Wealth Capitalist
Your path to financial independance
  • Home
  • Principles
  • Banking
  • Investing
  • Taxes
  • Tips & Tricks
  • About the Blog
Category:

Investing

How to grow your money and enjoy healthy returns

Dividend Investing

My Dividend Investing Portfolio

by Yoda April 21, 2019

After index investing, my next favorite investing strategy is Dividend Investing. You can read about it a lot over here. In this article I wanted to give details on my dividend portfolio. I divide my stocks into various sectors. Although, I do not have any target percentages for any sector. I plan on buying stocks based on their valuation and opportunities Mr. Market produces, not based on a target percentage for each sector. I am still young and do not want to restrict myself  by only buying a limited amount of some individual stock. Maybe a 5k position is large in my portfolio as of today but 10-15 years later it might not even be half of what I want each position to be. I plan on holding these holdings for a long time and re-investing dividends to create that compounding effect. Most of my stocks are in either my or my wife’s Roth accounts. Some dividend stocks although, are in my individual broker account which I purchased when I did not know too much about tax efficient investing. Read more about tax efficient investing here.

I will try to keep this portfolio as much updated as possible. Without much delay here is my current dividend stock portfolio (As of 31st MAR 2020):

Ticker Company Name Sector Quote Dividend Amount Dividend Yield Research Article Link
ABBV AbbVie Inc Health Care 76.19 4.72 6.20%
AOS A. O. Smith Corp Industrial 37.81 0.96 2.54%
BLK BlackRock, Inc. Financials 439.97 14.52 3.30% BLK Analysis
CSCO Cisco Systems, Inc. Information Technology 39.31 1.44 3.66% CSCO Analysis
DIS Walt Disney Co Consumer Discretionary 96.6 1.76 1.82%
HON Honeywell International Inc. Industrials 133.79 3.28 2.45%%
KTB Kontoor Brands Inc Consumer Discretionary 19.17 2.24 11.68%% KTB Analysis
LW Lamb Weston Holdings Inc Consumer Staples 57.91 0.92 1.61%
MO Altria Group Inc Consumer Discretionary 38.67 3.36 8.69%
NATI National Instruments Corp Information Technology 33.08 1.04 3.14%
O Realty Income Corp Real Estate 49.86 2.79 5.60%
PEP PepsiCo, Inc. Consumer Staples 120.10 3.82 3.18%
PFE Pfizer Inc. Health Care 32.64 1.52 4.66%
PM Philip Morris International Inc. Consumer Discretionary 72.96 4.68 6.41%
PSX Phillips 66 Consumer Staples 53.65 3.6 6.71%
QCOM QUALCOMM, Inc. Information Technology 67.65 2.48 3.67%
SBUX Starbucks Corporation Consumer Discretionary 65.74 1.64 2.49%
STOR Store Capital Corp Real Estate 18.12 1.4 7.73%
T AT&T Inc. Telecom 29.15 2.08 7.14%
TCEHY TENCENT HOLDING/ADR Information Technology 49.09 0.115 0.23%
TGT Target Corporation Consumer Discretionary 92.97 2.64 2.84%
TROW T. Rowe Price Group Inc Financials 97.65 3.60 3.69%
VFC VF Corp Consumer Discretionary 54.08 1.92 3.55%
WFC Wells Fargo & Co Financials 28.7 2.04 7.11%
XOM Exxon Mobil Corporation Energy 37.97 3.48 9.17%

Dividend Portfolio by Sector Breakdown

portfolio pie 2020 q1

 

Do remember, this is just a listing of all the dividend stocks I own and their per share metrics as of As of 31st MAR 2020. This doesn’t represent my own size of individual positions or my yield on cost on these stocks.

Please check out my latest quarterly dividend update here. Check out my buys and rare sells for the latest quarter.

Also check out how I get my financial news from WSJ and Barron’s for free every day.

 

April 21, 2019 2 comments
0 FacebookTwitterPinterestEmail
Dividend Investing

Blackrock Inc: BLK stock analysis

by Yoda November 3, 2018

Since many of you know dividend investing is one of my fav styles of investing. I wanted to start a new series of articles on dividend stocks. I plan to discuss fundamentals of the business I am buying, some very basic technical metrics to judge safety of dividend over long term. My plan on dividend investing is mostly to buy high quality companies at decent or undervalued prices. Focus more on the income that is being generated using dividends, re-invest and hold for the long term. These articles will also help me to revisit my theory on buying the stock in first place in future when deciding if ever to sell.

