Why You Should Be Investing, Right NOW

With the economy in a downturn, everyone knows cash is king.  However, the reason for this is simply because when you have cash, or liquid assets, you have an increased ability to act on opportunities when they present themselves.  By all means, holding cash through the length of a recession is not the way to capitalize on some excellent opportunities. 

With that said, the most important part of opportunity is knowledge.  Knowing when the market is at its lowest is a knowledge that many people would love to have.   However, it is unrealistic for anyone to actually know this with certainty.  You must realize that the market reacts, generally, to news.  And with news, in order to make successful investments, you must be able to interpret the reaction of the market to the news, so that you can, over time, anticipate it, and turn that anticipation into gains.

So here is what everyone should be doing right now.  Let’s forget about capital appreciation for the moment. Cap appreciation is when your money invested increases because the dollar value of the stock increases.  While gains through this method are not to be ignored, cap appreciation is much harder to predict.  

What we will be focusing on is dividends.  With the market in such a slump, there are some excellent possibilities right in front of us.  In this article, I will be assuming that you are both younger, and have some amount of cash to invest.  If the former is not true, that’s fine; however, you may not be able to reap the full benefits of my plan.  If the latter is true, go get a second job so you can have money to invest.  With that said, here goes.

Currently, there are some extremely high yield dividend stocks with moderate risk.  What this means is that you can invest small amounts of money, and get comparably large returns.  The two examples I will use to demonstrate my point will be Frontier Communications, (FTR) and Arbor Reality Trust Inc (ABR).  Both are companies in which the stock price is depressed, and both fit the high yield categories.  If you are interested in more stocks which I am watching, check the forum, as I’ll post them there as I find new deals. 

Lets take ABR to start.  The current share price is around $3 a share.  Now, everyone sees a real estate investment trust (REIT) and runs away lately.  But, on further inspection, you can see that ABR is a diversified trust.  From CNBC (profile tab):

“Arbor Realty Trust, Inc.. The Group’s principal activities are to invest in real estate related bridge and mezzanine loans, preferred equity and, in limited cases, discounted mortgage notes and other real estate related assets. It is a self-managed and self-administered Real Estate Investment Trust (REIT) and qualifies under section 856 of the Internal Revenue Code of 1986. It conducts substantially all its operations through their operating partnership, Arbor Realty Limited Partnership. At 31-Dec-2007, it had 147 loans and investments in its portfolio. These loans and investments were for 70 multi-family properties, five condominium properties, 34 office properties, 15 hotel properties, seven commercial properties, 12 land properties and four retail properties. It operates throughout the United States.”

So as you can see, unlike General Growth Properties (GGP), which specializes in malls, ABR is well diversified.  If you take a further look at the earnings data, ABR has a solid past and solid forward outlook. 

Here’s the kicker.  At $3 a share, ABR reports earnings per share of $2.03.  That’s better than double their dividend of $.96.  So, consider this.  If you bought 100 shares for $300, you would effectively receive $96 by next year, with relative certainty (considering forward outlook and company earnings profile).  That’s a 30% return on your money.

Moreover, if you let your dividends reinvest each quarter, after 1^st quarter, you’d receive $24.  However, after 1^st quarter, you’d have 108 shares, so 2^nd quarter, you’d receive $26.  That’d give you 8 more shares, so you’d have 116, and 3^rd quarter you’d receive $28.  You’d have 126 shares heading into 4^th quarter, therefore giving you $32 for your final dividend payment.  So you’d receive $110 back after one year against your investment of $300.  And that’s excluding Cap App. 

The part that I find most appealing is, if you had say, $12,000 to start, you could get 4000 shares, and if you reinvested the dividends ($960 per quarter) you would increase your per quarter dividend by approx $300 for each quarter you let it sit. 

Imagine if you did that, and then left this stock sit for a year, maybe two.  In two years, at that rate, a $12,000 investment would effectively be worth $21,000, and if you stopped reinvesting the dividends, you would receive $1,600 every quarter in cash, or approx $525 per month.  I know lots of people that have car payments that are way less than $500 a month.  With a great dividend history, while not a sure thing, ABR will most likely continue to pay dividends.  So an investment of 4000 shares today will equal $500 monthly cash as early as 2 years from now. 

This whole phenomenon is only possible because of the unusually low prices today.  If the price of the stock climbs back to $15 or $30 a share, this system no longer works (as quickly).  But then again, if the price rises that much, you’ll have made your gains in cap app.

This same concept applies for FTR, in the same way except FTR is a safer bet, but therefore higher priced.  At $8.50 a share, it will take longer to get your high monthly cash flow, but it is less risky. 

Tomorrow I’ll post about creating a sell command in your trading software, and how it can prevent you from losing while collecting dividends.  For those of you who are afraid to lose everything, I’ll show you how to prevent that from happening and build a bit of your confidence.  Remember to watch the forum for new stock tips, it will be in the business section.

Tags: ABR, capital appreciation, dividend, economy, FTR, GGP, investment, investor confidence, market, Money, REIT, Risk, stocks