What is Payout Ratio?

Payout Ratio is sometimes called Dividend Payout Ratio or DPR. It represents the percentage of earnings payed in dividends. It is calculated as follows: DPR = (Annual dividend per share)/(Earning per share).

Lower DPR means that the company retains earnings for development. Higher DPR means that there is no much room for development, and the best use of earnings is to pay dividends. Higher DPR is sometimes associated with more mature companies.

As other ratios DPR should be considered in the context of industry. DPR alone doesn't tell us much about the company.

What is dividend yield?

Dividend yield tels us how much money we will receive for each dollar invested. Dividend yield is Annual dividend per share divided by Current Share Price. For example, if the Annual dividend per share is $2 and the Current Share Price is $20, then Dividend yield is 2/20 or 10%.

High Dividend yield could means that the Annual dividend is high or that Current share price is low. We can conclude that high Dividend yield could mean that the share is undervalued. So having other parameters equal one should buy stocks with higher Dividend yield.

A simple way to track expenses

An ideal system for tracking expenses should be simple enough and good enough. It is hard to maintain both simplicity and quality. Therefore, you should think about things you actually want to catch using your tracking system. There are several issues you might want to track.

• date and time of spending
• amount
• specific product that you buy
  
• type of expenses
• point of sale
• manufacturer
• environmental issues (recyclable or not)
• ...
  

It would be nice to have all those features in our tracking system, but it would take several hours per week to type in all those data. One solution is to hire somebody to do it for you, but it is wasting of money if you don't need all those features. So what you could do now?

1. What types you are going to track? It would be nice to track gifts to family, gifts to friend, even maybe gift to a person, but it would take time. My suggestion is "No more than 10 types of expenses". Reserve one type called "Other expenses". Take a look at the following example:
   
   • transport
   • house maintenance
     
   • leisure
   • mortgages and other financial expenses
     
   • food
   • junk food
   • kids
   • clothes
   • investments
     
   • other expenses
     
   
   
2. Create a spreadsheet. Label three columns as: type of expenses, date of expense, amount spent. You could add one column for specific notes if you like.
3. Type in data daily or weekly.
   

Some recommendations

• Usually is doesn't matter if you miss accurate date. It is important to put in appropriate month. Therefore, you could even create combo boxes for choosing types, and months. Any actual data you have to type in is the amount of an expense.
• Even actual amount is not that important (there is not big difference between $27.89 and $28). Such data would be perfect but it could help to get a rough picture about your spending.
  
• Resist the need to modify types for first month or year. After that you can modify the list of types, but keep it simple as much as possible. The key point it to keep is simple because the more difficult tracking is, it is more is probable to abandon the tracking.
• You can group several expenses. For example: You buy apples for $5, carrots for $4, milk for $4.5 and pretzels for $1.5. You can type in:
  
  1. food, May, $13.5.
  2. junk food, May, $1.5
     

Using this method, you should spend no more than 30 minutes per week, or 3-4 minutes per day. And that is perfect for filling the time gaps in daily schedules.

What is Price to Free Cash Flow ratio?

Price to Free Cash Flow ratio is a stock valuation method that compares a company's market price to its free cash flow for a given period. This ratio is similar to the price-to-cash flow. It uses the free cash flow instead of cash flow. Free cash flow reduces operating cash flow by capital expenditures. The lower price to free cash flow ratio the better. This ratio basically tells us how much we spend for each dollar of free cash flow.

For example, if a company generated $100 million in operating cash flow and spent $20 million on capital expenditure, then it generated free cash flow of $80 million. If the company currently has a market capitalization of $2 billion, the company trades at 25 times free cash flow ($2 billion/$80 million).

Capital expenditures are funds used by a company to buy, repair or improve assets such as property, industrial buildings or equipment.

What is Price to Cash Flow ratio?

Price to Cash Flow (P/CF) is an investment ratio used for valuing stocks. It compares company's market capitalization to its cash flow, and it is calculated by dividing share price by cash flow per share. Other parameters being equal, lower P/CF means better investing opportunities. This ratio can be understood as how much do investor spend for a single dollar of cash flow.

As this ratio can vary from sector to sector, this ratio should be used for comparison for companies within the same sector.

What is Price to Tangible Book Value ratio?

