Links to Carnivals - December 28, 2009

PFStock.com participated in two blog Carnivals this week. Here are links to the Carnivals in which PFStock.com was mentioned for December 28, 2009:

My post about the account aggregation service, Yodlee, was mentioned in The Last Carnival of Personal Finance of the Year.

My post about dividends and ex-dividends was mentioned in the 173rd Edition of the Festival of Stocks. There appear to be two URLs for this carnival:

http://www.fatpitchfinancials.com/1842/173st-edition-of-the-festival-of-stocks
http://www.tradercurrencies.com/currency-trading/48287/173rd-edition-of-the-festival-of-stocks

Thanks to the bloggers who hosted these carnivals! Please check out the other interesting articles at these Carnivals.

PFS

About Dividends and ex-Dividends

One of my investment strategies is to buy companies that pay dividends (i.e. dividend paying stocks). In conjunction with my recent post about dividend yields, I want to also discuss the mechanics of dividends. Basically, stocks could be classified into two categories: those that pay dividends, and those that don't. A lot of smaller, growth companies do not pay a dividend. Companies are not required to pay dividends, and each dividend must be declared by the company (usually at a board of directors meeting) before it is paid. An example of a big company that does not pay a dividend is Berkshire Hathaway (NYSE: BRK-A and BRK-B).

In the United States, most companies that pay a regular dividend do so every quarter. There are exceptions, for example some companies pay their dividends only once or twice a year. When looking at a finance site such as Yahoo Finance, the dividend is listed with the company stock quote. I estimate that 95% of the time this data is correct. However, sometimes it is inaccurate or outdated, so it is a good idea to confirm this information with another source.

Typically, when dividends are announced, the company will usually issue a press release that says something like this:

The board of directors of Pfizer Inc (NYSE: PFE) today declared a 16-cent fourth-quarter 2009 dividend on the company’s common stock, payable December 1, 2009, to shareholders of record at the close of business on November 6, 2009.

Let's dissect this statement. For 2009, Pfizer (NYSE: PFE) paid dividends of 16 cents per quarter (equivalent to 64 cents for the year). The dividend was paid on December 1 to "shareholders of record" on November 6. In order to be a "shareholder of record" one has to own the stock 3 business days before the record date. In this case, that date is November 3. On November 4, the stock goes "ex-dividend". What that means is that if you buy the stock on November 4 or later, you are not entitled to this particular 16-cent dividend. The term "ex-" in this case means "without". So as of November 4, the stock trades without the current dividend.

A common question about dividends is "What happens if you sell the stock on November 4 or later, but before the December 1 date when dividends are paid?" In this case, you would be entitled to the dividend, even though you don't own the stock on the pay date. This has happened to me several times where I've received dividends on stock that I no longer own.

Another more involved question that people sometimes ask is "What if you bought the stock on November 3 and sold the stock on November 4. Does that qualify you as a "shareholder of record" for November 6?"

Looking at a calendar, if you buy the stock on Tuesday, November 3 (trade date), it will show up in your account on the morning of Friday, November 6 (settlement date). On the settlement date, the brokerage deducts cash from your sweep account in exchange for the stock. If you sell the stock on Wednesday, November 4, the sale will settle in your account on the following Monday, Nov 9.

In this example, you are the "shareholder of record" from the morning of Nov 6 until the morning of Nov 9. This sounds strange because you have already traded away the stock. Nevertheless, you "own" the stock at the close of business of Nov 6, so you are entitled to the dividend. Some investors actually use this method, which is known as a "dividend capture" strategy, to invest in stocks.

PFS

Dividend Yields

One of my investment strategies is to buy dividend-paying stocks. When making investment decisions on dividend-paying stocks, it is important to know what the dividend yield of the stock is. Basically, a dividend yield is the sum of the regular dividends that a company pays over the course of a year, divided by the current stock price. In the United States, most dividend-paying stocks pay out every three months (quarterly). In a previous post, I stated that Pfizer (NYSE: PFE) had a dividend yield of 3.64%. Currently, Pfizer pays 16 cents per share in quarterly dividends, for a total of 64 cents in dividends per year. At the time of my post, Pfizer was trading at 17.56. If you take the annual dividend divided by the price, you get 0.64/17.56 = 0.0364 or 3.64%.

When researching a stock at a financial website such as Yahoo Finance, the dividend and yield is listed with the company quote. I estimate that 95% of the time this number is correct. However, sometimes this number is inaccurate or outdated.

