Foreword Another quarter and another state of confusion. The U.S. - China trade war continues to drag the overall markets down. Many companies we reviewed over the past several months received passing grades based on their numbers, but their exposure to China prevented us from investing in them. So how does one invest with the threat of more tariffs and product bans looming? Simply invest in companies that will survive and then thrive. Companies that will survive the short- term global turmoil then thrive in the long run, we believe we’ve isolated two this quarter. Yes, only two companies in this quarters newsletter, not our typical three companies. Our survive then thrive mindset brings us back to an organization that appears to be slimming down and reshaping itself for a big push forward. The second company is a global leader in payment processing. This quarter we also discuss the income investment strategy and dividend reinvestment plans. A dividend reinvestment plan is the easiest tool for an investor - novice or experienced - to grow a portfolio fast. It takes a steel stomach to invest when the near term outlook is rocky, but the seeds of fortune are planted during bad times and reaped during good times. Thanks for checking out this quarters Seville Report. Sincerely, Paul Black 2!
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What Does Cognizant Do Cognizant Technology Solutions Corporation, a professional services company, provides consulting and technology, and outsourcing services worldwide. The company operates through four segments: Financial Services; Healthcare; Products and Resources; and Communications, Media and Technology. It offers business, process, operations, and technology consulting services; application design and development, and systems integration services; application testing, consulting, and engineering services; and enterprise information management services. The company also develops, licenses, implements, and supports various software products for the healthcare industry, including solutions for health insurance plans, third party benefit administrators, and healthcare providers. In addition, it provides application maintenance services; information technology infrastructure services, such as data center, infrastructure security, network and convergence, end-user computing, and mobility services; and business process services comprising clinical data management, pharmacovigilance, equity 6!
research support, commercial operations, and order management services, as well as consulting and platform based services. The company markets and sells its services directly through its professional staff, senior management, and direct sales personnel. It serves banking and insurance, healthcare and life sciences, manufacturing and logistics, retail and consumer goods, travel and hospitality, energy and utilities, communications and media, and technology industries. Why Invest in Cognizant? This quarter brings us back to Cognizant Technology Solutions (CTSH). We first discussed Cognizant in our September 2018 issue, and at that time the stock traded in the mid $70 range. Since then the stock suffered a sell off with the rest of the market at the end of 2018, rebounded back to around where we first recommended it, and has pulled back again. In our first discussion of Cognizant we loved that their business was exposed to the financial and healthcare sectors. Unfortunately, an outlook of slower growth in the financial and healthcare sectors have effected CTSH. Despite the slow down in spending in the healthcare and finance sectors Cognizant was still able to grow Q1 2019 revenue by 5% versus Q1 2018. Not eye popping numbers but growth none-the-less. 2019 revenue is expected to grow by 3.5%, again not really eye popping numbers. In the company’s most recent earnings call management advised that two of their top five clients continue to show growth, while three of the five remain under pressure. !7
However, they continue to see growth in their cloud and digital engineering services and increased demand for interactive IoT. The Media and Technology arm of Cognizant saw 19% year- over-year growth in Q1 2019. We believe the increased demand for interactive IoT and Cognizant’s cloud business is where the company can make its mark and accelerate revenue growth. Companies are moving away from IT outsourcing and into cloud-essential consulting. We believe this is the reason behind Cognizant’s trimming of staff. In the latest news on Cognizant it’s reported to be trimming 300 executive positions. The company appears to be slimming down in order to accelerate major growth again The need for the digital solutions that Cognizant provides isn’t optional for many companies. IoT, artificial intelligence, machine learning, automation are needed by companies to seriously compete, and Cognizant can provide these solutions. Also for Cognizant there is the growing revenue over the past four years, along with stable net income. The company does well at controlling its cost, and still holds more cash and cash equivalent than debt. The company’s growth by acquisition strategy led Cognizant to acquire six companies in 2018. In 2019 the company has acquired Samlink and Meritsoft, two companies that will help enhance what Cognizant is already doing. We believe the growth by acquisition strategy will help it acquire the cloud based resources it needs to compete in the market place. Cognizant doesn’t have the sexy story, which is okay with us. We like stable, conservative, plug away each day, and grow value slowly type of companies and this is what we see in Cognizant. 8!