So without any other delays, a stock I have been looking at recently is BlackRock Inc.

Overview of BlackRock Inc (BLK)

BlackRock is one of the largest asset management firms in the world. Basically, they are responsible for managing over 6 trillion dollars in various types of assets like fixed income, stocks etc. World’s biggest universities hand over the keys to blackrocktheir endowment funds to BlackRock to manage it and grow. World’s biggest companies ask Blackrock to manage their pensions funds and grow them. Some of the world’s biggest wealth funds, tax exempt institutions, charities etc. engage in services of BlackRock to manage their money. Blackrock in turn charges them fees to do it. Apart from this, they also own the iShares brand of etfs. If you want to do index investing but want more liquidity in selling and buying your shares, you would look towards ETFs. ETFs like IEMG (emerging markets), ITOT(Total US stock market), IVV(US S&P 500) are products of the Blackrock family. These cost almost nothing to make, all they do is package different individual stocks and sell them together as 1 security and collect some fees every year on it. They already have country specific, industry specific, dividends specific ETFs. ETFs inherently reduce risk since it allows you to diversify. and provide liquidity. They are very popular among all type of investors retail/institutional or individual. Blackrock is the largest ETF provider in the world!

Tollbooth in the investment world

All this makes Blackrock analogous to Visa and Mastercard in payments world. Just like Visa/Mastercard charge fee on any transaction done across the world using their cards, BlackRock charges fee to people holding their investment assets. They charge it every year! So its not like a one time transaction fee either. It’s like a toll booth on the superhighway of investing. Lots of people/institutions/retail clients invest in assets and some/most of them will use assets packaged by BlackRock and pay fees to hold them.

Best part is as the total assets under management grows for BlackRock, the more fee discounts they can offer to their clients thereby growing even more. The services Blackrock offers are also very sticky. An institutional client or a retail investor with significant portion of their wealth invested and managed by BlackRock is not going to sell everything and switch to a new provider just because someone else offered lower fee. I think BlackRock has excellent moat in form of its size and brand. They are one of the absolute go to places for big institutional clients looking to manage their money.

Dividend Yield

As of Oct 25 2018 is 3.31% with 12.52$ payout per share per year

Dividend history & Growth

BlackRock has a pretty good history of increasing and growing dividends every year since 2003 except for 2009 when they froze it. For 2009 I think companies can be excused if they had a pause in dividend growth because of the worldwide scenario going on at that time. They could have just cut the dividend in 09 but they decided to just freeze it. This seems to suggest me that the management is invested in growing and increasing dividends year over year.  The dividend over last 5 years has grown around at 13.18%. Such growth rate is just great! What is there to not like about this history and growth rate?

Payout Ratio & Dividend Safety

blackrock valueline

Courtesy Valueline Inc.

Looking at the past 15 years of data from Valueline, we can identify the following about dividend safety:

Dividend per share as of 2018 $12.02
EPS as of end of 2018 $26.93
EPS Payout ratio (12.02/26.93)*100 = 44.63%
Cashflow per share as of 2018 $29.08
Cashflow Payout ratio (12.02/29.08)*100 = 41.33%

So with payout ratio in 40’s it seems like BLK makes enough money to cover dividends. This also allows BLK to withstand competition in race to 0 over commission fees. BLK has the scale and the money to innovate and take market share from other companies in its field.

Total Debt as of end of 2018 $6000 million
Total Shareholder’s equity as of end of 2018 $32374 million
DEBT/Equity .185 or 18%
Operating Income as of 2018 $5531 million
Annual Interest payments $175 million from Annual statement
Interest Coverage ratio 5531/175 = 31.60

.18 or 18% debt to equity ratio tells us, Blackrock has not used much debt to finance its assets and growth. Its competitors like State Street is at .53 or 53% Northern Trust is at .34 or 34%.  Interest coverage ratio of 31 suggests that BLK should have no problems paying its interest obligations every year. It generates enough money to cover them 31 times! This is a good spot to be in. In case of a crisis, BLK should be able to support its debt obligations which will allow it to ensure dividend is also paid there after.

