If the tired old cliché applies and the best things in life are free, then surely its opposite does as well and the worst things in life are fee. ATM fees. Concert ticket surcharge fees. Airport tax fees. How shall we count the feeble paths to hair-tearing aggravation?But if you're an investor, perhaps no fee rankles the spirit and wrangles the portfolio quite like the ones investment managers and financial advisors might overcharge.And while it's possible to sweep such charges under the rug as the cost of doing business, investors do so at their portfolio's peril."I see it every week, when I ask investors questions," says Scott Krase, founder and president at CrossPoint Wealth in the Chicago area. "Whether in a meeting, video conference call or on the phone, I ask questions about their current investments. I ask if they know the risk they truly hold and what do these investments cost them. The answer is the same. They don't know."Yes, but they absolutely need to know."Fees take a percentage of a client's return over time," says Ryan Goldenhar, partner advisor at AdvicePeriod and based in San Diego. "The higher the fees, the lower the benefits of compound interest for a client."Albert Einstein supposedly called compound interest the eighth wonder of the world, adding: "He who understands it, earns it; he who doesn't pays it." Safe to say that if he weren't dabbling in the relativity thing, Einstein might well have made a splendid investment guru. For as money accrues in a portfolio, you can easily reinvest it – think of dividends – and create a mountain of money where none once existed.For example, let's take $5,000 with a monthly addition of $10, compounded 10 years over a return rate of 8%. You'll end up with $12,553. Now, let's do it again: You're now up to $28,840. One more time, and in 30 years you've got a whopping $64,000. And all it cost you was 33 cents a day and some patience.If you tried the same thing but did not contribute that $120 – which a financial advisor's commissions and hidden fees could far surpass – here's what happens: You'll have just $50,313 after those same 30 years, or close to $13,700 less. (You can run similar calculations at investor.gov, a website of the U.S. Securities and Exchange Commission.)The trouble is, many people invest greater sums and hence miss out on much more money than that."Fees can be silent killers in a portfolio," says Daniel Kern, chief investment officer at TFC Financial Management in Boston.TFC is independent and "fee only," but don't be confused by the term. It means they fulfill a fiduciary responsibility to always act in their clients' best interest. They do not accept any sales-related fees or compensation, which is where charges really begin to kill an investor."Managing costs and taxes is an important aspect of selecting an advisor or mutual fund," Kern says. "A 1% annual fee on a $500,000 investment at a 6% return over 20 years compounds to more than $180,000.""Over an investors' lifetime, excessive fees can take an astonishingly huge share of the investors nest egg," says Stefan Sharkansky, creator of the Personal Fund analyzer site for advisors and individual investors. "Although some managers do beat the market before fees, it's impossible to know in advance who the lucky managers are going to be."Investors should observe two types of fees, says Carlos Dias Jr., founder of Florida-Based MVP Wealth Management Group and Excel Tax & Wealth Group."With investment advisors, a portfolio manager – the person who's doing the actual investing – might charge 0.5% more or less, while the financial advisor – the person overseeing the account and providing financial advice – might charge 1%," Dias says.When fees pass those amounts, or commissions run high, it's time to take a closer look at your arrangement. Another danger sign: lack of transparency in how an advisor constructs a portfolio, says Mason Williams, chief investment officer at Coral Gables Trust in Florida."Minimal proactive contact from your advisor is a clue," Williams says. "It's important to ask for service expectations up front and what is to be expected as a relationship begins."That's the key word: relationship. Some people need the financial equivalent of a personal trainer to get themselves in ship shape, even if other people can start and follow their own fitness regimen."If advisors are only charging for investment advice, then arguably the fees might not be worth it to an investor," says Matthew Schulte, head of financial planning at eMoney Advisor.Indeed, one way around high fees is to work with a web-based, automated investing platform commonly known as a robo advisor."Depending on an investor's personal financial situation, it might make sense for them to work only with a robo advisor," Schulte says. "If their needs are simple, pursuing a low-cost, low-touch module is certainly one possible way to achieve their financial goals. However, as their needs become more complicated, an investor can greatly benefit from working with a planning-led advisor who can provide recommendations based on their holistic financial picture."And of course not all fees are alike, and an educated investor needs to learn the difference, says Brent Weiss, co-founder of Baltimore-based Facet Wealth."Start by educating yourself on the total fees that you are paying," Weiss says. "Ask your advisor or your service provider for a summary of all fees so you know the true cost."Because in the end, knowing and dealing with the total cost now is far preferable to and cheaper than dealing with it later.
income
Payout ratio is a key figure for income stocks.
