The “Dogs of The Dow” is a stock investing strategy that suggest you invest in the five top yielding stocks on the Dow Jones Industrial.  Every year you review your investments and again purchase the new top five yielding stocks.

Historically, this strategy has averaged an 18% annual rate of return on investment.  Not bad for an investment strategy that involved very little thought about the stocks?

Does it make sense now?

Given the state of the economy does this strategy still make sense?  Will the companies that are at the bottom of the Dow, still be around in the near future?

According to the website Dogs of the Dow, the current dogs include:

• GE
• Alcoa
• Pfizer
• DuPont
• AT&T

These companies seem strong enough to alst the recession, but who knows for sure:

What is your theory?

Leave a comment.

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The economy lost more than 600,000 jobs for the third month in a row.  At this point roughly 12.5 million Americans are out of work.

Will It Continue?

Many have lost jobs, some have had to take pay cuts or forgo pay increases.  Still others have lost benefits they once have had or have had their hours reduced.

What Do You Think?

Have you been hit by these cuts?

Ho long do you  think it will last?

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Now granted in late 2007 through 2008, the housing market in the United States took a deep hit in terms of value.  Housing princes fell and many people were left with mortgages that exceeded the value of their home and left many with no value at all.  If you find yourself in this situation, don’t overreact.  Over time the value of any investment will go up and down but over a longer period it will go up.  Given time, the value of your home will increase.

Regardless of whether you have equity in your home or not, here are some very simple and easy techniques you can use to pay off your home faster and build your wealth.

• Accelerate your payments.  Most mortgage lenders allow you the opportunity to make accelerated payments.  If you are currently making monthly payments, consider weekly or bi-weekly payments.

Consider this.  If you have a $200,000 30 year mortgage with a rate of 5.75% and are making monthly payments of $1,167 you’ll pay off your mortgage 24.5 years and saved nearly $46,000 in interest by making weekly payments of $292!

• Give your mortgage a raise.  Your mortgage lender may allow you to make prepayments.  In other words they will allow you to increase the amount of the payment you make without any penalty. 

Many of us may receive annual salary increases.  Consider this.  If you receive annual salary increases of 3% every year and you increase your weekly mortgage payment every year by 3%, you will have paid off your mortgage in just over 16.5 years and saved over $96,900 in interest over monthly mortgage payments!

Still not convinced?  If you make accelerated payments and give your mortgage payments an annual raise, your savings are almost $100,000.  You will also be free of your mortgage payments to which you can then invest.

• Make lump sum payments.  If you are allowed to make lump sum payments, take advantage of any savings you have or unexpected money you come across (i.e. tax returns, bonuses, & gifts).  Those funds should be used to pay down your mortgage unless you can invest the funds and earn more, after tax, on your investment than you pay interest on your mortgage (again after tax).

If you still want to pay off your mortgage faster and are risk adverse your can try something that can really turn up the steam on paying off your mortgage.  Keep in mind that this technique is the more sophisticated investor and you should seek professional advice before making any sort of investment decisions.  The technique is simple:  Take out a home equity line of credit and invest the entire amount of the line of credit.  If your after tax cost of borrowing (that is, if the interest you pay on the line of credit can be deducted from your income) is less than the returns on your investment, then you are building additional wealth that you can then use to pay down your mortgage.

Resources
Nationwide Real Estate Valuation Reports. Through US Search.com

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The actual answer depends on the rate of interest you pay on the debt after tax and the after tax rate of return on your investments. Now it is important to note that in Canada that the interest you pay on debt is only deductible if the borrowed funds were used to earn income. Therefore, investment loans will have a lower after tax interest rate as compared to interest on personal loans or credit cards.

The general rule of thumb is must then be modified: If you can earn a higher, after tax return on your investments than the after-tax interest rate on your debt, then you should invest. Otherwise pay off your debts first.

The reason is simple. Your objective should be to pay the least amount of interest between the two alternatives. The additional interest you earn on the investment can be used to reduce your debt.

Consider the following:

Note: You must convert the interest rates to an effective annual rate to ensure they are comparable.

