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Dividend Alerts Issue April
April 08, 2011

April 8th, 2011

  • Investing is hard work!

  • Company News

  • What will happen if QE2 ends?

Dear Dividend Alerts Subscriber

You can spend hours digging through stock screeners, identifying likely share purchase candidates, checking Ebitda, free cash flow and a multitude of other ratios.

That’s not all. You also need to keep abreast with current affairs, company and competitor news, sector developments and reading the small print in annual reports.

Wouldn’t you rather sitting in the garden watching your (grand-)children play or watching your favourite football club win on the television?

But still, that’s not all. Once you've made your favourite share picks and added them to your portfolio, there are the regular checks for RNS announcements to follow, worrying over possible profit warnings and subsequent dividend cuts.

And what about all those disappointing “long-term” holdings which you should have sold a long time ago, when they had become overvalued, but you didn’t as you hadn’t put a stop loss in place, and which now require continuing prayers for recovery.

Well, I think investing should not only be fun but also profitable. However, looking back at any long-term chart of the FTSE 100, the market is almost back where it was in 2000 and 2007. That's 11 or 4 years with no price gains. Was it really that much fun? I doubt it.

Be less demanding

Perhaps there are easier and less demanding ways to make an adequate return?

Yes - and the first step to cutting out all the work and worry is to accept that you cannot beat the market year after year. But can you?

Most investors focus on trying to beat that average, rather than assessing solid companies’ fundamentals. If the FTSE 100 index rose 14 per cent last year, then they strive for 20 per cent. If it rose 20 per cent, they aim for 25 per cent. If it fell 5 per cent, they seek a 5 per cent rise.

Purveyors of courses on trading techniques, charting and derivatives have made their fortunes on our drive to break the benchmark, and rack up market-beating gains year after year. More often . . . not!

But beating the market takes time . . . at lot of time, dedication, discipline, knowledge, patience - and luck. I know it, I have been there.

And, on average, it doesn't work. Indeed, for all market players, on average it just cannot. Averages are just that.

If the majority of fund managers, for whom buying and selling shares is a full-time job, cannot beat the market regularly, what makes you , or, for that matter “I” think we can? So drop the unreasonable demand for market-beating returns, every year.

The stock market has only made a real return, when dividends are reinvested, but only of just under five per cent a year over the last 100 years or so. Add back in average annual inflation of, say, 2.5 per cent, and you could expect a nominal annual return of about 7.5 per cent. That will pretty much double your money in 10 years.

If you want to sleep peacefully overnight, that's a good start for the long term, and, then I mean truly long-term dividend investors.

Also don't over trade

The financial services industry wants you to trade more often, because every time you click the 'buy' or “sell” button, they make a margin. But research has proven time and time again that over-trading is tremendously bad for your returns.

And, it’s bad for your wallet. Let's say you have a £50,000 portfolio, returning 10 per cent every year through better-than-average stock picking. That is 2.5 points better than the market's 7.5 per cent return, so instead of a market-average £3,750 a year of gains, the stock-picker reaps £5,000. But that's of course before costs.

Let's assume you trade once a week, with commission, stamp duty and bid-offer spread totalling a modest £30 a time. That eats up £1,500 of those gains, leaving you only £250 ahead of the market. And it makes no allowance for the value of your time.

Let's say you spend four hours a week managing your portfolio. At a relatively paltry £10 an hour, that is another £2,000 gone. Now your overall gains are £1,500 or three per cent, which is half the market's return. Instead . . .

Let Dividend Income do the hard work for you

Investment returns for long term investors are determined on their entree and exit prices, as well as on dividends and their re-investment.

However, investors can spend hours, if not days or weeks, agonising over the best share price at which to buy a share, without knowing whether a company’s share price is truly undervalued or not

And once they've come to the decision to buy shares - and even assuming they get it right - they then have to chew their fingernails again and again over the right time to take profits, without the certainty whether at that time the shares are overvalued. I know all this, as I have been there . . .

But not any longer!

Dividend Income

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Company news

Scottish & Southern Energy

SSE, the gas and electric utility published a trading statement with regards to the year ending 31 March, the full results being out on 20 May.

The statement confirmed that SSE expect to pay a full year dividend increase of at least RPI+2% over last year and a total of at least 74.5p. Based on this information, since the interim dividend was 22.4p we can expect a minimum final payment of 52.1p.

SSE also re-confirmed their long-term commitment to above inflation dividend growth, which is precisely what we want to hear, disclosing a dividend forecast of at least 74.5p for 2011.


