LIVING OFF DIVIDENDS & PASSIVE INCOME

Almost exactly a year ago, I mentioned a paired-trade between the long-term Bond ETF (TLT) and short-term corporate/sovereign bond ETF (AWF).  I went long AWF and shorted an equal dollar amount of TLT. Last week, I closed the position after holding it for just over a year.

When I entered the trade, AWF was trading for $8.29 and had a yield of 13.4%, while my short position in TLT was trading at $112.10 and had a yield of 3.5%.  When I close out my position a year later, AWF had a price of $13.10 and a yield of 8.6%, while TLT was going for $91.65 and yielding 3.9%.

I made about 63% on the long AWF position and 18% on the short TLT position. Coupled with the 9.9% net dividend yield, that trade made me ~91%. Not a bad return for a year and 4 days.  Bond yields don’t usually move 500 basis points in a year. No point being greedy. Time to bank some profit!  Read more... (238 words, 9 images, estimated 57 secs reading time)

Here’s an interesting article by Dominic Frisby about Venezuela’s devaluation, the effect on a country’s currency and the relation with gold prices.

Gold bugs are forever telling you to buy gold because it is ‘nobody else’s liability’. It’s become one of those hackneyed phrases that has almost lost its meaning.

But recent events in Venezuela give us a nice illustration of what that phrase really means. And there’s a stark, but important message for savers everywhere.

Inflation is currently running at 27% in Venezuela. That’s just the official figure. You can expect the real number to be considerably higher.

Earlier this month, the Venezuelan president Hugo Chavez, devalued the bolivar by half, from 2.15 per US dollar to 4.30 per dollar. There will be a second peg, subsidised by the government, of 2.60 bolivars per dollar for essential imports such as food, medicine and machinery.  Read more... (1013 words, 10 images, estimated 4:03 mins reading time)

Today the baby Berkshires (BRK.B) split 50 to 1. And it’s up 4%! This was to be expected. The stock is now affordable to many small investors and there is talk about it being added to the S&P500 index.

When the stock split was first announced, I had a brilliant idea to sell my baby Berks on the news and then re-buy them just before the split. I figured that the euphoria of the split news would push the stock higher and then the enthusiasm would die down and I could buy them back lower.  So the stocks that I bought at $2,550 (split adjusted price of $51) were sold at $3,500 (split adjusted stock price of $70).

My plan worked. The stock drifted down to $3,250. I would’ve been happy to buy them at $3,300. Especially since the current price is $72.25 or just over $3,600 pre-split price. Unfortunately, with my busy school schedule, I totally forgot to put in a buy order and ended up buying the stock back at $71.  Read more... (207 words, 8 images, estimated 50 secs reading time)

Here’s an excellent video about an empty city in China that has been built using government funds. Ploughing billions of dollars in infrastructure and construction works theorectically improves the GDP but benefits no one (unless you count the companies that were awarded the contracts), and actually punishes tax-payers. But of course, the people reaping the rewards are not those being punished so there is no incentive to change the way things are.

The government bailout of poorly run companies (via direct investment and subsidizing of their products) also distorts the GDP. GDP numbers in the US without the Trillion dollar bailout would not look so rosy.

Despite all the talk of the economy being out of recession, 39 million people in are on food stamps. [source: USA Today] Thats 12.65% of the US population! And 6 million of that number have no other source of income. In what was once the world’s most prosperous nation, 2% of people would starve if the government didn’t send them food stamps.  Read more... (198 words, 8 images, estimated 48 secs reading time)

Suzie Orman is a famous financial planner who appears regularly on TV and is a prolific writer. I’m not a big fan, mostly because her ideas are too simplistic for me although they must appeal to a lot of people who have no knowledge of financial information.

But now and then she has a good nugget of information. Check out this short clip about paying off your home mortgage as soon as possible.

The only counter argument I can think of is inflation.

If you bought your house in 1980 for $50,000 and never paid off the mortgage (that wouldn’t be possible unless you refinanced the home loan along the way), the value of $50,000 today is a lot lower than it used to be 30 years ago.

But on the flip side, the mortgage interest tax deduction on $50,000 is rather small too. So maybe you should send in that extra $100 every month!  Read more... (204 words, 10 images, estimated 49 secs reading time)

In October 2008 I bought Annaly Capital Management (NLY)  at around $13.  Annaly Capital is a REIT that buys mortgage-backed real estate securities that are essentially guaranteed by the government via GSEs (or government sponsored agencies).

According to Google finance “it owns mortgage pass-through certificates, collateralized mortgage obligations, agency callable debentures, and other securities representing interests in or obligations backed by pools of mortgage loans. The Company is focused in generating net income for distribution to the stockholders from the spread between the interest income on the investment securities and the cost of borrowings to finance the acquisition of investment securities”.

It basically borrrows money and invests it in MBS and CMOs. When the short term borrowing rate is hovering around 2% and mortgage yields are around 5%, the spread is pretty juicy and it can afford to pay out pretty decent dividends.  Read more... (457 words, 9 images, estimated 1:50 mins reading time)