If your mortgage rate is 5.25% and you are earning 8% on your investments annually, your effective annual rates on each are:

The investment income is subject to tax at your marginal tax rate.

If your marginal tax rate is 35%, then the after tax investment income is 4.4% and you are better off paying down your mortgage rather than investing.

However, if your marginal tax rate is 25%, then the after tax investment income is 6.0% and you are investing.

Another Factor To Consider
One other factor to consider is your overall level of debt and your ability to service your debt. If you have excessive amounts of debt or if you are not able to make your monthly payments and make all of your other commitments (rent, groceries, entertainment etc.) then you should concentrate on reducing your debt anyway.

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• Credit cards have zero transaction costs.
• Credit cards are widely accepted and convenient to use and reduces the amount of cash lying around (and therefore spent).
• Credit cards have excellent tracking that you simply do not have with cash.
• Credit cards offer a “float” which means you can save your cash and earn interest and pay your credit card bill one a month.

The caveat is that a credit card with no annual fee is obtained and that the monthly bill must be paid in full when due to avoid the higher interest on the credit card.

So What?

You may by asking yourself why bother? You may have a checking account with unlimited free transactions and may not see the added benefit of using credit cards. Here is a short list of what the true benefits are:

1. Points. If you can get a credit card with no annual fee and a nice points program there are benefits available. Now points programs are not the be all and end all of selecting a credit card. Keep in mind that often credit cards that have rewards programs will have an annual fee. With that in mind, a no annual fee card is of primary importance to save money. That being said, my wife and I have a no annual fee credit card with rewards points and the year before last we had Christmas on points!

2. Earn interest. You can invest your pay in very short term vehicles until you need to pay it out. The longer you can save your money the better off you are. Assume you are paid $5,000 on the last day of every month, that you have a monthly mortgage payment of $1,000 that comes out on the 15th of the month as well as an automatic savings sweep of $500 at the same time. The rest of your bills are paid directly from your credit card.

If you have a credit card limit of $3,500 and you also pay that bill on the15th.
What you have done is left $5,000 in your account for an average of 15 days amonth. If you sweep the funds to a high yield savings account paying say 3.25% per year, means you are earning $0.445 per day in interest, or earning anadditional pre-tax interest income of roughly $81.

The amount is small, but for the effort it can be worth it especially of you canautomate your transfers on-line.

3. Security. Lost credit cards can be replaced easily. Cash is almost always gone for good.

4. Purchase protection. When you make a purchase on many credit cards you are offered purchase protection.

Tips To Reduce Your Exposure

If you find yourself the impulsive type of personality here are some tips you can use to reduce the likelihood you’ll fail to pay your bill in full or run into trouble.

1.) Reduce the number of credit cards you have. Do you really need two, three, orfour MasterCard’s and a plethora of department store charge cards? Do youactually use them all? Consider reducing the number of credit cards you have toone or two. Ideally, you could have one card for all of your regular”discretionary” purchases and another card for major purchases.

Having too many credit cards may expose your credit rating and can affectyour borrowing capacity.

2.)  Consider reducing the limit on your discretionary purchase card.  The limit you choose should reflect the amount of available cash you would normally spend on discretionary items.

3.)  Tell your credit card provider to not annually increase your limit.  This does not mean you’ll never be able to increase your limit, but rather you must ask to have your limit increased.

4.)  Credit cards offer purchase protection and may offer extended warranties to their cardholders.  If you make periodic “big ticket” purchases, you may want to have another card with a higher limit to allow you to make these purchases. If you find yourself tempted or are the type to make purchases on impulse, leave this card at home or put it in your safe deposit box at the bank. If you make it not easily accessible then the temptation to make an impulse buy is reduced. But remember not to make a purchase unless you can pay the balance in full when it is due.

The trick is to put yourself in control by limiting your available credit to no more than what you would have for cash and thus ensuring you are always in a position to pay your bill in full when it is due.

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The first few months will be the toughest.  Along with the personal issues you may have you probably have many questions that you need answers to.

• How will I support myself and my family?
• How do I manage my cash flow?
• What is the best way to deal with my severance package?
• What do I do with my pension benefits?
• Can I claim unemployment insurance benefits?
• What about my health insurance?

