All posts by John Border

The Spike In Unsecured Credit – A Sign Of Return To Better Times

After half a decade’s credit deprivation, people in the UK have begun seeking and getting credit again. Unsecured debt rose by 9% in 2014, higher than it has been in over seven years. Roughly translated, that amounts to approximately £9,000 in unsecured debt per household. And that is projected to rise to £10,000 per household by the end of 2016.
Before we all chime in with festive dances and happy songs, we might give a thought to whether our renewed love affair with credit is in our best financial interests, as individuals and the Kingdom as a whole. For one thing, we need to look at the kind of credit we are taking advantage of, and how well it serves our financial needs.

The types of loans that are gaining popularity has shifted

Payday loans – There was a time not so long ago that payday loans were typically a borrower’s last legal source of available credit when no other sources were available. There was even a bit of a stigma attached to such loans and the people who sought them. With the economic crisis, that all changed. When even some of the formerly credit-worthy individuals couldn’t convince their long-time bankers to approve loans such as had been readily available to them prior to the crunch, it was inevitable for those newly-rejected borrowers to look elsewhere. Payday lenders had correctly anticipated this emerging market, and geared up for it. The rise in popularity of payday loans caught regulators by surprise, and there were many abuses by lenders before the government set caps on how much they could charge in interest, fees and penalties.

Despite the higher cost of payday loans, they became the most popular form of credit in the UK, and with the constraints included in the new regulations, the abuses by payday lenders have diminished significantly, rendering the loans more popular than ever.

Credit cards – Issuing companies have in the recent past engaged in such aggressive marketing practices that they have caused the government to look more closely into and apply additional restraints upon those practices. The companies still tend to avoid issuing their cards to individuals in high-risk groups, such as those just beginning to establish credit, those with low income, self-employed individuals and those with a history of credit problems.

However, they continue marketing to people who have a history of making minimum payments, despite the fact that such individuals are likely to exhibit a pattern of financial difficulties. The card companies accept the risk in approving such individuals because the minimum-payment accounts are easily their most profitable, offsetting the risk that some will default on their payments. Because credit cards are easier to obtain than traditional loans, their popularity continues to rise.

Instalment loans – These loans are typically for relatively small amounts, and are made on a short-term basis, often with greater flexibility in repayment than payday loans. While they usually offer lower interest rates than those charged by credit card companies or payday lenders, their rates are still somewhat higher than those applied to more traditional loans.

Instalment loans also offer the borrower a more stable payment schedule than payday loans or credit card balances, so that the borrower knows ahead of time exactly how much the monthly payment will be. This can be particularly helpful to the borrower’s efforts to set and adhere to a budget. Instalment loans are marketed primarily to individuals whose credit history places them in a lower risk category than those who routinely seek payday loans or credit card advances. Interest rates and terms can vary significantly between lenders, and while the loan might not be approved and processed quite as quickly as a payday loan, the delay can be offset by the reduced cost of the loan.

Our return from the financial abyss of the last seven years has been a long and tedious one, and it is reassuring to see conditions improve. Hopefully, we have learned a lesson in the process, and will strive to keep a tight rein on our indebtedness. We are only human and it is understandable that we would jump at the chance to enjoy something to which we’d long grown accustomed, but which had been denied us for a number of years. Let us just make certain that we don’t allow our jubilation and renewed confidence to overshadow our common sense, and lead us back into that abyss once again.

Warren Buffett’s Annual Shareholder Letter : Investment Advice and Lessons

Warren Buffett recently released his annual letter to shareholders. This letter is much anticipated by the media and investors around the world as they look to it to see what Berkshire Hathaway is investing in, their views on the economy and other musings of the Oracle of Omaha. This year’s letter provides some very valuable education for the average retail investor. For our purposes, I want to focus on pages 17-21 of the current letter that was recently sent out.

In this section, Buffet provides us with some thoughts on investing. Who better to give investing advice then a man who built a billion dollar empire from scratch? He starts out by citing the most important book he ever read called The Intelligent Investor, by Benjamin Graham.