What are the Investment Risk We’ve touched on the healthcare and finance sectors slower than expected growth and their slow down in spending which really hurts any investment in Cognizant. This is a big issue for the company as it receives 36% of its revenue from the financial services sectors. It’s is one of the reasons Morgan Stanley cut its target for Cognizant from $85 to $69 per share. In Cognizant’s last quarterly report it revealed that 75% of the company’s revenue comes from North America, which may comfort some who are concerned about the trade war, but this makes the company vulnerable to economic slow downs in North America. We see the competition as the riskiest part of this investment. Some of the larger competitors to Cognizant are Accenture, Computer Science Corp, Deloitte Digital, HP Enterprise, IBM Global Services, and Infosys Technologies. There is also Google, who could at any time ramp up their Business Solutions offerings and eat into Cognizant’s as well as other companies market share. As for the numbers, the company’s profit margin shrank in 2018 compared to 2017. Price to cash flow and price to book for CTSH don’t scream bargain when compared to the industry and sector averages. We’ve taken the risk into account and believe Cognizant at these levels is a solid investment, There’s nothing extremely exciting about the company as compared to a tech / consumer electronics company, but that’s okay. We believe the long-term rewards outweigh the risk for Cognizant. !9
Cognizant Peer Review Cognizant (CTSH); InfoSys Limited (INFY); International Business Machine (IBM); Qualys (QLYS); Accenture (ACN) There is nothing that screams bargain investment based on Cognizant’s numbers versus some of it’s peers, which is okay. The digital solutions industry that Cognizant operates in still has large growth potential. A quality company like Cognizant should be able to continue to grow with the industry. 1! 0
Cognizant Buy Zone Our buy zone for Cognizant is in the mid $50 to low $60 range. As stocks fell in Q4 2018, CTSH seemed to find support around the $58 range, and after missing Q1 earnings estimates it seems to have headed back to that $58 price range. We feel the $58 range represents a significant level of support that investors can use as an area of accumulation. Should the stock fall below the mid $50 range we will review our position.
What is Wall Street Saying 5/10/19 Argus Research Hold 5/7/19 HSBC Upgraded to Buy Price Target $72.00 5/7/19 Daiwa Hold, Price Target $62.00 5/6/19 Merrill Lynch Sell, Price Target $57.00 5/3/19 Wells Fargo Hold, Price Target $63.00 Summary Top Reasons to Buy CTSH 1. The company’s history of revenue growth. 2. The company has more cash and cash equivalent than debt (This will ease burden of the finance and healthcare sector slow downs and reduced spending) 3. A dividend paying company that is also repurchasing shares. Top Reasons to Avoid CTSH 1. The slow down in spending by the finance and healthcare industries will hurt Cognizant over the short-term. 2. Figures such as ROA, ROE, profit margin, operating margin also P/E, P/S, P/B are in the middle of the pack. Nothing really stands out.
