In my initial review of new brokerage firm Motif Investing, I wanted to use this new brokerage structure to create cheap, custom ETFs – specifically, baskets of dividend-oriented stocks that for example match the S&P Dividend Aristocrat or Dividend Achiever companies that have raised dividends for 10-25 consecutive years or more. Motif asked if I had any specific questions, I sent some over, and here are the answers as provided by Tariq Hilaly, Motif Investing’s Co-Founder & Chief Investment Officer:

MMB: I’m specifically interested in dividend-oriented strategies. Do you offer any motifs that offer high dividend yields?
A: We sure do. As you know, a motif is a portfolio of up to 30 stocks reflecting a specific idea or theme. For starters, we have the Energetic MLPs motif, which is made up of master limited partnership stocks that have a current composite dividend yield of 7.20%. This motif comprises more stable MLPs because those with the highest debt-to-equity ratios were screened out. Motif members can find each company’s dividend yield by logging in to view the motif’s Overview page, clicking on the Detail Table, then clicking “Add Columns” and checking the dividend yield box. Like all motifs, this motif can be customized in order to meet the needs of the investor’s particular investment strategy.

Another motif, Office Space is made up of commercial real estate investment trusts (REITs) that have a current composite yield of 3.88%. This motif avoids REITs with more than 30% of their debt maturing in the next three years to control for refinancing risk.

Our Recession Resistant motif screens for companies with a low debt-to-equity ratio, high dividend-coverage ratios, and positive dividend growth, then ranks them by dividend yield – those stocks have a current composite dividend yield of 3.21%. These companies are known to carry the potential to survive even a deep recession without having to cut their dividends as quickly as many companies had to do during the recession of ‘08-‘09 (dividend cuts can often result in stocks taking a big hit). Note: The dividend yields provided above are as of August 29, 2012.

MMB: Are there plans in the future for me to be able to “share” a custom motif with others? Or at least name them and save them locally in my own account?
A: Yes, we plan to launch a feature later this year that will let our members share a motif they’ve customized by adding or deleting stocks– or change a motif’s weightings. In the future, they’ll also be able to name the custom motifs any way they want.

MMB: I figured a reason why Motif doesn’t really venture into this is that you can’t mention specific indexes without paying royalties, is that partially correct?
A: Yes, you’re correct. For us to replicate or mention an established index we have to license it. So at this point, we don’t mention specific indexes.

MMB: Does the motif ever “rebalance” in the future back to the original weightings to prevent drift?
A: Yes, we rebalance most motifs on a quarterly basis. On rare occasions, with longer-term investing strategies that take longer to play out, we rebalance once a year.
Since the motifs are designed to represent an idea, we update them according to the rebalancing schedule as the idea evolves, so that they continue to best represent the idea. For example, companies may enter or exit a market – this was the case in tablets, where Amazon entered and Research In Motion and Hewlett-Packard left. So in our Tablet Takeover motif, Amazon was added, and RIMM and HP were removed at the last rebalance. Another example is our Onward Online Ads motif — both Facebook and Yelp were added after their IPOs. That’s how we work to prevent idea drift in our base motifs.

Follow-up

I’m still not interested in any of their current motifs, but I am glad they are open to sharing custom motifs as that can encourage the making some good ones. I looked into the S&P 500 Dividend Aristocrats, but there are 51 of them. With a limit of 30 stocks, I’d have to do some additional screening (or make two baskets, but that would be double the commissions). I just think something could be done here to take advantage of the ability to trade 30 stocks at a time for only $9.95, with no ongoing ETF expense ratios eating into returns. Perhaps someone else can come up with a better idea.

Current Sign-up Bonus

Right now, Motif Investing is offering a $150 cash bonus when you open a new brokerage account with $2,000+ and make 5 trades. If you make 1 trade, you’ll get $50. 3 trades will get $75. Limit one account bonus per household.
[Read more…]

(Update: They are now blocking visits with my referral domain. You can view the site directly by typing in www.loyalfinancial.com.)

I received an e-mail today asking me to look into Loyal Financial Private Investments at LoyalFinancial.com and give my opinion whether it was legit or a possible scam or ponzi scheme. I found that Loyal Financial Private Group claims some of the most consistently positive returns I’ve ever seen on their website. Here are screenshots for posterity:

[Read more…]

When looking at the dividend payout of stocks and ETFs, there are actually a few different ways to measure dividend yield. In general, dividend yield is defined as:

However, there are various ways you can define either of those terms. For the annual dividends, are you looking in the past, or projecting forward? Are you taking the share price at the end of last month, or the most current market price? When looking up information online, you should check to see which definition they are using.

SEC Yield / 30-day Yield
This standardized calculation for ETFs and mutual funds takes the dividends and interest accrued minus fund expenses during the most recent 30-day period ending on the last day of the previous month. That value is annualized (projected forward) and then divided by net asset value (NAV) at the end of that period. This figure works best for funds with regular dividend payments like many bond funds, but not so well for funds with uneven dividend distributions over a year.

Forward Dividend Yield / Projected Dividend Yield
This calculation for individual stocks takes the company’s most recent dividend payment and annualizes it. For example, if the last quarterly dividend paid was 25 cents, it would assume the annual dividend to be $1.00 (even though it may not be). Then divide that by current share price.

12-Month Distribution Yield
This calculation used by Morningstar adds up the trailing 12-month’s income distributions from a fund and divides by the last month’s ending NAV (plus any capital gains distributed). This provides a historical view of actual dividends that were paid, but may not accurately represent the future.

Trailing 12 Month (TTM) Yield
Similar to above, but for individual stocks. Add up all the dividend payments from the last 12 months, and then divide by the current share price. This backward-looking method can help smooth out any variable or seasonal payouts over a year’s time.

