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21 Oct 2011

GE unfairly linked with TARP association


By J. Scott Applewhite, AP

GE CEO Jeffrey Immelt, left, and plant manager Kevin Sharkey, right, give President Barack Obama a tour of a GE plant in Schenectady, N.Y.

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20 Oct 2011

Is there a Tea Party investment portfolio?

A: Mixing politics with just about anything is usually a bad idea. And that adage often applies with investing.

There’s no shortage of mutual funds or investment philosophies that attempt to make some sort of political statement with their holdings. For instance, there are funds that attempt to be “socially responsible” by avoiding investing in companies that promote what are commonly deemed to be societal ills. Likewise, some investors try to do the opposite, by investing in companies that profit from drinking, smoking and other acts. The track record of this type of investment has been mixed.

Looks like you, too, are trying to make a political statement with your portfolio. Doing so is probably not advisable. Over the long term, investors’ returns are largely determined by the risk and valuation of stocks. Political feelings can be fleeting and not a great thing to build your long-term portfolio, or retirement savings, on.

But with that said, there are certainly particular industries and companies that are more closely aligned with beliefs held true by many political conservatives. This isn’t intended to be a political discussion of the merits or disadvantages of any type of political thinking. This column is dedicated to investing, and I’ll leave the political commentary to the comments below.

The following list doesn’t indicate all companies that may provide goods and services that support some aspects of conservative thinking. And most important, the inclusion of the companies in the list does not in any way indicate that the companies, executives or employees at the companies support any particular political views.


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USA TODAY financial markets reporter Matt Krantz answers a new question every weekday at money.usatoday.com.

A few of the companies that make goods or services that are commonly associated with conservative political thinking include:

•Smith Wesson (SWHC) is one of the largest sellers of guns and firearm accessories. Some political conservatives and various sections of the Tea Party are enthusiastic supporters of Americans’ right to bear arms, and Smith Wesson makes many of the guns used for both self-defense and for recreation.

•Halliburton (HAL) is at the center of many of the beliefs held close by some conservatives. The company’s oil and natural gas business reinforces the idea that exploration is more important to satisfy the nation’s need for energy than conservation or alternatives. In addition, the company has been involved in the reconstruction efforts in the Middle East following multiple wars there.

•General Dynamics (GD) has been instrumental in developing the nation’s military might. In addition to its business aircraft unit, the company sells a wide range of combat equipment and military vehicles. General Dynamics not only makes air weapons, but also designs and builds battle tanks and naval weapons.

•Ford (F) is a leading maker of cars and trucks. Conservatives, as well as most Americans, can appreciate the fact that the company was founded and headquartered in the U.S. But what makes Ford such an appealing investment for Tea Party conservatives is the fact that Ford was the only major U.S. automaker to not accept federal bailout money in the wake of the financial crisis.

•News Corp (NWS) is a widely diversified media company. What makes it of interest to conservatives is the company’s Fox television properties.

Again, just because the companies above may provide products appreciated by conservatives does not mean the companies are intentionally aiming to adhere to such principles. And more important, the above list of stocks may or may not perform well in the future. But in terms of providing products and services of interest to many conservatives, the companies above certainly qualify.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz

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19 Oct 2011

Shareholders are demanding more from corporate profits

A: When you own stock in a company, you own part of that company. When the company earns money, part of that profit is supposed to belong to you, the investors.

But you’re right. Investors usually get back just a fraction of the money companies make in a form of dividends, or periodic cash payments made from the company’s coffers. And some highly profitable companies, like Apple (AAPL), don’t pay a dividend at all.

The disconnect between what companies earn and what they pay out to investors can be pretty significant. Currently, the Standard Poor’s 500 has a P-E ratio of 13, meaning that stocks are trading for 13 times what the companies have earned over the past four quarters. If you flip that ratio over, you see that currently, companies are paying 7.6 cents for every $1 in stock price, or an earnings yield of 7.6%.

Meanwhile, the SP 500 is paying much less than that to investors. Stocks have a dividend yield of just 2%, which is the percentage of cash paid back to shareholders. You can also examine this same measurement using companies profit relative to all the money invested in the business, called return on assets. And the result is the same. Companies aren’t paying out nearly what they earn in profit.

Why is this happening? There are several reasons. First of all, companies are not required to pay profits back to investors. They may, and do, retain earnings. Part of that is prudent. After all, just a few years ago, companies found themselves unable to borrow and even giant companies like General Electric (GE) had to borrow money from investors at less-than-flattering terms.


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USA TODAY financial markets reporter Matt Krantz answers a new question every weekday at money.usatoday.com.

