Is this your master key for full financial freedom? - The 5 Minute WrapUp by Equitymaster
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Is this your master key for full financial freedom?

Mar 24, 2012

In this issue:
» Is the concept of petro-dollars under threat?
» Urban poor has a right to his home
» Government dilly dallies on fuel price deregulation
» World stock markets end week on a poor note
» ..and more!


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00:00
 
If you want to start planning for a retirement, there are options galore we believe. Every financial firm worth its name will line up a whole range of products to cater to this particular need of yours. And more often than not, stocks find themselves at the bottom of this pecking order. Conventional wisdom has it that stocks are risky by nature. Therefore, they cannot be relied upon to offer a regular stream of income once a person quits work.

The conventional wisdom has it wrong we believe. Although stocks carry more risk, not all of them are risky. Besides, even regular stream of income can be assured if the stocks under consideration are bought for their dividend income. Thus, a portfolio of stocks that is not only fundamentally strong but also throws off a lot of dividends can be one of the most effective retirement options out there.

But deciding to build a portfolio of dividend producing stocks in order to achieve full financial freedom is only half the job done we believe. Nothing can be more damaging than ending up with dud stocks and this is where the investor really has to be on its toes. Thankfully though, there are a few pointers that can prove to be of immense help.

A blog by the name of dividend growth investor has argued that only those companies should be considered that have a long history of paying and raising dividends. Not to forget that such stocks have to be bought at attractive valuations. The blog believes that paying a P/E of more than 20 for such stocks can prove to be risky in the long run. Lastly, the prospective portfolio companies should have a sustainable and a well defined moat. This point cannot be emphasised enough. A company with an eroding moat will soon be forced to either fully stop its dividend payouts or lower dividends considerably. Hence, this aspect has to be thoroughly looked into.

We are of the view that a well diversified portfolio of dividend stocks with the above characteristics in mind can prove to be your best bet for financial freedom and it can help you achieve this goal much earlier than imagined.

Do you think dividend producing stocks are the best bet for an early retirement? Share comments with us or you can also comment on Facebook page / Google+ page.

01:25
 Chart of the day
 
Today's chart of the day highlights the world's largest arms exporters for the five year combined i.e 2007-11. As per Economist, the exports in value terms were 24% higher during the period as opposed to the period between 2002-06. Furthermore, India remains the biggest importer of arms, buying 10% of the world's total. Another important development is the change in pecking order for China where the dragon nation moved from being the second largest importer to now the fourth largest. China also emerged as the sixth largest exporter, only narrowly trailing Great Britain.

Source: The Economist

01:56
 
Saudi Arabia, being the largest oil exporter in the Middle East is bound to be awash with funds given the steep rise in crude prices. But wait! Here is another nation, which is leaving no stone unturned to claim its super power status. In fact it is ensuring in more ways than one that the US loses its most powerful nation tag. You may have guessed it right that it is none other than China. The latter is not just piling up its forex reserves. It is also pressuring the IMF to award Yuan the reserve currency status. But there is more to China's super power ambitions. Something that even the US seems unaware of!

As per a blog on The Economic Collapse, the Mandarin economy has teamed up with Saudi Arabia to undertake the building of a mammoth oil refinery. This mammoth new refinery is scheduled to be fully operational by 2014. The development is not completely out of the blue. Over the past several years, China has aggressively expanded trade with Saudi Arabia. In fact, China now imports more oil from Saudi Arabia than the United States does.

So why is this important? Well, back in 1973 the United States and Saudi Arabia agreed that all oil sold by Saudi Arabia would be denominated in US dollars. This 'petrodollar system' was later adopted by rest of the world. However, the biggest beneficiary was the US as it immensely strengthened the US dollar. If China were to replace US as the key determinant of oil prices, will the 'petro dollar' last long? Well, we certainly see petro-Yuan on its way.