I was updating my portfolio spreadsheet over the weekend and noticed that many of my funds have been a quite a roll recently. The trailing one-year total return of the US stock market is over 21%. I don’t know of any market “expert” that called that, do you? Here’s the return data for the Vanguard Total US Market ETF (VTI) via Morningstar:

(click to enlarge)

This brings me to a great quote on “lumpy” asset returns by David Merkel on Aleph Blog:

Asset returns are not what the financial planners tell you. Asset returns are lumpy. They are feast and famine, with more feast than famine, but with enough famine scare a lot of people away. The good returns come when most are scared, and think the market is rigged. The bad returns come after a period of prosperity, and those that don’t understand the market start investing, because it seems to be free money.

In other words, that 8-10% average annual return of the stock market that we always bring up? That never happens. Here are the annual returns of the Total US Market ETF for the last 10 years:

(click to enlarge)

Up, down, up, down. If you’re going to invest in stocks you should expect this erratic behavior and the resulting uncomfortable feelings, and hopefully figure out how to deal with them. I recommend trying to keep things methodical with buy-hold-rebalance.

If you’re an account holder at either online broker TradeKing or Zecco Trading, you probably know that the two agreed to merge recently. I think the merger makes sense, as they were pretty similar and there is room for savings in consolidation. I have accounts at both TradeKing and Zecco, so it will be interested to see how things work out in the end. The merger is currently awaiting regulatory approval, and here’s what I understand so far:

• For the next few to several months, both sites will continue to operate separately until they are fully integrated.
• Expect the pricing of trades should remain the same at $4.95 per stock or options trade plus $0.65 per options contract.
• As they already use the same backend clearing firm (Apex Clearing, formerly Penson Financial), you shouldn’t need to make any changes and future statements should look similar. Bank ACH relationships should transfer over without issues.
• What will it be called? TradeZecco? ZeccoKing? Actually, TradeKing will be the permanent name of the combined company, similar to how United + Continental = United. Zecco was supposed to stand for “zero commissions”, a business model that didn’t work out for them.

What will the final merged product look like? Let’s hope they pick the best features of both sides and drop the worst ones. Zecco’s Forex trading system is gambling as far as I am concerned. The time-consuming login process of TradeKing is something I’d like to see disappear. The features that I would like to keep are the Live Chat Customer Service of TradeKing along with the forward-thinking mobile trading apps of Zecco. As TradeKing is the larger firm, I would guess that their users would undergo the least amount of change in the future.

This may also be the last time you can double-dip on any bonuses, like the TradeKing Referral bonus and the Zecco Friends program, as the two accounts should be merged into one eventually.

I read on CNN today that a company called “Zeek Rewards” was just shut down by the SEC for being a ponzi scheme. After some research into how ZeekRewards worked, all the same telltale signs were there from the original Ponzi scheme and also another scheme that became popular in 2006.

Here’s a synopsis of the original Ponzi scheme, based on my reading of the book Ponzi: The Incredible True Story of the King of Financial Cons:

Let’s start with Charles Ponzi, an Italian immigrant in the 1920s who promised a 50% return in only 45 days, compared to the 3-4% [annual returns] that banks were giving out at the time. He stated that the crazy returns he got were from some sort of international transactions involving postal stamps and currency exchanges. The first people involved were skeptical, but when he delivered on the promise in 45 days, people started rushing in with their money. At his peak, he had about $10 million (in 1920s money!!) of other people’s cash. Of course, there was a spectacular collapse when the government finally stepped in and shut it down. Even at the end, Ponzi still had many devoted followers who refused to believe it was a scam.

The 12DailyPro story from the same previous post (2006 SEC press release):

12DailyPro.com debuts, and promises a 44% return on your money in only 12 days, as compared to the ~4% [annualized returns] banks are giving out now. The investment program states that the money comes from users surfing websites with advertisements for about 5 minutes a day, amongst other vague things. The first people involved were skeptical, but as the site consistently delivered the said returns, people started rushing in with their money. Millions of dollars are reported to have went through the company. Due to recent investigations by various state and federal authorities, the site has shut down, with many people losing tens of thousands of dollars. Even during this collapse, 12DailyPro still has many devoted followers who refuse to believe it was a scam.

The Zeek Rewards Story
Zeek Rewards debuts in 2011, and promised a 1.5% daily return on investment, as compared to the ~1% APY banks are giving out now. The program proudly states that it’s not an “investment”, but they are simply “profit-sharing” with you in exchange for marketing their penny auction website with the simple task of posting ads on public classified sites like Craigslist. The first people involved were skeptical, but as the site consistently delivered the said returns, over a million people started rushing in with their money. As of August 2012, the SEC has frozen $225 million in investor funds that remain in the company’s bank accounts, while millions have been siphoned off for the operators of this scam. Even after being shut down, Zeek Rewards still has many devoted followers who still support the site and believe it was legit.

From what I could gather from a Google cache, a purchase of “VIP Sample Bids” (1 VIP ProfitPoint = $1) would earn a ~1.5% return daily for 90 days (ex. $1,000 would return $15 after one day) and then expire. You could then reinvest your money again into more bids to compound your returns, meaning a $500 initial investment could turn into over $15,000 in a year. This time, the victims thought this impossibly easy return for work that took minutes a day was legit because they were told it was profit-sharing from promoting the penny auction site. (By the way, penny auction sites are ripoffs as well, but most are legal ripoffs for now.)

There will always be scams. What I can’t believe is that the ringleader Paul Burks was allowed to settle the case without admitting any wrongdoing by agreeing to pay a $4 million penalty with no jail time! From reading the press release, it’s hard to decipher how much the SEC will recoup of the “several” million that Burks already stole. Such lax enforcement and soft penalties all but guarantees this will happen again.