Wednesday, May 27, 2009

Tankless Waterheaters

In 2005 Linda and I built our house. We hired a General Contractor and presented him with a floor plan and specifications we had painfully developed, tweaked, and negotiated over the previous two years. In 2003, during the planning phase we renewed our acquaintance with Roger, a man in North Carolina who had recently completed construction of his new home.

Roger took us on a tour of his home pointing out the many features of which he was justly proud. The feature that made the biggest impression on me was his Rinnai tankless waterheater.

Back in 1980, I read about and tried unsuccessfully to find these devices for heating water on demand instead of keeping a reservoir of water hot all the time. I was excited to see one in use in a real home. I quizzed Roger and he gave me the name of his plumber and the plumbing supply shop where the Rinnai was purchased.

When it came time to spec out our new house the Rinnai tankless waterheater was on the list. The installed cost of our Rinnai was about double the cost of a good quality standard water heater but there are two huge benefits.

You never run out of hot water. If two people are running the hot water at the same time you still have the problem of one demand stealing hot water from the other. But the tank doesn’t run out of hot water and there is no waiting time to allow the tank to heat up to temperature.
The propane only burns when hot water is actually being used. I estimate we saved enough propane over the past three years to more than pay the difference between the Rinnai and the cheaper standard water heater.

By the way, the wait to get hot water actually delivered to the faucet after it is turned on is the same as the wait for hot water to arrive at the faucet from a standard tank.

We love the Rinnai and we are very pleased with our decision.

Links to Cutting Expenses Special Report
Cutting Expenses - Introduction

Thursday, May 21, 2009

Mortgage Refinance

With interest rates down across the board recently Linda and I have been looking for an opportunity to reduce our monthly payment by refinancing our 6.25% 30 year fixed mortgage.

In recent years many people refinanced mortgages to cash out some or all of their home equity. They effectively started over on their mortgages with the same or higher monthly payments. I was surprised by the number of loan officers who expected me to take equity out of our home. Our objective, however, was a lower monthly payment in case our income becomes jeopardized by the on-going recession.

4.875% to 5.125% interest rates on 30 year fixed mortgages have been available for months - but the quoted closing costs from the various lending institutions were in the $5,000 to $7,000 range. We were unwilling to pay that much.

One day a colleague mentioned that he had just closed on refinancing his home with a 15 year fixed mortgage at 4.5% and $2,000 in closing costs. I jumped on that and called his loan officer at BB&T Bank to see what he could do for Linda and me.

The BB&T loan officer was working 14 hour days seven days a week refinancing mortgages. There was a reason for that.

BB&T was able to put together a 30 year fixed refinance for us with a 5.0% interest rate, zero points, and closing costs of $4,500. $2,500 of the closing costs were effectively rebated by the return of escrow from our previous mortgage company and the fact that no mortgage payment was due in the month of closing (May) or the following month (June). More than half of the $4,500 closing costs consisted of interest paid to the previous mortgage company for the month of April, the prepaid interest to BB&T for May, plus setting up the new escrow account at BB&T. so the rebates were near one-to-one replacements of these charges. This left us with a net closing cost of about $2,000.

We rolled the $2,000 net closing cost into the new .mortgage. Even so, our total monthly payment was reduced by $133 per month; this despite a coincidental increase in our homeowners insurance and the required escrow.

Instead of allowing the extra $133 to trickle away we will continue making payments of the old payment amount and apply the difference to paying off the mortgage early.

Links to Cutting Expenses Special Report
Cutting Expenses - Introduction

Friday, May 15, 2009

Dividends - Part 5 – DRIP Accounts

DRIP Accounts – Dividend ReInvestment Accounts – are managed by a number of service providers for the benefit of companies that want a more stable shareholder base.

Many companies also want to provide their employees the opportunity to buy company stock using payroll deductions. Typically these ESPP (Employee Stock Purchase Plans) are DRIP accounts managed by the same group of DRIP account service providers.

My employer’s ESPP is managed by ComputerServe. In addition to my ESPP I also have a personal DRIP account at ComputerServe.

The typical features of a DRIP account are:
Very low transaction costs for buying shares
Provision for making small dollar purchases of fractional shares
Provision for making periodic – usually monthly – purchases
Provision to automatically reinvest quarterly dividends in fractional shares of the company’s stock

So, DRIP accounts provide a way for an individual to invest in a single company’s common stock with small but regular purchases and very low transaction fees. Reinvesting dividends provides yield compounding.

There are other DRIP provider’s besides ComputerServe. Another that I’ve dealt with is Bank of New York – Mellon.

Setting up DRIP accounts can be tedious but once set up they are easy to manage.

Many brokerage houses now offer free dividend reinvestment if you ask, but you do have to buy the shares and pay a commission as usual. I’m doing this through USAA Investment Bank in an account I’m managing for my wife.

Another thought on DRIP accounts; I have adult children for whom buying Christmas & birthday gifts was becoming difficult. Plus, they were not saving any money and had little or no understanding of investing.

So, I set up DRIP accounts for each of them. I make contributions to their accounts instead of buying gifts and, so they can watch the accounts grow, I send them the statements twice a year instead. This may be too impersonal for some folks but I believe it to be the best gift I could give them. They are seeing the advantages of saving & investing and learning something about it too.

Links to the Dividend Special Report
Part 1 - Introduction
Part 2 - Reinvestment
Part 3 - Dividend Growth
Part 4 - Dividend Yield vs Dividend Growth
Part 5 - DRIP Accounts

Wednesday, May 6, 2009

Dividends - Part 4 - Dividend Yield vs Dividend Growth

In eight years I expect to retire from my full time job. So I have eight years to contribute to my retirement accounts and grow their value. I invest in a mix of mutual funds (active & index), TIPS Treasury Bonds, and individual stocks.

Over the past two years my stock picking criteria has evolved considerably. Now I use a fairly complicated screening formula to select the companies I buy. But, to even make my consideration list, a company must pay dividends.

My formula strongly favors companies that grow their dividends over time and I’ve noticed that high yield stocks with slow but steady dividend growth and low yield stocks with high dividend growth can both pass my test – if the combination of the two (yield and growth rate) exceeds my current 10% discount rate.

I was surprised at this result. Until recently I abjured utilities as growing too slowly and also dividend paying growth stocks with yields less than 2%. But in reality it is the combination of yield & growth that results in return on investment.

Only a few utilities and growth stocks meet my criteria and I’m getting fussier as I slowly reduce the number of different companies I own. My intention is to reduce the number to between 15 and 20 companies selected for expected long term return on investment and long term competitive advantage; a “wide moat” in Buffet Speak.

Links to the Dividend Special Report
Part 1 - Introduction
Part 2 - Reinvestment
Part 3 - Dividend Growth
Part 4 - Dividend Yield vs Dividend Growth
Part 5 - DRIP Accounts