History Lesson #1: Wall Street

In the past few years, “Wall Street” has come to represent the excesses and evils of a capitalist system.

When one hears the term, images of fat-cat bankers, hot-shot traders, and billionaire hedge-fund mangers come to mind. But the most important financial street in the world had some humble beginnings as nothing more than a wooden fence.

In the 17th century, what is now Wall Street was then the northern boundary of the New Amsterdam Dutch settlement.  In order to keep out the encroaching British colonists, as well as defend against Native American threats, the Dutch decided to build a barrier.

At first, it was nothing more than a simple picket and plank fence.  But soon that was sufficient, and a reinforced 12 foot wall was erected with the help of the Dutch West India Company, led by Peter Stuyvesant.

The city grew, and in 1699 the British tore down the wall.  But the name was kept, and what was once "de Waal Straat" was corrupted into the now infamous Wall Street.

Over the years, Wall Street became a bustling commercial thoroughfare, as it joined the banks of the East River with those of the Hudson in the west.  The street was lined with shops and warehouses, and Federal Hall, our first national capital building, was built there.  George Washington was inaugurated on the steps.

At the end of the street was a Buttonwood tree, where the cities leading merchants, investors, and speculators would gather to trade informally.  In 1792, in an effort to eliminate the power of auctioneers, 24 of these men formalized their activities with what is now called the “Buttonwood Agreement.”  This contract set trading fees and restricted members to trade only within themselves.  This group would grow into what is now the New York Stock Exchange.

Weekend Reads for 10.31.2010

Blog Articles

Dividend Growth Investor Analyzes Sysco here

Dividend Monk Analyzes Kimberly Clark here

Dividends Value does his weekly dividend power rankings here

Mark from Buy Like Buffett shows us how to make money in a downturn here

Mainstream Media

Why it’s never to early to start a Roth IRA here

Why history says stocks are cheap here

Five off-beat ways to generate 10% yields  here

Enjoy and have a great weekend!

Why Altria May be a Better Buy than PMI

If you were lucky enough to own Altria before the 2008 split into two companies, you were rewarded with 1 share of Philip Morris International for every share of Altria you owned.  If not, you are left with a decision:  do you invest in the domestic operations of Altria or the international operations of PMI? 

Jim Cramer of Mad Money says invest in Altria for a value play, PMI for a growth.  But which stock will provide the best total return?  I think it may be Altria. 

Shareholder return is a combination of dividends and earnings growth.  The market prices both into stocks.  The ones with the best returns are not the fastest growers, but those that grow faster than expected.  Investors are expecting PMI to grow like gangbusters in the emerging markets, and it may.  But if that growth is priced into the stock, and it does not exceed the optimistic expectations of 10% EPS growth, its returns will lag.

Altria on the other hand, is basically DOA.  Investors expect it to slowly implode as litigations costs, heavy government regulation, and decreases in the smoking population continue.  This investor fear may lead to superior returns. 

One day, litigation will stop.  You could sue in the 1980’s and 90’s because you smoked for 40 years and “no one” told you it would cause cancer.  But now we all know, and one day that argument will no longer hold water. 

Government regulation will persist, but cigarette companies generate too much revenue, and the government will continue to work with them and their lobbyist. 

Yes, less people smoke in the US than 50 years ago.  But, with litigation worries, government red tape, and a complete ban on advertising, no one is interested in getting into the cigarette business.  This means Altria has relatively few competitors in the US, and that’s not going to change.  The world market is wide open, and PMI will see increased competition as these markets develop.

People have smoked for hundreds of years, and I doubt they are going to stop anytime soon.  Someone has to make and sell cigarettes in the US, and Altria does it better than anyone else.  No investors want to touch the stock or the industry.  If that’s not contrarians investing, I don’t know what is. 

Disclosure:  I do not own any shares of MO or PM.  You can see my holdings under the Current Portfolio Holdings tab

3 Tables Every Dividend Investor Must Know

I just finished reading Jeremy Siegel’s 2005 book, “The Future for Investors.”  The book was an interesting and informative look at how the aging of the population in the developed world (baby boomers in particular) will affect the future of investing.  I picked it up at the local library, and would recommend you do the same. 

In the book were three very important charts for dividend growth investors.  The first chart is the “Break Even” chart.  This chart shows how many years it will take for a stock with a dividend yield of x (x axis), and a price decline of y (y axis), to recoup the initial investment.