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What Does Visa Do Visa Inc. operates as a payments technology company worldwide. The company facilitates commerce through the transfer of value and information among consumers, merchants, financial institutions, businesses, strategic partners, and government entities. It operates VisaNet, a processing network that enables authorization, clearing, and settlement of payment transactions; and offers fraud protection for account holders and assured payment for merchants. In addition, the company offers card products, as well as value-added services. It provides its services under the Visa, Visa Electron, Interlink, V PAY, and PLUS brands. Visa Inc. Why Invest in Visa An investment for us in Visa is long over due. When it went public in 2008 it was very easy to overlook what was considered a credit card company in the middle of a credit crisis. !14
However, Visa’s stock price has outpaced the markets as the global economy recovered from the financial meltdown. Visa isn’t a credit card company, it is a payment technology company as it states in its description. As society slowly phases out cash Visa gets more valuable. For Visa’s latest quarterly earnings, the company reported a 9.5% increase in revenue year-over-year and an 8.2% increase in net income year-over-year. The company saw increases in service revenue, data process revenue, international transaction revenue and other revenue. The number of cards increased during the last quarter as did the number of transactions by 9% y/y and payment volume by 4% y/y. The recent acquisition of Earthport will help boost Visa’s cross boarder payments business. Visa shareholders have constantly been rewarded by the company. Visa has repurchased over $4 billion worth of stock in the current fiscal year and has paid out over $1 billion in dividends. Also Visa has a 10 year history of dividend increases. In Q1 2019 consumer spending increased by 1.2% versus Q1 2018, which is a growth driver for VISA. The growing network that links, consumers, merchants, and banks will continue to benefit payment companies like Visa. As we alluded to earlier, society is slowly moving away from cash. Emerging markets that are still reliant on cash represent a huge opportunity of growth for Visa as well other payment transaction platforms. !15
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Of the New Cannabis Ventures list, the top five companies by market cap are Canopy Growth Corporation ($16 billion), Aurora Cannabis ($8.8 billion), GW Pharmaceuticals ($5.6 billion), Curaleaf Holdings Inc ($5.1 billion), and Tilray Inc. ($4.4 billion). The bottom five are National Access Cannabis Corp ($107 million), Dionymed Brands ($94.7 million), Grow Generation Corp. ($89.5 million), Terra Tech Corp. ($82.5 million), and Isodiol International Inc. ($43.2 million). Industries That Could Receive a Boost from Legalization In investing, sometimes the big money isn’t made investing in the thing, but in the support system. It’s no different in the marijuana business. Several industries could see major growth as laws surrounding marijuana change. Pharmaceutical companies for instance could experience major growth due to lax weed laws. For over 80 years marijuana has been a controlled substance, making it almost impossible for many doctors, scientist, and researchers in the U.S. to study the potentials of the plant. A lot of what we know comes by way of researchers in Brazil and Europe. What’s been advertised by medical marijuana pushers and doctors is only scratching the surface of what we know, and that goes for the good and the bad. The versatility of Hemp could have a huge impact on the manufacturing industry. From makeup, to paper, to clothing, Hemp has been used to produce many different consumer items.
The banking industry could experience the biggest impact. In The United States, banks have been cautious to work with companies in the marijuana industry because marijuana in the U.S. is still not legal on the federal level. However, some banks are coming around in states where the business is legal. This is a big deal for marijuana businesses big and small, who have had to figure out how to safely move, deploy, and distribute stacks of cash. The agriculture industry will also reap some benefits from legalized weed, think fertilizers and pesticides. The weed business is morphing into a huge legal business, crop yields matter. HempCrete is a bio-composite material used in construction, which is another example of hemps versatility. Products like this and others could have an impact on the construction industry. Transportation is another industry that could see benefits from legalized weed. Then there are industries like the security business, which has seen benefits from changing legislation. As we pointed out the weed business has mainly been a cash business, someone has to protect those stacks. Also, benefits should trickle down to plastics and glass manufacturers, as items like holders, carriers, containers, packaging materials, and pipes experience increases in demand. Also, weed laboratories that test product to verify safety, quality, and potency will experience a benefit. Another benefactor could be equipment manufactures. Grand View Research Inc. believes global marijuana drying and curing equipment business could reach $175 million by 2025. !29
