1. Ms. Faith Moono Simwami mo.simwami@gmail.com
Dividends Overview
Ms. Faith Moono Simwami

2. The Corporation
[1611] A body corporate legally authorized to act as a single individual, an artificial person created by royal charter, prescription, or act of legislature, and having authority to preserve certain rights in perpetual succession. (OED)
Compare publicani of ancient Rome, essentially corporations (though the most prominent were private collecting agencies for taxes)

3. For-Profit vs. Non-Profit
For-profit corporation is owned by shareholders, equal claim after debts paid, subject to corporate profits tax.
Non-profit is not owned, self-perpetuating directors. Not subject to corporate profits tax.

4. 3. Represents OWNERSHIP in the Corporation.
Common Stock Basics
1. Definition: Stocks are A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.
Types: Common Stock (usually entitles the owner to vote at shareholders' meetings and to receive dividends). Preferred (generally does not have voting rights, but has a higher claim on assets and earnings than the common shares).
Class A: A classification of common stock that may be accompanied by more voting rights. Class B: a classification of common stock that usually does not have as many or may not have any voting rights to elect officers to the Board of Directors of a Corporation.
3. Represents OWNERSHIP in the Corporation.

5. Owners are also referred to as shareholders or equity owners.
Common Stock Basics
Owners are also referred to as shareholders or equity owners.
5. Board of Directors: A group of individuals that are elected as, or elected to act as, representatives of the stockholders to establish corporate management related policies and to make decisions on major company issues. Such issues include the hiring/firing of executives, dividend policies, options policies and executive compensation. Every public company must have a Board of Directors.

6.  Dividends
Distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
The dividend is most often quoted in terms of the dollar amount each share receives (i.e. dividends per share or DPS).
It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.
Dividends may be in the form of cash, stock or property.
Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this.

7. The Economic Crisis of 2008
Cause and Aftermath

8. U.S. housing policies are the root cause of the current financial crisis. Other players-- “greedy” investment bankers; foolish investors; imprudent bankers; incompetent rating agencies; irresponsible housing speculators; short sighted homeowners; and predatory mortgage brokers, lenders, and borrowers--all played a part, but they were only following the economic incentives that government policy laid out for them.
- Peter J. Wallison

9. Key Events Leading up to the Crisis
Housing price increase during , followed by a levelling off and price decline
Increase in the default and foreclosure rates beginning in the second half of 2006
Collapse of major investment banks in 2008
2008 collapse of stock prices

10. Exhibit 1: House Price Change
Housing prices were relatively stable during the 1990s, but they began to rise toward the end of the decade.
Between January 2002 and mid-year 2006, housing prices increased by a whopping 87 percent.
The boom had turned to a bust, and the housing price declines continued throughout and 2008.
By the third quarter of 2008, housing prices were approximately 25 percent below their peak.
Annual Existing House Price Change
Source: S and P Case-Schiller Housing Price Index.

11. Exhibit 2a: The Default Rate
The default rate fluctuated, within a narrow range, around 2 percent prior to 2006.
It increased only slightly during the recessions of 1982, 1990, and 2001.
The rate began increasing sharply during the second half of 2006
It reached 5.2 percent during the third quarter of 2008.
Default Rate
Source: mbaa.org, National Delinquency Survey.

12. Exhibit 2b: Foreclosure Rate
Housing prices were relatively stable during the 1990s, but they began to rise toward the end of the decade.
Between January 2002 and mid-year 2006, housing prices increased by a whopping 87 percent.
The boom had turned to a bust, and the housing price declines continued throughout and 2008.
By the third quarter of 2008, housing prices were approximately 25 percent below their peak.
Foreclosure Rate
Source: National Delinquency Survey.

13. Exhibit 3: Stock Market Returns
As of mid-December of 2008, stock returns were down by 37 percent since the beginning of the year.
This is nearly twice the magnitude of any year since 1950.
This collapse eroded the wealth and endangered the retirement savings of many Americans.
S and P 500 Total Return
Source:

14. Key Questions About the Crisis of 2008
Why did housing prices rise rapidly and then fall?
Why did the mortgage default and housing foreclosure rates begin to increase more than a year before the recession of 2008 started?
Why are the recent default and foreclosure rates so much higher than at any time during the 1980s and 1990s?
Why did investment banks like Bear Stearns and Lehman Brothers run into financial troubles so quickly?
Four factors provide the answers to all of these questions.