Trends

There is a very popular reversion to mean theory.  It says that most stock metrics tend to hover around the mean of its lifetime average. So if the PE of a stock increases to very over-valued, over time it will fall back to its mean PE ratio. Hence, I also like to look at average PE ratio and dividend yield of stock I am looking to purchase as compared to its historical values. This plays a small part in my decision-making process. Looking at BLK historical PE, it’s been around 13-17. This chart below doesn’t include the latest price decline in month of October and including that, fwd pe today is around 12-13 PE. I think this is below the average in last 12 years.

blackrock pe

Next coming up to the dividend yield, historically seems to range between 1.5 to 2.5%. Again, today the yield is close to 3.1%. Kind of the highest its been in last 12 years!

blackrock div yield

Looking at revenues and net income over the last 10 years from Morningstar shows us the following(in millions):

revenue blackrock

As you can see both revenue and net income have gone up in the correct direction over last 10 years. This just means management is great at growing the business and making it more efficient.

Positive trends tell us that BlackRock is just a great company that has reduced to reasonable levels in the last few months.

In Conclusion

BlackRock seems to be a fundamentally strong company with great dividend starting yield at around 3% at present. I usually only care about my dividend income and safety of that dividend. The dividend growth and payout ratio with BLK seems very good at current levels. I like to keep the whole process of picking dividend stocks simple and easy. Even if the stock drops more good for me since that means my DRIP will get more of BLK stock. If it goes up again good for me. I would just let the stock DRIP and reinvest all dividends. Usually I buy in lots and bought my first lot here. I will slowly buy more lots and build BLK into a full position for me over the next year or so.

If you liked this article, it will help us immensely if you can share it with your social circle.

Disclaimer: The above are just my opinions expressed in the article. I am not your fiduciary and not a financial advisor. Do not consider this as investment advice to you. This article is just for informational and entertainment purposes only. Please do your own research before making investment decisions or talk to a fiduciary. 

November 3, 2018 0 comments
0 FacebookTwitterPinterestEmail
Investing

REIT Investing: What, How and Why

by Yoda October 1, 2018

As you all know from my previous articles, dividend investing is my favorite style of investing. Although along with that, I also like to make sure my portfolio has different type of assets.  One way to do this is via real estate. However not all of us have the money to pay every month for mortgage. Here is where Real Estate investment Trusts (REIT) come in.

REIT what if i told you

What are REIT’s?

A REIT is a company that owns, operates and manages real estate assets around the world and collects rent to make money. There can be publicly traded or privately held REIT’s. The good thing about public REIT’s is that they are required by law to pay out at least 90% of their taxable income in form of dividends.  This makes them excellent alternative to just normal dividend stocks. Public REIT’s usually operate in a single industry.  For e.g. Data Center, Telecom towers, industrial, storage, healthcare properties etc. This is not a hard and fast rule though. Some REIT’s do invest in all types of properties. There are also some REIT’s which invest in mortgages and make money using the interest payments on mortgage instead of collecting rents and managing properties.  They are called mREIT’s but we will only be focusing on Publicly traded normal REIT in this article.

Advantages of REIT’s

Juicy Dividend Yields

Since REIT’s are legally mandated to pay at least 90% of their taxable income, they have high dividend yields. Most REIT’s can pay 4-5 or even 7% sustainable dividend yields. As compared to the average 2-3% dividend of rest of the S&P 500, REIT’s dividends are amazing! These yields are also usually very stable since most tenants are in long term leases which have increases priced every year as per inflation at least. However, check out various ways to ensure/safeguard you keep getting dividends at the bottom of the article.

Instant Diversification

Since we know its very important to diversify in various asset classes in your portfolio.  REIT’s help in this regard. REIT’s indirectly make you owner of real estate. They usually have low correlation with stocks so, helps with reducing risk in your portfolio.  Plus, best part is you get to be a real estate owner without doing the hard work in maintaining or collecting rents or paying any mortgage. Agreed they do trade like stocks, but REIT underlying asset that produces income is real estate.