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Not All Roses But it’s not all roses for the marijuana industry. The issue of legality on the state and federal level are still a threat to the business. Also, at least in the United States, the slow bureaucratic process that exists around the business keeps the black market weed dealer still in demand. In the U.S. there are still states who have not legalized marijuana on any level, and the current Attorney General is not for legalization, but has stated that legalization should be kept at the state level. There’s also the black market which is still a major concern. According to Inc.com illegal marijuana sales topped $46 billion in 2016. That’s a lot of money not going into a pipeline where investors can benefit. The hope is that the number of illegal sales will shrink as legislation for legalization spreads, but to think that there will be zero legalized sales is silly. Not every state or country will legalize, but the demand will remain. How The Business Will Mature The marijuana business is still the wild wild west, which will scare off many conservative investors. Because of its growth potential we are constantly seeing new companies enter the business. New growers, new retailers, new product suppliers, etcetera. Sadly, this allows a lot of opportunity for snake-oil salesman to get lumped in with those companies that are attempting to do legit business. The legalized weed business is young, and like everything young, it will change as it matures. 3! 1
We see lots of marijuana related businesses starting, and lots of businesses not making it. We also see a lot acquisitions taking place in the future, which will add to the number of smaller companies that end up out of business as they find it harder to compete against large conglomerates. We also believe as the industry and companies mature there will be more specialization. When we think of this industry 10 years out, we don’t see many companies doing the growing and retail and everything that falls in-between that. Our thoughts on this come from marijuana being a crop, like corn or potatoes. How many farmers are growing crops and retailing direct to the consumer? There’s an assumption amongst many marijuana investors that good weed companies can attain the heights of tobacco companies before they were hit with major litigation. This an interesting outlook that we believe could easily play out. Making a Sensible Weed Related Investment So how do you make a sensible weed related investment? You apply the following questions to any company that is under consideration.
1. Does the company have a product or service that can capture a sizable market share? Medicinal, recreational, or both. There are several dozen publicly traded weed companies, look for the one with stand out products and services. 2. Is the company spending money on research and development? We are in the early stages of the legalized marijuana, the company devoted to research and development will benefit the most over the long term. Remember earlier when we stated there could be 60 to over 100 different cannabinoids? Currently CBD seems to be the cannabinoid of focus, but good R&D could find positive uses for some other cannabinoids. 3. Does the company have a decent sales force? The sales force will be critical for the companies going forward. As companies develop new products around THC or CBD or other cannabinoids, the company that can close the most sales will win. Walgreens, CVS, the local cannabis supplier all have limited shelf space. The company who can win this shelf space will see revenue and hopefully their stock price increase. 4. Is the company's profit margin increasing and can the company continue to increase profit margins? A lot the marijuana related business we’ve viewed have a similar trait, they saw big revenue increases in 2018 and big net losses in 2018. While they brought in more money, they spent more money to make that money. As these companies fight it out for market share, profitability will suffer, so profit margins will be negative. However, look for the company’s who is getting closer to profitability and not further away from it.
5. Does the company have outstanding executives, managers, and board members? Venture capitalist have a saying when it comes to investing in new companies and ideas, and that is you bet on the jockey, not on the horse. The company’s idea can be great, but if it doesn’t have the right man, woman, or team behind it, it will never reach its potential. The same goes for investing in marijuana related companies in the early stages. Look for names that have been around the block and that have been successful. For companies focused on retail, they should have someone who has done well in the retail sector, for pharmaceutical focused companies, someone with a background in pharmaceuticals or biotech should be aligned with the company. The person or persons doesn’t necessarily have to be in the C-suite, they can be a board member as well. These five questions will help any investor considering an investment in a marijuana related enterprise make a better investment decision.
