Saturday, November 20, 2010

Reviewing My Stocks: AT&T and the Big Rule

I have to admit something. I don't really trust mutual funds. Yeah, I know that there are many reputable funds out there that produce good, solid growth quarter after quarter. I have an "Aggressive Growth" mutual fund in my 401(k) account. I don't discount their value as a means to invest without having to get too involved in picking your own stocks. For many investors, mutual funds are the auto equivalent of driving an automatic versus a manual.

Which is perfectly fine. However, for my own IRA account, I prefer picking my own stocks. It could be just that I like the control of my own destiny, or just plain stubbornness. Whatever quirk about my personality it is, it has made me view mutual funds as just investment pandora's boxes--no telling what might fly out of there at any moment.

Where does AT&T fit into all this? Well, if you're looking for a good, safe stock to park your money in a time when even giants like GM, Lehman Brothers, WaMu, and Morgan Stanley have all but evaporated or become shells of their former selves, the telecommunications giant is practically a no-brainer.

Some highlights about Ma Bell:
  • A market cap of $167.37 billion.
  • An average stock price of about $30 over the last five years, with a high peak of $42 and a low of $22. Considering all the market chaos just since 2008, that's damn stable.
  • Near universal influence. It's like the Wal-Mart of telecommunications.
  • A dividend yield of 6.00%
That last one is most important to me. Its last quarterly dividend paid out $.42 a share. I own 16 shares, so that was an easy $6.72. For this stock I opted to reinvest the dividends, so the last quarter I earned nearly a quarter of a stock. May not be much, but compounded quarterly year after year and it won't be long before some real gains are made.

However, what makes the dividends so attractive is that they pay enough to offset trading charges in brokerage account. I use Share Builder for both my IRA and individual stock account. For both accounts I have them set to make automatic monthly stock purchases at $4 per trade. This seems low, but after awhile it can start to add up. But if you have a stock like AT&T that pays out a good dividend, your trading fees are severely minimized. This leads me to my Big Rule regarding buying dividend stocks, courtesy of the Attention Arrow:

Always buy enough stock in a company so that your trading fee is completely paid for within one year.

For example, in order for the dividends in AT&T to pay for your trading fees, you would need to purchase about 10 shares in the company. Ten shares will net you $4.30 in your first dividend payout. If it costs $4 to make the trade, then in one quarter your investment has paid for itself.

But let's say you only bought 3 shares. That would be $1.29 in earnings the next quarter, and $5.16 for the year. It'll take longer to satisfy the Big Rule obviously, but you'll get there just the same in one year. Of course, that's given AT&T continues to pay out a dividend, and that it remains at the current level. The next quarterly dividend could always be higher or lower, or even nonexistent, as I discovered the hard way with my BP stock.

Once your dividends have paid for your transaction fee, from then on any money you make from them is yours minus any applicable taxes.

Why the focus on transaction fees? For this reason: As an amateur, poor investor, you are far more prone to seeing your profits eaten up by brokerage fees than the big guys on Wall Street. You must always keep in mind that the ballers in Manhattan are playing with a stacked deck in their favor. They own fancy software and million dollar computers that trade their shares millions of times a day. They have millions of dollars to spend. Most importantly, they have the time to wait around for an investment to accrue big profits. That's what big money and access give you in the financial world.

You and me, however, are very small fish that can get eaten up by trading fees. Big brokerage firms like ShareBuilder, Ameritrade, and E-Trade, love charging small fry big fees. That's how they make their money in addition to making loans if they are banks as well as brokerage houses.

The way around big trading fees is making investments in things that will pay you back early enough so that you start making money as soon as possible. You can't predict the ups and downs of the stock market, but you can at least put your money to good use in stable firms. This is why AT&T was the very first stock I purchased in 2009 when I was setting up my IRA.

So, to review, here are some things to know:
  • Always keep your transaction fees in mind and remember the Big Rule
  • Buying stocks for the dividend is a good way to make easy, passive income. Just remember that it's still risky no matter the size or value of the company.
  • A good, "safety" stock (like AT&T) can buttress your portfolio in the event of a big downturn or if you're other investments don't pan out as planned. I know that even if my other stocks disappoint, at least I have AT&T's dividends to look forward to.
  • Getting quarterly dividends is fun, watching your stock rise little by little at the same time makes it even better.
I'll be back later to discuss two riskier stocks I own that pay big dividends.

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