Lottery Tickets, Risk vs Reward – A Middle Class Rant VI

Human psychology is both tremendously fascinating, and mind numbingly scary. Although, there are probably a million different examples that would illustrate the fascinating delusions of the human psyche there is one in particular that I’d like to talk about…the risk vs. reward calculation that goes on (consciously or unconsciously) in the human mind when they purchase a lottery ticket. Ok… let me set the scene; the average lotto 6/49 payout is about 3 million dollars, a single ticket costs $2 and the odds of winning are 1 in 14 million. Just to put this into perspective your chances of being hit by lightening in Canada are 1 in 2.5 million. So, if you believe you’re going to win the lottery than you must also believe that you’re going to be struck by lightening at least five times in your life. However, the human psyche doesn’t work like that and despite the overwhelming odds 3 million dollars is a lot of money to most people, and because the tickets are only $2 people are willing to play regardless of the near impossible odds of winning. I can understand and relate to their logic “$2 for a chance at the impossible” it’s worth the risk. However, what I truly find fascinating is the predictable and dramatic increase in ticket sales as the jackpot gets larger. This phenomenon is often colourfully reported in the media with headlines such as “$40M Lotto 6/49 prize sparks ticket frenzy”. These ticket buying frenzies force me to ask the question; who is buying all these extra ticket? Regular lottery players buying more tickets? Or is it irregular players that have been lured by the prospect of winning the $40 million? My guess is it’s probably a combination of the above, but the real question is still unanswered, at what point does the human mental logic chip kick in and say “$2 for the chance at winning $3 million – no thanks… but given the same impossible odds of winning $40 million - now that’s worth 2 bucks.”

Home Renovations

I’ve recently been doing some renovations to my home in an attempt to increase its value before I sell later this year. I’ve budgeted $2000 to complete my “home makeover” and I’ll be doing all the work myself. I’ve done some reading on which areas of the house provide the most bang for your buck and as the literature suggests I’ll be concentrating most of my efforts on the kitchen and bathrooms but will be spending some time and money on the rest of the house as well. Here is a list of what I plan on doing:

1. Paint dated cabinets in the kitchen
2. Move and replace handles in kitchen
3. Remove wallpaper in kitchen
4. Replace kitchen counter tops
5. Tile a kitchen backsplash
6. Replace damaged trim around door in 3 rooms(dog scratched up)
7. Replace bathroom vanity, sink, faucet, mirror and
8. Stain back deck
9. Clean garage
10. Re-insulate garage door
11. Paint from deck
12. Paint entire interior of the house

What Do You Want to Read About?

I thought I would take today’s post to ask you, the readers, what you want to read about? If you have anything you’re interested in or anything you’d like to see me post about please leave me a comment and I’ll add them to my idea pile.

Cheers,
MCM

Payback for Hybrid Cars

This is a follow up post to my May 29th post, “Hybrid Vehicle Rebates”.

I was recently reading an article at MoneyCentral entitled “The Costly Secrets of Hybrid Cars”. This article questions the cost effectiveness of buying a hybrid vehicle and provides the cost difference between the hybrid and gas versions of a few different vehicles. More detail is provided in the article however, a basic summary is that although hybrid vehicles do save you money on gas they are not yet cost effective in the long run due to the higher initial sticker price.

To read the entire article please click here.

Big US Banks

For those of you considering taking a position in a large US bank here are the yields, payout ratios, current PE and forward PE of some of America’s biggest banks.

C
Yield: 4%
Payout Ratio:48%
PE: 13
Projected 2007 PE: 12

BAC
Yield: 4.47%
Payout Ratio:46%
PE: 10.65
Projected 2007 PE:10.38

JPM
Yield: 3%
Payout Ratio:31.5%
PE: 11.7
Projected 2007 PE: 11.3

USB
Yield: 4.7%
Payout Ratio:55%
PE: 13.1
Projected 2007 PE: 12.76

WB
Yield: 4.14%
Payout Ratio:46%
PE: 11.5
Projected 2007 PE: 10.9

WFC
Yield: 3.1%
Payout Ratio:43%
PE: 14.1
Projected 2007 PE: 13.3

Big Canadian Banks

As promised here are the yields, payout ratios, current PE and forward PE for the big Canadian banks. Tomorrow I’ll do the same for the big US banks.