Yet, the level of hoarding cash has reached levels never before seen. Coming off the second quarter, which set a record for corporate profit, non-financial companies in the SP 500 amassed $976.0 billion in cash, the highest level on record, says Standard Poor’s Capital IQ.

Companies also hold onto cash so they can fund expansion and research and development in the future. And certainly, having financial resources to plan future growth is critical to a company’s long-term success and survival. “These companies have shareholders and board members thinking they can do better with the money than returning it,” says Robert Maltbie of Singular Research. And in some cases, when companies are growing, that may be the case, especially in an age where savings accounts yield 1% a year in interest, if you’re lucky. Dividends, which use cash, are up 12.7% over the past twelve months, yet that’s still outpaced by 18.9% profit growth during that time.

But increasingly, more investors are saying enough is enough and calling on companies to start returning cash to them. Companies are starting to respond. During the third quarter, 350 companies of the 7,000 tracked by SP boosted their dividend. Dividend payments are expected to rise 14.5% this year, accounting for an increase to money paid to investors of $39.7 billion.

Still, many companies can easily afford to increase their dividend payments to investors even faster, Maltbie says. “Shareholders need to pound the table and say to increase those dividends,” he says.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz

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18 Oct 2011

Investors question wisdom of 10% rate of return rule

A: The rule of thumb that stocks return 10% a year was gospel. Now it’s considered heresy.

Investors, frustrated by a decade of poor returns by stocks, are questioning everything. Proven techniques of diversification and long-term investors are under assault. And included in the hit list of stock market assumptions is the long-term stock market data showing that stocks, on average, return 10% a year.

You’re right. The oft-quoted statistic of 10% a year returns is based on nearly 100 years of stock market data. To be precise, large-cap U.S. stocks have, on average, generated a compound average rate of growth of 9.3% since 1928, says IFA.com. Thanks to the abysmal past five years for stocks, that number was dragged down to 9.3% from its more traditional 10%.

Some investors get annoyed when people quote the 9.3% number because it’s based on such a long-term track record. The reason behind doing this, though, is based on statistics. Statistical analysis, in order to be valid, requires the use of a large sample size. Statistics based on just a few years of data don’t tell you much. You need to study at least 30 or more years of data to get a good statistical average.

But you ask a valid question. How have stocks actually done over the past, during shorter periods of time? Below is data showing the total return of large stocks per year over the past five, 10, 20, 30, 40 and 50 years, according to IFA.com:


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USA TODAY financial markets reporter Matt Krantz answers a new question every weekday at money.usatoday.com.

• 5 years: 1.3%

• 10 years: 2.0%

• 20 years: 7.9%

• 30 years: 10.5%

• 40 years: 9.8%

• 50 years: 9.2%

As you can see, over time the returns get very close to the long-term average annual return of the stock market. In fact, if there’s an anomaly, it’s the very poor performance over the past five and ten years.

Your question gets to the crux of the difficulty in using past results to predict future returns. If you measure your portfolio in the middle of a deep correction, you’re likely to be disappointed by what you see. However, if you measure during normal times, you’ll most likely get a number very close to the market’s long-term returns.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz

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17 Oct 2011

Are there better ways to invest in solar than Solyndra?

A: The solar business got a brutal sunburn following the Solyndra debacle.

The California-based maker of solar gear filed for bankruptcy in late August after receiving a $535 million loan backed by the Federal government. Hopes were so high for the company that it was visited by President Obama to highlight the bright future of the U.S. clean energy industry.

Before going any further, let’s be clear. This column isn’t a place to discuss politics and it’s well beyond the scope to talk about government policy and how it pertains to this case. You can take that discussion to the comment section below.

But from an investment standpoint, it’s clear investors got a healthy dose of reality on the failure of Solyndra. Given the world’s demand for clean and abundant energy, there’s no shortage of enthusiasm over the industry by investors. But even the federal government, given its resources and expertise, suffered a big mistake investing in the area. And that should be a clear reminder of the perils of betting on this emerging and speculative field.


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USA TODAY financial markets reporter Matt Krantz answers a new question every weekday at money.usatoday.com.

With that disclaimer in mind, there is no shortage of ways for investors to buy into solar energy. One of the largest U.S. players is First Solar(FSLR). The company, valued at more than $5 billion, is a leading player in U.S. solar technology. The company makes a variety of solar modules with proprietary thin technology. For most investors looking into the industry First Solar is a natural place to start since it’s one of the more established players.

