I recently ran across a video at Kitco’s Video News page that featured an interview with Kevin O’Leary who is a Canadian entrepreneur who founded SoftKey, a software company that eventually acquired The Learning Company before selling out to Mattel.  Apparently, he is also on the show Shark Tank on ABC which I have heard about but never bothered to watch.

I don’t think it is important to watch the full video, but I do think that he made one very important point which I will share with you and which I am working on implementing:

• Never buy a stock that doesn’t pay a dividend!

It is really quite simple and makes a lot of sense.  He doesn’t look at earnings when evaluating a stock.  He looks at free cash flow and wants to make sure that some of that cash is being returned to the owners (the shareholders) of the company.

A Transition in Thinking

I am starting to see from where he is coming.  Much of the market’s return has been the result of dividends.  Just take a look at the following graph which I found at The Market Oracle:

If this graph doesn’t convince you of the importance of dividends, which account for over half of the S&P 500′s, then how about I show you another graph that looks at the performance of the Dogs of the Dow vs the S&P 500.  In case you didn’t realize it, the Dogs of the Dow are those stocks in the 30 from the DJIA that have gotten so beat up in terms of price, that their dividend yield is among the top 10 of those 30 stocks.

No Lost Decade for Dividends

So had you been holding stocks that paid dividends, there really would not have been a lost decade.  You would have received consistent payments of cash to add to your portfolio enabling it to grow and make money.  You can just look at the graph and see that the S&P 500 lost money during the decade that saw two major shocks.  And yet, stocks that paid dividends (namely, the Dogs of the Dow) actually made money.

Fortunately, it is possible to teach this old dog some new tricks.  That is why I am simply working on changing all the stocks in my retirement accounts to dividend paying stocks and tracking my dividend income this year.  I did manage to hit my goal for the 1st quarter.  Over the next 25 years, I will allow those accounts to grow and reinvest those dividends into more stocks.

In fact, I will probably buy some more STX and INTC this week since they have been holding up quite nicely during this recent market decline.  I will also watch the ONXX $46 puts get exercised on Friday so I can start my purchase of Nucor (NUE) next week.  I won’t get the dividend for this quarter, but should be in a position to pick it up in the third quarter.  The same holds true for INTC and STX since the ex-dividend date has passed.  Nevertheless, adding to these positions is just a good idea.

Obviously, I will continue to publish the quarterly update on the dividend progress and see if it continues to grow.  According to the charts above, it should be a great plan!

Regular readers of this blog may or may not know that I follow the gold market fairly closely.  I am not a gold bug per se, but I do feel that gold is a decent store of wealth as opposed to the greatest investment as some would have you believe.  On the other hand, I don’t think that it should be dismissed entirely since it can have some purpose in a broad investment portfolio.

If you have been watching the gold market recently, you have probably noticed that the price has dipped below $1600 per ounce.  The gold market has historically been one that has been responsive to inflation expectations due to money supply or geopolitical concerns or even financial crises and a loss of confidence in fiat currency.

But with the gold price having backed off from a high of over $1900 per ounce last August and September, is there something that we should be expecting?

Global Industrial Slowdown?

Here is a recently published article that suggests gold is correlated with global industrial production.  That would seem to make sense as inflation, while technically a monetary phenomenon, seems to respond as a result of increased demand as well.  When the labor pool is tight, wages increase leading to a broad increase in prices.  Likewise, when the cost of oil and transportation and all the other goods that use oil in production increases, the gold market seems to respond to those inflation expectations.

If this is the case, one has to wonder whether the gold market is foretelling some global economic slowdown.  Is there another recession on the horizon?  Is China slowing down and are concerns about growth coming from that area of the world?  Is Europe really going to become a major headache?

On the other hand, is it simply the fact that there is no sign of inflation in the near future and that growth will continue albeit at a more moderate pace?  Is this simply a period of consolidation in the gold market?

