Cuapa Asset Management

Archive for the ‘Investment Options’ Category

So, you’re thinking about investing. Maybe you are planning to retire, or for a child’s education, or for a house. Maybe you just like the peace of mind that comes with having a sizeable amount of cash that you sit on.

But the market is currently hectic due to the recession (or depression as many of us argue), and you have no idea which companies only exist because of temporary government subsidies, and which companies will be able to weather the storm and grow your money over the long term without going out of business.

Fortunately for you, there are a few sectors with excellent equities available on the market. Here are some suggestions for where to look for companies which will continue to grow despite the economic downturn.

Precious Metals

Because of the rapid inflation occurring in many of the world’s central banks, precious metals are more in demand than ever, and will be for years to come. This makes gold and silver mining companies perfect opportunities to invest in, and there are some great junior mining companies with low P/E ratios available on the market. Two companies which come to mind are Northgate Minerals and European Goldfields.

Food

Many things may be purchased less during the recession, but food is not one of them. There will always be a consumer demand for food and beverages, and food stock levels are at a low for recent years in the United States due to all of the producers which have gone out of business. This means that any company still standing is likely to move in to fill the void and make a profit. Produce companies like Chiquita Brands International and Dole may be worth looking into. If you can’t find anything domestically, check out foreign companies like Switzerland’s Nestle, or Japan’s Asahi Breweries. Even first level producers like Norway Pelagic, which is a fishery, offer decent dividends and growth.

Oil

Though there is a “green” energy craze occurring, the world is still going to need oil for the foreseeable future since newer technologies are still inefficient and are only purchased for ideological reasons or because they have been artificially decreased in price by temporary subsidies. Check out the major oil companies, like Valero, North America’s biggest refinery.

Forestry

Not every company has stopped building, and there is still a demand in the forestry sector. However, a lot of it has moved into developing economies like Asia. The Hong Kong and Shanghai exchanges have some excellent offers, and there are even some Chinese companies listed on the American or at least Canadian exchanges like Sino-Forest Corporation which may be worth looking into.

Chemicals

There is still a demand for chemicals, even if domestic producers are producing them inefficiently. Developing economies like China may have good offerings, but even more developed economies like Europe offer this. Check out Germany’s Henkel, which has some excellent dividends and makes long term demand products like Loctite and Dial soap.

There is a debate over whether it’s wisest to purchase dividend stocks, growth stocks, or a combination of both. Here are a few pros and cons of each.

Dividend Stocks

Dividend stocks are shares of companies which focus on paying out a share of their income to investors during given time periods.

Pros

-Dividend stocks often come with less risk attached to them, because the board of directors pays out many of the earnings to investors rather than risking them on new investments.

-Dividends are useful to have coming into an investor’s portfolio if the investor wishes to diversify, because they can reinvest the dividends elsewhere.

-Dividend stocks often allow for the investor to enroll in a Dividend Reinvestment Plan (DRIP), which automatically uses the dividends to purchase extra shares of the stock at a discount, giving the investor greater ownership of the company and greater dividends over time without having to pay extra commissions to their broker each time more shares are purchased.

Cons

-Dividend stocks are often more conservative companies, so there is less of a chance for aggressive growth in equity over s short period of time.

-Paying out dividends prevents companies from using that capital to reinvest in more profitable enterprises which may increase the equity of the stock even more over time.

-Companies may pay out dividends just to maintain investor confidence, even if their sales are poor, making it possible for them to go into debt.

Growth Stocks

Growth stocks, unlike dividend stocks, focus on reinvesting their dividends and growing the equity value of the company’s shares by doing so.

Pros

-Growth stocks are more likely than dividend stocks to show aggressive periods of fast growth due to their reinvestment of capital.

-Companies with good boards of directors may be able to reinvest their earnings better than if individual investors used the earnings to purchase other shares. Berkshire Hathaway, for example, does not pay a dividend and instead lets Warren Buffett reinvest the money and sees excellent returns as a result.
Cons

-If a board of directors is incompetent, makes the wrong choices, or simply is wasteful, capital which may have been paid out as dividends to investors could be simply wasted on bad investments or corporate perks.

-Investors cannot use the earnings from some shares that they hold to invest in a new equity somewhere else on the market.

Summary

There is a clear distinction between solely dividend-paying stocks, and solely growth stocks, but sometimes it’s possible to get the best of both worlds. This is common in foreign companies, particularly European ones. Switzerland’s Nestle, for example, and Germany’s Henkel, both focus on moderate growth while paying out a high annual dividend (five to ten percent) to their shareholders.

The most important thing to keep in mind is the quality of the business’ management rather than how its profits are divided. Only then should you consider the debate over dividend versus growth stocks.