying to avoid?

I read an article this morning in Money Magazine. It was talking about the problems of going after high-yield (translate that into dividend paying) stocks. Their take was that as the price of the stock went up, the yield (translate that as the amount of the dividend payment as a percentage of the price of the stock) went down – unless the company increased the amount of the dividend.

For example, let’s say you buy 100 shares of Jim’s Journeys for $100 per share and I pay you $5.00 per share per year in dividends. The yield is 5%. Now, if everyone wants a piece of the action and the price of my stock doubles to $200 per share and I continue to pay the measly $5.00 dividend, the yield is now a mere 2.5%. On the other hand, if the market dives (through no fault of my blog) and my share price dips to $50 per share, your yield is now a whopping 10%.

Thus, looking through the “Market Place Blinders” unless you buy the shares at $50, it may not be a good deal. But the financial planners and experts fail to see it any other way. They only see values at the time of the transaction. If you are not currently buying or selling, they are not paying much attention. Yields, to them, are nothing more than the percentage of the selling price.

In truth, I can’t tell you how much we paid for individual shares along the way. I really don’t care. The only thing that concerns me is the size of the quarterly checks.

So, if I was your financial adviser, I’d tell you to do what I did. Spend a month examining every company that pays dividends. The questions I asked were: How much do they pay per share? Has that amount increased over the years? What sort of business are they in? (I avoided any company that did not manufacture something. Mortgage companies, banks, and holding companies all pay handsome dividends, but they’re the companies that had to be bailed out and were saved only because they were “too big to fail”.)

As to our dividend income payments, my only regret is not taking advantage of this methodology sooner in my life. I watched our nest egg grow for about ten years before we began to reap the benefits. Had I begun the process much earlier, the nest egg would have grown more substantial and we would now be living in the lap of luxury. But then again, we’re more than happy with enough.

Hopefully the time it took me to write this article will pay dividends for the person who takes the time to read it.

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Bring on the FAIR Tax

January 5, 2009

I’ve spent a good part of the last three days poring through receipts preparing to turn the entire mess over to a tax accountant.

The only part of the tax code I understand is the part that says I can deduct losses from my investments. I’m not sure exactly how it works, but if I can get a few tax dollars returning to my pocket, it will make the losses a little bit easier to bear.

There was a time when doing my taxes was fairly simple and I always did it myself. That all changed when I left IBM and became self-employed. It’s rather ironic that when I began to make less money, I had to hire someone to help me determine how much of my money would be sucked in by the various government entities.

At the end of my first year of self-employment, I decided to try to do the tax returns myself. It didn’t take long before I was totally confused. Fortunately, a good friend (Glenn Keen) who I’d met through the Cursillo (Christian Renewal) Movement happened to be an accountant. I went to him for help.

My original plan was to let Glenn do the first year. Then, after studying what he’d done, I’d be able to return to doing it myself.

Wrong! I’ve now been studying his work for over fifteen years and I still can’t make heads or tails out of it. I guess that’s why he’s called a ‘professional’!

I also have to admit that my financial life has become much more complicated in those fifteen years. In 1998 I began collecting my half of my pension from IBM. As a self-employed/retired person, I had to pay double social security on my contracting income and a lesser amount on my pension. I also had to make quarterly estimated tax payments since none were withheld from my contractor checks.

If you’ve read the Fair Tax Book, you’d know that there was a time when no taxes were deducted from anyone’s paycheck. That was when the taxpayer was periodically smacked in the face with the reality of how much the government was taking out of his or her pocket. Then the government started the payroll deductions and began stealing our money a little at a time.

In 1999 I remarried. My current bride had (and still has, thank God!) a full-time job. Thus, when it came to tax time, we had to include income from full-time employment, self-employed contracting checks, and a pension.

About a year later, I became the Southeastern U.S. sales representative for the Laser Golf game – a product developed in Australia that was one of the first virtual-reality computer games. It came with computer software, a sensor that was placed on the floor, and a golf club-like device that shined a light over the sensors as one took a realistic swing at a golf ball. The computer would then calculate the club speed and angle and send the ball down the fairway (or into the rough) in a simulated fashion.

It’s a wonderful game that is terribly over-priced. In three years, I managed to sell four or five of them. Had that been my only source of income, I would’ve been forced to turn to yet another source of income – welfare.

About three years ago I tried my hand at selling ads for the 400 Edition magazine. I should have learned from the golf game… I am not a salesman.

Last year Lu decided to try her hand at selling. She is now a full-fledged Mary Kay Beauty Consultant. Her sales performance has been much better than mine, but thus far, we’ve sunk all of her profits back into the business. We’re hoping that in years to come, she’ll have built up a good customer base and we’ll be able to spend some of her profits on more personal things… like food.

This past April, I began receiving Social Security payments. Needless to say, that additional income – combined with a better year of contracting work – has helped us pay off some nagging debts and raised our comfort level somewhat. However, watching our retirement nest egg shrivel up has made it perfectly clear that we’ll both need to continue working for some time to come.

In the meantime, the additional sources of income combined with the woeful losses in our investments means that, once again, I have to rely on Glenn to figure out how much of my money the government gets to keep.

That’s why I keep saying, “Bring on the FAIR tax!” If you’re not familiar with the Fair Tax, I encourage you to read the information on their web site or read one of the books that have been written about it.

I’ve contacted some members of Congress who oppose the Fair Tax. When I read their reasons for being against it, it was obvious that they have not taken the time to study the legislation.

Do yourself a favor, take the time to do what your representative may be too busy to do. Then, if your representative is one of those opposing the bill, drop him or her a line. If he or she still refuses to support it, maybe he or she needs to be dropped. The 2010 election isn’t that far off.

Now, if you’ll excuse me, I still have to run the numbers on Lu’s Mary Kay business.