Investing in stocks offers opportunity for greater returns
By David Dickman
By most everyone’s calculation, the COVID-19 pandemic has turned out to be a good thing for the swimming pool and spa industry.
We’ve all read stories about how travel restrictions, lockdowns and other government mandates have forced millions of Americans to hunker down at home for the past year, and how this has lead to a boom in pool construction and maintenance. And by logic, this should tell us that those companies that supply the basic components of pools and spas must also be doing pretty well.
Most of the companies in our industry are privately held. Just like your individual service firm, you are the sole owner. You take all the risks, you provide all of the goods and services, and if you use sound business practices in the operation of your company, you reap all of the rewards. If there are profits, they are yours to keep. If there are losses, you suffer them alone.
Unlike a sole proprietorship, large, publicly traded companies are actually owned by thousands, possibly millions, of owners — each one holding a tiny portion of the company, each portion represented by a single share of stock. You may not be able to buy a piece of your neighbor’s successful pool store or service firm, but you can, via the stock market, purchase a part of some large companies that supply your needs.
To some people, the buying and selling of stock is just a natural extension of their financial management. To others, it is a mysterious, little understood activity, fraught with peril and best left up to experts. In truth, stock investing is simply a way to put your money to work for you and to produce better yields than you could get by simply placing it in the bank. Yes, investing does present some risks when compared to placing your money in a savings account, but at today’s interest rates, putting your money in the bank is almost like storing it in your mattress. The money is safe, but it is really earning virtually nothing for you.
As an example, we checked on the savings account interest rates currently being offered by three of the nation’s largest banks — Bank of America, Chase and Wells Fargo. All three offer interest rates of 0.1 percent, which means that if you were to put $1,000 in a standard savings account at any one of these institutions, your money would earn exactly one dollar in interest every year. All three institutions offer some higher yielding accounts, but these require larger investments. And still, the yield is only about 0.5 percent, which would give you an annual profit of five dollars for every $1,000 invested.
Now let’s say that instead of keeping your money in a savings account, you had purchased stock in a profitable company that pays dividends to its shareholders. For this particular example, we chose one of the publicly traded companies that has close ties to the pool and spa industry — Emerson Electric Co. (stock symbol EMR), which supplies many of the electric motors used on pool pumps. A dividend is a cash disbursement that a company issues to its shareholders. Often, these are issued every three months, after the company looks over its books and assesses its profit or loss for a given quarter. Publicly traded companies are required to disclose their profits, and you can view this by reading the firm’s quarterly report or the summary that is available online. After the report is issued, the company’s board of directors votes whether to issue a dividend and how much that dividend will be. Often, the company will commit to issue a fixed dividend every quarter. This is a promise to shareholders that they will be rewarded for putting their faith — and investing their money — in that particular company.
The dividend takes the form of a cash payment to the owner of record of the company stock on a particular date. In the case of Emerson Electric, in 2020 the company issued dividends of 50 cents per share in February, May and August and a dividend of 50.5 cents in November, for an annual dividend payout of $2.05. It also announced another 50.5-cent dividend that was paid on Feb. 11, 2021.
As of February 9, 2021, Emerson stock was selling for $85.90 per share, so a quarterly dividend of 50.5 cents ($2.02 per year), would represent a return on investment of 2.35 percent — a whole lot better than one would do by leaving one’s money in a savings account.
Traditionally, purchasing stock with an eye toward collecting dividends was the
way that savvy, conservative investors put their money into the stock market. It is a slow, steady grind that produces profits that exceed what one would receive by putting the money in the bank.
But there is another — far more risky but far more potentially profitable — investment strategy that is used by many people who “play” the stock market . And that is using the price of the stock itself to generate profits. Using this strategy, one would purchase shares at a given price with an eye to selling them at a higher price sometime in the future. This is a game that is more akin to gambling than investing, but it is nevertheless one that grabs the biggest headlines and paints the most familiar picture of what it means to put one’s money into stocks.
Let’s take another look at Emerson Electric. On February 10, 2020, Emerson stock was selling for $73.39 a share right before the pandemic started making us really nervous. Then, as the country adjusted to its first big COVID-19 shock, the price of the stock fell dramatically. By March 23, it had dropped to $38.08 per share before starting its recovery. Since then, it has risen steadily to nearly $86. You can tell lots of stories by looking at that picture.
Imagine that you had purchased 100 shares of Emerson on March 23, 2020. You would have spent $3,808. Imagine that you had sold your shares this Feb. 9 for $8,590. You would have made a profit
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of $4,782 or 126 percent!
Now imagine that you had purchased your shares on February 10, 2020, for $7,339 and finally bailed when their value fell to $3,808. You would have lost $3,531, or 49 percent of your investment.
Other stocks related to our industry have seen equally dramatic changes in their prices since the pandemic took hold.
Pool Corp. (stock symbol POOL), which bills itself as “the world’s leading wholesale distributor” of pool equipment, parts and supplies, is the parent company of SCP, Superior Pool Products and Horizon Distributors. On February 10, 2020, its stock was selling for $227.55 a share. By March 23, it had dropped to $169.31. On February 9, 2021, it was selling for $360.29.
For investment purposes, Pool Corp. paid a dividend of 58 cents per share in May, August and November of 2020, with another dividend expected in March, 2021. That’s $2.32 per share annually, assuming no change in the March payout. Based on its $360.29 selling price, that’s a return of 0.65 percent — not as healthy a return as that of Emerson, but still better than one could receive from a bank savings account.
Finally, let’s take a look at Pentair (stock symbol PNR), certainly one of the nation’s largest manufacturers of pool and spa equipment. On Feb. 10, 2020, a share of Pentair stock was selling for $43.84. Then, as the pandemic hit, its price tumbled, hitting $22.85 by March 23. Since then, it has climbed steadily, closing at $54.81 on February 9, 2021.
For investment purposes, Pentair paid dividends of 19 cents per share for all four quarters of last year, an annual yield of 76 cents per share. In January, its dividend was increased to 20 cents. Assuming an annual dividend payout of 80 cents per share in 2021, based on its February 9 price of $54.81 per share, that’s a return of 1.46 percent — nearly 15 times that which a bank savings account would yield.
It’s interesting to note that all three of these pool-related stocks followed a nearly identical price pattern since February, 2020, as all of them dropped dramatically, bottomed out on March 23, then rose steadily through the rest of the year.
Conservative investors — who put their money into profitable companies and look for their returns in the form of dividends — often look for declines in the share price of stocks before they invest. A lower stock price means that a steady or growing dividend will produce a higher percentage of profit.
Those who believe that profits can only be gained by rising share prices are often disappointed when prices eventually fall.
That distinction is the difference between investing in and “playing” the market.