Do-it-yourself investing is more than throwing money into an index or mutual fund and hoping that managers choose good stocks. Those potential gains are miniscule. The DIY person is smart, well read, and excellent in their field of study. The transition from their area of expertise into the stock market is an acceptable risk-to-reward investment that can return 100%, 200%, and more.
DIY investors don't typically quit their day job. They manage their stock portfolios in spare time or perhaps in leu of the common smoke or coffee break at work. Some popular online platforms for buying and selling stocks include: E-Trade, TD Ameritrade, and Robinhood. For additional help, try this simple guide on how to buy stocks.
Three acceptable DIY investing goals for 2018
The base goal for DIY investing in 2018 is to beat the S&P 500 Index. The goal has been said before to beat the bank. This means to beat the interest rate of a savings account or other money market instruments offered by "those guys." The bank is typically offering less than 1% interest for a savings account and maybe 3%-4% return on other products if you lock the money for 15-20 years. This is too low of a mark to beat. A DIY investor should strive to beat the popular indexes instead.
In 2017, the S&P 500 Index began the year at a low of approximately $2258 price per share (PPS). By the end of the year, a closing high was at $2674 PPS. An investment in the S&P 500 Index for the full year would have returned 18% on investment. Round this up to 20% and you have a conservative goal for a full portfolio or perhaps a standard for returns on individual stocks. For example, if an investment in a company results in a 20% gain in just a few months, it may fit a conservative strategy to sell that investment for a gain that beats the indexes. Holding that stock investment for a full year, may or may not continue to increase. The opportunity cost of selling conservatively is that you will not realize the reward of a multibagger.
A multibagger investment is a return on investment equal to at least the doubling of the principle investment. A 100% return is the doubling of the investment, aka, a double. The analogy is to baseball for taking more than one base after hitting the ball. A 200% return on investment, such as the above pick on NEPT/Neptune Wellness Solutions, is like a triple. The analogy doesn't hold entirely as there are only three bases, one home plate, and stocks can achieve a return well over 400%. Using the term multibagger is a good catch all phrase to express an investment that returns 100% or more. The list below shows multiple investments/stock picks that have returned 100% to 200% within a year's term. For longer holds, such as with Amazon.com, Inc. (NASDAQ: AMZN) the return could have been more than that. More examples are shown below and can be further reviewed at TipRanks.com.
Dividends are the cash paid by a company to its shareholders. The payments come from the earnings that could have otherwise went towards paying off debt, building new factories, research and development, etc. One way to value a dividend payment is to compare it unto a bank paying interest to the savings account holder. Whereas a bank hardly will pay 0.50% at times, a dividend stock company may pay upwards of 10%.
To better explain the percentage or what is called Div Yield, the nano-cap stock for Crown Crafts, Inc. (NASDAQ: CRWS) serves as an example. This stock has paid $0.32 a year in dividends. That is a $0.08 dividend payout for each quarter. A recent PPS for Crown Crafts, Inc. was $6.10. This means the dividend yield is about 5.25%. A DIY investor could place $100 in the bank and receive a total interest of $.05 by the end of the year; or buy $100 (16 full shares) worth of Crown Crafts, Inc. and receive $5.12 in dividends. There is a higher reward for dividends, because they also include a larger risk than bank savings accounts. The stock price for Crown Crafts, Inc. can also reduce in value, which means one could lose part or all of the initial $100.
If a dividend stock is paying less than 5% yield it could mean that they are devoting more earnings towards growing or maintaining the business. This could be a healthy sign for longevity. It could also mean that they are reducing dividend payments due to trouble, or the stock price has greatly increased due to good news, and the div yield is temporarily reduced by this new disparity. The meaning varies and requires further research.
If the div yield for a stock is greater that 5%, it could be a trap for DIY investing readers. A company may have an extreme high paying dividend only to entice unsuspecting new shareholders. The final result could be drastic reduction in the stock price, insiders bailing from their positions with the help from new, novice investors that joined late. Buyer beware, however there could be good opportunity in a high div yield as well. For the case with Crown Crafts, Inc. the company is small with fewer traders in the market. They have had flat revenue growth lately, but continue to buy (acquire) other companies to further growth. The recent closing of Toys R Us is of concern, as they were a major purchaser of Crown Craft goods. The current value of a +5% div yield could be a temporary opportunity as short-term concern has lead to a decrease in stock price while the $0.08 quarterly dividend payment remains the same. Read more about Crown Crafts, Inc. at Seeking Alpha.
In summary, try looking for dividends with more than 5% yield and then upon further review, sort out the more healthier and opportunistic investments. Having a good div yield stock is a way to diversify in types of stock investments. A good base goal for investing is to beat a popular index. Picking stocks that return 20% or more is possible for the DIY investor. Finally, with good screening and research, the goal is to make multibagger stock investments.
Disclosure: I am/we are long NEPT, CRWS, and no positions in the other mentioned stocks and with no plans to initiate any positions within the next 72 hours.
Image credit: A DIYSI derivative of Goal mouth fracas by Ronnie Macdonald (CC BY 4.0).
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Articles are written by Travis Brown at Seeking Alpha. Information covers stocks in the NASDAQ stock market and NYSE stock market.