I don’t know anyone who claims to enjoy a Colonoscopy, the preparation and the procedure are not things that are my fun list. There is no doubt that a Colonoscopy can help detect colorectal cancer. Starting at 50, the American Cancer Society recommends you begin regular colorectal cancer screening. More than 9 out of 10 diagnoses of colorectal cancer occur in patients at least 50 years old.
Due to new technology, we now have another option to detect colorectal cancer. Exact Sciences Corporation (EXAS) released their Cologuard DNA test kit this year. Cologuard is an easy to use, noninvasive colon cancer screening test based on the latest advances in DNA science. Cologuard finds both cancer and precancer situations. You can perform this test from their kit in the privacy of your own house and send the results to their lab for evaluation. Cologuard requires a doctor’s prescription and most doctors are just now coming up to speed on the benefits of this test. Centers for Medicare and Medicaid Services (CMS) have approved payment for this test in 2015, other insurance carriers should be jumping on this bandwagon. Traditional Medicare (Part B) patients should not have any co-pays, deductible amounts, or co-insurance for Cologuard. Medicare Advantage patients might be subject to laboratory co-pays or co-insurance as determined by their plan.
Now for the stock. Exact Sciences Corporation (EXAS) has already been up over 130% this year as compared to 18% for the S&P500. I started buying this stock in early summer in the $12-$15 range, it closed Friday at $28.52. Of 14 analysts who follow the stock, 4 rate it a Strong Buy, 6 a Buy, 3 a Hold and 1 an Underperform. EXAC is a somewhat volatile stock with a 1.48 beta.
I like buying stocks with a real life benefit and a great revenue growth story. This could easily double again in 2015 as the new Cologuard test kits get used by millions of people and the company starts to expand internationally.
In the years leading to retirement you face a decision, whether to fund a Traditional IRA or a Roth IRA.
- Tax-free withdrawal. This you already know, however another major advantage of a Roth is that withdrawals are not included in any “income” calculations, including Social Security benefits or the current 3.8% surtax on net investment income above $250k for joint returns.
- No minimum distribution. Have a sizeable IRA in retirement is both great and a problem. The problem is that at age 70 ½ you must begin a Minimum Distribution from an IRA, and if you do the math, it isn’t so “minimum”. If you really don’t need this money, you first pay taxes on it as ordinary income, then you invest it into a taxable account and continue to pay taxes on it. The Minimum Distribution possibly raises your tax rate on your Social Security benefits. The Roth is 100% tax free after the age of 59 ½ with no requirements to ever distribute it.
- Penalty free withdrawal. If you fund a Roth IRA you can withdrawal your contribution with no tax penalty. A withdrawal from an IRA before 59 ½ incurs both income tax and a 10% penalty. A Roth can become an emergency fund if necessary.
- Estate planning. With a Roth you can pass your account to your heirs and other than an annual tax free withdrawal the account could continue for decades all tax free. The power of compounding could turn a modest account into a 7 digit account in no time. A Traditional IRS can be left to heirs but they must pay taxes on the annual withdrawals.
- Conversion flexibility. Let’s say that in January you convert $100,000 of Apple stock from a IRA to a Roth, you immediately incur a tax liability for $100,000 of income. Unfortunately by October 15th the market has dropped substantially and this investment is worth only $75,000. You can actually reverse the conversion (still only $75,000) and eliminate the tax on $100,000. This protects you in a down market. Of course if the market goes up as in the last few years you are even further ahead with a conversion.
Each year the Fed destroys billions of dollars*. This currency is taken out of circulation because it is old, wore out, torn or otherwise unfit for use. In the past most of it was shredded and dumped in landfills. If you visit many regional Federal banks or Bureau of Engraving and Printing you may get a souvenir bag of shredded money.
The Federal Reserve in now looking to “go green” with the disposal of all this cash. United Fibers LLC in Chandler, AZ uses shredded cash for home insulation. The Philadelphia Fed sends cash to a local power plant to generate electricity. The Sanitation Districts of Los Angeles burns about 400 – 500 tons of cash a year. Every now and then the Fed’s approve special request for the disposal of cash, including cash to fill luxury dog beds.
What would do with a pile of shredded cash?