Another case where the dividend yield may be incorrect is when the company pays a one-time special dividend. This will make you believe that the dividend (and thus the yield) is greater than it really is. Unfortunately, it is not always obvious whether a dividend payment is a regular dividend or a special dividend. So be careful when looking only at the dividend yield statistic on financial sites.

While dividend yield is an important criteria used for selecting stocks worth buying, it is not the only criteria. Dividend yield is not the most important criteria either. In future posts, I will cover some of the other criteria that I use for selecting stocks to buy.

PFS

Yodlee: A Love/Hate Relationship

I have over 25 bank and brokerage accounts, and I use an account aggregation service called Yodlee to help keep track of them. Yodlee automatically polls different websites where you have online accounts. These accounts are then aggregated at the Yodlee MoneyCenter so that you can get a "big picture" look at your financial data. As someone with accounts at several different financial institutions and nearly 100 financial transactions a month, I find this type of service to be useful.

But over the years, I have developed a sort of a love/hate relationship with Yodlee because I have had various problems with the service. To be fair, many of the problems that I've had with Yodlee were temporary, and were more likely related to technical problems with the financial institutions' websites that Yodlee is trying to aggregate rather than with Yodlee itself. Several times a month, I receive an Email message with a subject like this: "Your Yodlee MoneyCenter Alert: Account Error".

In this example, Yodlee tells me that one or more accounts can't be updated because I have invalid login credentials (user name and/or password). However, I do not encounter any technical problems if I try to log into the financial institution's website manually, and the problem usually goes away by itself. I've found that oftentimes, Yodlee problems seem to clear up by themselves. Has anybody experienced similar technical problems with Yodlee?

Yodlee's customer service is fairly responsive. At one time, I even received a message from Yodlee's senior VP Peter Hazlehurst, who offered to help with my issues. Despite its problems, I consider Yodlee a necessary evil since I have so many accounts to keep track of. Although Yodlee is probably the best overall service to use for its intended purpose, I also keep a Microsoft Excel spreadsheet that tracks the balances of all my accounts. However, I only update that spreadsheet once or twice a year.

Here are some of the downsides to Yodlee's service that are worth pointing out:
1) Not all banks participate in Yodlee. About three or four of my accounts are not supported, and I would need to add and update them manually if I wanted to track them in Yodlee. According to Peter Hazlehurst, some credit unions use a technology called "CAPTCHA" which shows "squiggly" letters, and Yodlee doesn't support them. The term CAPTCHA is an acronym that means "Completely Automated Public Turing test to tell Computers and Humans Apart". I have no idea what a Turing test is.

2) Security and "Secure Sign On" concerns are valid points to consider. This is a question of risk versus reward, and should be up to the individual user. How comfortable are you with storing your personal information online with Yodlee? While Yodlee's security is probably very good, if their security was ever compromised, fixing the problem would be a massive headache for its numerous users.

3) From time to time, I notice that I am missing transactions, or get an incorrect balance in Yodlee. For example, Countrywide Bank was recently merged into Bank of America. As a result, the previous history with Countrywide was lost, and it looks like I got a big boost in my net worth when money magically appeared in my Bank of America accounts. This situation results in an inaccurate accounting of net worth, and it is frustrating since I have to make a mental note of which balances are incorrect.

4) Another extreme example relates to the conversion of Washington Mutual (WaMu) accounts to Chase. By contrast to the Bank of America case, I now have a history of duplicate transactions going all the way back to the beginning of 2008. If I follow it back, Yodlee thinks that at one point my balance was negative by about $60,000. (I hope not!) These transactions can be manually reconciled, but for me there would be over 500 records to go through.

5) In another case, I have a 401(k) account that is administer by JPMorgan. Earlier this year, this account stopped being supported by Yodlee. I believe this is due to something called Multi-factor Authentication (MFA) that JPMorgan has recently implemented. While MFA is meant to improve security, it also makes it impossible for this account to be aggregated. The balance shown for my account is frozen in time and does not update anymore. Again I could update the balance manually, but that would defeat the purpose of using an account aggregation service.

I will also mention two features that I do find very useful in Yodlee are alerts and auto-login. The alerts feature allow you to set alerts if, for example, your account balance drops below a certain amount, or a very large transaction is processed. This feature can help in the early detection of fraud. The other feature I like is auto-login where Yodlee can automatically log you in to some (but not all) accounts with the click of a button. You don't need to remember or type your password. This, of course, makes it all the more important that you keep your Yodlee password secure.

