Good Stock Market Tip; Good Return

Forget making a profit; instead focus on the income provided from your stock portfolio. That’s right! Forget making a profit. The burden is now lifted - no more pressure on making a buck in the stock market. (Instead of trying to bend the spoon, that is impossible, instead just think of the spoon as – omigosh! - I’m in the Matrix!) When you focus on the amount of money your holdings are providing in dividends – and when those companies selected have a history of raising their dividends each year – a lower stock price allows the dividends that are being rolled back into the stock to accelerate your income. The total value of your portfolio may go lower, but your income from that lower priced portfolio would increase dramatically. Profit by income!

To demonstrate this tip, I’m going to take you back in time, but the strategy of that time is just as viable today, as it was in the past. The year is 1990, the stock for the demonstration is Comerica, and the amount of money invested was $3,333.34. Comerica (CMA) was selected for one simple reason – in 1990 CMA had a historical record of raising their dividend for the past 21 years. Today’s CMA has a 36 year history of raising their dividend every year.

In January 1990 Comerica was selling at $48.38 a share, paid a quarterly dividend of 65 cents a share, with a dividend yield of 5.37% (.65 divided by 48.38 x 4 x 100 = 5.37%). The result of just holding this stock through the years, never taking a profit, and simply having the dividends reinvested each quarter (commission-free) back into the stock is chronicled below: These are the actual returns based on the closing prices of the stock on the company’s dividend payout date (the date a company purchases their stock on the open market for investors enrolled in their stock dividend reinvestment plan; The figures were taken from the research I did, and is from an excerpt from my book The Stockopoly Plan – Investing for Retirement.)

Comerica: (with the dividend each quarter rolled back into the stock) $3,333.34 into CMA in January, 1990 at $48.38 a share: Shares purchased, 68.90 shares.

Total Amount of shares at the end of 1990: 72.92 shares.

Total Amount of shares at the end of 1991: 115.01 shares.

Total Amount of shares at the end of 1992: 118.85 shares.

Total Amount of shares at the end of 1993: 245.78 shares.

Total Amount of shares at the end of 1994: 256.96 shares.

Total Amount of shares at the end of 1995: 268.78 shares.

Total Amount of shares at the end of 1996: 277.83 shares.

Total Amount of shares at the end of 1997: 285.32 shares.

Total Amount of shares at the end of 1998: 436.65 shares.

Total Amount of shares at the end of 1999: 446.04 shares.

Total Amount of shares at the end of 2000: 463.82 shares.

Total Amount of shares at the end of 2001: 474.47 shares.

Total Amount of shares at the end of 2002: 490.23 shares.

Total Amount of shares at the end of 2003: 512.60 shares.

Total Amount of shares as of April 1, 2004: 522.23 shares.

On April 1, 2004 Comerica closed at $54.65, for the total market value of $28,539.87 for 522.23 shares of stock. To put the total $28,539.87 into perspective, an interest rate of 15 percent a year on $3,333.34, compounded annually for fourteen and a quarter years would return $28,282.15.

Since this excerpt from my book Comerica has raised their dividend again, from 52 cents a share per quarter, to the current 55 cents a share per quarter, payable to shareholders of record on March 15, 2005.

I own Comerica stock and I have no intention of ever taking a profit! I will continue being a buyer, as long as the company continues its program of raising their dividend every year.

However, I also understand that in the stock market there are no guarantees! It is for this reason and this reason alone, that diversity is a necessity. If I knew for certain that CMA would continue its program of raising their dividend every year, and that the next 14 years would provide better than 15 percent return on my money, I would only own CMA stock. It is because of this ‘risk of no guarantees’ in the stock market that the rewards for investing in the stock market are much higher than a passbook savings account, CD’s or Bonds.

So, to beat the ‘risk of no guarantees’, and to reap the benefits of a better return, I diversify into other companies with the same historical performance. Through a systematic approach of dollar-cost averaging into my stock positions every quarter, along with my quarterly dividend reinvestment, I increase the amount of dividends paid to me each quarter, from every company that I own. My measurement for success in the stock market is not measured by the amount my portfolio is worth. It is measured by the amount of ever-increasing cash dividends received from every stock that I own. As a matter of fact, when my portfolio dips in net-worth, my dividend income accelerates. The reason for this is simple. The lower my port- folio’s net-worth, the higher the dividend yields of the stocks in my portfolio.

All my personal holdings in the stock market have the same basic theme. They are all purchased commission-free, have a long-term history of raising their dividend every year, and are purchased with the intent of supplying ever-increasing dividend income for my retirement years. The Stockopoly Plan was written with this purpose or goal in mind. The Plan itself uses a timing approach for purchases of more shares each quarter, along with the dividend reinvestments.