*As reported in the Wall Street Journal
If you guessed vinyl records you are correct. The sales of old fashion LP vinyl records is up 49% in 2014. Younger people think they are cool and like the idea of a needle riding the grooves. The problem is that there are almost no one can press vinyl records anymore. There is just one company who supplies 90% of the raw vinyl used for these records. A small Connecticut factory with a dozen employees is working overtime just to supply the steel molds that press the vinyl into shape. Record labels are waiting months to get their orders filled. Pressing machined only make 125 records per hour and many of very old these machines are running around the clock.
Don’t get rid of those old records quite yet, they are on their way back.
Isn’t it just great, the price of gasoline continues to drop like a rock? Oil (WTI) futures market has settled into the mid-$50 range and are expected to stay low for quite some time. The RBOB futures (Jan 15) price has now dropped to $1.53,see my story on the price of gasoline.
So now there is another problem, what to do with all the oil and gas being produced and no place to put it. How big is the problem? In the week ending December 5th US inventories of crude oil and gasoline rose by 15.3 million barrels, the expected amount was only 800,000 barrels. The US now produces almost 9 million barrels of oil per day, and 80% increase in just the last 6 years.
OPEC oil producers, especially the Saudi’s account for about 40% of worldwide production and are loading up their oil into all the available tankers and sending them out to sea. We now have millions of gallons sloshing around with nowhere to go. Much of this is being stored in hopes that there is a quick fix to the low price dilemma the producers face. Here in the US producers have already maxed out tank storage and are filling up rail cars. China has been taking advantage of this reduction and is also stockpiling all the oil they can.
On a temporary basis this is probably fine, but pretty soon we’ll run out of rail tank cars, ships and storage facilities.
Any suggestions on where to put all of this “liquid gold”?
Planning for retirement income is one of the most important jobs you’ll ever have. If you are like most investors you have a great “rear-view mirror, but very poor headlights”.
- Many retirees need income from their investments to supplement Social Security and pensions
- Fixed Income to many mean just buying bonds and bond funds (ETF’s)
- Given the poor outlook for bonds during rising interest rate cycles many investors are looking for other methods of “Fixed Income” investing
- A conservative stock portfolio with income producing stocks might look pretty attractive
- There are tips for choosing these income producing stocks
Today’s retirees can’t rely on the traditional methods for securing income during their retirement, mostly bonds. As I’ve written before, current bond holders are going to face a huge shock when interest rates start to rise in the next 6-9 months. Many of you will think, oh good, interest rates are rising! However as they do your current bonds (or funds) will drop substantially in principle value. What good will it do to have a bond fund pay you 3%annually, drop by 15-20% in value? Just to be clear, some day it will pay handsomely for a retiree to buy bonds, when they yield 6-8%, but not now as they rise to that level.
What to do
The “Fixed Income” stock dividend theory says that you develop a stock portfolio of reliable companies with secure dividends that will pay you “bond level or better yields and just hold onto those investments. In this case you also have the possibility of capital appreciation over the years and dividend growth. Bonds do not have any possibility of dividend growth. For example, you buy a basket of blue-chip dividend growth stocks for $1,000,000 and they average 3% yield, or $30,000 a year in dividends. If, over a period of years your blue-chip stocks follow the average market return of 6% (or more) your $1,000,000 will grow by $60,000/yr compounded. Furthermore, many of these companies increase their dividend every year so the $30,000/yr also grows.
Tips for Choosing Income Stocks
- It is relatively easy to research on line and find blue-chip companies that have a solid history of both dividend payments and growth.
- Look for a large dividend supported out of free cash flow, not borrowing. Determine what % of free cash goes to support the dividend.
- Choose stocks with growth potential
- Here are some examples of dividend growth over the last 5 years:
- McDonalds 14%
- General Mills 12.5%
- Phillip Morris 12%
- Get help from sources like Morningstar or a web site I like http://www.dividendyieldhunter.com/
Here is an example of how this works:
I bought Altria (MO) the cigarette company in early 2014, it is a blue-chip stock with a long history of dividends increases. I bought it $34/share with at the time a $.48/quarter dividend or 5.6% yield. Today the stock trades for $51/share with a $52 dividend. Therefore, I’m up 50% on the value of my investment and the dividend has increased by almost 10%. Therefore my current dividend yield on my purchase price is over 6%. During this same time frame the S&P 500 up a shade less than 6%.
