Exxon Mobil is one of the stocks I like to buy-n-hold.  My reasons:

• An annual dividend increase for past 20+ years.  No decrease has occurred during this time.  This increases the ROI on the initial shares purchased.
• Frequent stock buy backs.  This makes less shares available, which in turn drives up the share price. Over the past five years, Exxon repurchased $135 billion worth of stock, reducing outstanding shares by 23%.
• Is a cash flow fiend.  The trailing 12 months generated over $32 Billion in cash flow.  Though decreases in oil prices will decrease future cash flow.
• A method to hedge inflation.  The many government initiatives in the long term will surely increase the cost to produce resources like oil.

The last item I should mention, was a great way to offset the increases we saw in gas prices at the pump.  The stock purchase basically negated (with additional profit) the increases we paid filling up our cars.  With increasing consumer prices hedging with stocks is a great way to help ease the pain.

As I mentioned before, FDIC secured investments are now generating poor returns and some of the lowest in history.  The highest 5 year CD rate nationally is 3.29% APY, while XOM’s dividend is 3.11%.  Ten-year treasuries are earning an even lower 2.98% return.  It’s a no brainier to buy this stock over a CD because of:

• The stock’s current and 8.3 forward P/E
• Cash reserves of over $9 Billion, ensuring the dividend can be paid.
• Their history of increasing the dividend overtime.
• The steady dividend, and very good chance of upside potential.

While in the short term the stock could go lower, my time horizon is 10+ years.  The stock also has gotten beaten up because of the announced XTO Energy (XTO) acquisition, which will give them increased exposure into natural gas.  This is also another win-win as natural gas prices are very depressed at the moment, and could help aid increase the stock valuation.  In my opinion Exxon Mobil is a much safer value play on oil, than say BP (BP).  There are many unknowns with BP which makes it much more riskier to invest in: the total cost of cleanup, the total cost of payouts, and what additional government intervention (ahem shakedown) will occur with BP.

This stock is owned in my taxable growth portfolio.  While I am worried about the possible increases in tax dividends, since Bush’s tax cuts will end January 1st 2011, long-term I still think it’s a great stock to own.

Full Disclosure: Long XOM

Related posts:

1. Weekend Reading for February 28, 2010
2. What is a Master Limited Partnership (MLP)?

This interesting guest post is by Mr. Credit Card. While I (Investor Junkie) may not completely agree with his position, it’s a more common notion to let investment professionals perform the stock picking for you via actively managed funds.

I used to work in the financial industry and I can tell you that I know how difficult investing is. However, many folks are passionate about investing and most spend lots of time doing research and analysis. But in my opinion, unless you are a professional and paid to actually manage money, you are better off spending your time with other pursuits. In this post, I am going to list down the reasons why it is so difficult to actually to succeed as an amateur investor.

Analyzing Stocks is extremely difficult – One of the greatest disservice that Peter Lynch has done with his book “One Up on Wall Street” is that he has convinced many of us that investing is easy. Just buy stocks of companies that make products that you know! But if you think about it, understanding a company is much more difficult that that. One has to understand accounting, how revenue is counted, various FASB rules about stock option accounting, pension liabilities and capital structure.

Analyzing stock is simply not about looking and comparing PE Ratios. You have to truly understand a company’s business model, the products they sell, their accounting. Take banks and credit cards for example. Even the professionals who buy bank stocks did not really understand what credit derivatives were! Or how they were accounted for! If you were analyzing JP Morgan Chase, would you understand what was going on in their trading books, their loans books, their off balance sheet items or even how their Chase credit cards were doing? Look at all the research reports on AIG prior to their demise! Even Warren Buffet did not anticipate how much American Express would suffer in the crisis.

Understanding other markets – But analyzing stocks isn’t simply enough. To really get a handle of how a particular stock or company is doing, one has to be aware of what other market participants are thinking, and what they are pricing into the market. Here are some examples of other markets that a stock investor has to look at.

Options Market – One often has to check what is the options of (vol) market expecting and thinking in terms of future volatility of the stock you are researching. That involves understanding options pricing and what it means.

Understanding private equity valuation – One of the keys in understanding the backstop price of the stock. To do that you really need to understand how do private equity investors value companies and how they do their analysis of what asset sales and leverage can have on potential value.

Understanding Capital Structure Arbitrage – Many savvy hedge funds employ a trading strategy called “capital structure arbitrage” in which they either go long the stock and short the debt or vice versa. They create models to find equilibrium values of both debt and equity and do arbitrage trades if they are trading out of whack. Understanding how these folks look at markets is also necessary to understanding what is really going on with the stock you are researching.

Understanding Debt Value – Very often, where a company’s debt is trading is a leading indicator of how the equity is going to trade. Professional investors, hedge funds and proprietary trading desks look at both debt and stock value. It is important to understand the trajectory of a company’s credit rating as well. But while the pros look at these relationships all the time, most investors simply are not aware of these things. The professionals also use credit default swap levels as a guide to how their debt is trading. Most of us do not even have access to these data.

Macro economics take a lot of work and study – Aside from the amount of information that you have to look at for an individual stock, one has to be aware of the macroeconomic environment as well. It is important to understand monetary policy, currencies etc. In fact, even very few professional investors understand macroeconomics, which was why they were so caught up by the oil spike in 2007 and 2008 and the demise of the banks in 2008. Many value investors fell into “value traps” and kept doubling down on the bank stocks that they own.

But really understanding economics is an extremely difficult thing if you have not studied the topic. Simply relying on consensus forecast isn’t going to cut it. After all, no economist forecasted the near collapse of the financial system in 2008. And it is not just forecasting GDP growth that you have to understand but also knowing and understanding global central banks and monetary policies.