For more excerpts from the book ‘The Stockopoly Plan – Investing for Retirement’ visit: http://www.thestockopolyplan.com

You have permission to this article either electronically or in print as long as the author bylines are included, with a live link and the article is not changed in any way (typos excluded). Please provide a courtesy e-mail to charles@thestockopolyplan.com telling where the article was published. (Word Count 1000)

Charles M. O’Melia is an individual investor with almost 40 years of experience and passion for the stock market. The author of the book ‘The Stockopoly Plan – Investing for Retirement’; published by American-Book Publishing. The book can be purchased at http://www.pdbookstore.com/comfiles/pages/CharlesMOMelia.shtml

There is an inherent conflict between owners and managers of companies. The former want, for instance, to minimize costs - the latter to draw huge salaries as long as they are in power (who knows what will transpire tomorrow). For companies traded in the stock exchanges, the former wish to maximize the value of the stocks (short term), the latter might have a longer term view of things. In the USA, shareholders place emphasis on the appreciation of the stocks (the result of quarterly and annual profit figures). This leaves little room for technological innovation, investment in research and development and in infrastructure. The theory is that workers who are also own stocks will avoid these cancerous conflicts which, at times, bring companies to ruin and, in many cases, dilapidate them financially and technologically. Whether reality leaves up to theory, is an altogether different question to which we will dedicate a separate article.

A stock option is the right to purchase (or sell - but this is not applicable in our case) a stock at a specified price (=strike price) on or before a given date. Stock options are either not traded (in the case of private firms) or traded in a stock exchange (in the case of public firms whose shares are traded in a stock exchange).

Stock options have many uses: they are popular investments and speculative vehicles in many markets in the West, they are a way to hedge (to insure) stock positions (in the case of put options which allow you to sell your stocks at a pre-fixed price). With very minor investment and very little risk (one can lose only the money invested in buying the option) - huge profits can be realized.

Creative owners and shareholders began to use stock options to provide their workers with an incentive to work for the company and only for the company. Normally such perks were reserved to the senior managers who were thought indispensable. Later, as companies realized that their main asset were their employees, all the workers began to enjoy similar opportunities. Under an incentive stock option scheme, an employee is given by the company (as part of his compensation package) an option to purchase its shares at a certain price (at or below market price at the time that the option was granted) for a given number of years. Profits derived from such options now constitute the main part of the compensation of the top managers of the Fortune 500 in the USA and the habit is catching on even with more conservative Europe.

A Stock Option Plan is an organized program for employees of a corporation allowing them to buy its shares. Sometimes the employer gives the employees subsidized loans to enable them to invest in the shares or even matches their purchases: for every share bought by the employee, the employer will give him another free of charge. In many companies, employees are offered the opportunity to buy the shares of the company at a discount (which constitutes an immediate profit). Dividends that the workers receive on the shares that they hold can be reinvested by them in additional shares of the firm (some firms do it for them automatically and without or with reduced brokerage commissions). Many companies have wage "set-aside" programs: employees regularly use a part of their wages to purchase the shares of the company at the prices which prevail at the time of purchase. Another well known form is the Employee Stock Ownership Plan (ESOP) whereby employees regularly accumulate shares and may ultimately assume control of the company.

Let us study in depth a few of these schemes:

It all began with Ronald Reagan. His administration passed in Congress the Economic Recovery Tax Act (ERTA - 1981) under which certain kinds of stock options ("qualifying options") were declared tax-free at the date that they were granted and at the date that they were exercised. Profits on shares sold after being held at least two years from the date that they were granted or one year from the date that they were transferred to an employee were subjected to preferential (lower rate) capital gains tax. A new class of stock options was thus invented: the "Qualifying Stock Option". Such an option was legally regarded as a privilege granted to an employee of the company that allowed him to purchase, for a special price, shares of its capital stock (subject to conditions of the Internal Revenue - the American income tax - code). To qualify, the option plan must be approved by the shareholders, the options must not be transferable (i.e., cannot be sold in the stock exchange or privately - at least for a certain period of time). Additional conditions: the exercise price must not be less than the market price of the shares at the time that the options were issued and that the employee who receives the stock options (the grantee) may not own stock representing more than 10% of the company's voting power unless the option price equals 110% of the market price and the option is not exercisable for more than five years following its grant. No income tax is payable by the employee either at the time of the grant or at the time that he converts the option to shares (which he can sell at the stock exchange at a profit) - the exercise. If the market price falls below the option price, another option, with a lower exercise price can be issued. There is a 100,000 USD per employee limit on the value of the stock covered by options that can be exercised in any one calendar year.

This law - designed to encourage closer bondage between workers and their workplaces and to boost stock ownership - led to the creation of Employee Stock Ownership Plans (ESOPs). Those are programs which encourage employees to purchase stock in their company. Employees may participate in the management of the company. In certain cases - for instance, when the company needs rescuing - they can even take control (without losing their rights). Employees may offer wage concessions or other concessions regarding the work rules in return for ownership privileges - but only if otherwise a company is liable to be closed down ("marginal facility").

How much of its stock should a company offer to its workers and in which manner?

There are no rules (except that ownership and control need not be transferred). A few of the methods:

• The company offers packages of shares cum options of different sizes and the employees bid for them in open tender

• The company sells its shares to the employees on an equal basis (all the members of the senior management, for instance, have the right to buy the same number of shares) - and the workers are then allowed to trade the shares between them

• The company could give one or more of the current shareholders the right to offer his shares to the employees or to a specific group of them.

The money generated by the conversion of the stock options (when an employee exercises his right and buys shares) usually goes to the company. The company sets aside in its books a number of shares sufficient to meet the demand which will be generated by the conversion of all the stock options. If necessary, the company will issue new shares to meet such a demand. Rarely, the stock options are converted into shares already held by other shareholders.

In one of the next articles we will deal with the (surprisingly) dubious efficacy of stock option plans.