We have been discussing dividends with Paul Petillo, a regular contributor on MomsMakingaMillion Radio for the last several weeks. As we continue or series, we have five questions:
Could you recap briefly for our listeners what we have already discussed?
Our discussion about dividends has offered a brief overview of what they are: profits paid back to the shareholder of record, and how you can buy them directly: through direct stock purchase of through dividend reinvestment plans or DRIPs. By far, the easiest way to take advantage of what these companies offer shareholders is to spread the risk and the time you might take looking for them by using mutual funds.
When we look at mutual funds that pay dividends, what are we looking for exactly?
This group of mutual funds is often referred to as 'equity income'. They are stocks that provide income and fund managers in this space are looking for good stocks selling for less than what they perceive which means they are hunting for value and stocks that pay a dividend. Keep in mind, this was much easier to do just a few short years ago.
Why is that?
There was a tax advantage to these types of funds and in the pre-bailout economy, many companies were increasing their dividends because of it. Since then, many companies, particularly those with a financial component (like GE and GM) or businesses focused on the financial sector (such as Citigroup) have either suspended or reduced their dividend in response to those changes in fortune. Currently, there are about 296 stocks that pay a dividend of some sort. In fact, holding an S&P 500 index fund will net you a dividend yield of about 2.5%. That 2.5% is what equity income funds use as the number to beat.
Are all dividend paying stocks the same?
Not at all. There is a term for it: dividend payout ratio. In the thirties, this ratio was about 90% - that's roughly ninety cents for every dollar made was given to shareholders. Now it is about 30% or less. This is a good rule of thumb for investors. If your stock is paying more than 30% of their profits back to shareholders, this might be a sign of trouble (if you consider that this percentage has gone up while the share price, a vote of investor confidence has gone down). If it is paying less the 30%, the company might be overvalued by the markets or simply in too much trouble to pay enough of the profits to shareholders.
Any last thoughts?
Keep in mind that dividends are backward looking, reflecting profits from the past year. If companies cut their dividends because profits were down, raising or reinstating them might not happen until next year. A lot of companies are going to buy back shares of their own businesses in large part because they are still cheap and because doing so, increases the price of the stock by making less shares available.
Look for companies that have been able to increase dividends over a long period of time (like McDonalds (dividend payout ratio: 52%), Pepsi (dividend payout ratio: 54%), Kimberly-Clark (dividend payout ratio: 55%) or a mutual fund that has beaten the S&P500 average payout of 2.5% (Columbia Dividend Income 2.47%, Nicholas Equity Income, yield 3.12%)
Paul Petillo is the Managing Editor of Target2025.com
Friday, December 11, 2009
Thursday, December 10, 2009
Retirement Planning: Where the Best 401k Plans Work
In a previous post, we introduced a rating system for your 401(k) offered by Brightscope. Now, they are offering a look at the best 401(k) plans.
Does your plan work as hard as you do?
The Top 30 401(k) plans as rated by Brightscope.
Paul Petillo is the Managing Editor of Target2025.com
Does your plan work as hard as you do?
The Top 30 401(k) plans as rated by Brightscope.
Paul Petillo is the Managing Editor of Target2025.com
Saturday, December 5, 2009
One the Edge of Losing Ground: Bankruptcy
The latest employment numbers are showing a slight increase in jobs. That's small comfort for the enormous group of folks who are still unemployed.
With over ten percent of us out of work, another eight percent of us no longer bothering and an estimated twenty percent of us contemplating the possibility that we might lose everything we have worked so hard for, the subject of who owns what as we consider our options in an economy that doesn't seem to be recovering fast enough to suit most of, the question of your 401(k) as part of a bankruptcy is worth asking.
The choice of bankruptcy is always the last option. When you consider this option, you will find your assets under the control of the bankruptcy estate while your case is pending. You still own these assets. Your home is protected providing you can make the payments and if your home is worth more than your mortgage, the bankruptcy estate will exclude up to $37,500 in equity from consideration. The same applies to any equity you might have in your car.
The concept for exempting these two items is relatively straightforward. How could you possibly hope to recover from bankruptcy if you were stripped of these items? Understanding the need for shelter and transportation is important. But does the most valuable asset protecting your future fall under the same consideration?
Although you will need a bankruptcy attorney to guide you through the maze of rules, the focus of such an action is to come to some sort of agreement with your creditors on how you will repay what you owe. In some instances, it might be the forgiveness of your interest obligation in favor of satisfying the debt. Repayments plans and schedules are worked out and as long as you follow those obligations, you can remain under the roof that you own and be able to get to and from work.
The question of your 401(k) however is not so clear-cut. And the answer depends on ERISA qualifications. Section 541(c)(2) of the Bankruptcy Code. Section 541(c)(2) provides: “A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable law is enforceable in a case under the Bankruptcy Code.”
This means that your 401(k) is safe from the actions of bankruptcy court and cannot be considered when determining the value of the estate. If you plan falls under ERISA protection, and generally this qualification applies to most larger company plans, your assets are safe. The exception however, effects the smaller business owner.