	1%	2%	3%	4%	5%	6%	7%	8%	9%	10%
10%	95.8	48.4	32.6	24.7	20	16.8	14.5	12.9	11.5	10.5
20%	90.3	45.6	30.8	23.3	18.9	15.9	13.8	12.2	10.9	9.9
30%	84.2	42.6	28.8	21.8	17.7	14.9	12.9	11.4	10.3	9.3
40%	77.6	39.3	26.6	20.2	16.3	13.8	12	10.6	9.5	8.7
50%	70.4	35.7	24.1	18.4	14.9	12.6	10.9	9.7	8.7	8
60%	62.2	31.6	21.4	16.3	13.3	11.2	9.8	8.7	7.8	7.2
70%	52.7	26.9	18.3	14	11.4	9.7	8.5	7.6	6.8	6.3
80%	41.4	21.3	14.6	11.2	9.2	7.9	6.9	6.2	5.6	5.2

So if for example you buy stock XYZ with a 5% yield, and the price declines by 50%, it will take 14.9 years until the reinvested dividends buy back enough shares to offset the price decrease.  As you can see, the higher the yield, and the larger the price decrease, the faster you break even.

This second chart is called the “Return Accelerator.”  It shows the average annual return investors will receive if the previously mentioned stock returns to its original share price.

	1%	2%	3%	4%	5%	6%	7%	8%	9%	10%
10%	10.12%	10.24%	10.36%	10.47%	10.58%	10.69%	10.80%	10.91%	11.01%	11.11%
20%	10.27%	10.54%	10.80%	11.06%	11.31%	11.56%	11.80%	12.04%	12.27%	12.50%
30%	10.47%	10.92%	11.37%	11.81%	12.24%	12.67%	13.08%	13.49%	13.89%	14.29%
40%	10.73%	11.44%	12.14%	12.82%	13.49%	14.15%	14.80%	15.43%	16.06%	16.67%
50%	11.09%	12.16%	13.20%	14.23%	15.24%	16.23%	17.20%	18.15%	19.08%	20.00%
60%	11.63%	13.24%	14.81%	16.35%	17.86%	19.34%	20.79%	22.22%	23.62%	25.00%
70%	12.54%	15.03%	17.48%	19.87%	22.22%	24.53%	26.79%	29.01%	31.19%	33.33%
80%	14.36%	18.63%	22.82%	26.92%	30.95%	34.91%	38.79%	42.59%	46.33%	50.00%

So, assuming we have held on to stock XYZ for 14.9 years, it now returns to its original price.  The average annual return over those 14.9 years is 15.24%. 

These charts are very powerful.  They show the power of reinvesting dividends over time, one of the most powerful investment available. These charts show why the past decade has been good to dividend investors.  As prices have been stagnant, investors have been accumulating more shares at better prices.  Once we hit the next boom cycle, they will see some great returns. 

This last chart is just for motivational purposes.  Siegel analyzed the original S&P 500 members and charted their returns from 1957-2003.  These are the top performers, and the accumulation of $1000 invested in 1957 with dividends reinvested. 

Rank	2003 Name	Accumulation of $1000	Annual Return
1	Phillip Morris	4,626,402	19.75%
2	Abbot Labs	1,281,335	16.51%
3	Bristol-Myers Squibb	1,209,445	16.36%
4	Tootise Roll Ind.	1,090,955	16.11%
5	Pfizer	1,054,823	16.03%
6	Coca Cola	1,051,646	16.02%
7	Merck	1,003,410	15.90%
8	PepsiCo	866,068	15.54%
9	Colgate Palmolive	761,163	15.22%
10	Crane	736,796	15.14%
11	H.J. Heinz	635,988	14.78%
12	Wrigley	603,877	14.65%
13	Fortune Brands	580,025	14.55%
14	Kroger	546,793	14.41%
15	Schering Plough	537,050	14.36%
16	Procter and Gamble	513,752	14.26%
17	Hershey	507,001	14.22%
18	Wyeth	461,186	13.99%
19	Royal Dutch Petroleum	398,837	13.64%
20	General Mills	388,425	13.58%

Use these charts as tools to help you along your path.  When prices of a good company sink, tell yourself you're buying more shares at a cheaper price and magnifying your returns.  Be patient, and imagine your bank account after 40+ years of investing wisely, very similar to those amounts above…