Riske Business June 2007

“When it comes to investing, it pays to be downright slothful.” -Warren Buffet.

Who doesn’t envy people like Buffet, the guy who invested early, stayed in, contributed regularly and let the earnings compound? Now he’s got income from investments that guarantee his future comforts. There’s nothing left to do after making a stock purchase but to let it alone and let it accumulate. The only hard part is “paying yourself first”. Like most things worthwhile, paying yourself first is simple but not easy to do. To pay yourself first take a chunk of your paycheck and put it away in an investment, then spend whatever you have left.

Take a look at the graph on this page. Notice that as time goes by, compounded dividends represent the lion’s share of the increase in market value. But we’re not just looking for companies that pay dividends. We are looking for companies that pay dividends monthly for two reasons: first, they compound faster and second, when you want to begin to draw on your income, a monthly check is nice. What you want to look for in a long term investment is a collection of companies that appreciate during bull markets and decline only slightly in a bear market. But the problem is, U.S. stocks are paying historically low dividends. America’s 500 largest companies together are paying less than 1.7% dividends today. At a 1.7% return, you’d have to have $2 million in savings to earn $2,833.33 per month. So what to do? Well, let’s take a look at foreign markets and foreign commodity stocks and the dividends they are paying.

But before we do that, I want to talk a bit about compounding and the importance of time. As you look at the graph on this page, first look at the giant share of the current value is dividends paid over time and compounded. At the beginning of the graph you can see that dividends were as small a proportion of the total value as the underlying investment itself. It was only after time had gone by that dividends had their compounding effect. Go to this website to see graphic illustrations of compounding power: http://www.angelfire.com/ca/hennings1/Acompounding.html So the big lesson is, start now to pay yourself first. Also as soon as your kids are born, start putting a few dollars a month aside for them and let the funds compound.

You may have heard stories about how the value of the U.S. dollar has declined relative to resource rich foreign countries. As I’m writing this the Canadian dollar has just hit 92 cents per US dollar vs: only 56 cents a few years ago. Therefore, those holding dividend-paying Canadian stocks are being paid in a currency that is increasing in value vs: the U.S. dollar. The British pound just rose to over $2.00 U.S. up from $1.06, so British and Canadian companies paying dividends in British currency offer a double whammy: rising dividends in a currency that is rising in value against the U.S. dollar.

The next step is to look for foreign stocks that will appreciate in a bull market but decline only slightly in a bear market. One of my favorite foreign stocks is United Utilities, a water and utility company based in Great Britain. Even at today’s price, UU pays a very competitive 5.6%. What is more necessary than water? The next most necessary item in a modern country is electricity. United Utilities sells both water and electricity.

Boralex Power Income Fund is a Canadian utility trust with great cash flows that pays a monthly dividend. It has interests in 10 power generating stations in Quebec and the U.S. The fund is listed with the Toronto Stock Exchange as BPT.UN. And, by the way, if you are unaccustomed to buying shares from foreign exchanges you’d be much better off by getting used to it. Expect to pay far higher commissions unless you use an ETF traded on domestic exchanges. The world is global and the sooner we all get less America-centric the better our financial future will be. Boralex holdings generate 190 MW from environment-friendly hydroelectric stations, wood chip stations and natural gas.

The CanRoys are really hopping. Oil and gas properties like these will track the volitility of the price of oil, but the dividends are monthly and generous. Canadian Royalty Trusts suffered a meltdown November 1, 2006 when the Canadian government suddenly jerked the tax free status of trust incomes on 2011. This may very well reverse as Canadian retirees who vote regularly and rely on the income and capital of these fine investments have been kicking and screaming. But, even if there is no tax reversal, at today’s prices the dividend returns are truly mouth-watering. Consider my old favorite oil and gas producer Pengrowth Energy Trust for example. Legendary contrarian investor David Dreman who runs DCS, a high dividend paying closed end fund, just bought a slug of PGH. As I’m writing this PGH is paying 14.5%. Folks this is proven fields already pumping oil and gas, not some wildcat hope. Some of my other favorite CanRoys are PVX (dividend 11.06%), PWE (dividend 10.7%) and HTE (dividend 13.53%). All pay monthly and all have performed marvelously of late, so you may want to watch your graphs for a chance to pick them up after they’ve cooled a bit. Also, ask your broker to automatically reinvest your dividends for a commission-free compounding; this works especially well in your IRA. There are more than 100 investments that pay monthly. If you’d like me to talk more about these and give examples, let the publisher of The Business Journal know.

There’s lots of dollars sitting on the sidelines here in the U.S. because investors have been expecting a correction. However, China just committed $3 billion to the Blackstone Group to invest for them. The DOW has been hopping to new highs confirmed by Transport and Utility Averages. The thinking here is that if the U.S. dollar continues to decline, it is better for foreign countries to hold U.S. stock ownership rather than depreciating paper. We agree and we like the dividend paying ETF with the stock symbol DIA, now paying around 3%. DIA holds the 30 stocks of the Dow Jones Industrial Average. Most of the 30 companies listed in the DOW index earn almost half of their sales by exporting, so they are really global companies earning money in strong foreign currencies.

Buy the BRIC countries and the stuff they need as they continue to flourish, Brazil, Russia, India and China will continue to industrialize while consuming huge quantities of base metals like iron, nickel, tin, zinc and exotic metals like molybdenum. There are several companies who are really a type of mutual fund of the various metals mines. AAUK (Anglo American, South Africa), RIO (Campanhia Vale do Rio Doce, Brazil), RTP (Rio Tinto, Britain) and BHP (Billiton, Australia) can all be found in U.S. stock exchanges. These are excellent companies paying good dividends. Brazil has an excellent oil company called Petrobras (PBR) listed on the New York Stock Exchange and pays about 2.4%. These do not pay monthly and the returns are not as high as resource trusts from Canada, but they are in a bull market and dividends are being raised regularly. War is inflationary because governments don’t like to ask citizens to pay for them. The first beneficiaries of rising prices are the resource stocks, the materials used in the manufacture of goods. Also, wars are big users of energy and exotic metals.

You might say, “Why should I trust what Riske has to say about commodity stock investments?” and I don’t blame you. So let’s defer to Jim Rogers, former partner of George Soros in the amazing Quantum Fund. Rogers and Soros partnered up in the early ‘70s and went on to deliver an investment return of 3,365% by 1980. During that same time the Dow Jones Industrial Average returned 20%. In 1998 Rogers launched the Rogers International Commodities Index. So far the index has gained 250% and Rogers figures the commodities bull has another 10 years to run. Oil comprises 37% of the Rogers Fund along with smaller percentages of other commodities like sugar which he also expects to boom. Rogers says, “Sometimes I wonder if our central bank is just going to print money until we run out of trees.”

Riske Business: Expect meat prices to skyrocket because of the rising costs of feedstock. Corn is being diverted to the production of ethanol. BMO Capital’s strategist Donald Coxe warns: “Consumers could get burned at the steak this summer.”

Riske began his entrepreneurial career with a waterbed store in Grand Forks in 1971 called The Walrus. Walrus Waterbeds was sold to HOM Furnature in 1984. Currently Riske is owner of Take Two Video, Take 2 Express, MJ Capelli Family Hair Salons, VidCycle and Sunseekers Tanning Salon. Riske is not a licensed financial advisor and those seeking investment advice should consult with a licensed financial advisor. To contact Riske, email marty@fmbizjournal.com

To read other financial and business news, visit http://www.fmbizjournal.com. The Business Journal is a locally-owned newspaper serving the greater Fargo Moorhead area and the Red River Valley.