15. What Caused the Crisis of 2008?
FACTOR 1: Beginning in the mid-1990s, government regulations began to erode the conventional lending standards.
Fannie Mae and Freddie Mac hold a huge share of American mortgages.
Beginning in 1995, HUD regulations required Fannie Mae and Freddie Mac to increase their holdings of loans to low and moderate income borrowers.
HUD regulations imposed in 1999 required Fannie and Freddie to accept more loans with little or no down payment.
1995 regulations stemming from an extension of the Community Reinvestment Act required banks to extend loans in proportion to the share of minority population in their market area. Conventional lending standards were reduced to meet these goals.

16. Exhibit 4: Fannie Mae/Freddie Mac Share
The share of all mortgages held by Fannie Mae and Freddie Mac rose from 25 percent in 1990 to 45 percent in 2001.
Their share has fluctuated modestly around 45 percent since 2001.
Freddie Mac/Fannie Mae Share of Outstanding Mortgages
Source: Office of Federal Housing Enterprise Oversight,

17. Exhibit 4.1: Subprime Mortgages
Subprime mortgages as a share of total mortgages originated during the year, increased from 5% in 1994 to 13% in 2000 and on to 20% in
Subprime Mortgage Originations as a Share of Total
Source: Data from is from the Federal Reserve Board while is from the Joint Center for Housing Studies at Harvard University

18. Exhibit 4.2: Subprime, Alt-A, and Home Equity
Like subprime, Alt-A and home equity loans have increased substantially as a share of the total since 2000.
In 2006, subprime, Alt-A, and home equity loans accounted for almost half of the mortgages originated during the year.
Subprime, Alt-A, and Home Equity as a Share of Total
Source: Data from is from the Federal Reserve Board while is from the Joint Center for Housing Studies at Harvard University

19. What Caused the Crisis of 2008?
FACTOR 2: The Fed’s manipulation of interest rates during
Fed's prolonged Low-Interest Rate Policy of increased demand for, and price of, housing.
The low short-term interest rates made adjustable rate loans with low down payments highly attractive.
As the Fed pushed short-term interest rates upward in , adjustable rates were soon reset, monthly payment on these loans increased, housing prices began to fall, and defaults soared.

20. Exhibit 5: Short-Term Interest Rates
The Fed injected additional reserves and kept short-term interest rates at 2% or less throughout
Due to rising inflation in 2005, the Fed pushed interest rates upward.
Interest rates on adjustable rate mortgages rose and the default rate began to increase rapidly.
Federal Funds Rate and 1-Year T-Bill Rate
Source: and

21. Exhibit 5.1: ARM Loans Outstanding
Following the Fed's low interest rate policy of , Adjustable Rate Mortgages (ARMs) increased sharply.
Measured as a share of total mortgages outstanding, ARMs increased from 10% in to 21% in 2005.
ARM Loans Outstanding
Source: Office of Federal Housing Enterprise Oversight,

22. What Caused the Crisis of 2008?
FACTOR 3: An SEC Rule change adopted in April 2004 led to highly leverage lending practices by investment banks and their quick demise when default rates increased.
The rule favored lending for residential housing.
Loans for residential housing could be leveraged by as much as 25 to 1, and as much as 60 to 1, when bundled together and financed with securities.
Based on historical default rates, mortgage loans for residential housing were thought to be safe. But this was no longer true because regulations had seriously eroded the lending standards and the low interest rates of had increased the share of ARM loans with little or no down payment.
When default rates increased in 2006 and 2007, the highly leveraged investment banks soon collapsed.

23. Exhibit 5.2: Leverage Ratios
The leverage ratios of loans and other investments to capital assets for various financial institutions are shown here.
When Bear Stearns was acquired by JP Morgan Chase its leverage ratio was 33 to 1. Note, this was not particularly unusual for the GSEs and large investment banks.
Leverage Ratios (June 2008)‏
Source: The Rise and Fall of the U.S. Mortgage and Credit Markets: A Comprehensive Analysis of the Meltdown, Milken Institute

24. What Caused the Crisis of 2008?
FACTOR 4: Doubling of the Debt/Income Ratio of Households since the mid-1980s.
The debt-to-income ratio of households was generally between 45 and 60 percent for several decades prior to the mid 1980s. By 2007, the debt-to- income ratio of households had increased to 135 percent.
Interest on household debt also increased substantially.
Because interest on housing loans was tax deductible, households had an incentive to wrap more of their debt into housing loans.
The heavy indebtedness of households meant they had no leeway to deal with unexpected expenses or rising mortgage payments.

