One
of the major benefits of investing in dividend paying stocks is their constant
cash flow. The cash received from the dividend payments returns investors with
a certain return despite what happens to the stock market overall.
Inflation?
Inflation
occurs when a currency becomes worth less. This happens naturally in economies
around the world. In the United States, the inflation rate is measured by the
consumer price index, referred to as the CPI. The CPI measures the cost of a
“basket of goods” each month. Over time, the cost of the goods will slowly
rise. According to the Bureau of Labor
Statistics,
the government organization responsible for measuring the CPI, inflation in the
United States has ranged from -2% per month to slightly over 4% per month (at
an annual rate) over the last ten years. Other than in the year of 2009,
however, it has always trended upward.
Example of Inflation
Assuming
a 3% annual inflation rate (this is an arbitrary number chosen for this
example, it is not based on the current inflation rate), the cost of everything
you buy is going to rise by 3% per year. If a loaf of bread cost $1.00 at the
beginning of the year, it will cost $1.03 at the end of the year. While $0.03
doesn’t sound like a huge number, imagine if you have an inflation of 3% over
the next 20 years; your loaf of bred will cost $1.81. Inflation has the reverse
effect on financial instruments. If you have a dollar at the beginning of the
year and leave it in your wallet, it will still be worth a dollar at the end of
the year. However, you will only be able to buy what .97 cents would have
bought you at the beginning of the year.
Investing in Dividend paying stocks
vs Inflation
This
rate impacts your investments as well. If you own shares of a non-dividend
paying stock that rises 3% over the year, on the surface you have made a 3%
return. 3% is better than no return, but did you really earn 3%? In the
situation above, based on a 3% interest rate, you actually came out even. Your
3% gain was cannibalized by the inflation rate.
If
you own shares of a dividend paying stock, the situation is different. The
dividend acts as a hedge, or protection, against inflation. If you own a stock
that pays a 2.5% annual dividend and rises 3% over the year, you have earned a
5.5% annual return. After subtracting 3% for inflation, you have earned a 2.5%
annual return. The dividend accounted for your entire return over the calendar
year.
Natural Gas
According to Commodity HQ, as fracking continues to develop, and with new
reserves being discovered on a daily basis, the world has watched natural gas
production surge. Though still a non-renewable resource, natural gas burns
cleaner and is cheaper than crude oil. As the world looks to replace dated
energy sources, natural gas figures to be an increasingly significant
commodity. At the forefront of the NG movement has been the U.S., as its
presence in the natural gas world has continued to skyrocket in recent years.
The
U.S. is now king of the gas world. In 2011, the country produced 62.7 billion
cubic feet per day (bcfd), a record figure. That record was shattered in 2012,
when the U.S. showed 65.7 bcfd for the 12 month period, an increase of 4.8%
from the prior year. That figure also accounted for approximately 20% of
natural gas produced worldwide. For 2013, the U.S. is already on pace to show
another production record.
As production has surged, prices for
the commodity have been battered, keeping something of a ceiling on NG. While
this has hurt some traders and bottom line revenues for major producers, it has
translated into lower energy bills and more money in the pocket of the
consumer. The excess in supply has also led to speculation that the U.S. will
begin exporting NG to foreign countries as some of the price differentials have
painted a prime opportunity. “US natural
gas producers have begun eyeing these markets due to the large differential in
price between US natural gas and LNG prices in certain countries” writes Robert Rapier. Rapier goes on to explain that
transporting NG products overseas costs approximately $6/MMBtu. Last year saw a
price difference between the U.S. and Japan of $14/MMBtu and $8/MMBtu for
European markets, leaving plenty of room for U.S. producers to turn a handsome
profit.
For
our members this week we have looked at several of these companies for
exportation of the fuel and have chosen one to place in our portfolio that is
poised to do well in this market in the coming years.
Disclaimer: Suburban Trader is a publisher of financial
news and opinions and NOT a securities broker/dealer or an investment
adviser. You are responsible for your
own investment decisions. All
information contained in our newsletters or on our web site(s) should be
independently verified with the companies mentioned, and readers should always
conduct their own research and due diligence.
Investment Strategies
No comments:
Post a Comment