All posts by Pat McKeough

Dogs of the Dow is themed ETF investing but flawed

Posted By Pat McKeough | September 30, 2016

Inner Circle members often ask us about themed ETF investing strategies, and most of the time, we tell them we do not recommend investing in themes.

For example, some ETFs out there are based on the so-called “Dogs of the Dow” stocks. Essentially, the “Dogs of the Dow” ETF is based on a collection of the lowest-priced, highest dividend yielding stocks that trade on the Dow Jones Industrial Average and are updated yearly.

Rising interest rates will work against Dogs of the Dow ETF investing approach
The ALPS Sector Dividend Dogs ETF (symbol SDOG on New York; www. alpssectordividenddogs.com), is an example of an ETF that applies the “Dogs of the Dow” theory on a sector-by-sector basis using the stocks in the S&P 500.

As we mentioned above, the Dogs of the Dow approach involves buying the lowest-priced, highest-yielding stocks in the Dow Jones Industrial Average. At the end of each year, you pick the 10 stocks from the 30-stock Dow with the highest dividend yields. You then invest an equal dollar amount in each, hold them for one year and repeat these steps annually.

The ALPS Sector Dividend Dogs ETF picks five stocks from each of the 10 sectors as defined by the S&P 500 index—consumer discretionary, consumer staples, energy, financials, healthcare, industrials, information technology, materials, telecommunication services and utilities. The ETF picks the stocks with the highest dividend yields. Each holding is then equally weighted so that every company has a similar influence on the ETF’s total return. The end result is a portfolio of 50 large-cap stocks.

The Dogs of the Dow strategy worked well in the 1990s because interest rates were going down. This tended to raise all stock prices. But high-yielding stocks were affected more than most, because they attracted former bond investors who were switching into stocks.
Interest rates are now likely to remain steady, or they could creep upward. So we see little appeal in a Dogs of the Dow approach.

For that matter, we see little appeal in following any formulaic approach to investing. The one basic rule about things like this is that if it sounds too good to be true, then it isn’t true.

The ALPS Sector Dividend Dogs ETF holds a number of stocks we recommend in Wall Street Stock Forecaster (including McDonald’s, Kraft Foods Group, Wells Fargo & Co., Baxter International, Pfizer, General Electric and Intel). It also holds a lot of stocks we don’t recommend. But, more to the point, we don’t recommend using a Dogs of the Dow approach to picking stocks or ETF investing.

There is no “philosopher’s stone”

Capital gains tax is one of the lowest you’ll ever pay

Posted By Pat McKeough | September 22, 2016

There are three forms of Investment Income in Canada: Interest, Dividends and Capital Gains. Each Is taxed differently. Here’s a reminder of how smart investors use their knowledge to taxation rates, especially tax on Capital Gains, to protect their returns.

With stocks, you only pay capital gains tax when you sell or “realize” the increase in the value of the stock over and above what you paid for it. (Although mutual funds generally pass on their realized capital gains each year.)

Several years ago, the Canadian government cut the capital gains inclusion rate (the percentage of gains you need to “take into income”) from 75% to 50%. For example, if an investor purchases stock for $1,000 and then sells that stock for $2,000, then they have a $1,000 capital gain. Investors pay Canadian capital gains tax on 50% of the capital gain amount. This means that if you earn $1,000 in capital gains, and you are in the highest tax bracket in, say, Ontario (49.53%), you will pay $247.65 in Canadian capital gains tax on the $1,000 in gains.

The other forms of investment income are interest and dividends. Interest income is 100% taxable in Canada, while dividend income is eligible for a dividend tax credit in Canada. In the 49.53% tax bracket, you’ll pay $495.30 in taxes on $1,000 in interest income, and you will pay $295.20 on $1,000 in dividend income.

Three capital-gains strategies

3 retirement investment “strategies” to avoid

Posted By Pat McKeough | September 13, 2016

Here are 3 retirement investment “strategies” that will kill your returns and put your retirement goals in jeopardy.

If you’re headed into retirement, you’ve probably read about a range of different retirement investment strategies to follow. One we’ve been asked about a number of times is whether we can supply one last can’t-miss trading idea that can make up for the shortfall in savings (brokers sometimes refer to this as a “rescue stock”).

This, of course, is unrealistic. If we could find stocks with that rare combination of low risk and high potential, why would we ever recommend anything else?

In fact, if you’re heading into retirement and are short of money, you should move your investing in the opposite direction: aim for safer investments, rather than taking one last gamble. As well, here are three other examples of really bad retirement investing strategies:

First retirement Investment strategy to avoid: Stock options

Stock options are not a smart idea if you’re headed into retirement. Stock options are expensive to trade. You pay commissions each time you buy or sell stock options. Commissions eat up a large part of any profits you may make with stock options, particularly if you trade in small quantities. What’s more, every trade costs you money in “slippage,” or the difference between the bid and the ask price. With options, this difference is larger than it is with stocks. Continue Reading…

When to buy an ETF for maximum return

Posted By Pat McKeough | September 6, 2016

To determine when to buy an ETF, some investors use technical analysis and other tools. But you need to dig deeper.

Investors often wonder: what is a good entry point when purchasing a stock or an ETF?

The first question before asking when to buy an ETF is whether an exchange traded fund investment is right for your portfolio. An ETF investment is one of the most popular and most benign investing innovations of our time. ETF investments are a little like conventional mutual funds, but with two key differences.

First, ETF investments trade on a stock exchange throughout the day, much like ordinary stocks. So you can buy them through a broker whenever the stock market is open, and generally you pay the same commission rate that you pay to buy stocks. In contrast, you can only buy most conventional mutual funds at the end of the day. What’s more, commissions vary widely, depending on negotiations with your broker or fund dealer.

Second, the MER (Management Expense Ratio) is generally much lower on ETFs than on conventional mutual funds. That’s because most ETFs take a much simpler approach to investing. Instead of actively managing clients’ investments, ETF providers invest so as to mirror the holdings and performance of a particular stock-market index.

ETFs practice this “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Traditional ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poors). Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks change. They don’t attempt to pick and choose which stocks they think have the best prospects.

This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.

When to buy an ETF

Why you should forget about buying Canadian marijuana stocks

Posted By Pat McKeough | August 25, 2016

Canadian marijuana stocks offer some speculative appeal — but here’s why we think you should avoid them

As you probably know, several U.S. states have decriminalized or legalized marijuana use and have begun authorizing legal production and sale of the plant. In Canada, marijuana has been legal for medical use for some time, and we are occasionally asked about Canadian marijuana stocks.

This change in the law is bound to lead to a shift in current and future marijuana production, from the underground economy to the legal economy, where it can be regulated, taxed and invested in. Tax revenues are already starting to roll in, but we haven’t found any Canadian marijuana stocks worthy of investment. So far, most of what we’ve seen are stock promotions.

We advise staying out of stock promotions of Canadian marijuana stocks businesses or anything else. They attract the wrong kind of people. Stock promotion is a take-the-money-and-run type of business. Most successful entrepreneurs value their reputations, and want to build a profitable, sustainable business that can pay off for investors. So they generally go into some other line of work, and stay out of stock promotion.

These days, it’s faster and easier than ever to launch a stock promotion, thanks to the Internet. One recent “penny pot” stock scam almost seems like an MBA-style case study on how to launch one of these frauds online.

We won’t name the penny stock company that is the subject of the promotion campaign, since it claims it’s not involved in the fraud. Let’s just refer to it as “Pot o’ Gold,” or POG for short.

The POG spam emails we’ve seen use the following techniques:

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To determine when to buy an ETF, some investors use technical analysis and other tools. But you need to dig deeper.

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