25. Exhibit 6a: Household Debt as a Share of Income
Between , household debt as a share of disposable (after-tax) income ranged from 40 percent to 60 percent.
However, since the early 1980s, the debt-to-income ratio of households has been climbing at an alarming rate.
It reached 135 percent in 2007, more than twice the level of the mid-1980s.
Household Debt to Disposable Personal Income Ratio
Source:

26. Exhibit 6b: Debt Payments as a Share of Income
Today, interest payments consume nearly 15 percent of the after-tax income of American households, up from about 10 percent in the early 1980s.
Debt Payments to Disposable Personal Income Ratios
Source:

27. Exhibit 7a: Foreclosure Rates on Subprime
Compared to their prime borrower counterparts, the foreclosure rate for subprime borrowers is approximately 10 times higher for fixed rate mortgages and 7 times higher for adjustable rate mortgages.
There was no trend in the foreclosure rate prior to 2006 for adjustable rate or fixed rate mortgages.
Starting in 2006, there was a sharp increase in the adjustable rate mortgage foreclosure rate.
Foreclosure Rates on Subprime Mortgages
Source: Liebowitz, Stan J., “Anatomy of a Train Wreck: Causes of the Mortgage Meltdown,” Ch. 13 in Randall G. Holcombe and Benjamin Powell, eds, Housing America: Building Out of a Crisis (New Brunswick, NJ: Transaction Publishers, 2009 (forthcoming) We would like to thank Professor Liebowitz for making this data available to us.

28. Exhibit 7b: Foreclosure Rates on Prime
While the foreclosure rate on fixed rate mortgages was relatively constant, the foreclosures on adjustable rate mortgages began to soar in the second half of 2006.
This was true for both prime and subprime loans.
Foreclosure Rates on Prime Mortgages
Source: Liebowitz, Stan J., “Anatomy of a Train Wreck: Causes of the Mortgage Meltdown,” Ch. 13 in Randall G. Holcombe and Benjamin Powell, eds, Housing America: Building Out of a Crisis (New Brunswick, NJ: Transaction Publishers, 2009 (forthcoming) We would like to thank Professor Liebowitz for making this data available to us.

29. Fixed vs. Variable Rate Mortgages
Default and foreclosure rates on fixed interest rate mortgages did not rise much in 2007 and This was true for loans to both prime and sub- prime borrowers.
In contrast, the default and foreclosure rates on adjustable rate mortgages soared during 2007 and 2008 for both prime and sub-prime borrowers.
The combination of lower lending standards, adjustable rate loans, and the Fed's interest rate policies of was disastrous.
Incentives matter and perverse incentives created the crisis of 2008.

30. Are We Headed Toward Another Great Depression?
Are the current conditions unprecedented?
How do the current conditions compare with the Great Depression?

31. Exhibit 8a: Unemployment in Recent Severe Recessions
At the end of January 2009, the unemployment rate was 7.6 percent and it will surely go higher. This is not unprecedented.
The unemployment rate rose to 9.6 percent during the recession, and to percent during the recession.
Even during the relatively short recession of , the unemployment rate rose to nearly 8 percent and it remained at, or near, 7 percent for almost two years.
Peak Monthly Unemployment Rates in Recent Severe Recessions
Source:

32. Exhibit 8b: Great Depression Unemployment
The unemployment rate soared to nearly 25 percent during 1933.
The unemployment rate was 14 percent or more every year throughout
Unemployment Rates During the Great Depression
Source: Bureau of the Census, The Statistical History of the United States from Colonial Times to the Present (New York: Basic Books, 1976)‏

33. Lessons From the Great Depression
Avoid these policies:
Monetary contraction
Trade restrictions
Tax increases
Constant changes in policy; this merely creates uncertainty and delays private sector recovery.

34. This Recession is Likely to be Lengthy
It will take time for the malinvestments to be corrected and for households to improve their personal financial situation.
Various types of stimulus packages are not likely to be very effective.
Danger: Frequent policy changes will retard recovery. The recent policies of the Bush Administration illustrate this point.

35. What Needs to be Done?
The keys to sound policy are well-defined property rights, monetary and price stability, open markets, low taxes, control of government spending, and above all, neutral treatment of both people and enterprises.
Monetary policy is way off track. Since the late 1990s it has been on a stop-and-go course that generates instability. The Fed needs to announce it will follow a stable course in the future. There will be no repeat of the Great Depression, but neither will there be a repeat of the 1970s.
President Obama and Congress should announce that:
The mistakes of the 1930s will not be repeated, including the uncertainty generated by the frequent policy changes that characterized the New Deal.
In the future, government spending will be controlled and the deficit reduced.