Dividend payments can a reliable source of income for investors. But a dividend is only as safe as the company paying it. When a company runs into financial trouble, dividend cuts are often one of the first ways to stop the bleeding. One quick way to assess dividend reliability is to look at a stock’s payout ratio, the percentage of a company’s profits that is committed to dividends. Generally, the lower the payout ratio, the safer the dividend. Here are seven stocks to buy with payout ratios of less than 40%, according to Morningstar.
BMW (ticker: BMWYY)
BMW is a German luxury automaker that owns the BMW and Rolls-Royce brands. Analyst Richard Hilgert says BMW has strong global brands that give the company pricing power and competitive advantages. Its worldwide presence also provides geopolitical diversification. Hilgert says BMW shares are “attractively valued” given the stock’s yield and its steep earnings multiple discount to peers. Despite a difficult auto market, BMW reported solid earnings and revenue growth last quarter. BMW pays a 4.3% dividend and has just a 22% payout ratio. Morningstar has a “buy” rating and $44 fair value estimate for BMWYY stock.
China Telecom (CHA)
China Telecom is the third-largest Chinese telecommunications company, with more than 230 million mobile subscribers. Analyst Dan Baker says mobile services revenue growth slowed to just 4.4% in the most recent quarter, down from 5.6% in the first half of 2019. However, he says China Telecom’s overall services revenue growth of 1.8% last quarter outpaced its two larger peers and the company added 7 million mobile customers. China Telecom pays a 3.5% dividend, with a 36% payout ratio. Morningstar has a “buy” rating and $63 fair value estimate for CHA stock.
Enel Americas (ENIA)
Enel Americas is a South American electrical energy conglomerate that operates in Argentina, Brazil, Colombia and Peru. Analyst Charles Fishman says Enel Americas provides investors with a rare combination of value, revenue growth and dividend yield. Electricity demand in the four countries mentioned is projected to average 4% annual growth in the long term compared with less than 1% annual growth in developed countries. The company’s diversification also helps minimize political risk. Enel Americas pays a 3.7% dividend with a 36% payout ratio. Morningstar has a “buy” rating and $13 fair value estimate for ENIA stock.
General Motors (GM)
General Motors investors have watched from the sidelines while Tesla (TSLA) has captured all of the market headlines and gains in the past six months. However, analyst David Whiston says GM stock offers investors much more value at its current level. Now that the autoworker’s strike is over, Whiston says 2020 may be another difficult year for automakers as a glut in used vehicles drives down prices. However, he says GM’s autonomous ride-hailing business, its OnStar data-gathering and its 9% stake in Lyft (LYFT) provide potential upside. GM pays a 4.3% dividend with a 27% payout ratio.
Marathon Petroleum (MPC)
Marathon Petroleum owns 16 petroleum refineries and is one of the largest refiners in the U.S. Analyst Allen Good says the energy company is well-positioned to grow earnings in a weak macro environment in 2020, as it delivers on its projected $1.4 billion in synergies from its acquisition of Andeavor. Marathon also is in the process of spinning off its Speedway retail business and undergoing a strategic review of its midstream segment. Marathon pays a 3.7% dividend with a 34% payout ratio. Morningstar has a “buy” rating and $89 fair value estimate for MPC stock.
Banco Santander (SAN)
Banco Santander is the largest Spanish bank, but more than 70% of its revenue comes from international markets. European banks have been challenged due to the low rate environment, but Santander has heavy exposure to higher-growth markets overseas. Analyst Johann Scholtz says Santander’s focus on retail banking and its geographical diversification differentiate it from struggling European peers. In addition, management has a long track record of smart acquisitions that create value for shareholders. Santander pays a 6.4% dividend, with a 37% payout ratio. Morningstar has a “buy” rating and $5.60 fair value estimate for SAN stock.
Mitsubishi UFJ Financial Group (MUFG)
Mitsubishi UFJ Financial is Japan’s largest financial institution. Analyst Michael Makdad says the difficult environment for Japanese banks will likely continue in the coming years. That said, Mitsubishi’s price-book ratio of less than 0.5 makes it one of the best values among global bank stocks. Mitsubishi also has a significant market share in several underbanked regions in Southeast Asia, which could provide long-term revenue growth opportunities. Overseas loans now represent 40% of its total loans. Mitsubishi pays a 3.3% dividend, with a 27% payout ratio. Morningstar has a “buy” rating and $6.77 fair value estimate for MUFG stock.
Dividend stocks to buy with low payout ratios:
BMW (BMWYY)China Telecom (CHA)Enel Americas (ENIA)General Motors (GM)Marathon Petroleum (MPC)Banco Santander (SAN)Mitsubishi UFJ Financial Group (MUFG)
Payout ratio is a key figure for income stocks.