But First Solar is not alone. Below is a list of some of the solar stocks that trade on U.S. exchanges that are considered to be competitors in the industry:

Canadian Solar, CSIQ

Comverge, COMV

DayStar, DSTI

ECOtality, ECTY

Energy Conversion Devices, ENER

EnerNOC, ENOC

General Electric, GE

Hanwha SolarOne, HSOL

Honeywell, HON

JA Solar, JASO

Johnson Controls, JCI

LDK Solar, LDK

MEMC Electronic, WFR

NextEra, NEE

Ocean Power, OPTT

Ormat, ORA

Real Goods Solar, RSOL

ReneSola, SOL

Westinghouse Solar, WEST

But again, I stress, the solar industry is very much in its early stages. Investing in this area is only for speculators and people willing to lose their investments. After all, even the government with the counsel of the Department of Labor made it own bum “clean” investment.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz

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13 Oct 2011

Choosing an ETF with dividend-paying stocks

A: Investors are hungry for any way to make money in this tough market. And dividends are gaining popularity due to their relative predictability.

Who doesn’t like getting cut a check every year or quarter by companies? And it’s even better if those dividend checks keep getting bigger year after year.

It’s that search for increasing dividends that have some investors seriously considering grabbing exchange-traded funds that will haul dividends in for them. ETFs are mutual-fund like stocks that typically own pieces of hundreds of stocks.

ETFs are very effective tools for dividend investors. Dividend ETFs mitigate the risk a company might commit the ultimate sin: suspend or cut a dividend. By owning one ETF, which owns shares of hundreds of dividend-paying stocks, if just one company halts its dividend, the impact to the investor will be relatively small.

But as you point out, investors looking to buy an ETF that will generate dividend income have many choices. The two you mention are top candidates: Vanguard Dividend Appreciation (VIG) or SPDR SP Dividend (SDY).

You ask a great question because it gets to the core of an increasingly important dilemma for investors. With so many ETFs available, many of which address the same types of investments, how do investors choose between them? Here are some of the key things investors should consider:

•The ETF sponsor company. As ETFs became increasingly popular, many companies piled on with new products. When considering an ETF, you want to make sure the ETF provider has the market power and resources to stay in the game. Both of the ETFs you are considering are certainly in the top tier. Vanguard is a storied firm, with some of the largest mutual funds, that’s becoming a powerhouse in the ETF field as well. The SPDR family of ETFs are provided by another industry heavy-hitter, State Street Global.

•Dividend yield. Since you’re looking for dividends from your ETFs, then yield is key. The dividend yield is the amount of the dividend you receive as a percentage of the stock’s price. The yield shows the return an investor would receive if the stock was bought at the current price. Currently, VIG is yielding 2.2%, according to USATODAY.com’s ETF page and SDY is yielding a much higher 3.4%.


Dividends paid

ETFVIGSDYSource: Morningstar

Clearly, the SDY has the edge with the current yield.

However, don’t jump to conclusions just yet, as you might be surprised when you dig deeper. While SDY has a higher yield now, Vanguard is including companies that have increased their dividends at a faster pace. The dividend yield on VIG has been stable and increasing the past few years, according to data from Morningstar, while the SDY’s yield has fallen.

So while SDY’s current yield might be tempting, as an investor, you might not know how dependable it is in the future.

•Risk. If security and dependability is what attracts you to dividend ETFs, then you probably don’t want to load up with an investment that will whipsaw you. VIG has the leg up here, again. VIG has a standard deviation, or measure of risk, of 18.2, compared to the 20.9 standard deviation of SDY, Morningstar says. The lower risk means that VIG typically doesn’t swing around as much as SDY does on a price basis.

•Spreads. ETF investors understand they pay a hidden cost when they buy or sell ETFs, which is the difference between the bid and the ask prices. The ask price is what you must pay to buy an ETF and the bid is what you get when you sell. The difference is a cost to you. VIG has a slight edge, but they’re so close, there’s hardly a difference. For VIG, the different between the bid and ask is one cent, and with SDY it’s two pennies.

•Fees. Fees really matter when it comes to the ETFs you buy. All things held equal, fees can be the determining factor for many investors. VIG has the edge again here, sporting an annual expense ratio of 0.24%. In contrast, SDY charges 0.35%.

With that said, don’t forget commissions. Check with your brokerage to see if either VIG or SDY qualify for discounted or free trading commissions. If so, the break in the commission might more than make up for any difference in the expense ratio.

The bottom line is that if you’re just looking for current yield, then SDY is a greater payer. If yield is all you care about, then you might consider SDY. But if you’re looking for a dividend ETF to keep in your portfolio for a longer period of time, VIG might be the best choice. The ETF’s track record for dividends holding up is much better than with SDY. It’s also a less volatile investment, which will make hanging onto it during bear markets less painful.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz

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12 Oct 2011

Preferred stocks can be a lucrative source of cash

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