Liquidity

Publicly traded REIT’s can be bought and sold just like stocks. So its easier to re balance your portfolio if needed. There are other private platforms like Fundrise and Real Estate Mogul that allow you to invest in REIT’s. But they are bound by extra rules on when you can sell and how much you need minimum to invest. So, publicly traded REIT’s are what I would suggest buying.

Proven long term performance

REIT’s over the last 25-30 years have returned over 11% annually reinvesting dividends. That is a great rate of return for any asset class given the fact we have had 2 recessions in that time. (courtesy NAREIT)

reit performance

This kind of performance has been almost second to no other group of equities.

Risks/Disadvantages of investing in REIT’s

Sensitivity to Rising rates

In a rising rate environment like today’s, REIT’s compete with other asset classes. For e.g bonds and US treasury rates increase which are usually safer than REIT’s. So a 3% bond would be appealing to people as compared to a 4% REIT with amount of risk involved and REIT usually under-performs. However, having said that if you are a young investor with retirement after a decade or two or more. Then what is there to worry about! Just relax and reinvest the dividends and watch your income from REIT stocks keep growing. Over long term even rising rates usually benefit economy and help in raising rents across most properties and helping REIT’s.

Industry Risks

Most REIT’s operate in a specific industry and are susceptible to business risks weighing down respective industry. For e.g. recent fears over retail apocalypse over slowing sales in 2016-2017 lead to huge decreases in stock prices of most retail-oriented REIT’s. However, if you just focused on fundamentals and bought/invested then, most REIT’s are way more up since then this year.

Tax treatment for you

As we know publicly traded REIT’s are required to pay out at least 90% of their taxable income and they are exempt from paying any income taxes. But then for this reason, you get taxed at full income tax rate on unqualified dividends you receive from REIT. Instead of the favorable tax treatment at lower tax bracket for normal dividend stocks.  So, its important to understand what type of investing account they should go in to minimize taxes/eliminate taxes. Yes! its possible to pay absolutely no taxes on REIT’s and get the high dividend yield they offer.

Different Type of REIT Sectors

As mentioned, REIT’s can operate in different industries and business. Type of industry has a lot of impact on REIT’s ability to earn rents. Here are some examples:

  1. Industrial: These invest in making warehouses, distribution centers, logistics center for housing any kind of equipment’s, process, materials required by customers. Some examples include Prologis Inc, Plymouth Industrial etc.
  2. Telecom: These invest in creating tower sites that which network operators use to provide cell services. Some examples include American Tower, Crown Castle Inc etc.
  3. Data Center: These invest in building huge infrastructure for data centers which big tech companies rent. They are usually fitted with features like extra cooling, 24*7 power supply and extremely secure environment. Some examples include Digital Realty, Cyrus One etc.
  4. Retail: These invest in single standing or mall like shopping centers. Some examples include Realty Income, Store  Capital etc.
  5. Healthcare: Theses invest in creating hospitals, nursing homes, skilled nursing facilities etc. Some examples include Omega Healthcare Inc, Sabra Healthcare etc.

Other sectors include Office, Residential, Timber based REIT’s etc. You can find more about them here. Its important to know that at any given time, its easily possible that one sector of business is booming and REIT’s involved in that sector will also be booming.

In Conclusion

There are a lot of other factors like adjusted funds from operations AFFO, management etc to look at when choosing REIT’s. Factors to ensuring/safeguarding that dividend yield. Correct investment accounts to buy REIT’s in etc. To know more on how to go about choosing best REIT’s please consider subscribing below for free to help support the blog.

October 1, 2018 0 comments
1 FacebookTwitterPinterestEmail
Investing

Index Funds: lazy & proven way to portfolio

by Yoda April 14, 2018

What are index funds?

An index fund is a basket of stocks. The basket is usually based on a market index, for e.g. S&P 500 which is basically based on top 500 companies traded on NYSE or Nasdaq. Similarly, we have Dow Jones Index which is a selection of 30 companies in US. An index fund basically has each of the stock based on the market cap of it in the index which the fund is tracking. Let’s say if in S&P500 index Apple has 7% market cap as compared to the total of all the 500 stocks, then every 1$ worth of the index fund will have 7% of fractional shares in Apple stock. So this way you are getting exposure to all companies in the S&P 500 index.

index_funds_everywhere

Advantages

1. Risk management/diversification

You are instantly invested in multiple companies across multiple industries with most index funds. This diversification helps you reduce risk compared to buying a few stocks. More the number of stocks across various industries smaller is your risk. You can easily afford to let one of the companies be bankrupt. At the same time you will probably also enjoy the returns from top companies in the index!