There is a seasonality to the gold price and summer tends to be a slow time in regards to the price.  Is this a factor in the current pull back?  Will the price for an ounce of gold make another strong run in the fall?

To be perfectly honest, I really don’t have a clue.  So, what am I doing with this information?

Buying More Silver Wheaton Stock

I am buying more Silver Wheaton stock.  Silver typically follows the gold price although with some added volatility.  This has provided me a decent opportunity to purchase some more SLW which should make a nice rebound should seasonal factors be playing a role or should global economic activity improve.

I have already increased my share count by 6.5% this past month and am looking to add some more when I sell some calls and collect the premium.  Hopefully, I will have enough cash to do this during June.  I should be collecting some dividends from Seadrill and AK Steel during the month of June so that should help with the needed cash.

The key will be to maintain patience and add to positions when the stocks are down and pare back when they spike.  I plan on using the same technique with Silver Wheaton and by extension, the price of gold and silver.

What do you think is happening with the gold market?

Well, I managed to make an extra payment on the Discover Card.  I was able to make this extra payment because I took some of the money that I had made from blogging in March and moved it into my personal checking account.  I did let it sit for a little while until I made sure that I was going to have enough money to keep up with my blogging expenses for the month of April and the next few.  The reason is because I actually lost money blogging during the month of April.

However, I do feel confident enough that I can cover expenses for the next few months, so I went ahead and made the extra payment.  It has always been my goal to develop my online opportunities using only my time and not any of my own dollars, and I have been able to do that.  Of course, growth has been somewhat slow as a result, but that doesn’t matter as much to me as being able to bootstrap and create something from nothing.  I am pleased to say that I have been able to make extra payments and pay off some debt as a result of blogging.

Future Discover Card Payments

My main blogging financial goal for this year has been to get the Discover Card paid off.  With recent changes to blogging revenue, I have to wonder from where the funds for this goal might come.  I could hope that things improve later this year, and they may.  I am also working hard to develop my other online income sources, but that will probably simply help to pay for ongoing expenses.  I will just have to see what the next couple of months bring.

I have considered using the money that I have gotten from recycling aluminum cans for making an extra payment.  I have also considered using the change that I periodically roll and redeem for dollars to make an extra payment.  Of course, I have also considered looking at the stuff that I own and having a garage sale.  It would be good to kill two birds with one stone, namely getting rid of household clutter and make some money in the process.  The only catch in this plan would be the time involved.  I will have to see how this works out.

I am still committed to getting that card paid off by the end of the year.  Half of the balance will be covered through the normal monthly payments that I have been making so as long as I can keep up with the extra payments, it should happen.  For now I suppose, I won’t be making any major changes, but will have to monitor the situation to see if blogging income totally disappears or if this is just a slight dry spell.

Carnivals with My Blogs

I do want to take a moment to highlight those carnivals that featured an article from one of my 3 blogs.  CFM = Cash Flow Mantra, GPM = Grand Per Month, and PT = Penny Thots.  Be sure to subscribe to all 3 so you can get lots of great personal financial information.

You may have heard that Green Mountain Coffee Roasters stock took a big hit earlier this week when they missed earnings and put out a disappointing forcast for the remainder of the year.  In fact, the stock lost almost 48% of its value in one single trading day.  Ouch!  Now if you have been long the stock, that is a major hit to that portion of the portfolio.  Granted GMCR has been a momentum stock for some time now, so it isn’t unexpected that the gains would slow at some point.  However, it can still make for some sleepness nights knowing that one day could wipe out so much value.

Sleep Better At Night–Buy Some Protective Puts

If you are investing in the stock market (and especially in individual stocks), you need to have some plan for these events when they occur.  There are many ways to do this from not buying individual stocks and going only with indexes, to diversifying across several stocks and sectors, to using stop losses, to buying put options.  I would like to address the concept of risk management from the perspective of put options and share what I do with my retirement account.