A recent first quarter trading update from Tesco proved to be in line with expectations, notes Merrill Lynch.

Although underperforming rivals in Britain, the gap is slowly being closed, while European sales looked to have bottomed and Asia is showing signs of a pickup, highlights Merrill.

In conclusion, earnings estimates have been tweaked higher, the group is showing more momentum and the valuation still looks attractive for this international growth company. A target price of 395p has been formulated.

Spot on as per our Dividend Income Report from February, which you can download here.

What’s happening across the pond . . .

Despite generally positive news for the U.S. economy ...

  • the benchmark ten-year treasury plunged and interest rates ticked higher — more bad news for U.S. businesses . . .

  • gold — the ultimate crisis hedge — soared to a new all-time high of over $1,461 per ounce and silver jumped to another 31-year high of nearly $40 . . .

  • and on top of everything else, it looks as if the U.S. government is on the verge of a shutdown . . .
I am increasingly getting worried what . . .

will happen if QE2 ends?

There are clear hints that the end of quantitative easing (“QE”) is nearing its end, at the latest by end June. Smart investors may take note and consider hedging for the downside.

You see, if QE really is done for, share prices could plunge again just as they did at the close of QE1. Back then, when QE1 ended, from April 2010 highs many indices plunged to August 2010 lows. . . Of course, Greece was also on its way to defaulting during the Summer.

Today, with the help of QE2 many indices have surpassed 2010 highs, with Portugal just having effectively defaulted, and, possibly Spain, Belgium, Italy and who know who else in the frame. Buyer beware!

Quick recap on quantitative easing As per Wikipedia’s explanation:

”Quantitative easing is an unconventional monetary policy used by some central banks to stimulate their economy when conventional monetary policy has become ineffective”

“The central bank creates money by buying government bonds and other financial assets in order to increase money supply and the excessive reserves of the banking system. This action also raises the prices of the financial assets bought, which lowers their yield (as long as the yield is above zero)”

Quantitative easing is often nicknamed a recipe for "printing money" by the media. The story goes as follows: the FED “prints” money and the proceeds go into stocks, shares and commodities inflating their respective prices.

However, central banks state that the use of the newly created money is different in QE. With QE, the newly created money is used for buying government bonds or other financial assets, whereas the term "printing money" usually implies that the newly minted money is used to directly finance government deficits or pay off government debt.

Still QE may cause higher inflation than desired if too much money is created. It can fail if banks are still reluctant to lend money to small business and households in order to spur demand. That sound familiar!

In fact, QE can effectively ease the process of deleveraging as it lowers yields. But in the context of a global economy, lower interest rates may contribute to asset bubbles in other economies and traditional inflation hedges such commodities and certain “defensive” shares such as utilities.

So, will QE stop anytime soon?

Who knows? But the sign are there . . .

As we are nearing the end of June, keep in mind that FED chairman Bernanke needs to make a call on where the US economy is going, and what various inflation indicators look like.

If unemployment is still too high, then QE may continue. If the US is moving towards less unemployment, then the US won’t need to stimulate more. Check out the US unemployment figures as they are published.

Also keep in mind what other Fed officials have been saying recently:

“What markets would like are clear rules,” as per the chief U.S. economist at Deutsche Bank Securities Inc. in New York. “If they said they are going to end QE in June, they should end in June.”

That’s a view shared by the Philadelphia Fed’s Plosser, who is also a voting member of the FOMC this year, who confirmed:

“Barring a change in policy or a change in economic conditions, we have already communicated what is going to happen,” Plosser told reporters February 23rd.

Also Federal Reserve Bank of Dallas president Richard Fisher believes the USA doen't need any additional monetary stimulus.

What the Fed will do is anyone's best guess

As with any decision process, the Fed must also take into consideration the uncertainties — including the effects of Japan's crisis, the Middle East tension, the European sovereign debt...

There's also a timing issue to consider.

If the Fed ends the QE program anytime soon, the U.S. economy may not be strong enough to hold up on its own. There's a real concern that demand for Treasury bonds would fall, since the Fed would no longer buy them. That could lead to spikes in bond yields. Plus, the end of QE could destabilise confidence even more.

So while you may be considering shorting the major indices prior to the end of june (or, even earlier), or, even selling some of your shares, you may also want to consider hedging with inflation plays — like metals, energy, food, and other commodities as they'll all rocket if Bernanke hints at launching QE3.

It's really anyone's guess as to what will happen.

Thank you.

Until next time.

Kind regards

Steven Dotsch
Early Retirement

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