No Specific Recommendation The reason there are no specific recommendations in this article is because most weed companies don’t meet our investment grade. The weed industry represents a growth industry, which emphasizes revenue growth over immediate profitability. In the growth phase of a company they will likely issue more shares to raise money, which will dilute an investment. They will issue more debt to raise money, which will decrease the stability of the company. They will overestimate the market and take big swings that will fail, and a host of other growth company behaviors that we try to avoid. To paraphrase Warren Buffett, rule number one as an investor is not to lose money. It’s hard to live by rule number one if the companies we’re investing in are losing money. For investors, it’s important to understand that there is no need to rush in. Netflix, a successful growth investment story went public in 2002 at $15 a share, after going public it traded down to under $5 a share, and now the stock trades at $354 per share as of this writing. If an investor purchased Netflix stock two years ago and held it they would still be up over 170%, that’s not a bad return. There is no need to rush an investment in the weed industry. Consider this as an intro to our weed industry coverage. We have analyzed a dozen companies in the industry and are monitoring them quarterly. We will publish our thoughts on the industry and companies within the industry in other issues of The Seville Report. !35
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If you want to grow an investment account quickly at a pace that you can afford, and you’re not a millionaire or a hundred- thousandaire, a dividend reinvestment plan may be exactly what you need. Dividend Reinvestment Plans or DRIPs, takes an investors dividend payout and puts it into additional shares and sometimes fractional shares of the company. As an investor instead of receiving a quarterly dividend payout to your bank account or brokerage account, the dividend is automatically used to purchase more shares of the companies stock. A dividend reinvestment plan can be started with a brokerage firm or directly with a publicly traded company. Companies like 3M, Kellogg, Exxon Mobile, and Johnson and Johnson offer dividend reinvestment programs. The Benefits There are several benefits to joining a dividend reinvestment plan. One is the ability to buy fractional shares. When just starting out, your dividend payout may not be enough to buy whole shares. Most dividend reinvestment plans will allow you to put that money to use and purchase a fraction of share. Why is this a benefit? The more shares you own, the more dividend you receive, the bigger your next payout, the more shares you can purchase. 3! 8
Another benefit is the ability to accumulate shares at a discount. Some companies allow shareholders to reinvest dividend at a discount to the stock’s market price. This can occur because shares are purchased from the company’s reserves, when participating in a dividend reinvestment plan directly through a company. Keep in mind the discount will vary from company to company. A third advantage is commission free investment purchases. Some companies allow an investor to participate in the DRIP without charging a commission or fees. Whether an investor is allocating $50 a month to a DRIP or $250 a month, knowing that 100% of the funds are going towards the investment is a major benefit of a dividend reinvestment plan. The fourth and maybe the most important benefit of a dividend reinvestment plan is the advantages of compounding. The theory of compounding interest was explained briefly under the first benefit. But let’s look at an example. Let’s say an investor initially purchased 10 shares of a company’s stock in their dividend reinvestment plan, and it worked out that in the first year of the plan the dividend from the 10 shares was able to purchase 3 additional shares. The following year the investor will start the year off collecting a dividend on 13 shares. As shares of stock or a fraction of a share is added to the investors holdings every quarter, that represents another dividend payout. Compounding interest in the market, working for you, is like a financial snowball rolling down hill, getting bigger and bigger the further and longer it rolls. There is a reason compounding interest was called the eight wonder of the world. 3! 9
Some Drawbacks Like everything dividend reinvestment plans have their drawbacks. For one you’re stuck with purchasing that company’s stock if you participate directly through a company. If you are enrolled in the dividend reinvestment plan, you’re dividends will continuously purchase Exxon’s stock no matter what the market is doing. Whether the stock is undervalued or overpriced the stock will be purchased. Also if you have multiple DRIPs going directly through the company, for instance one with American Express, one with 3M, and Home Depot, that’s three different statements you have to look out for and keep a track of. Also, not all DRIPs are commission free. Some do charge a per share processing fee. It is usually pretty small in comparison to a full service broker, but that’s still money not being invested. Another drawback when signing up directly with a company to participate in its dividend reinvestment plan is the required deposit. Home Depot for example has a $500 minimum for new shareholders, and a required minimum of $50 deposited to the account every month for 10 months. The minimums and the length of time for the reoccurring payment varies from company to company. Finally, although an investor doesn’t get a dividend check or deposit, the investor still owes taxes on the reinvested dividend. While there options to get around some of the other drawbacks of dividend reinvestment plans, there’s no way to get around the tax aspect of it. Even with the drawbacks listed we still believe a dividend reinvestment plans is a great tool for someone looking for an easy way to start investing. 4! 0