2. Self cleansing

An index fund usually doesn’t do any active buying and selling of stocks. The only time a stock position is sold from index is when the company falls of the index. For e.g. if a company goes bankrupt or performs so poorly that it is dropped off the S&P 500 index, that’s when the index also sells shares of that company. In its place a new company shows up and the index buys that company’s stock accordingly. So in this way bad companies are removed from the index and fresh new company is introduced into the index.

3. Low expense ratio

Since the index fund is a passive buyer and seller of stocks and there is no active fund manager that buys and sells stock. As a result of this the expense ratio(fees charged = amount invested* expense ratio/100 ) is usually way lesser as compared to hedge funds/other actively managed funds. This fees includes transaction commission costs, taxes etc and is charged annually. But for index funds usually its cheapest.

4. Takes less of your time

Index fund investing is the simplest easiest thing to do for most people. Doesn’t take too much of your time. Its like set it and forget it. Doesn’t need too much understanding its pretty self explanatory and is proven strategy to invest.

Disadvantages

1. Average/market returns

Since you invest in indexes, you get the index return. If the index went up by 8% in that year, then you also make 8% on your money. If It goes down by 2-3% then even your money goes down by 2-3%. However, don’t be discouraged by average market returns. Most investors loose money and cant even beat the indexes. There was a very famous bet between Warren Buffet and an active fund manager Ted Seides. Between performance of an index fund and an active fund of funds over 10 years. It concluded recently, and as expected Buffet won! You can read about it here.

2. Holding some bad apples/no control over holdings

When you own an index fund with many stocks, most of the times you know a few companies in that fund are performing poorly. Since its an index fund, you cannot do anything about it until the company in question goes bankrupt or gets dropped from the index based on the criteria of index. However, in reality even this is not so bad. Since I mentioned above this is just the process of self-cleansing and eventually you get new companies in the index.

So what index funds to buy?

Buying index funds is one of the best, easiest, simplest, proven strategies for investing. Usually total stock market index fund, bond fund and an international index fund is more than enough. That diversifies you across total universe of companies across the world. Here are some examples from Vanguard & Schwab:

Fund name Description Expense Ratio
Vanguard Total Stock Market Index Fund (VTSAX) All company stocks traded in US equity markets 0.04%
Vanguard Total Bond Market Index Fund (VBTLX) Bonds from US traded companies and US government 0.05%
Vanguard Total International Index Fund (VTIAX) Stocks from all over the world except for US market 0.11%
Schwab Total Stock Market Index Fund (SWTSX) All company stocks traded in US equity markets 0.03%
Schwab US Aggregate Bond Index Fund (SWAGX) Bonds from US traded companies and US government 0.04%
Schwab International Index Fund (SWISX) Stocks from all over the world except for US market 0.06%

Investing in index fund doesn’t need any understanding of industries, stocks or fundamentals etc. Historically stock market has grown at 8-10% per year. So its just simple math by investing in stock market over long term you are almost getting the same return every year. Makes the whole task of picking stocks to grow wealth easy, less complex. This definitely allows you to focus your time on family and hobbies all the while your money keeps growing. Depending on your age and risk tolerance its better to figure out a what percentage of your money do you want to be in stocks bonds and real estates and then buy index funds based on that. There are also other index funds for different sectors in business, real estates countries etc. Do your research before diving into those and keep an out on the fees.

buffet_index_funds

 

Disclaimer: I am not a financial professional, and every person’s situation is different. This blog is personal opinion, not financial advice. You should thoroughly investigate and analyze any financial decision yourself before investing any money in any investment program.