In spite of its problems, I consider Yodlee to be satisfactory for my purposes. While I still use an Excel spreadsheet to periodically get a complete picture of my finances, Yodlee is a quick way to check on my account balances. Note a shortcut to the Yodlee Money Center appears in my blog sidebar.

See Also: Mint.com Versus Yodlee

PFS

USB Flash Drive Freebies

I recently mentioned attending the San Francisco Hard Assets Conference, which was held last month. One of the highlights of this annual investment conference is that the exhibitors usually offer a variety of freebies to attendees. Over the years I've been able to snag several tote bags, caps, and keychains. I have one titanium keychain that was offered by a titanium mining company, and a few stuffed animals and toys that I've collected for my daughter.

But actually, the conference itself is not the topic of this post. A couple years back, I discovered a new trend in freebies. Some companies now offer free promotional USB flash drives. For those who are not familiar with the technology, a USB (Universal Serial Bus) flash drive is a portable computer memory that plugs into your computer's USB port and can be used like a miniature hard disk. While they were once a novelty among computer enthusiasts, nowadays USB Flash drives (also known as thumb drives) can often be purchased in the many commonplace stores, including drug and discount stores.

Anyway, conference exhibitors usually load up these USB flash drives with information about their companies: annual reports, company press releases, PowerPoint slides, etc. The casing of each USB flash memory is printed with the company logo and is given away to people willing to stop and talk at their booth. In general, a flash drive can be reused for storing pictures, MP3s, documents, etc. You only need to delete the existing data, or just re-format the drive to make room for your own files.

This year I obtained a couple of new USB flash drives: a 512MB drive from US Gold and a 256MB one from Minera Andes. Nowadays, even 512MB is considered to be a small flash drive, but what can you expect for free? Anyway, thanks to these companies for the freebies.

Does anybody else know of other companies offering free USB flash drives? I would appreciate it if you could share the information. And, if your company offers promotional flash drives, you may Email me (my Email address is in the sidebar) and I will mention it on my blog.

PFS

Links to Carnivals

PFStock.com participated in two blog Carnivals this week. Here are links to the Carnivals in which PFStock.com was mentioned for December 7, 2009:

Carnival of Money Stories #31

Festival of Stocks #170

Thanks go to the bloggers who host these carnivals.  Please check out the other interesting articles at these Carnivals.

PFS

Use It or Lose It

I have just completed my company's annual open enrollment. This is where employees have the opportunity to change medical or dental plans, and to opt into making contributions to a flexible spending account (FSA). In general, a flexible spending account allows one to contribute deposit pre-tax dollars into the account to pay for medical expenses, or to pay for dependent care. Note that these are two different types of accounts. The ability to use pre-tax money to pay for expenses is a good benefit that can save a lot of money.

However, one thing to keep in mind is that most flex spending accounts operate on a "use it or lose it" basis. This means that any balance you have in the account at the end of calendar year is forfeited to your employer. Since this is something that I would rather not do, I never leave any money on the table at the end of the year.

But in the current economy, I also want to warn my readers of one more potential hazard with FSAs. Having been downsized twice in the last decade, I can tell you that the "use it or lose it" provision also applies if you are terminated without cause (i.e., laid off). This may seem totally unfair, but that has been my real life experience.

PFS

How Banks Calculate APY

Have you ever wondered how banks calculate the annual percentage yield (APY) of a bank account? Suppose that an account pays 4.88% (nominal rate) compounded daily and yields 5.00% APY. (I know that this interest rate is not a realistic one these days, but it is used only for the purpose of illustrating my point.) The APY is the annual percentage yield, and is the best number to use when comparing rates from different banks. To calculate the APY from the nominal rate, you will need a scientific or financial calculator. A computer spreadsheet could be used instead of a calculator.

Warning: math is involved in the next section. In this example,

1) Enter the interest rate in decimal form: 0.0488
2) Divide the rate by 365 (number of days in a year)
3) Add 1 to the result
4) Then use the y^x key, and type 365 for the number of days.

You should end up with something that says 1.0500069.... The digits after the decimal point represent the APY. In this case, it is 5.00% APY.

Shortcut: In most cases, you can take the nominal interest rate: 0.0488, and hit the e^x key on your calculator to get 1.0500103.... This quickly approximates the APY, assuming that interest is compounded daily.

If you have an account that is compounded monthly, then replace the 365's above with 12 (number of months in a year). In this case, if interest were compounded monthly, then the APY would round off to 4.99% APY.

PFS