The Do It Yourself Method You don’t need to sign up directly with a company to reinvest dividend. Any investor with access to a brokerage account can do it. Investors that use investing apps like Robinhood, Stash, or Motif can get commission free trades and/or purchase fractional shares. For the investor that chooses to do it on their own, they will need to keep track of when dividends are paid out and then reinvest those dividends themselves. The benefit of an investor doing their own DRIP is they can choose to apply a DRIP to any stock they want that pays a dividend of course. It could be a large company like Apple or a REIT that pays a monthly dividend, it’s totally up to the investor. 4! 1
Another benefit an investor has reinvesting their own dividend is they can set a price and or range when they will reinvest the dividend. For example, an investor may want to reinvest the dividend in a particular stock between the prices of $8 and $15 per share, and any dividend collected over $15 per share will be put towards another investment. Dividend reinvestment plans are a phenomenal tool to help investors new and experienced, young or old build wealth from the stock market. The benefits that DRIPs offer such as the ability to purchase fractional shares, the ability to make investments at a discount to the market, the capability to make commission free investments, and the power of compounding are why we recommend dividend reinvestment programs. The drawbacks vary by way of how an investor plans to do their dividend reinvestment. But those choosing to go directly through a company will have to deal with required minimum monthly deposits and a minimum investment to start. There is also issue of being stuck in repurchasing that particular company. Then there are the taxes that apply to all dividend, whether reinvested or not, whether done directly through a company or through a brokerage account. !42
To find stocks that provide dividend reinvestment plans Compushares website https://www-us.computershare.com/ Investor/#DirectStock/Index is a good place to start. For those that plan to handle their own dividend reinvestment, this newsletter is a good place to start. Of the 21 recommendations made prior to this issue, only 5 did not pay a dividend. Whether an investor participates through a brokerage firm, goes directly through a company, or does it on their own we strongly advise that they get a dividend reinvestment plan going as soon as possible. 4! 3
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The Income Strategy In our last issue we discussed the growth investment strategy where investors put capital appreciation over safety and income. The growth strategy is an aggressive investment strategy that requires an above average tolerance to risk. In this issue we discuss the income investment strategy. A strategy a little more conservative than the growth investment strategy. Investors who employ the income investment strategy are as the name suggest, looking for income from their investments. The income comes by way of stock dividends, bond interest, capital gains distributions from mutual funds, and even rent from investment properties. Because we mainly focus on securities, we won’t discuss much real estate in this article, but we will discuss Real Estate Investment Trusts (REITs). Looking for Dividend and Interest to meet Obligations All types of people invest in the market for income, but usually it’s associated with retirees or people setting up an income strategy for retirement. When looking for income investments, investors look for companies with a long track record of dividend payments and dividend increases. A track record of dividend payments shows the company has the ability to consistently produce free cash flow to pay dividends. A record of steady dividend increases isn’t always required but it is a nice bonus for an investor.
Not all companies pay a dividend, many growth companies like Netflix, Amazon, and Google reinvest their capital back into the company to fuel growth instead of paying dividends. Who Employs an Income Investment Strategy The income investment strategy can work for just about any investor. Retirees or investors investing for retirement, people who received a windfall of cash, and people looking to build passive income are just a few. If you are retirement planning and you aren’t wealthy and did not hit the lottery, having enough money to cover living expenses when older is a concern. By investing for income, retirees or future retirees can establish a portfolios that pays out quarterly and sometime monthly to cover living expenses. !46
For people who receive a windfall of cash, an income investment strategy can be used to establish another income. A person making $50,000 per year, who receives an inheritance of $500,000, may choose to invest the $500K in a portfolio yielding 3.5%. That’s additional $17,500 per year, on top of the $50,000 per year salary. An additional $17,500 to spend, save, or reinvest. Both of the cases above provide examples of passive income, but you don’t have to be close to retirement or win a lump sum of money to start an income based investment portfolio to generate passive income. Benefits of Income Investing There are many benefits to utilizing an income investment strategy, but to keep it simple the best benefit is the income. Having income that you can look forward to, that didn’t require any additional work from the investor is the most important benefit. What to Look For in an Income Investment? Types of Income Investments In our last issue we discussed that investors who are investing for growth, prioritize companies that exhibit above average revenue growth and earnings per share growth. For an income investor, the priority is stable companies that generate free cash flow to pay dividends and or service debt. For stock based investors, dividend paying blue-chip stocks are usually the preference. Stocks like AT&T, Exxon Mobil, Apple, and Johnson and Johnson to name a few are viewed as relatively safe dividend paying blue-chip companies.