36. Crisis of Markets or a Crisis of Politics?
Are the current conditions unprecedented?
Both the Great Depression and the current crisis are the result of perverse policies.
During the Great Depression era, disastrous policies led to a huge expansion in the size and role of government. Will the same thing happen this time? The answer to this question will determine the future economic status of Americans.

37. Graham’s 14 Investment Points
Be an investor, not a speculator.
Know the asking price.
Search the market for bargains.
Determine if the stock is undervalued.
Regard corporate figures with suspicion.
Don’t stress out.
Don’t sweat the math.
8. Diversify among stocks and bonds.
9. Diversify among stocks.
10. When in doubt, stick to quality.
11. Use dividends as a clue for success.
12. Defend your shareholder rights.
13. Be patient.
14. Think for yourself.

38. Contemporary Fundamentals:
Peter Lynch’s Ten Golden Rules of Investing:
1. Don’t be intimidated by experts (ex spurts).
2. Look in your own backyard.
3. Don’t buy something you can’t illustrate with a crayon.
4. Make sure you have the stomach for stocks.
5. Avoid hot stocks in hot industries.
6. Owning stocks is like having children. Do not have more than
you can handle.
7. Don’t even try to predict the future.
8. Avoid weekend worrying. Do not get scared out of good stocks.
Own your mind.
9. Never invest in a company without first understanding its finances.
10. Do not expect too much, too soon. Think long-term.

39. Contemporary Fundamentals:
Peter Lynch’s mistakes to avoid:
1. Thinking that this year will be any different than any other year
2. Becoming too concerned over whether the stock market is going up or down
3. Trying to time the market
4. Not knowing the story behind the company in
which you are buying stock
5. Buying stocks for the short-term

40. Contemporary Fundamentals:
Lynch Maxim’s:
1. A good company usually increases its dividends every year.
2. You can lose money in a very short time, but it takes a long time to make money.
3. The stock market isn’t a gamble as long as you pick good companies that you think will do well and not just because of the stock price.
4. You have to research the company before you put money into it.

41. Lynch Maxim’s (cont.)
5. When you invest in the stock market you should always diversify.
6. You should invest in several stocks (5).
7. Never fall in love with a stock, always have an open mind.
8. Do your homework.
9. Just because a stock goes down doesn’t mean it can’t go lower.
10. Over the long-term it is generally better to buy stocks in small companies.
Never buy a stock because it is cheap, but because you know a lot about it.
Source: One Up On Wallstreet, by Peter Lynch

42. Sir John Marks Templeton
Who is Sir John Marks Templeton?
John Templeton borrowed $10,000 and started a brilliant investment career, which enabled him to be one of two investors to become billionaires solely through their investment prowess. Templeton has had decade after decade of 20% plus annual returns and managed over $6 Billion in assets. Templeton is generally regarded as one of the world’s wisest and most successful investors. Forbes Magazine said,
“Templeton is one of a handful of true investment greats in a field of crowded mediocrity and bloated reputations.” Templeton holds that the common denominator connecting successful people with successful enterprises is a devotion to ethical and spiritual principles. Many regard Sir John as the greatest Wallstreet Investor of all time.

43. Sir John Mark Templeton
Sir John’s 16 Rules for Investment Success:
1. Invest for maximum total real return including taxes and inflation.
2. Invest. Don’t trade or speculate.
3. Remain flexible and open-minded about types of investments. No one kind of investment is always best.
4. Buy at a low price. Buy what others are despondently selling. Then sell what others are despondently buying.
5. Search for bargains among quality stocks.
6. Buy value not market trends or economic value.
7. Diversify. There is safety in numbers.
8. Do your homework. Do not take the word of experts. Investigate before you invest.

44. Templeton’s 16 Rules 9. Aggressively monitor your investments.
10. Don’t panic. Sometimes you won’t have everything sold as the market crashes. Once the market has crashed, don’t sell unless you find another more attractive undervalued stock to buy.
11. Learn from your mistakes, but do not dwell on them.
12. Begin with prayer, you will think more clearly.
13. Outperforming the market is a difficult task, you must outthink the
managers of the largest institutions.
14. Success is a process of continually seeking answers to new questions.
15. There is no free lunch. Do not invest on sentiment. Never invest in an IPO. Never invest on a tip. Run the numbers and research the quality of management.
16. Do not be fearful or negative too often. For 100 years optimists have carried the day in U.S. Stocks.

45. END