Asset allocation is not a set and forget thing – After writing all of the above, many would say “hey, you are right, and that is why we invest in index funds or do some simple basic asset allocation and be hands off most of the time. And that is true, the majority of us should simply invest in index funds. That is the easy part. The hard part is deciding on what your asset allocation should be. How much of your asset allocation should be in stocks vs bonds, international stocks vs domestic stocks, domestic vs international bonds. How much commodities should be in your portfolio? How much cash should you carry? How much alternative assets you should have? How often should you rebalance your portfolio?

Folks like University endowment funds hire huge staffs just to perform this function. And even then, they have their bad years.

Ending Thoughts – Investing is a really tough job. But books like “Beating the Street” from Peter Lynch and tons of others give the impression that it is easy. It is definitely not easy managing money (whether your own or others). Many folks really spend too much time on their investments or portfolio. But the truth is that those time spent is mostly futile. Only folks who are professional investors should spend all their time on the financial markets. And when I say professional investors, I mean folks like money managers, hedge fund managers etc. You may spend as much time as a successful manager on the “markets”, but the hedge fund manager is likely to make many more multiples of what you and I can make! Even then, a successful fund depends on more money being invested in the fund from investors. That is how money managers make their money. They develop a good track record and investors give them more money to manage and they make more money from fees. But the ordinary folks can have a “good year” and nobody is going to give you anything to invest! Hence, what really makes you more wealthy is how much income you make and how much you save and not really the performance of your portfolio! Focus on making more money from your career instead rather than chasing the extra 1% from your portfolio.

Readers what do you think? Do you think investing should be left to the professionals?  Isn’t it true even “professionals” rarely beat passive indexing over the long haul?

Related posts:

1. The 4% Rule to Investing
2. How is Investing and Owning a Small Business Related?
3. Morningstar Review
4. Ginnie Mae Investing

• I’ve had considerable gains in the stocks I owned (20%+ in one year)
• Believe the market is overbought with a somewhat high P/E ratio (approx 20)
• The stocks I sold have dividends and since they are in a taxable account will be subject to much higher tax rate next year
• The primary reason was to fully fund our Roth IRA accounts for the year

We are already 5% in cash with our retirement accounts.  I’ve made adjustments to our retirement accounts in the past few months, but I have not (nor will) make adjustments to them other than for some re-balancing.  I believe asset allocation is much more important than selling based upon emotional factors.

I’m taking the money from today’s sale and fully funding our Roth IRA accounts for 2010.   I’ve not mentioned this before, but our 2010 investment strategy is:

• Max out my wife’s 403(b) account (I don’t have a 401k or IRA setup within my company)
• Max out both our Roth IRA accounts
• Contribute $10,000 to our children’s NY State 529 accounts (since contributions up to $10k are tax deductible to the state)
• Invest $5-10,000 in US I Savings Bonds (I’m not sure the exact amount because I’m not crazy about the existing rate)
• All remaining funds invest within our taxable accounts

I eventually want to invest our taxable savings into real estate or another business.  I haven’t found anything suitable so far.  My thought is then take some of that taxable money off the table, and move into tax differed savings.

No related posts.

MLP is NOT My Little Pony!

What is a MLP?  It is NOT My Little Pony as what came up when I was Googling for this article.  MLP in the investment world means Master Limited Partnership.  MLPs have generated some of the best returns for the past decade, and yet it’s a secret to most investors.  I myself only found out about them two years ago. They are publicly traded and you can purchase one on many of the security exchanges.  MLP’s combine the tax benefits of a limited partnership, with the liquidity of a publicly traded security. It is known to some as a granny investment;  they generate steady income, can appreciate like a stock, and have good tax benefits.  I happen to love them since they are very similar, in tax advantages, to owning your own business.  Master Limited Partnerships are limited by US tax Code to only apply to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum, natural gas extraction and transportation. Some real estate enterprises may also qualify as MLPs.  In addition, some private equity management companies such as the recently gone public, Blackstone Group (BX) and Fortress Investment Group (FIG) are structured as MLPs.  Many MLPs generate 7 – 8% dividend yields, and most is tax-deferred.  For many large master limited partnerships, 70% or more of their dividends are tax-deferred.

What are the Advantages of a MLP?

• High consistent distributions make MLP average yield in the 8% range
• MLPs have constantly increased their distributions over time.
• MLPs have a low correlation to bonds and stocks, which makes it perfect in your asset allocation mix.
• The corporate structure makes it a favorable tax treatment and avoids double taxation.

Tax Advantages

MLPs have a big tax advantage compared to stocks with dividends and other assets classes. It’s a perfect investment to put into taxable accounts. While you can put a MLP into a retirement account (such as an IRA) it is not recommended because of the tax complexities.  With MLPs, you should practice a buy and hold mentality because of the tax implications.  When selling a long-held MLP the cost basis can be high because of the many years of dividends (they are really distributions).  With a MLP you do not get a standard 1099 form, and get a K-1 tax form instead. Unlike dividends, these distributions are not taxed when they are received; instead, they are considered reductions in the investment’s cost basis and create a tax liability that is deferred until the MLP is sold.  Because of this deferral, unit holders often pay an effective tax rate of under 10% of annual distributions. Depending upon your tax situation, this rate can fall as low as zero in some cases.

MLP Stocks

Here is a partial list of MLP stocks.

• Boardwalk Pipline (BWP)
• Enbridge Engergy (EEP)
• Enterprise Product Partners LP  (EPD)
• Kinder Morgan Engergy (KMP)
• Magellan Midstream (MMP)
• Plains All American (PAA)

In Summary

For anyone who’s looking for a a steady income and nice tax deferral, a MLP might be something you want to add to your taxable portfolio.

Disclosure:  I own shares in PAA.

Related posts:

1. The 4% Rule to Investing