Among the exceptions to this rule is a retirement plans that has only one participant, such as single employee corporate plans, and some other plans originating in self employment. These plans may be property of the estate. They may be vulnerable to creditors. When you consider the number of small businesses affected by the economic downturn, this is an important exemption.
For those of you who do have a plan that is exempt, the ownership of this property has found its way to the US Appeals Court. The question posed by the case dealt with the loan that was borrowed from a 401(k). Although the person was obligated to pay back the loan, the loan payment was questioned.
Chapter 7 bankruptcy subjects the estate in question to a means test. This sorts out what is qualified and what is not in terms of "necessary expenses". The loan repayment to the 401(k) was challenged. The court, ruling in the case of Egjebjerg v. Anderson found that the repayment to the 401(k) was the same as a contribution to that person's plan. In other words, if you loan money to yourself, the repayment of that loan is not considered a debt under the law.
The plan has not right to sue for repayment of the 401(k) loan but can, according to the court, offset the loan against future benefits. But the court that while Chapter 7 proceedings did not cover the individual, Chapter 13 would consider the repayment as part of the debt owed. This subtle difference is important and makes the consideration of good representation a must for anyone considering such a drastic move.
It is important to consider all of your options before subjecting your finances to estate scrutiny. And secondly, borrowing from your 401(k) is still a bad idea. In a Chapter 7 proceeding, the losses to that important linger far into the future. And while Chapter 13, often referred to as the wage-earners plan, does allow for the repayment of that loan under the court's approved structure, the loss of earnings in the retirement plan will have lingering effects long after you emerge, finances revitalized.
Paul Petillo is the Managing Editor of Target2025.com
With over ten percent of us out of work, another eight percent of us no longer bothering and an estimated twenty percent of us contemplating the possibility that we might lose everything we have worked so hard for, the subject of who owns what as we consider our options in an economy that doesn't seem to be recovering fast enough to suit most of, the question of your 401(k) as part of a bankruptcy is worth asking.
The choice of bankruptcy is always the last option. When you consider this option, you will find your assets under the control of the bankruptcy estate while your case is pending. You still own these assets. Your home is protected providing you can make the payments and if your home is worth more than your mortgage, the bankruptcy estate will exclude up to $37,500 in equity from consideration. The same applies to any equity you might have in your car.
The concept for exempting these two items is relatively straightforward. How could you possibly hope to recover from bankruptcy if you were stripped of these items? Understanding the need for shelter and transportation is important. But does the most valuable asset protecting your future fall under the same consideration?
Although you will need a bankruptcy attorney to guide you through the maze of rules, the focus of such an action is to come to some sort of agreement with your creditors on how you will repay what you owe. In some instances, it might be the forgiveness of your interest obligation in favor of satisfying the debt. Repayments plans and schedules are worked out and as long as you follow those obligations, you can remain under the roof that you own and be able to get to and from work.
The question of your 401(k) however is not so clear-cut. And the answer depends on ERISA qualifications. Section 541(c)(2) of the Bankruptcy Code. Section 541(c)(2) provides: “A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable law is enforceable in a case under the Bankruptcy Code.”
This means that your 401(k) is safe from the actions of bankruptcy court and cannot be considered when determining the value of the estate. If you plan falls under ERISA protection, and generally this qualification applies to most larger company plans, your assets are safe. The exception however, effects the smaller business owner.
Among the exceptions to this rule is a retirement plans that has only one participant, such as single employee corporate plans, and some other plans originating in self employment. These plans may be property of the estate. They may be vulnerable to creditors. When you consider the number of small businesses affected by the economic downturn, this is an important exemption.
For those of you who do have a plan that is exempt, the ownership of this property has found its way to the US Appeals Court. The question posed by the case dealt with the loan that was borrowed from a 401(k). Although the person was obligated to pay back the loan, the loan payment was questioned.
Chapter 7 bankruptcy subjects the estate in question to a means test. This sorts out what is qualified and what is not in terms of "necessary expenses". The loan repayment to the 401(k) was challenged. The court, ruling in the case of Egjebjerg v. Anderson found that the repayment to the 401(k) was the same as a contribution to that person's plan. In other words, if you loan money to yourself, the repayment of that loan is not considered a debt under the law.
The plan has not right to sue for repayment of the 401(k) loan but can, according to the court, offset the loan against future benefits. But the court that while Chapter 7 proceedings did not cover the individual, Chapter 13 would consider the repayment as part of the debt owed. This subtle difference is important and makes the consideration of good representation a must for anyone considering such a drastic move.
It is important to consider all of your options before subjecting your finances to estate scrutiny. And secondly, borrowing from your 401(k) is still a bad idea. In a Chapter 7 proceeding, the losses to that important linger far into the future. And while Chapter 13, often referred to as the wage-earners plan, does allow for the repayment of that loan under the court's approved structure, the loss of earnings in the retirement plan will have lingering effects long after you emerge, finances revitalized.
Paul Petillo is the Managing Editor of Target2025.com
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