The US dollar has become the strongest currency in the world for a lot of good reasons. A strong dollar benefits such things as international travel and imported goods and materials. Our dollar strength is primarily due to the fact that the US economy is the stronger than South America, Europe, Asia and Emerging Markets. As our Fed (central bank) is ending our Qualitative Easing, places like Europe’s ECB is just talking about starting theirs to boost the economy. The Russian Ruble has all but collapsed and inflation is already running at 10%.
So how can you invest in something to take advantage of this situation? One simple way is to invest in the PowerShares DB US Dollar Bullish ETF “UUP”. Behind the scenes this stock index is made up of long futures contracts. These contracts are long (betting the price will go up) the US Dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. The UUP can be easily bought and sold just like any other stock. It has plenty of liquidity, trading over a million shares per day on average so there is no problem buying or selling.
American College of Financial Services in Bryn Mawr, Pa. released a poll this week based on online interviews of 1,019 people 60 to 75 years old with at least $100,000 in household assets. They asked 38 retirement literacy questions on basics, such as Social Security, life expectancy, IRAs, life insurance and investments, and how bonds work. Only 2 in 10 had passing grades! What a shame. Everyone needs to take responsibility for their own financial health, especially retirees. American College hasn’t published the actual questions they used, so I developed a few questions to help you test your retirement understanding.
Here is a Word document containing the questions and answers:
Gasoline prices have been falling almost every day now. As of the date of this posting AAA reports the national average price for gasoline is $2.71/gal. A year ago the average was $3.52/gal. So who actually determines the price for gasoline and how can you predict what the future price?
The actual price of gasoline is mostly determined by both the price of oil and more specifically the RBOB futures. RBOB is a futures market benchmark that is traded on the New York Mercantile Exchange, the CME Group’s Globex and ClearPort electronic trading platforms. RBOB stands for “Reformulated gasoline Blend stock for Oxygen Blending”, you and I just call it gasoline. A single futures contract of RBOB represents 42,000 of gasoline delivered to the port of New York in a future month. RBOB contains 10% ethanol and is prepared so that a purchaser can get another 10% ethanol added right at the point of delivery. The price of RBOB is quoted in US dollars. A strong dollar tends to lower the price of oil and gasoline. The US dollar is on a real up trend compared to all other world currencies.
The above futures chart shows the trading history of RBOB since September 2014. Today “front month” contract (January 2015 delivery) is about $1.78/gal. If you look at the RBOB futures contract price for January – June 2015 you’ll see that at the moment the market thinks we’ll have really cheap gas for the next 6 months. Of course, the price of RBOB could become quite volatile based on the price of oil and geo-political events. But for now we’ll enjoy it.
Now that you know the core cost of gasoline you can start determining whether your local area is giving you the best deal. There are places in Oklahoma currently selling gas for $1.99/gal, our local price here in Florida is $2.69 and seems to drop every few days. Keep in mind that the “costs” of your gasoline includes taxes, transportation costs and retail profits. I can already tell that our local price of $2.69 will continue to drop before January to possibly the $2.40 – $2.50/gal range.
Many people still invest money in mutual funds held in their taxable accounts. Mutual funds give investors the opportunity to pool money with others and own securities such as stocks, bonds and so forth. A more recent investment type has surfaced in the last decade called Exchange Traded Funds (ETF’s).
So what is the issue with the “tax man”? Normally in December Mutual Funds make distributions to their shareholders that can be quite a tax surprise. Let’s say that you own 1,000 shares of a well-known equity fund that currently trades for $50/share. In mid-December the fund declares a $2/share distribution classified as capital gains. In December you elect to get this distribution as cash in your account instead of additional shares. On the distribution date the mutual fund share price (NAV) will drop to $48, representing the distribution and you will get $2,000 in your cash account.
Now comes the surprise, you have to pay capital gains tax on the $2,000 even though you never sold any of your mutual fund shares. Now let’s add fuel to the fire, you actually bought these shares at $100/share and this year you lost $50,000 in the value of your fund, yet still owe taxes.
That’s how it works with mutual funds. This happens because mutual funds must periodically sell shares to fund investors who sell their mutual fund shares.
There is another way to get the same benefit, switch from mutual funds to ETF’s. ETF’s act just like stocks from a tax point of view. If you don’t sell them you don’t have any capital gains! No December surprises. ETF’s have many other advantages for all types of investors.
Just Google ETF’s and read about the advantages.
BTW, if you act quickly you can sell your mutual fund before the distribution date and save on taxes. Many mutual funds have already posted their expected “distributions” on their web site.