HALF OF ALL MY SUBSCRIBERS WANT TO KNOW THESE TWO THINGS ABOUT MONEY………
Did my Buzzfeed style headline get you to read this far? I promise you won’t be disappointed!!!!!!
One of my two subscribers asked me some interesting questions about money this weekend. But before we get to that, let’s look at a stock pick.
Kinder Morgan (KMI) has the largest network of natural gas pipelines in the United States. The company’s pipelines deliver gas from all the major natural gas fields in the US to places where the gas can be used.
The future is electric and renewable. But in the meantime – natural gas is a great alternative to coal or oil. Natural gas emissions per Btu of energy produced are half that of coal and 30% lower than oil[1] and the use of natural gas in power generation is growing rapidly as coal burning generation phases out. You have to burn something to charge all those Tesla batteries. It’s going to be natural gas for quite some time.
A quick look at the numbers for Kinder Morgan:
The price for which any stock sells depends, in the short run, on how popular the stock is. But over a longer period of time the price is usually a function of how much money a company makes and how fast it’s growing.
A company’s earnings are always lumpy. So, I like to look at a four-year average of earnings per share. And since growth is lumpy. I look at the annualized growth rate of the four-year average of earnings per share.
Since 2011, KMI has grown its average earnings per share 17 ½ % annually. I figure, if they grow their earnings, on average, 17 ½ % a year for the next 10 years the average earnings per share will be a little more than $4 a share in 2032.
During the period between 2011 and now, the stock has typically sold for 30 times earnings. That’s higher than the average pipeline business sells for (according to analysts typical is 16 times earnings). I’ll assume I will sell it in ten years for 16 times average earnings of $4.17 a share: $67 a share.
In the meantime, the stock pays a dividend of about $1 per share per year. That’s more than 5% ($1/$17) - so better than I can do leaving the money in a savings account.
So that’s my pick of the week. I’m buying KMI on Monday at some price around $17 a share. Then I’ll collect the dividend every year for ten years then sell it for 4 times what I paid for it.
HALF OF ALL MY SUBSCRIBERS WANT TO KNOW THESE TWO THINGS ABOUT MONEY………
Okay, back to my catchy headline. College Daughter is home for the Winter Break. We were talking about money. She would like to be rich some day. But she suffers terribly from a condition she calls “Happy Fingers.” This disorder is, I’ve learned, quite common among college aged girls.
Symptoms of “Happy Fingers” include an above average number of Amazon packages delivered to the door (think once a day.) And a low number of dollars in the bank.
So how should a college kid get rich? She has to spend less than she earns and invest the difference.
She should keep spending on college tuition (but only if she’s going to finish college). College tuition makes the most sense if she gets a degree that lets her get a high paying job in a field that always needs people. So think about engineering, accounting, nursing, teaching. Forget Poetry and Gender Studies.
She should work through college so she doesn’t take on much debt. And while she’s working in college she should start saving for the long term.
Open an investment account separate from the bank account. Do it somewhere cheap (I use Fidelity on-line). She should put 10% of every paycheck – starting while she’s in college – in the account. Set her bank account to auto pay so money goes into Fidelity every payday.
She should set up her Fidelity account to buy two stocks every month. Buy RSP and SPY. RSP is fund that holds an equal percent of its money in each of the 500 stocks in the Fortune 500. SPY also holds its money in shares of the Fortune 500 companies. But it holds more of the big companies (like Amazon, Apple, Facebook, Google) and less of the smaller companies. She should not try to buy individual stocks in this account. Stock picking is fun. But it’s no way to get rich.
History tells us that over a long period of time the value of stocks increases by 8% a year. By buying these low-cost funds her return will be as good as the stock market.
Do this for the next 45 years and five hundred dollars turns into $2.2 million dollars. The numbers look like this:
HALF OF ALL MY SUBSCRIBERS WANT TO KNOW THESE TWO THINGS ABOUT MONEY………
The second question was even more interesting. Come back next week and I’ll answer that using last week’s pick, Phillips 66, as the example.
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That’s all for today folks.
Okay, one more thing:
DAD JOKE:
Question: Where does the weatherman go for a drink after work?
Answer: To “The Isobar”
OK, nobody else got it either. You see, an Isobar is this:
Definition of Isobar:
i·so·bar
/ˈīsəˌbär/
In Meteorology a line on a map connecting points having the same atmospheric pressure at a given time or on average over a given period.
[1] https://www.c2es.org/content/natural-gas/