Dividend payments can a reliable source of income for investors. But a dividend is only as safe as the company paying it. When a company runs into financial trouble, dividend cuts are often one of the first ways to stop the bleeding. One quick way to assess dividend reliability is to look at a stock’s payout ratio, the percentage of a company’s profits that is committed to dividends. Generally, the lower the payout ratio, the safer the dividend. Here are seven stocks to buy with payout ratios of less than 40%, according to Morningstar.
BMW (ticker: BMWYY)
BMW is a German luxury automaker that owns the BMW and Rolls-Royce brands. Analyst Richard Hilgert says BMW has strong global brands that give the company pricing power and competitive advantages. Its worldwide presence also provides geopolitical diversification. Hilgert says BMW shares are “attractively valued” given the stock’s yield and its steep earnings multiple discount to peers. Despite a difficult auto market, BMW reported solid earnings and revenue growth last quarter. BMW pays a 4.3% dividend and has just a 22% payout ratio. Morningstar has a “buy” rating and $44 fair value estimate for BMWYY stock.
China Telecom (CHA)
China Telecom is the third-largest Chinese telecommunications company, with more than 230 million mobile subscribers. Analyst Dan Baker says mobile services revenue growth slowed to just 4.4% in the most recent quarter, down from 5.6% in the first half of 2019. However, he says China Telecom’s overall services revenue growth of 1.8% last quarter outpaced its two larger peers and the company added 7 million mobile customers. China Telecom pays a 3.5% dividend, with a 36% payout ratio. Morningstar has a “buy” rating and $63 fair value estimate for CHA stock.
Enel Americas (ENIA)
Enel Americas is a South American electrical energy conglomerate that operates in Argentina, Brazil, Colombia and Peru. Analyst Charles Fishman says Enel Americas provides investors with a rare combination of value, revenue growth and dividend yield. Electricity demand in the four countries mentioned is projected to average 4% annual growth in the long term compared with less than 1% annual growth in developed countries. The company’s diversification also helps minimize political risk. Enel Americas pays a 3.7% dividend with a 36% payout ratio. Morningstar has a “buy” rating and $13 fair value estimate for ENIA stock.
General Motors (GM)
General Motors investors have watched from the sidelines while Tesla (TSLA) has captured all of the market headlines and gains in the past six months. However, analyst David Whiston says GM stock offers investors much more value at its current level. Now that the autoworker’s strike is over, Whiston says 2020 may be another difficult year for automakers as a glut in used vehicles drives down prices. However, he says GM’s autonomous ride-hailing business, its OnStar data-gathering and its 9% stake in Lyft (LYFT) provide potential upside. GM pays a 4.3% dividend with a 27% payout ratio.
Marathon Petroleum (MPC)
Marathon Petroleum owns 16 petroleum refineries and is one of the largest refiners in the U.S. Analyst Allen Good says the energy company is well-positioned to grow earnings in a weak macro environment in 2020, as it delivers on its projected $1.4 billion in synergies from its acquisition of Andeavor. Marathon also is in the process of spinning off its Speedway retail business and undergoing a strategic review of its midstream segment. Marathon pays a 3.7% dividend with a 34% payout ratio. Morningstar has a “buy” rating and $89 fair value estimate for MPC stock.
Banco Santander (SAN)
Banco Santander is the largest Spanish bank, but more than 70% of its revenue comes from international markets. European banks have been challenged due to the low rate environment, but Santander has heavy exposure to higher-growth markets overseas. Analyst Johann Scholtz says Santander’s focus on retail banking and its geographical diversification differentiate it from struggling European peers. In addition, management has a long track record of smart acquisitions that create value for shareholders. Santander pays a 6.4% dividend, with a 37% payout ratio. Morningstar has a “buy” rating and $5.60 fair value estimate for SAN stock.
Mitsubishi UFJ Financial Group (MUFG)
Mitsubishi UFJ Financial is Japan’s largest financial institution. Analyst Michael Makdad says the difficult environment for Japanese banks will likely continue in the coming years. That said, Mitsubishi’s price-book ratio of less than 0.5 makes it one of the best values among global bank stocks. Mitsubishi also has a significant market share in several underbanked regions in Southeast Asia, which could provide long-term revenue growth opportunities. Overseas loans now represent 40% of its total loans. Mitsubishi pays a 3.3% dividend, with a 27% payout ratio. Morningstar has a “buy” rating and $6.77 fair value estimate for MUFG stock.
Dividend stocks to buy with low payout ratios:
BMW (BMWYY)China Telecom (CHA)Enel Americas (ENIA)General Motors (GM)Marathon Petroleum (MPC)Banco Santander (SAN)Mitsubishi UFJ Financial Group (MUFG)