TD
Yield: 2.9%
Payout Ratio: 46%
PE: 15.7
Projected 2007 PE: 13.1

RY
Yield: 3.2%
Payout Ratio: 45%
PE: 14.1
Projected 2007 PE: 13.5

BNS
Yield: 3.4%
Payout Ratio: 46%
PE: 13.6
Projected 2007 PE: 13.2

CM
Yield: 3.1%
Payout Ratio: 36%
PE: 11.4
Projected 2007 PE: 12.3

BMO
Yield: 4%
Payout Ratio: 57%
PE: 14.4
Projected 2007 PE: 12.3

NA
Yield: 3.9%
Payout Ratio:43%
PE: 11.3
Projected 2007 PE:11.1

Banks Dividend Yields & Payout Ratios

I have seen a number of posts recently comparing the yields of various banks to one another in an attempt to determine the “best buy”. Although, I think that the yield is important I don’t think that the yield by itself is a useful number even for those looking exclusively for dividend income. In my opinion you also need to compare the payout ratio of the banks in order to ascertain if:

1. The dividend is sustainable
2. The dividend has room to grow
3. The business has sufficient excess capital to grow

The payout ratio is a simple ratio that investors can easily calculate.

DIVIDEND PAYOUT RATIO = DIVIDENDS PER SHARE/EARNINGS PER SHARE

In tomorrows post I’ll compile both the yields, payout ratios, current PE and forward PE for the big Canadian banks and on Wednesday I’ll do the same for the big US banks.

Chou Funds

I just thought I’d point readers to a recent article in globeinvestor about my favorite Canadian mutual fund manager Francis Chou. I like his disciplined, methodical and deep-value approach to investing and although I’m personally not a big fan of mutual funds I own, and like the Chou Associates Fund for the following reasons:

•I think Francis Chou is a seasoned pro at finding deep value before the market

•He invests in markets that I do not have the time to follow

•15yr return 15.5%

•He invests for the long term and is not concerned with quarter to quarter fluctuations

•Very methodical investing style

•MER of 1.74% (in my opinion it is worth every penny)

(Disclaimer: I’m not your boss or your spouse so do you own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice)

Dividend Growing Stocks – IV

Enbridge (ENB) is an energy distribution, transportation and services company. Core businesses include distribution of natural gas and transportation of liquid hydrocarbons.

-paid a dividend for over 50 years
-dividend has grown an average of 10% yearly
-currently yielding 3.40%
-65% payout ratio
-95% of their business is regulated
-PE 19X
-Stable credit rating (A-, Baa1, A)
-click here for a complete dividend history 1953 – 2006

I don't currently own ENB however it is one I would eventually like to add to my portfolio.

No Post Today or Tommorow

Sorry all but there will be no posts either today or tomorrow as I recently had a new edition to my family and will be tied up for the next couple of days.

Questrade - Comparison Follow Up

Last month I posted a review of Questrade’s WebTrader platform based on my experiences using it compared to the trading account of the big banks. In response to this review I received a number of comments on this post including some from Emil Vojkollari who is the Client Acquisitions Supervisor for Questrade. In the comments section I invited him to write up a comparison of Questrade versus some of his competitors... and that's exactly what he did!

Emil has sent me a .PDF file however, blogger does not have the ability to host them so I’ve uploaded the file to a 3rd party location. Please follow the below link and then click on the large organge "Download" button to view the file sent from Emil at Questrade.

http://www.savefile.com/files/768369

Nine Most Likely DOW Stocks to Raise their Dividend

Well here’s a post for all you insatiable yield seekers out there. Over at http://www.stockpickr.com/ they’ve compiled a list of the nine DOW stocks that are most likely to increase their dividends. Here are the stocks along with their current yield:

1. MO - 4.8%
2. PFE - 4.3%
3. C - 3.9%
4. GE - 3.1%
5. KO - 2.6%
6. JNJ - 2.6%
7. MMM - 2.2%
8. PG - 2.2%
9. WMT - 1.9%

If you want to view the full article please follow this link.

