Dividends Archives | Value Investing - Business and Economic Principles

Value Investing With Real Estate Investment Trusts – Analysis and Evaluation Techniques

REITs Pool, Value Investing / By David J Hoare MSA / 11/01/2020 02/05/2022

Real Estate Investment Trusts (REITs) are considered excellent long-term investments. There are two underlying reasons. First, under the Internal Revenue Code, they are considered income tax free investments. To comply, the REIT must distribute at least 90% of all net income earned to shareholders. The shareholders pay income tax on those dividends received. Because of the dividend distribution requirement, REITs have excellent dividend yields. This is why REITs are considered perfect investments for widow and orphan funds whereby cash is necessary to fund the monthly payments to annuitants. Secondly, similar to any real estate investment, time is beneficial to the overall value of the REIT’s fixed assets.

This in-depth article explains these two elements of real estate ownership and how they are applied to publicly traded REITs. The dividend yield formula is covered in detail and how it is applied with REITs due to the every increasing dividend payout REITs generate. Net income is then covered and an actual example is illustrated discussing how to interpret annual and interim income statements REITs provide. There is also an explanation to calculating cash flow related to the income statement. Finally, with regard to the underlying assets of real estate, the fixed assets turnover rate is explained and how it is applied to REITs. There is an expected norm for the turnover rate.

From this information, buy/sell trigger points are covered along with an example for a club member.

Union Pacific – Buy/Sell Model

Railways Pool / By David J Hoare MSA / 11/17/2019 03/02/2022

Union Pacific’s stock carries the highest price to book ratio among the six Class I Railways. It is about a 1.43 times factor over the next best price to book ratio of CSX at 4.73. Strong price to book ratio investments infrequently have deep or extended price depressions. Therefore, an investor must be patient and wait for opportunities to buy. Take note, Union Pacific’s price to book ratio is 2.33 times that of Kansas City Southern. This means the buy/sell model is also different; it is actually almost the exact opposite of KSU’s model. In KSU’s model, the investor looks for opportunity when the price slips more than 5% and then sells once the stock recovers about 12%. With Union Pacific, the investor gets value by waiting on the price to dramatically decrease. The change must be more than 17% decrease. Gains are earned once the stock recovers almost to the prior peak. This peak to peak model takes much longer to cycle through with high price to book ratio investments, but the reward is worth the wait.

To develop a good model, the reader needs to understand why the down aspect of the cycle is where the real value is earned. Unlike KSU’s model where the down point to buy is 5% less than the peak, with Union Pacific the down point must be greater. In addition, another section explains that buying in a down cycle more than one time is also lucrative to the investor. Finally, the sell point is set and the corresponding results are calculated. The end result is a model that earns a good return for a high price to book ratio investment.

Railroad Stock – Discovering Opportunities

Railways Pool / By David J Hoare MSA / 10/23/2019 02/05/2022

Railroad stocks are solid and steady investments. There is limited downside risk and adequate historical data to illustrate buy and sell points for an investor. If properly applied, an investor should earn yields of 18 to 30% year on year. Learn how to develop the investment model for this particular industry.

One of the benefits of railroad stocks is the downside risk. When the stock’s share price decreases, it is unlikely it will continuously fall. The business ratios used in this industry assist in understanding how far a share price can fall. The further the price decreases, the more lucrative the investment becomes. Thus, the market – other buyer are enticed to purchase the stock due to the desirable attributes of the stock. The first section below covers this particular aspect of the share price decreasing.

On the flip side are increases in share price. How does an investor know when to sell? If you sell early, you miss out on any additional increases in share price that can add dramatically to your gain upon the sale of the stock. With railroad stock, the historical pattern has rarely wavered from a continuously increasing trend line. The key is to be patient. Yes, the longer it takes to recover and generate gains for the investor, the lower the yield for the investor. Never look at this in isolation, it’s about Bernoulli’s Law (Law of Large Numbers).

Constructive Dividends – Definition, Understanding and Application

Income Taxes / By David J Hoare MSA / 07/25/2018 03/01/2022

When a corporation confers an economic benefit upon a shareholder, in his capacity as such, without an expectation of reimbursement, that economic benefit becomes a constructive dividend, taxable as such. See INTERNAL REVENUE SERVICE NATIONAL OFFICE FIELD SERVICE ADVICE MEMORANDUM FOR DISTRICT COUNSEL, Number 200011003 dated October 27, 1999; specifically Page 4, 3rd paragraph.

Owner’s Draw in Business

Terminology / By David J Hoare MSA / 06/22/2015 02/27/2022

When an owner of a small business operation transfers money from the business bank account to their personal bank account the transaction is commonly referred to as a ‘Draw’. There are other terms but this is the traditional word used. The technical definition is: ‘A transfer of earnings from the business on behalf of the owner is referred to as a draw’.

Dividends and Distributions – Use in the Proper Context

Report Analysis - How to Read the Statements / By David J Hoare MSA / 04/29/2014 02/25/2022

Dividends and distributions refer to the payment of cash to investors. Why are there two separate terms? Well, the term is tied back to the type of entity that makes the payment. Simply stated, regular corporations, i.e. C-Corporations as identified in the Internal Revenue Code use the term ‘Dividends’ and S-Corporations (Small Business Corporations) use the term ‘Distributions’. In addition to S-Corporations, other closely held business use the term ‘Distributions’ to identify amounts disbursed to the respective owners or beneficiaries. These forms of entities include Partnerships, Limited Liability Corporations, Trusts and Estates.

Although it appears relatively simple at first, it is slightly more involved than this and this article addresses the proper definition and context use when using these two similar terms. In addition, there are more differences between the two terms than just the source of the payment. For a full and detailed understanding of the terms, continue reading.

Passive Income

Income Taxes / By David J Hoare MSA / 06/19/2013 03/01/2022

Passive income is a form of earning money without materially participating in the activity from which the income is derived. There are two definitions for the reader to understand. There is the common business definition and the tax code definition.