 

 

April 14, 2018 0 comments
1 FacebookTwitterPinterestEmail
Investing

Asset class and Asset Allocation strategy

by Yoda April 8, 2018

An asset from my very first article we know is something that puts money in your pocket. Mostly passively. Simply put an asset class is a collection or grouping of similar behaving assets. They might be similar in terms of how they perform, where they are traded, may be regulated using similar laws etc. As you progress in your financial independence journey, its important to understand different asset classes and re balance depending on your age.

asset class tell me more

Types of Asset Class

1. Fixed Income Assets

Few examples are things like bonds and certificates of deposits. Bonds are just a loan you give to a corporation or a government entity for a fixed period in exchange for a fixed rate of interest during that time. High quality bonds are usually low risk as compared to other forms of asset classes. Since they have a fixed rate of return, every investor closer to their retirement or based on risk tolerance should have certain percentage in bonds.

2. Equities

Also known as stock or security is a small share in a public company. Buying a share of a company gives you part of earnings the company earns annually. However, this class of assets is much riskier since there is no guarantee on the return on your investment. It can go to the moon or burn into the ground. Having said that, there have been many studies that prove in the long-term stocks are the single best performing asset over anything else.

3. Real Estate & commodities

Real estate can be in form of owning actual property and renting it out to gain money. There are also publicly traded securities called Real Estate Investments Trust(REIT’s) which buy law are required to give back 90% of their earnings to the shareholders. REITs can be companies that invest in data centers and rent them out, public offices, apartment complexes etc. REIT’s usually provide a very high dividend yield compared to other asset classes and are good way to diversify. Commodities can be precious metals like gold and silver etc.

Stocks are the single best performing asset class over a long periods of time

Check out this graph that compares the values of various assets since 1802. See how 1$ invested in stocks grows way more than any other asset class. Bonds grew in value too but not as much as stocks. Interesting to notice is how gold and other metals/commodities barely grew in that time which is a big deviation from what people usually buy gold for. Usually a bar of gold just remains a bar of gold. Doesn’t really grow in value. Also focus on how 1$ bill in 1802 is now probably half of what it was in 1802. This is mainly because of inflation if you remember from our previous article. This just goes onto show that its important to invest and have diverse type of assets to be financially independent and secure your retirement.

stocks vs other asset class

What asset allocation strategy to adopt?

With knowledge of various asset classes, how do we go about deciding what is right for us and in what mix? That all depends on one’s own situation, age, goals etc. Ideally one should have a mix of all the asset classes mentioned above in some varying percentages. Since stocks are very risky but usually go up in long term, its better to have more stocks if you are in your 20’s or 30’s since you can take on much more risk. Maybe 90-100% of your investments in stocks. Later in your 50’s and 60’s you might want to have a stable stream of income coming in from your investments and so you might want to have more money in fixed income assets like bonds. It’s essential to not just stick with 1 strategy and mix in your asset allocation. You must re-balance it as you move along in your financial independence journey. It all depends on your investment horizon, risk tolerance. Ask yourselves questions like will you be able to stomach a 30-40% drop in value? Do you have other sources of income? How good is your general knowledge about stocks and bonds and these assets etc.? Then decide  how much money do you want in various types of assets and go on form there. One of the biggest advantages of diversifying among different asset classes is that you reduce your overall risk. Stocks could be in free-fall or may be depressed for 4-6 years but if you have bonds, you could continue to receive income form them during that time.

asset class inception

 

Let me know if you have any other questions or comments, type them below and I will make sure to reply to them.

 

April 8, 2018 0 comments
0 FacebookTwitterPinterestEmail
Investing

Primer on different types of investing accounts

by Yoda April 5, 2018

So you decided to dip your toes into investing your money to beat inflation and prepare for your financial independence. Not sure where to begin ? Does everything sound too complex and confusing? Well here is a guide that will help you to start your investing journey. This guide details what type of investing accounts exist, taxable, non-taxable and in what order should you go about investing money.

confused_investing_accounts

Types of investing accounts

1. Savings account/Emergency Fund

Do not start investing your money without having an emergency account. Investing is a long-term game. Its easily possible you may lose money in short term on paper. Investing needs a lot of patience but over time compounding and a good creates a nice retirement nest for you. Hence its important you have 6 months or more of your expenses saved for emergency. You can try the savings account from my previous post and still get 5% interest to beat inflation.

2. 401K/Employer Sponsored Plans

Many public employers in USA offer to match some % of your annual contribution to a retirement account. This account can be a 401K or a SIMPLE IRA which some employers provide. Examples can be employer matching 50% of your contribution at dollar to dollar up to 6% of your salary. Which means you get 6% more money in your 401K if you put 6% every year!