Price to Tangible Book Value ratio is a valuation ratio expressing the price of a stock compared to its tangible book value as reported in the company's balance sheet. The tangible book value is the company's total book value minus the value of any intangible assets (patents, intellectual property, goodwill, ...). The ratio is calculated by dividing the share price by the tangible book value per share. Greater PTBV means greater potential risk, since the tangible book value is the lowest price (in theory) at which the share can be traded.

What is Price to Sales ratio?

Price to Sales ratio (or P/S ratio or just PSR) is a tool for valuation and comparison of stocks. It is calculated by dividing company' market capitalization with company's revenue in a given period (usually the most recent fiscal year). We could interpret it as how many dollars you have to pay for a single dollar of revenue.

PSR can vary a lot among sectors, therefore it is useful in comparing stocks from the same sectors. The lower PSR is better. For example, stock A trading at 100$ and having 10$ revenues yields PSR=100/10=10. A stock B trading at 100$ and having 20$ revenues yields PSR=100/20=5. Therefore, other parameters being equal, stock B is a better investing opportunity.

As with other ratios this one could be compared with projections and historical values.

What is the difference between ETFs and index funds?

Costs

ETFs trade on an exchange and each transaction is subject to a brokerage commission. In general, mutual funds obtained directly from the fund company itself do not charge a brokerage fee. However, selling mutual funds can be subject to some fees.

Most ETFs have a lower expense ratio than appropriate mutual funds.

Taxation

In most cases, ETFs are more tax-efficient than conventional mutual funds in the same asset classes or categories.

Trading

Index funds are traded at the end of a trade day, and the price reflects its Net Assets Value. On the other hand, ETFs are traded throughout the day.

ETFs behaves like any other stock. You can use short selling, buying on margin, stop loss order, limit order and even options. Another important fact is that there is no minimum investment requirement. Mutual funds do not have those features.

ETFs or Index funds?

If you are a passive long term investor (buy and hold) , then index fund is probably the best options. On the other hand, ETFs are the best options for institutional investors and active investors.

Further reading

ETFs Vs Index Funds: Quantifying The Differences

Mutual Funds v ETFs

What is ETF?

Exchange-Traded Funds, also known as ETFs are a securities that tracks a basket of assets (certain index, commodities, ...) and can be bought and sold throughout the day just like stocks on an stock exchange market.

What is the benefit of ETFs?

The main benefit is that ETFs behaves as any other security traded on stock exchange market, meaning that you can use limit orders, options, short selling, etc. Being traded as other securities, the price of an ETF can surmount the NAV (Net asset value). That means that an ETF tracking S&P 500 index can rise more than S&P 500 index on a certain day.

ETFs are transparent unlike mutual funds. You can always find out what securities are incorporated in ETFs which is not the case for mutual funds.

What types of ETFs exists?

• Index ETFs
  They are tracking performance of a certain index (for example S&P500, DJIA or Nasdaq100)
• Commodity ETFs
  They are tracking commodities such as gold, oil, etc.
• Actively managed funds
  They are tracking a certain mutual actively managed fund having obligation to be fully transparent (publishing their current securities portfolios on their web sites daily)

Today, index ETFs are the most commonly used. As of March 2008, there were 644 ETFs with $571 billion in assets in the U.S.

How To Buy An Index Fund?

Almost any broker now enables us to buy an index fund. So go and ask your broker if he provide this service for you. It is important to notice that not all S&P500 index funds are equal. The difference is in the costs of maintaining fund. For example, one S&P index fund could have 5 employees and other could have 20 employees. Also, fund that buys more stocks, could have less buying costs. So how could you compare different index funds? You could check for an Expense ratio. The lower expense ratio, the better. For example, Vanguard SP500 fund has 0.15% Expense ratio. Required initial amount could be very large, but it could also be zero. In the second case we call such funds no-load funds. Obviously, no-load funds are better than other funds.

To sum it up, go to SmartMoney fund screener and find which one suits you, or just go to the www.Vanguard.com and check for "Vanguard 500 Index Fund Investor Shares". Be aware that S&P500 is copyrighted, so appropriate index funds are probably not named "SP500 index fund". The list of some SP500 index funds, you can find here. Be aware that you should do your homework and choose the best for you.


Links:

Money 70: The best mutual funds you can buy


Funds Tracking the S&P 500


COMMODITY INDEX FUNDS

Mutual Funds - Morningstar


SmartMoney’s Fund Screener