The companies have a solid reputation, a long history of dividend payments, and generate enough free cash flow to payout dividends, and sometimes increase dividend payments. Some investors use bonds and other fixed income security investments to gain income. Bonds are debt issued by corporations and governments that pay a fixed interest rate to the bond holder every six months. At a date in the future the bond matures, and investor gets back their principal investment. Treasury Bills are considered safe short term investments issued by the U.S. Treasury. T-Bills are auctioned to the public at a discount to face value. An investor receives the face value of the treasury bill upon maturity. For example a Treasury Bill with a one year maturity may have a face value of $1,000, but sold to an investor for $900. The Treasury Bill would then have a 10% interest rate. Real estate investment trust or REITs, work similar to a dividend paying stock. Real estate investment trust are companies that own or finance income producing properties. Under the guidelines that regulate REITs, they must payout 90% of their taxable income to investors. REITs can differ in the types of property they own and invest in. From private rentals, commercial spaces, hotels, prisons, and even cell phone towers, there is a REIT for almost everyone. REITs offer investors a way to invest in real estate without the huge cash outlay. Money Market Funds or Money Market Mutual Funds are a little riskier than a cash position, but are considered to be generally safe investments. 4! 8
Money Market Funds can invest in short-term government issued debt, certificates of deposits (CDs), and commercial paper among a few other investment vehicles. Money Market Funds can provide income for income seeking investors, but there is a small chance of any capital appreciation with Money Market Funds. There’s also MLPs or Master Limited Partnerships. These publicly traded limited partnerships trade like stocks and are required to distribute all available cash to investors. MLPs can be very complicated investment instruments, but they can provide returns for investors seeking income. It should also be mentioned that ETFs provide a great alternative to picking individual stocks, bonds, or REITs. There are ETFs that focus on blue-chip stock holdings, high-yield corporate bonds, REITs and a variety of other income investment instruments. 4! 9
There is no shortage of ways to get income out of the markets. An investor can go all in on one method or spread it out over a number of different income investments. Things to be Aware of There are a few things to be aware of when building an income bearing portfolio. For stocks, when looking up a stock quote an investor will likely get the dividend yield with the stock quote. Investors should be weary of high and/or above average dividend yields. Dividend yields are calculated by dividing the stock price by the amount of the dividend. A stock trading at $30 per share that pays $1 in dividend ($0.25 per quarter, per share of stock owned) has a dividend yield of 3.33%, $1/ $30 = 3.33%. When stock prices decrease, dividend yields go up $1/$25 = 4.0%. Income investors should try to not be seduced by stocks that carry high dividend rates and falling share prices. Share prices decline for many reasons, most of those reasons have to do with something the company isn’t doing correctly. Bond buyers should be aware of bonds offered by companies with low credit ratings. Usually the lower the companies rating, the higher the yield, this is the risk-to-reward trade off with bonds. Bonds can be subject to interest rate risk, credit risk, prepayment risk, and liquidity risk. REIT investors should be aware of anything affecting the real estate market. For example during the 2008, 2009 housing market crisis, some REITs lost as much as 60% of their value. 5! 0
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