3. Individual Retirement Accounts

You can contribute up to 5500 USD in IRA accounts per year based on your annual salary and age. A traditional IRA allows you to claim your yearly contributions as tax deductions. You pay taxes after retirement when you withdraw money from this account. Roth IRA’s do not allow you to claim any tax deductions upfront, but you never pay taxes on any gains/withdrawals after retirement. However, these accounts have restrictions on when you can withdraw money and if you want it earlier, you pay penalty to access this money. Self-employed individuals have SEP-IRA which is like IRA’s for employed individuals.

4. Health Savings Account (HSA)

These are new breed of investing accounts. This is an option to you only if you subscribe to a high deductible health plan at work. They are also known as triple tax benefit account. The contributions are tax deductible, money withdrawn to pay for medical expenses is tax free. Any money you have after your retirement can also be withdrawn tax free for daily expenses! So ideally you never pay tax on the money in your HSA.

5. 529 College Accounts

These are investing accounts whose funds are meant to be used for college tuition, books and similar expenses. Most states provide one or the other form of these accounts. There are certain limits on if the money can be used in other places apart from college expenses. Some of these accounts also provide state level tax deductions.

6. Normal Brokerage Accounts

In addition to the above accounts, you can also have an account with any broker. Most brokers today open accounts online and allow you to buy sell securities for free or with some commission. These are usually taxable and you pay taxes on any gains you make when you sell securities in this account. You also have the ability to recognize losses if you have any in your tax returns form this account.

How do we go about investing now ?

  • Obviously first you should have your emergency fund saved up!
  • Next if you get any match from your employer in a 401K/SIMPLE IRA, I would suggest to make use of that since it’s just free money. Why leave it on the table. Make sure to contribute as much to get the maximum match from your employer.
  • Next if you have more money left over, then try going for a IRA account. You can open them at any broker and broker usually tells you to not exceed the 5500 limit based on your profile. IRA usually gives you more options to invest your money than 401K’s.

investing accounts more_money_more_problems

  • Still got more money to invest? Hot damn! Limits on 401k’s per year is up to 18500 USD. If you did not meet this limit in second point then it can be a good idea to contribute more money here. Alternatively, you can even contribute money to 529 college accounts or your HSA depending on your situation.

In Conclusion

The above recommendations are just organized in a way to help you automate your investing/maximize returns and have the least tax bill. As you go on in your life, you do not want to bother about smaller details on these accounts. Most of these investing accounts usually work on autopilot. 401K’s usually only have mutual or index funds as options which you just buy and hold forever. So, it removes the decision making aspect and allows you to spend time on your hobbies or family. The only thing you need to make sure is you are not contributing more than the legal limits allowed per year. For more details on legal limits its best to look on government websites for respective plans.

Do you agree with these recommendations? What type of investing accounts do you use? Let me know in the comments below.

 

April 5, 2018 0 comments
0 FacebookTwitterPinterestEmail
Investing

Investing 101: Why Invest Money?

by Yoda March 26, 2018

yoda_investing_why

As I mentioned in my article on being wealthy and its importance. One of the important ways using which you become wealthy was investing. Investing prudently over long term gives you the most returns for your money. Here are some reasons why you should invest your money.

Advantages

1. Invest to beat inflation

On an average we have around 2-3% inflation every year. So whatever items, products you bought last year cost 2-3% more this year. Most checking/savings account as of 2018 give you around 1.50%. Even if you put 1000$ in your account to save, it’s only going to be 1015$ next year. But the same 1000$ worth of products from last year is going to cost you 1030$ because of inflation. You are losing money by keeping the extra in your checking account. Most people do not realize this and are often scared of investing and growing money to beat inflation.

2. Save on Taxes

The government usually incentivizes us to be an investor. By contributing to traditional IRA and 401k’s you can reduce the amount of money that is taxable every year. That way you pay no tax on contributions today and way lesser based on your tax bracket after retirement. Similarly using Roth versions of 401K and IRA’s, you pay taxes today let the money grow and never pay any tax after retirement. Even the dividends that you get every year are taxed lower than the income tax. You can even do tax loss harvesting to reduce the amount of tax you pay on capital gains from sale of assets in loss.