 You need to take stock of everything and develop a plan to help you though this difficult time.

Get Your Finances in Order

You need to have a clear picture of your net worth: What you own and owe as well as what your monthly obligations will be.  Develop a conservative but realistic budget for the next 6 to 12 months.  Look at your expenses and see if there are any expenses you can defer or avoid, any payments you can reduce, and anything you can give up in the short term.

If you have established an emergency fund or have other investments, you should be on the right track.  If not, you need to consider other options such as your severance package or unemployment insurance to help get you through this time.

Severance Options

If you have a choice you may decide to take you package lump sum so that you can invest you money as quickly as possible.  However, since your package is almost always taxable you might want to consider spreading out your payments to delay taxes.

Your retirement plan may be a significant portion of your package.  You may need to withdraw the funds and pay the taxes, transfer the funds to a new employer’s plan, leave the funds on you old employer’s plan, or roll-over the funds to and IRA.

Health Benefits

Loss of employment may mean a loss of health benefits.  In certain circumstances your former employer may allow you to keep your benefits for a period of time.  If not you may need to find a benefit plan for yourself and your family.  A provider such as eHealthInsurance can provide benefits in the interim.

Develop a Plan

It is east to become preoccupied with your situation and lose sight of the big picture.  Whatever your situation, it is important to consider all of your options and develop a plan that is right for you.  Life is unpredictable but a well thought out plan will help reduce anxiety and help identify critical issues that must be addresses now.  The plan will provide some certainty in your immediate future. 

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I am shocked that someone would turn down free money.  The way I see it, I am giving up 5% of my annual salary and in return I am getting a 100% return on my investment right at the bat.  Three are very few investments out there that can tout a 100% immediate return on investment.  In my case, my plan is fully vested when the company makes the contribution, so if I had to make a withdrawal, I’m already ahead of the game since half of the money was not mine to begin with.

Now I have heard over the years that people say that in these types of program the funds are invested in a mutual fund and the fees associated with mutual funds eat away at the returns.  But perhaps those that feel mutual funds are expensive (and I am one of those people) are missing the point here:  It doesn’t matter of the funds are expensive as long as they have a somewhat decent positive return and remember half of the investment is free money.

Any matching is better than none in my opinion!

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When evaluating whether you need to have insurance you need to consider whether you can afford to assume the risk and insure the risk you cannot afford.  Phillip Brewer of Wise Bread believes that there is no reason to insure predictable even if large.  You would not buy an insurance policy to cover your car wearing out but you would buy coverage in case you had an accident.  Thus you should budget for the large, predictable expenses (a replacement car, annual property taxes, etc.) and insure those expenses that have a probability of occurring or not and that you can’t afford to cover if they did occur.

What Should Be Insured?

Depending on your level of income, there is really no limit to what you can self insure.  If you are considering self insuring you should understand the probability of the event occurring (risk) and whether you could afford if it did occur.

Needless to say most of us should all have house insurance, car insurance, life insurance, disability insurance, and health insurance.

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Once enough has been saved for the emergency fund, many people choose to keep these funds in savings accounts, money market funds, treasury bills, or even certificates of deposit.  My question is why should these funds remain in very short-term instruments that have such low returns when you already have a line of credit as an emergency fund?

By keeping emergency funds in savings accounts or short-term investments your capital is tied up capital in low rate of return investments.  With the effects of inflation, you run the risk of having the purchasing power of your emergency fund actually decrease over time.

An Alternative: Line Of Credit & Cash Invested

If you need to establish an emergency fund, why not set up a line of credit as your emergency fund and then systematically invest your contributions into mutual funds, stocks or bonds? 

The contributions should be treated like an insurance policy premium and made regularly.  The investments will be subject to the market and should generally earn better returns than savings accounts or CD’s.  If you have a short term cash need, draw from the line of credit and pay it back immediately.  If you emergency need is longer-term you can cash in your investments and pay the line of credit.

The Risk

Since the investments will be in variable return securities, there is a down size risk that the market may go down and your investments may lose value.  However, if you plan for a market decline in your investment strategy, you can hedge that risk as well.

Resources

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