Tom's Comments

Arnold Bernhard II

“What is an investment, anyhow, but a body of capital that produces income. The income may be current income, or it may be prospective income, but it is the magnitude of the income, current or prospective, that determines the value of the capital which produces it.” Arnold Bernhard's 1959 book Evaluation of Common Stocks, p.21

Dividend stocks provide income and the magnitude of that income grows with dividend growth. I take into account prospective income by adding yield and dividend growth to obtain total return. And as the dividend grows, so does the capital. Bernhard has many charts in his book to illustrate this with pairs of charts plotting price and dividends from 1946 to 1958. He compares, for instance, General Telephone whose dividend went from $1.50 to $2.00 over this period, and whose price rose from $15 to $50 to AT&T whose dividend was flat from 1946 to 1958 and whose price was likewise flat. Arnold Bernhard also compares General Electric to Singer, Federated Departments Stores (dividend from .50 to $1.75) to Macy's ($2.50 to $2.00) and IBM to Underwood. It is fascinating material. Too bad the book is out of print.

If your capital is in a mutual fund, most likely it is not producing much income. Funds are not noted for producing income. If you own a fund, check how much income it produces. Do not count capital appreciation as income: gains are not income. Gains disappeared with the market drop in 2008. In contrast, the income produced by the dividend stocks I follow actually went up by 9% in 2008. In 2009 our dividend income went up by 6.16%. There was one reduction: MFC. The most recent increase was Empire…up another four cents per share, per year. That's the game plan with dividend growth investing. We do not have to depend on market prices to fund our retirement. Once the dividend is deposited in your account, it is yours to keep. You can spend it, or re-invested as your needs at the time dictate. From the 1,400 BMO shares Louise bought in 1987, $980 is deposited into her account every quarter. In 2011 we expect another dividend increase from BMO common shares.

Bernhard talks about the value of your capital. That our common stocks produce income makes our capital valuable. This is the ultimate backstop for dividend investors. Regardless of what happens, investors will be drawn to stocks that produce income. Investigate dividend growth investing. It could be your cup of tea. (According to Foods That Fight Cancer on page 129, Japanese Gyokuro green tea and Japanese Sencha green tea contain the most anti-cancer compounds…catechins…about one third by weight of the tea leaf. It's the EGCG (epigallocatechin gallate) you are after. “Japanese green teas contain far more EGCG than Chinese teas”. 127 We prepare a cup of Gyokuro every day. We never let the water boil, nor use tea bags. Foods That Fight Cancer is a great book as is Cooking with Foods that Fight Cancer. (gobs+ccc+TTT is my memory key for the 11 good cancer fighting foods…GOBS = garlic, omege-3, berries, soy; 3Cs = citrus, chocolate (only dark), cabbage; 3Ts = tomato, tumeric and tea (green and Japanese)) The eleventh is red wine.

· 2009/07/10 08:37 · Tom Connolly
· 2009/06/06 19:56 · Tom Connolly

Dividends Return

The decade from 1998 to 2008 was dismal for most investors. It was not dismal for dividend growth devotees. It was a lost decade for people who invested in 1998 because is was the peak of the bull market for many stocks. If you buy when stocks are popular and prices are high, future returns will be poor. It's that simple. And poor returns they were. Ten years later, at the end of 2008, share prices the world over had plummeted. Return, note, is composed of two elements: capital appreciation and income (interest or dividends). If your stocks do not gain in price and if they do not pay dividends, what do you get? Zip! If on the other hand, your common stock not only pays a dividend, but grows the dividend, what do you get? Both…gains and income.

I was curious. How did our dividend growing shares handle this dismal decade? Actually, quite well. There were no negative numbers among the dividend-paying stocks in my list for the decade ending December 31 2008. If we can handle what happened last year, we can handle anything, right! On average, dividends provided most of the return over the decade. This is too be expected when prices are not roaring. The average return provided by dividends from stocks in my list was 63% from 1998 to 2008. The high was 134% from BMO, the low 10% from Empire. Average dividend growth over this decade was 14.8%. Most common stocks in the list had double digit dividend growth (preferred stocks do not provide any dividend growth: I do not buy preferreds)). The only four commons with single digit dividend growth were TRP, CU, TOC, LB. I'll have a full report on this data in my June 2009 report. I'll print a few extra copies. It is important to know how dividend paying stocks have done. “it is to be expected that dividends will continue to outpace capital gains for some time” David Stanley, MoneySaver May 2009

David Stanley had an excellent column on this topic in the May 2009 issue of Canadian MoneySaver: Dividends Take The Cake. I thank Dr Stanley for the idea and for his help in developing the data I needed to do this project for all the stocks in my list. Dr David's data went from 2000 to the end of the first quarter of 2009. The CAGR of the TSX was .74 for that period…less than 1% see what I mean by dismal). The CAGR of the nine dividend stocks he did (all in my list) was 9.56%. CAGR = compound annual growth rate. David Stanley found the portion of the return provided by dividends was 77%. Connolly thought: if your stocks do not pay dividends…how do you make your money? There are people out there who buy stocks that do not pay dividends: imagine! Of course, there were people who bought asset-backed commercial paper too. But that's another story.

· 2009/06/05 07:39 · Tom Connolly

The retirement rule of 20

Rob Carrick's Personal Finance column in the Report on Business of Thursday June 4 2009 contained an interesting idea about how much money you need to fund retirement: for every dollar of income you need to live on, you should have $20 saved when your retire. There were a few flaws in the return assumptions used by Russell Investment Canada and in the split between bonds (65%) and stocks, in my view, but hey, we are after ideas. And, if you have not retired yet, the column contains ideas on the topic.

'Death unleashes goodwill…' tips to avoid family feuds June 5 2009, John Heinzl's column has good ideas on estate planning:

Reading both Carrick and Heinzl regularly will give you most of the ideas needed for investment and financial planning. They both know their 'stuff'.

· 2009/06/04 15:52 · Tom Connolly

Older entries >>

“The key is to wait for the market to decline and to pick companies with the best likelihood of maintaining their dividends” Martin D. Weiss, The Ultimate Depression Survival Guide. TC: Notice his fifth word: there is a lot of waiting with the dividend growth strategy. Valuation is everything. Arnold Bernhard's 1959 book Evaluation of Common Stocks talking about valuation at the time of purchase on page 121. (When I get a jiff, I'll add it here.) The bigger question is: when do you know the market has declined? That's a tough one. One of my guides it yield. I plot yield data.

most_recent_comments.txt · Last modified: 2009/07/10 08:22 by tom
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