Is there a Bigger Pockets for Investing in Stocks / Paper Assets?

Question

Hi Everyone.

I'm trying to put together my first five year plan for investing.  My goal is to generate enough passive income within five years to be able to cover my expenses. Or get out of the rat race as Robert Kiyosaki would say.

As I'm based in Australia, I'm a little hesitant to buy into the US real estate market at this point.  I am also starting with only a small amount of capital.  While I think REI will be my big love eventually, I thought I should start in paper assets.  Specifically stocks that I believe are undervalued by the market and also returning >5% return on dividends.  I have a subscription to Motley Fool which will help me identify those stocks.

However, I am interested in educating myself as much as possible to mitigate the risk of uneducated choices.  Is there a site or program members would recommend that I start with?

Thanks in advance!

Helen

Ricky Bobby · Answer

The problem with investing in foreign markets is you risk the chance of a currency decline.

"O" is a great REIT in the US with long term dividend growth. You can normally pick it up for around 5% ROI. However if your currency declines 5% against the dollar you erase the entire years' earnings. The dollar has been pretty strong this year.

REITs also have income tax implications, at least to those who live in the US. The dividends in most cases are passed on as regular earnings to your income tax form, meaning most will pay in the 15%-25% range. Which means your 5% really becomes 4%.

Qualified dividends from stocks (again, for the US investor) are TAX FREE up to the 15% bracket. Which means a married couple earning $75,000 a year in dividends (with no other outside earnings) pay NO INCOME TAX on those earnings. Pretty powerful!

Michael Boyer · Answer

Hi Helen,

Not sure of a BP type network for stocks per se, but I there are some interesting reader generated articles and discussion (in the comments section) of sites like Seeking Alpha, and the one you mention (Motley Fool).

A few investing books I like (from the states) are those by Peter Lynch (One Up On Wall Street, etc) (pretty simple gateway book).. And, of course, hard to beat anything by John Bogle on index funds.

And you could even get US real estate exposure through a range of REIT's and ETFs and other investments if interested.

Ricky Bobby · Answer

Keep in mind the value of the stock is set by the market. There are reasons why it's been sold off and the price is depressed, probably more than you as a layperson would ever begin to know.

Buying stocks involve significant risks especially ones where you make any kind of money. They have little intrinsic value whatsoever. Go to Google Finance and type in the ticker RJET, it's a recent purchase of mine.

I paid around $3/share and it's now trading about twice that after holding it a month or so. So I doubled my money (haven't sold yet).

Why did it drop so much? I'll tell you. The pilots have rejected several contracts and the company is unable to staff their planes, requiring them to park them. They hinted at even having to declare bankruptcy. That is when the stock dropped like a lead weight, and I threw money at it. If they declare bankruptcy, I lose all my money. When you buy a house, how often to you lose 100% of your equity? Never.

There was extreme risk involved. The voting on the new pilot contract closes tomorrow and I think it will pass.

Companies that are producing 5% dividend payouts right now are energy companies (for the most part) that probably aren't even able to cover their payouts with their free cash flow. This is dangerous.

That being said, again, I bought shares of Exxon, Chevron, BP and Shell between late August and late September. Average dividend was around 6% across all four. But I'm up around 20% on them in not even two months.

Why were the prices depressed? Oil dropped like crazy and so far has recovered a bit but it will most likely remain low for the next 1-2 years. These four companies can barely cover their dividend payout at current earnings, except BP, which has to dip into cash reserves. This is unsustainable, and should make any long term investor cautious.

I'm telling you this stuff to show you to make any sort of serious money in stocks, you need to have a lot to begin with, and be able to stomach huge price swings and be ready to buy when everyone else thinks you should sell.

For books, check out:

The Little book that beats the marketRule #1

That will teach you how to analyze stocks and give you some basic fundamentals. Stocks are basically legalized gambling.

PS. I bought VW stock after the huge sell off as well.

PPS Good luck!

Helen Rolls · Answer

@Ricky Bobby and @Michael Boyer, thanks for your responses. Ricky thanks for the recommendation, I have bought the ebook.  I plan to invest Warren Buffett style, buy and hold. I am not interested in blue chip but smaller companies that have a sustainable growth agenda and that look to be undervalued by the market, and decent dividend returns.

Thanks Michael, I've added them to my list to borrow from the library.  I am aiming to avoid funds, I have a high enough exposure through my Superannuation Fund, which rode through the GFC better than most, but I have little control and I want to be an educated investor.

Ricky, I think your impact is around the wrong way.  At the moment the AUD is around $0.71 on the USD.  Pity I didn't start this while the AUD was strong.  While our tax rules are different any income I receive from foreign investments is taxed as income which is about 30%. There is some benefit to buying local shares that are fully franked which means that if the company pays company tax you get some tax relief from any income.  I need to get my head around tax implications - or more sensibly talk to my tax agent.

Michael, I did mention Motley Fool, but you made me take a better look.  I had not realised there was a forum.  I had only been looking at recommendations. So thank you.

Cheers,

Helen

Is there a Bigger Pockets for Investing in Stocks / Paper Assets?

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