3. Retirement Goals

Chances are when most people retire they will see a big dip in their annual earnings. Social security is having a huge amount of problems. The money most people will get from social security is not going to be enough for daily expenses during retirement.  One needs an additional source of income and investments usually allow you to just do that. But its important to start saving early to sit back and watch the magic of compounding work.

4. Magic of compounding

Einstein is rumored to have said compound interest is the 8th wonder of the world. If you save small amounts of money over a long period of time. The interest it earns over interest and principal every year keeps increasing every year. Now imagine investing money slowly every year and getting a 10% average historical return. Slowly you realize the snowball effect compound interest creates over long term. Check out the chart below which compares the returns for 3 people who started investing at 3 different times in their life (courtesy BI/JP Morgan )

investing_returns_over_time

Notice how Chris invests just 5k every year starting at 25 and comes out way ahead of the other two people who start late or stop later in their life. So being early and consistent over the long term is what matters.

5. Diversify/Reduce Risk

Investing especially in index funds helps you diversify your money across different companies. This allows you to spread out your risk, in case anything goes wrong with one company. Many people during the Enron scandal invested money but only in their company’s stock. When the scandal broke out, they lost all their life savings. It’s important to diversify and make sure to not have all your eggs in one basket.

6. Financial Independence/Retire Early

Investing allows you to grow money over the long term and once your nest egg is big enough it can become your primary source of income. You can technically earn dividends or take out small percentages every year and let rest of the nest egg grow. This can eventually allow you to stop working forever. You can even spend more time in other non money-making hobbies/family stuff you like. There’s a whole sub reddit devoted to people who have either already retired and are living on their investments or aspire to do so.

Pitfalls/Disadvantages

Having seen some advantages of investing I think its also important to have a look at some disadvantages/ points to remember:

1. High Risks/Volatile

Most investments options usually come with high risks. Most stocks are traded everyday and so go up and down every day. So its important to know if you need any money over the short term (3-5 years), better to not invest that at all. You tend to see better results and more likely to see the 10% per year return over long term.

2. Needs Patience

Segueing from last point, investing usually needs a lot of time. People buy some index funds/stocks and on first sight of volatility they hurry over to sell them. There have been lost of psychological studies which say people feel more loss and pain when they see their investments go down than the joy when they go up.

3. Too complex

For most people investing seems too complex. Most people do not know how to manage risk or what to do or where to begin with. With this fear most, people never even step into investing. However, with my next few articles, I plan to make all this easier, so people realize its not that big of a deal at all.

4. Emergency Fund

Its very important to know that one should always have an emergency fund before investing. Usually it’s a good idea to have 5-6 months of your monthly expenses saved away before you start investing. There could be a stock market crash or any such event which might make it difficult for you to pull out your invested money.

investing_bitcoin_no

I hope my next few articles in this category will help you choose your own path to investing.

 

March 26, 2018 0 comments
5 FacebookTwitterPinterestEmail
  • 1
  • 2
  • 3

Search

Popular Posts

  • How to make a dividend tracking spreadsheet

    December 11, 2020
  • Barron’s and WSJ subscription for free

    September 5, 2019
  • Adjust cost basis for ESPP/RSU tax return

    March 25, 2020
  • All about making a living off dividends

    July 12, 2019
  • Motley Fool Stock Advisor/Rule Breakers for 20$ or Free per Year

    October 6, 2019

About Me

About Me

Jedi Master

Twenty something programmer by profession, passionate about technology, movies, finance, investing & current affairs.

Keep in touch

Facebook Twitter Email Rss

Tag Cloud

banking (1) books (1) budgeting (1) car (1) credit cards (2) dividends (10) financial principles (7) financial sense (2) guides (7) howto (14) investing (3) investing101 (4) quarterly dividend updates (12) save (1) stock series (3) tax (4) taxreturn (3) wealth vs rich (1)

Meta

  • Log in
  • Entries feed
  • Comments feed
  • WordPress.org
  • Facebook
  • Twitter

@2017 - PenciDesign. All Right Reserved. Designed and Developed by PenciDesign


Back To Top
Wealth Capitalist
  • Home
  • Principles
  • Banking
  • Investing
  • Taxes
  • Tips & Tricks
  • About the Blog