Author Topic: Individual Stock- advice please  (Read 5987 times)

I'm a red panda

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Individual Stock- advice please
« on: May 27, 2015, 09:16:32 AM »
I am looking at purchasing a stock due to a shareholder benefit they offer.
However, my portfolio doesn't contain any individual stocks, so I am not really sure how to weigh whether this is sound investment or not.

It is a dividend paying stock that expects to pay $2.48 per share each year. The expected value of the shareholder benefit to me is about $50 (I'm pretty sure this is tax free because of what it is) per year.  If both of these remain constant- in 16 years the value of the dividends/benefits would exceed the amount we invested in the stock (which would also hopefully have grown...)

The stock currently has a BBB rating, which concerns me a bit, but I think the company is unlikely to disappear anytime soon. The amount of the stock we would have to buy to be eligible for the benefit would amount to approximately 5% of my non-retirement portfolio (which is still rather small; the rest is in indexes). It would not affect my equity/bond ratio that I've chosen.

What are the things I need to consider about whether this is a sound investment?
Does anyone know about brokerage accounts at Vanguard? I was very confused by the funds- is there an annual fee just to maintain the account, or is there just the trade fee?
« Last Edit: May 27, 2015, 09:22:00 AM by iowajes »

innerscorecard

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Re: Individual Stock- advice please
« Reply #1 on: May 27, 2015, 09:36:53 AM »
Just buy it if the benefit to you is clear, and you can afford it. Don't take the indexing religion too seriously. You won't die if you buy 1 share of an individual stock.

I'm a red panda

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Re: Individual Stock- advice please
« Reply #2 on: May 27, 2015, 09:41:11 AM »
Well, this is 100 shares, not 1 share.

I can afford it, but it isn't an amount of money I'd just toss without thinking.

I'm just wondering what exactly I should think about before determining if a stock is a good idea or not.  I don't really know how to rationally analyze the decision.  There are a few agencies that list it as a buy, a few that list it as a hold to buy.

It is a company I use (hence the value of the shareholder benefit), and I know there is some good to the notion of "buy what you know".

adamwoods137

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Re: Individual Stock- advice please
« Reply #3 on: May 27, 2015, 10:02:06 AM »
Well, its probably time to learn some accounting.  An important question is whether or not the $50 is large relative to the size of the investment.  I would guess that since you're expecting $248 in dividends for 100 shares the $50 probably isn't worth it if the company represents more than 2% of your total net worth.  If it doesn't it might be worth looking at traditional valuation metrics.  What is the P/E? What is the price to book ratio? What is the market capitalization? What fee's would you pay purchasing it.  "Buy what you know" only applies when that knowledge gives you an edge over professional investors. An example might be that you are an expert in the drug approval process and you speculate on a basket of pharmaceutical companies with pending approvals that you think have a positive expected value.  It doesn't generally mean, "I use Tide detergent, therefore I should buy Procter and Gamble".  You don't have any knowledge there that the vast majority of people don't have, additionally Tide detergent makes up a small percentage of PG's sales.  Most things might fall somewhere in between. 

Of course if you give us the ticker we'd be happy to help.

forummm

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Re: Individual Stock- advice please
« Reply #4 on: May 27, 2015, 10:05:32 AM »
Do you have to buy 100 shares to get the $50 benefit? What percentage of your portfolio will be in the stock if you buy the minimum amount? How long do you need to keep it--just as long as you want the benefit?

I'm a red panda

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Re: Individual Stock- advice please
« Reply #5 on: May 27, 2015, 11:02:10 AM »
Do you have to buy 100 shares to get the $50 benefit? What percentage of your portfolio will be in the stock if you buy the minimum amount? How long do you need to keep it--just as long as you want the benefit?

100 shares is the minimum for the investment. At the current price, that is $5,000.
If I buy the minimum amount it is 5% of my non-retirement portfolio, and about 1% of my total portfolio.

I only need to keep it as long as I need the benefit, just have to submit a thing showing you own stock, so this year, I could sell in September after utilizing the $100 benefit. (The shareholder benefit is $100 a use, I expect I would use it every other year. Hence the expected value of $50 a year.  A $50 year benefit represents 1% of the investment.)

Calimandc

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Re: Individual Stock- advice please
« Reply #6 on: May 27, 2015, 11:07:15 AM »
If you have some time it would really help to read the Berkshire Hathaway Annual Reports.  These would give you everything you need to know about owning individual stocks.  To sum it up:
- buy companies you understand and that have a huge competitive advantage
- think of yourself as an owner of the company, not just a speculator of the stock
- if you see a discount buy big

The rest is commentary.

Now, for your specific question, there is a lot to consider about your decision if you want to make it complex.  Then, there's a simple way to consider it: 

Does the company have a competitive advantage so that they will be around and putting out dividends long enough to make this work?
Is the company selling at a discount to what it's worth?
What trade-offs in potential returns from other investments am I making my putting my money here?

As for Vanguard, you may want to use them as a brokerage, but there are far less expensive ways to invest.  I use MB Trading ($2 per trade), there are free trading apps you can use.  If you have no intent of ever trading again, then stick with Vanguard.  If this is something that you're interested in doing in the future, then consider some low-fee trading services.

Best of luck!

Long 14 company individual stocks, as well as a huge advocate of Vanguard Funds.  One is for fun, the other for FI.

J- 

I'm a red panda

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Re: Individual Stock- advice please
« Reply #7 on: May 27, 2015, 11:15:27 AM »

Of course if you give us the ticker we'd be happy to help.

I messaged you. I'd rather not make that public, just to avoid discussion of the company in general, as opposed to it's financial specifics.

Thanks for all the suggestions of things I should look into.  (And there are quite a few people who think "I like Disney world", I'll buy Disney stock. - so I really did think that was what that advice meant...)

KungfuRabbit

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Re: Individual Stock- advice please
« Reply #8 on: May 27, 2015, 11:31:00 AM »
Um. Dividends are not tax free.  How they are taxed depends on type of account an if ou invest or take cash.

There is nothing magical about an individual dividend stock. In general though individual stocks are not a wise choice.

If you want dividends there are plenty of dividend focused ETFs.

forummm

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Re: Individual Stock- advice please
« Reply #9 on: May 27, 2015, 11:34:45 AM »
Do you have to buy 100 shares to get the $50 benefit? What percentage of your portfolio will be in the stock if you buy the minimum amount? How long do you need to keep it--just as long as you want the benefit?

100 shares is the minimum for the investment. At the current price, that is $5,000.
If I buy the minimum amount it is 5% of my non-retirement portfolio, and about 1% of my total portfolio.

I only need to keep it as long as I need the benefit, just have to submit a thing showing you own stock, so this year, I could sell in September after utilizing the $100 benefit. (The shareholder benefit is $100 a use, I expect I would use it every other year. Hence the expected value of $50 a year.  A $50 year benefit represents 1% of the investment.)

This sounds like something I would do. If the stock does nothing, and you would definitely be doing whatever gives you the $50 benefit anyway (i.e. you were buying something anyway and not buying it because you get $50 off), you get a 10% return. If the company has a multibillion dollar valuation, it's probably large enough that your entire $5k won't disappear. And if it does, you won't miss it from your portfolio.

forummm

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Re: Individual Stock- advice please
« Reply #10 on: May 27, 2015, 11:35:41 AM »

Of course if you give us the ticker we'd be happy to help.

I messaged you. I'd rather not make that public, just to avoid discussion of the company in general, as opposed to it's financial specifics.

Thanks for all the suggestions of things I should look into.  (And there are quite a few people who think "I like Disney world", I'll buy Disney stock. - so I really did think that was what that advice meant...)

If you send it to me I'll give further thoughts too.

I'm a red panda

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Re: Individual Stock- advice please
« Reply #11 on: May 27, 2015, 11:36:54 AM »
Um. Dividends are not tax free.  How they are taxed depends on type of account an if ou invest or take cash.

No, not the dividend. What the stockholder benefit is appears to be tax free.  I am aware I pay taxes on the dividend.  Sorry to confuse.

forummm

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Re: Individual Stock- advice please
« Reply #12 on: May 27, 2015, 12:08:33 PM »
This company is a fine one to invest in and is not going to fail without an unusual event. I wouldn't buy an individual stock normally, but the rewards seem worth it. Again, 1) assuming that you would already be paying for the $100 product anyway, 2) you would be using this business and not a competitor anyway, and 3) would not be using this service more frequently because of some sense that it's cheaper now. If these 3 conditions hold, the return is great. If not, then it makes less sense, but could still be a good thing to do.

Given what you described to me, I would do it.

I'm a red panda

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Re: Individual Stock- advice please
« Reply #13 on: May 27, 2015, 12:14:18 PM »
They've made it through a few unusual events without failing....


Thanks for the advice.
I would say that 1, 2, and 3 all hold true.

forummm

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Re: Individual Stock- advice please
« Reply #14 on: May 27, 2015, 12:33:15 PM »
Thanks for sharing the tip. I might do this eventually when I'm in the market for that kind of service.

GEICO does this too with BRK stock--but only if you aren't getting other discounts. In my case I don't qualify for the stockholder discount. Otherwise I would have bought a share.

Eric

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Re: Individual Stock- advice please
« Reply #15 on: May 27, 2015, 12:36:59 PM »
Do you have to buy 100 shares to get the $50 benefit? What percentage of your portfolio will be in the stock if you buy the minimum amount? How long do you need to keep it--just as long as you want the benefit?

100 shares is the minimum for the investment. At the current price, that is $5,000.
If I buy the minimum amount it is 5% of my non-retirement portfolio, and about 1% of my total portfolio.

I only need to keep it as long as I need the benefit, just have to submit a thing showing you own stock, so this year, I could sell in September after utilizing the $100 benefit. (The shareholder benefit is $100 a use, I expect I would use it every other year. Hence the expected value of $50 a year.  A $50 year benefit represents 1% of the investment.)

This sounds like something I would do. If the stock does nothing, and you would definitely be doing whatever gives you the $50 benefit anyway (i.e. you were buying something anyway and not buying it because you get $50 off), you get a 10% return. If the company has a multibillion dollar valuation, it's probably large enough that your entire $5k won't disappear. And if it does, you won't miss it from your portfolio.

A 10% return would be $500, right?  So it's only a 1% return in this case.  Is that worth it?  Hard to say.

I'm a red panda

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Re: Individual Stock- advice please
« Reply #16 on: May 27, 2015, 12:41:14 PM »

A 10% return would be $500, right?  So it's only a 1% return in this case.  Is that worth it?  Hard to say.

Yes, your math is right.

However, $50 is my expected value per year. (Alternate years I expect to not use it).  I would get $100 in September; so that is a near immediate 2% ROI.  If used more times in the future, even if the stock under performs, that goes up.


I do think buying 100 shares of this stock solely for a $100 return would be quite ridiculous, which is one of the reasons I wanted some advice on what things to look at when considering an individual stock.  But the shareholder benefit is a nice perk.

forummm

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Re: Individual Stock- advice please
« Reply #17 on: May 27, 2015, 12:54:57 PM »
Oh, my bad on the math. Yeah, I guess 1% is a little more ridiculous than 10%. Then it's a tossup to me. I would lean towards doing it. It could be fun too.

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Re: Individual Stock- advice please
« Reply #18 on: May 27, 2015, 02:03:22 PM »
This benefit will boost your returns by 1% on that portion of your portfolio, but since it's only 1% of your total portfolio, you're looking at a 0.01% boost to your total portfolio returns. And that's if this stock's performance matches the market. It only has to underperform by 1% to make that benefit disappear. Seems like a lot of hassle for a pretty small benefit, and perhaps not one that sufficiently compensates you for the increased risk vs. an index.

And you also have to overcome any tax drag of that relatively hefty dividend. If you're at or above the 25% income tax bracket (and thus paying 15% tax on dividends), you'll pay $248*0.15=$37 in tax each year on that $5k investment, whereas if that money was in VTSAX, you'd pay only $14 in dividend tax. So that's an additional tax drag of $23, which effectively reduces your $50 benefit to only $27.

Also, as mentioned, the dividend tells you nothing about the total returns that the stock will generate, and it's total returns (dividends + capital growth) that matter. So calculating the time for dividends+benefit to equal your initial investment amount is a meaningless metric and shouldn't be part of this analysis.

I'm a red panda

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Re: Individual Stock- advice please
« Reply #19 on: May 27, 2015, 02:13:50 PM »
Thanks- that is a helpful post.

Since I don't expect this company to increase 7% year to year, but I could (sort of) expect the total market to do that, I would get much better returns by just putting it in my regular funds. 

Unless I used the product that got the benefit a lot more often (and that is highly unlikely), but that just increases spending, so it lessens the return too.

Hmmmm....
« Last Edit: May 27, 2015, 02:18:46 PM by iowajes »

forummm

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Re: Individual Stock- advice please
« Reply #20 on: May 27, 2015, 02:51:28 PM »
Thanks- that is a helpful post.

Since I don't expect this company to increase 7% year to year, but I could (sort of) expect the total market to do that, I would get much better returns by just putting it in my regular funds. 

Unless I used the product that got the benefit a lot more often (and that is highly unlikely), but that just increases spending, so it lessens the return too.

Hmmmm....

Investors expect it to have a risk-adjusted total return that matches the risk-adjusted total return of any other large consumer discretionary company. Otherwise the stock would be priced differently.