04-03-2014, 09:49 AM
(This post was last modified: 04-03-2014, 09:54 AM by Dividend Watcher.)
Jimbo posted a reply to earthtodan in the Introduction section thusly:
I missed that article so don't know any of the details but Jimbo's comment struck a chord with me. Presumably, the person on SA was being excoriated about buying in lots of less than $1000 or so in value That is the premise I am basing this thread on.
First off, I know the angst you can feel when everyone around you is bragging about their 200 or 300 share purchases. You wonder whether you are doing the right thing or just cheating yourself. I thought about this a while ago and came up with my rationale.
In my wife's portfolio, which I've delineated someplace here, I've often purchased in lots of $500-$1100. In fact, that's the most common size of the trade. Her portfolio is smaller and the revenue stream we can divert the money from is highly cyclical. Rather than sit for what may be months before we can add a significant chunk, I keep scanning our porfolios and watch lists looking for a situation where Mr. Market is offering a fair value. When I find something, I just may purchase it.
I've also done it in my portfolio. In our portfolio spreadsheet, I have a sheet that has the "dream portfolio" with desired sector and size allocations. From those numbers, I calculate the number of shares we need to own to meet those desired allocations. If I'm short 5 or 15 shares and the stock drops into what I feel is a value range, I'll purchase them to bring that section of the portfolio to the desired size. Sometimes I want to add a new position and my free cash is only a few hundred. If the price is right, I'm not afraid to buy even though the transaction cost is still over 1%.
If you're only investing $500 and the commission is $10, the transaction cost is 2%. Eeks, that's a little high.
But if it's a dividend growth stock and a solid company, you can amortize that commission over 5 years to a more reasonable 0.4% annually. Are you planning to hold this company for the long term or are you just speculating? In the meantime, you can compound that dividend over 5 years. Compare that to the 0.1% or less many brokers are paying in your sweep account and you come out ahead.
You can also look at the mutual fund example. You're Mr. Small Fry Investor and everyone is telling you that you're stupid for investing in individual stocks with those small amounts. Right now, KO is trading about $38 and yielding 3.2%. Is there a growth & income style mutual fund you can buy right now yielding over 3% that has KO's brand name, the distribution system and a 50 year record of increasing its payout to you? In the meantime, what is their management fee? Even Vanguard, the iconic "cheap management fee" mutual fund company, will probably ding you 0.3-0.5% annually in management fees forever. Imagine being in your 30's and buying $500 of KO every year for the next 30 years and reinvesting those dividends. Do that with KO, PG, EMR, XOM and AFL for 30 years and come back and tell me (ok, maybe my kids since I won't be around) about it. Gawd to be young again.
Now I know everyone on this board is richer, smarter and better looking than I so maybe this doesn't have any relevance to you. However, if we have some whippersnapper gawking at these pages that is in the same boat as I am, I encourage you to think through this yourself and see if it makes any sense.
What do you do?
(04-03-2014, 03:12 AM)Jimbo Wrote: I read an article on SA about a guy that is buying small positions and most responders were workin him for buying so small of lots. Uggghh, thats my style.
I missed that article so don't know any of the details but Jimbo's comment struck a chord with me. Presumably, the person on SA was being excoriated about buying in lots of less than $1000 or so in value That is the premise I am basing this thread on.
First off, I know the angst you can feel when everyone around you is bragging about their 200 or 300 share purchases. You wonder whether you are doing the right thing or just cheating yourself. I thought about this a while ago and came up with my rationale.
In my wife's portfolio, which I've delineated someplace here, I've often purchased in lots of $500-$1100. In fact, that's the most common size of the trade. Her portfolio is smaller and the revenue stream we can divert the money from is highly cyclical. Rather than sit for what may be months before we can add a significant chunk, I keep scanning our porfolios and watch lists looking for a situation where Mr. Market is offering a fair value. When I find something, I just may purchase it.
I've also done it in my portfolio. In our portfolio spreadsheet, I have a sheet that has the "dream portfolio" with desired sector and size allocations. From those numbers, I calculate the number of shares we need to own to meet those desired allocations. If I'm short 5 or 15 shares and the stock drops into what I feel is a value range, I'll purchase them to bring that section of the portfolio to the desired size. Sometimes I want to add a new position and my free cash is only a few hundred. If the price is right, I'm not afraid to buy even though the transaction cost is still over 1%.
If you're only investing $500 and the commission is $10, the transaction cost is 2%. Eeks, that's a little high.
But if it's a dividend growth stock and a solid company, you can amortize that commission over 5 years to a more reasonable 0.4% annually. Are you planning to hold this company for the long term or are you just speculating? In the meantime, you can compound that dividend over 5 years. Compare that to the 0.1% or less many brokers are paying in your sweep account and you come out ahead.You can also look at the mutual fund example. You're Mr. Small Fry Investor and everyone is telling you that you're stupid for investing in individual stocks with those small amounts. Right now, KO is trading about $38 and yielding 3.2%. Is there a growth & income style mutual fund you can buy right now yielding over 3% that has KO's brand name, the distribution system and a 50 year record of increasing its payout to you? In the meantime, what is their management fee? Even Vanguard, the iconic "cheap management fee" mutual fund company, will probably ding you 0.3-0.5% annually in management fees forever. Imagine being in your 30's and buying $500 of KO every year for the next 30 years and reinvesting those dividends. Do that with KO, PG, EMR, XOM and AFL for 30 years and come back and tell me (ok, maybe my kids since I won't be around) about it. Gawd to be young again.
Now I know everyone on this board is richer, smarter and better looking than I so maybe this doesn't have any relevance to you. However, if we have some whippersnapper gawking at these pages that is in the same boat as I am, I encourage you to think through this yourself and see if it makes any sense.
What do you do?
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“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan
“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan