Upon a quick search of my archives, it turns out my estimate of mailbags in Financial Uproar’s history may be slightly overstated. By a lot. 

BUT, this mailbag is a little different than last time. First off, let’s call it a mailsack. And since it’s a financial blog, the sack has a dollar sign on it. I would very much like a sack with a dollar symbol on it. I would carry my unmentionables in it.

And secondly, I actually have real questions from real people. This is a big improvement from last time, where I just used questions that I pulled out of my ass. Okay, a couple of ass related questions might make it on this mailsack. It’s like a guessing game, to figure out which are which.

ONTO YOUR SACK QUESTIONS.

I saw an add for vector vest on BNN..could you write a post on it? What it does and if it works etc. Thanks!

Kevin

Thanking me in advance? Yeah, that’s a risk.

According to the dude who created it, Vector Vest “is the only stock analysis and portfolio management system that analyzes, ranks, and graphs over 23,000 stocks for value, safety, and timing. VectorVest gives a buy, sell, or hold recommendation on every stock, every day.” That’s some lofty praise.

Starting in 1978, Dr. Bart DiLiddo, sought a solution to figure out exactly why stocks went up. And, apparently he found it. Instead of using his process to make himself untold millions, he’s being nice enough to sell it to investors for a $60-$130 a month. And if that doesn’t make your B.S. detector go off, I’ve got some Saskatchewan oceanfront property to sell you.

Naturally, the website is a little short of details on how the system works, but I’ll give it a shot. Basically, it’s an elaborate stock screener. It looks at the usual variables, and figures out if a stock is cheap in comparison to the market. Then it tries to figure out whether the stock has a good chance of going up in value — because as we all know, that’s soooooooooo easy — and assigns it a score based on that too. Those two values are combined in a score from 0-2. A stock that has good value and good safety would score near a 2, while a riskier stock that’s overvalued would score near a 0.

On the surface, it seems interesting. But is it worth a minimum of $700 a year? I doubt it. There are way too many variables for computers to analyze. A computer can’t tell me if an undervalued stock is interested in doing things to get its share price back up, or if management is more interested in cashing a pay cheque. Investors should avoid products like this, and just stick to doing the hard work themselves. Stock screeners are a valuable starting point, but that’s it.

Do you know anything about a “product” called “Dividend 15 split corp” and why it would or would not be a good investment? They advertise it in the Globe and mail. They claim they have had 150 divided payments
in a row with a 10.5% yield. Seems like a cannibalistic type offering because of the high yield.

Paul

That’s down to a 10.3% yield as I write this, which makes things TOTALLY DIFFERENT.

So what exactly does the company do? It invests in 15 solid blue chip Canadian companies that pay dividends. A small sampling includes the big 5 Canadian banks, BCE, Telus, Manulife, Sun Life, and so on. Most of those underlying stocks yield somewhere in the 3-4% range. How can Dividend 15 Split Corp pay out such a rich dividend if the underlying stocks don’t yield even close to 10%?

The fund mainly executes the strategy by writing covered calls against the companies it already owns. Since the fund owns the underlying stock and has no intention to sell it, this strategy can make money in a sideways market. These option premiums, plus the underlying stock dividends, let it earn enough to cover the dividend.

It’s been around since 2004, and hasn’t missed a dividend since inception. It’s sister product, also called Dividend 15 Split Corp, however, has (ticker symbols are DFN and DF, respectively). DF has missed a few dividends over the years, and consequently trades at a 13% dividend.

Both funds are scheduled to fold in 2019, unless investors vote to keep them around an additional five years — which they just did. Current asset values for both funds are almost twice as much as the underlying share price, indicating investors see some pretty major risk in the ol’ covered call strategy. Oh, and both funds have preferred shares that are paying more than 5%, and are then using that money to leverage into more stocks management can then write options on.

Bottom line, there’s about four levels of leverage on these names. They’ll do okay in a rising or sideways market, but since all the earnings are being paid out in dividends, they’re risky. Still, you can’t argue with the track record for DFN.

Hey Nelson

Why do you suck so much?

Nelson’s Dad

Genes

Can you give me a very brief overview in what you look for in a potential stock?

Jim

Basically, I look for assets trading at a sharp discount to what they’re really worth, with fixable problems.

It’s why my favorite ratio is price to book value. If I can find a company that has history, very little debt, preferably some cash, and it’s trading at less than 75 cents on the dollar? I’m all over that like me on a double cheeseburger. If it’s beaten up and the price is down 50-90% from previous high levels, I’ll usually start taking a look.

I like smaller companies, but only because they tend to fly under the radar. If MRRM was General Mills, do you think I’d ever get the chance to buy at about half book value? But I’m not exclusively a small cap investor. Many previous mid caps will end up being small caps if they get beaten up enough. Investors gotta buy whatever is cheap. Small caps will just be cheap more often.

I find most investors don’t understand being a contrarian. A lot of them get the small cap part, but then they fall in love with the story, or the demographic trends, or whatever. A story is important, because it’s the plan to get the company to the next level. But value is even more important. It’s fine to be bullish on a company’s future, but buying it at 75 cents on the dollar ensures safety. For the stocks I’m looking at, safety is pretty important.

That’s about it. If you have another question for a future mailbag, just scroll on up and click on the contact me button, and I’ll probably get around to answering it. Or I might die trying to get across the border to North Korea.

Tell everyone, yo!