Toronto Star Article

I was doing my daily read over at Canadian Capitalist and just discovered that my blog was recently mentioned in a personal finance article for the Toronto Star. Other blogs mentioned were The Money Diva, Canadian Capitalist and Financial Jungle.

I want to take today’s post to welcome any new readers that have discovered this site through Ellen Rosemans column and to also thank my existing readers who have read, commented and supported this blog over the months.

Geographic Allocation

Yesterday I talked about allocation amongst the asset classes and today I’m going to talk about the second allocation of concern, allocation amongst countries. Before I being I just wanted to reiterate that there are many different views and beliefs on this subject. What I’m going to attempt to do is simply state what I believe is the best country allocation for my unique situation. Yours may be the same but will probably be different based on your unique investment objectives, time frame and risk tolerance.

Contrary to popular opinion I believe that the majority of my retirement portfolio should be in CDN dollars. I am aware of the argument that Canada is only 2.5% of the worlds markets so we should be diversifying as much as possible to take advantage of opportunities globally. Although I agree with that in principle I believe that the majority of my holdings should be in the currency of the country that I will ultimately be retiring in. Once my dividend cash flow is established I do not want my retirement interrupted because the peso, US dollar etc... is having a bad couple of years. I currently have about 70% of my holdings in Canadian securities but would be willing to go as low as 55% (if I thought a great opportunity presented itself) otherwise I would be comfortable between 60% and 70% CDN.

(Disclaimer: I’m not your boss or your spouse so do you own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice)

Asset Allocation I

There are many different views and beliefs on the ideal asset allocation. What I’m going to attempt to do is simply state what I believe is the best asset allocation for my unique situation. Your personal allocation may be the same however, it will probably be different based on your own unique investment objectives, time frame and risk tolerance.

I’m going to deal with 2 elements of asset allocation:

1. Allocation amongst the asset classes
2. Allocation amongst countries (currencies)

I’ll begin with asset allocation amongst the classes. The most common rule of thumb is that ideally you should subtract your age from 100 and that is the maximum percent of your portfolio that should be in equities, with the remainder of your portfolio being in some form of fixed income (basically your age is the percent of your portfolio that should be in fixed income). So according to this rule I should be 27% invested in fixed income. For some this may be true, however in my personal situation I would ideally like to have between 95% and 100% of my portfolio invested in equities. I believe that over time equities will continue to outperform bonds. I am comfortable in an all stock portfolio due to my long investment horizon and the fact that I am willing to take the additional risks and portfolio volatility that come along with a 100% equities portfolio. Additionally, I am pursuing a dividend growth strategy to fund my future retirement so a large temporary decrease in my portfolio value will not affect my retirement income as long as the dividends payments are not reduced. I am aware that companies do occasionally reduce or cut their dividends and it is for that reason that I believe that portfolios should contain between 15 and 25 high quality dividend paying securities.

Tomorrow I’ll talk about my beliefs of assets allocation amongst countries.

(Disclaimer: I’m not your boss or your spouse so do you own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice)

Retirement Nest Egg - June 1, 2007

Retirement Nest Egg at the close of May 31, 2007.

-Up 1.7% from last month
-Up 11.8% in 2007

TRP - 4.20%
ABX - 3.60%
CSH.UN - 3.59%
GWO - 4.70%
PFE - 4.19%
POW - 4.26%
BA.UN - 0.39%
L - 4.01%
UNS - 2.79%
GZ - 2.95%
TD - 13.68%
EIT.UN - 3.02%
JNJ - 5.73%
MMM - 4.03%
ZED - 0.78%
GO.A - 3.09%
O'Shaughnessy’s Global Fund - 3.97%
American Growth Fund - 1.02%
Canadian Value Fund - 3.80%
Small Cap Growth Fund - 4.24%
Chou Associates Fund - 10.45%
Health Science Fund - 0.88%
Bond (9% yield) - 5.35%
Money Market Fund - 5.29%

There were no major changes to my portfolio this month. The 1.7% monthly gain was a result of dividends, distributions, and share appreciation as no new money was added to my portfolio this month.