If you have been reading this blog for a while, you know that I invest my retirement account in some individual stocks many of which might be considered risking (ironically, GMCR only shows a beta of 0.8).  Take for example, my investment in Onyx Pharmaceuticals (ONXX).  This is a stock that I bought after selling Imclone which was bought out several years back.  I purchased ONXX as a potential buyout candidate for which there is still potential.  The most recent run up is due to buyout rumors again.

Over the past year, ONXX (with a beta of 1.2) has traded from $27.17 to $47.80 per share.  With this most recent pop, I decided to buy some protective puts at a strike of $46 expiring in the month of May in two weeks.  So far, that looks like a good decision since ONXX is now back down under $43 per share.  Since my overall cost in the stock is $43.57 even after the purchase of the puts, I have guaranteed myself a profit.

Then, I will be able to purchase back the same stock for less and either sit on the cash or purchase even more shares of ONXX in preparation for the next pop.  I will usually pay for the put options by selling some covered calls creating a collar.

I have found the technique of buying puts, selling calls or selling stock when it pops and buying back calls, exercising puts, and buying more stock to be fairly effective in mitigating losses and decreasing volatility in my retirement portfolio.

Hopefully, I won’t one day discover that the stock that I am holding has dropped by almost 50% in one day.  But if it does happen, I know that I will sleep well because I would have owned some protective puts.

Oh, and by the way, a stop loss order would not have helped with GMCR this week.  If you don’t know why, be sure to ask.

Readers:  I am guessing that most of you use indexes for your risk management, but for those who do pick individual stocks, what do you do?

Perhaps you’re battling credit card debt or your lack of follow through on budgeting tips.  Maybe you need to work on educational savings goals for your children, or your retirement savings.  Whatever the case may be, you must find your method for meeting your financial goals and budgeting needs.

Choose Your Budgeting Style

One of the major elements is in respect to your budget.  When you do this, you must consider some important aspects with you and your budget:

• How technological, or “un-technological,” must it be?  Consider any devices that you have which could lead to an obvious choice in terms of convenience.
• What features do you need?  From the basics that a notebook could take care of, to the advanced features that an advanced program on your notebook computer can demonstrate, there are many sides to this story.
• Do you need to keep multiple budgets?
• Identify any weaknesses you have with keeping a budget, or remembering to use it.

Some of these points will lead you to a certain direction.  If you’re old school, you might prefer to stick with your pen and paper.  A smartphone that you use every day could mean that an app is right.  Take some time to consider how you currently keep a budget, as having something that works well for you is extremely important – how else will you pay off credit cards and  save for your children’s education?

The Problem of Motivation

As we continue our casual look into financial methods, another incredibly important issue is brought up with motivation.  In financial articles, it is perhaps not spoken of more often.  After all, the best budgeting tips in the world will do no good if they are not followed, of course.

You have to take a deep, hard look at the ways needed to motivate yourself.  For instance, some consumers needing to cut their expenses down or save more may find success of the following:

• Give yourself a goal.  For instance, as part of your budgeting changes, you could invest a small amount into a savings account each month.  With that money you could go on a small trip, thus giving you incentive. Or you could be saving for a deposit on your dream home.
• Put your budget in plain sight.  You might “see no evil” if you ignore views of your budget.  Let yourself see the debt you have on a regular basis; it might drive you to act upon it and remain disciplined.
• Inspiration.  Do what it takes to follow through.  Maybe you can have your household keep each other honest with spending money, or post reminders (i.e. notes around those high-priced restaurants’ phone numbers).  Put a picture of your future trip via the first point.

Overall, there are many aspects that can impact your financial well-being that are not directly about money.  The manner in which you keep your budget and motivate yourself with your budget can make a big difference.  Approach these items carefully to make implementing your financial plan much easier on yourself.  Sometimes you just have to do what it takes when it comes to your budget, and these examples can certainly help with execution and practice of good habits.

The preceding post is a guest post.