02:54
 
Land is a scarce resource. It is also one of the most prized one. And in the urban parts of the country, it is literally a pot of gold. As a result, in terms of ownership, most of it is held by the rich. The reasons for this are many. The state governments have a free hand to revise the percentage of land allocated to the lower income groups (LIG). As such they randomly change the reserved percentage even below the norms. Most importantly these governments prefer to sell the land parcels to real estate developers or industries. Naturally they get a better rate when they do this rather than developing houses for the LIG. Whatever land does get allotted to the LIGs ends up being so small that it is difficult to accommodate anyone meaningfully.

The point is that the urban poor also deserve their dues. They deserve land and livable housing conditions. But till such time as the government decides to reform its policies this is not going to happen. There is a need for the government to become strict on the allocation of land to lower income groups. Further, the government also needs to encourage private players to participate in providing housing to LIGs. Unless the government takes a stronger hand in the process, the urban poor would continue to see their housing conditions worsen.

03:43
 
The Indian government is under pressure from oil marketing companies (OMCs) to raise the prices of petrol. The government had decontrolled petrol prices in June 2010. However, this was done only on paper. OMCs like Oil India, Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) still need Government's approval before raising petrol prices. Due to the state assembly elections, the OMCs were not able to raise petrol prices since December 2011, during which oil prices have increased by 11%. As a result OMCs are losing around Rs.4.86 bn a day on account of selling petroleum products at government-mandated prices. This trend cannot continue for long. The government is however still unsure of raising petrol prices and ruled out decontrolling diesel prices. OMCs would have to raise petrol price by about Rs 7.72 a litre to compensate for their losses. The government will have to bite the bullet on petrol prices sooner or later, otherwise the OMCs will bleed to death.

04:17
 
The world stock markets ended the week on a sour note. The US stock markets were down 1.1% during the week due to disappointing housing data. New home sales fell for the second straight month in February by 1.6% to 313,000. Fall in volumes suggested that the recovery in the US housing market may take longer than expected. Further, the factory data from Europe and China was also disappointing leading to a broader fall in global markets.

The Indian stock markets were down 0.6% during the week. The post-budget trading session was filled with high volatility as markets see-sawed during the week. This was the fifth consecutive weekly loss for the markets as uncertainties still linger as to when the central bank would cut interest rates. Higher borrowing plans for the next fiscal have also worried markets.

Amongst the other world markets, Singapore was down by 0.7% while Japan was down 1.2% during the week. France was the biggest loser registering losses of 3.3% during the week.

Data Source: Yahoo Finance


04:55
 Weekend investment mantra
"We just try to do smart things every day, and if there's nothing smart, then we sit on cash" - Warren Buffett

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    4 Responses to "Is this your master key for full financial freedom?"

    Sarit

    Mar 31, 2012

    The key is the dividend yield and the dividend payout ratio considered simultaneously. Dividend yield is the annual dividend paid out in Rs per share divided by the stock price. The payout ratio is the amount of dividend the company pays out of its profits. A high yield is good but if the payout ratio is also very high (say more than 40%) then its a sign that the company has run out of investment/growth opportunities and is just paying out its profits to investors. Identify companies with HIGH dividend yield and a LOW payout ratio (lower than 30%) and you have a great stock on your hands. Totally ignore the face value and the dividend % as they meaningless to investors.

    Like 

    Job Konthuruthy

    Mar 25, 2012

    Hi

    As divident is calculated on face value, I do not think
    this income will go to meet some one's post retirement financial needs. Unless a co pays divident % in the range of 500 up.

    Besidres there is always the risk factor in holding shares.

    Wait to hear from you furuther

    Like 

    r v iyengar

    Mar 25, 2012

    Why not get into Dividend Yield MFs?
    e.g. Tata dividend yield and UTI dividend yield have given good returns upto the year ending 31 mar 2011.

    Like 

    Carlos de Souza

    Mar 24, 2012

    Nopes, the yuan will not replace the US$ as the reserve currency for a long, long time. The yuan has to be floated freely first before it can even think of replacing the US$.

    Like 
      
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