He says that this book changed his life and his investment success. Then he shares a few stories about two smaller investments that he made that aren’t even purchases of stocks or companies. One was a 400-acre farm that he purchased in 1986 and the other was a commercial property that he bought in 1993. The common trait between the two was that they were bought during a crash in those asset classes due to a market panic. Buffett then goes on to describe some of the details behind both of the deals. Although each one is unique in location and asset class, he concludes that based on the data, both investments had very little downside risk but the ability to increase income in the future. He even states that he knows nothing about farming and has only visited the farm twice!

He tells us these points to teach us some important lessons about investing.

1. You don’t have to be an expert to achieve satisfactory returns.
2. It’s more important to be certain of the future income streams than what presently exists.
3. Don’t speculate based on the price fluctuations of the underlying asset.
4. Don’t worry about bigger economic issues and instead focus on the returns of your investment.

Analyze well and Invest : Do not track your stocks every day

He also goes on to emphasize that too many investors become glued to the daily price fluctuations of the stock market or their individual stocks. He tells us that if he had copied this behavior with his investments, it would have proved to be too distracting and might have caused him to sell at an irrational price. They key is to be sure of your analysis and trust your future income projections. No matter what devastation is going on around you, a well analyzed asset will continue to provide you with your expected returns.

Think Long term

Most importantly, he encourages us to stay the course as long as the investment is performing as expected. In reality, this is hard to do when a market is in free fall. In 2008, Buffett realized that there would be a very severe recession coming. Still, he didn’t sell either the farm or the commercial property he bought. In his opinion doing so would be crazy. He was still getting his expected returns regardless of the market turmoil. By taking in his advice, applying some discipline and developing good analytical skills, we can all become more successful investors just like Warren Buffett himself.

What are Dividends – Definition and Meaning

Dividends are one of the most powerful forces to have on your side when investing in stocks. History has shown that some of the best long term returns are realized from strong companies that pay consistent dividends and raise them regularly. Some studies have shown that stocks without dividends underperform the overall market over time. Understanding this is important but today I want to take a step back and explain what dividends are and why companies pay them.

Dividends are a form of payment to shareholders of a company. They are typically paid because a company has extra earned income that they can either use to reinvest in other growth opportunities or pay back to their shareholders. As companies mature and have less need for investment, they will often pay out dividends to their shareholders with the additional revenue that they have realized from the past quarter. An example of such a company is Coca-Cola. The company is not really inventing new products or expanding to more markets at this point. Because of this, Coke is able to pay back a portion of their revenues to shareholders in the form of a dividend.

Understanding Dividends

You can figure out if a company pays a dividend by looking up the stock ticker through your brokerage account or by using many popular online stock resources that are free. Every platform that I know of will show a field that gives you three bits of information about the dividend that the company pays. If this field is blank or has a N/A, then the company does not currently pay a dividend. The first field to look for is the annual dividend, which is stated in dollars. For example, you might notice a company pays $1.00 per year in dividends. That means that you will receive $0.25 per share that you own every quarter.

Dividend Yield

The second field you’ll notice is the dividend yield. This is calculated by dividing the current stock price by the annual dividend payout. Using our example from before, the annual dividend yield would be 5% if the current stock price was $20 per share. This is simply found by calculating 1/20. Lastly, there is an ex-dividend date listed. The ex-dividend date indicates the date that you must be listed as an owner of shares in the company to receive the dividend payment. You must be an owner of shares on that date to receive the distribution. That means if you sell the stock the next day, you will still receive the dividend payment on the payout date. If you buy the stock a day after the ex-dividend however, you’ll have missed the dividend distribution for that quarter.

Dividends are not Mandatory

Quarterly dividend distributions can fluctuate or stop completely if the company gets in to trouble and starts losing money. For this reason, it’s important to monitor any stocks you own that pay dividends to make sure that your income stream stays in tact.

In addition, some companies are required to pay dividends to their shareholders. These include trusts, master limited partnerships and real estate investment trusts. Although they are required to pay dividends, their quarterly distributions can fluctuate, so if you invest in one of these companies make sure to do your due diligence.

I hope that you now have a basic understanding of how dividends work, why companies pay them and why they’re important.