Second Quarter 2010

 “To not only learn but also effectively implement investment lessons requires a disciplined, often contrary, and long-term-oriented investment approach. It requires a resolute focus on risk aversion rather than maximizing immediate returns, as well as an understanding of history, a sense of financial market cycles, and, at times, extraordinary patience.” Seth Karlman

  • Yields on 1982 cost - I've written about holding common stocks for the growing income many times before. In the February 1993 Connolly Report, for instance, I had a table showing 1993 yields on stock bought ten years before in 1982. Those who were with me then are very wealthy now. Here are some examples: Quebec Tel bought in 1982, with dividend growth, yielded 17.2% by 1993, Maritime Electric 14.2%, MT&T 13.8%, BCE 13.7% Island Tel 13.7%, BC Gas 13.3%, Fortis 12.7% and Newtel 12.4% on the 1982 price. Most of those companies no longer exist (BC Gas was sold to Americans, Quebec Tel was bought by Telus, Maritime Electric in PEI was purchased by Fortis). The bank 'yields on cost' based on 1982 prices and 1993 dividends were just single digits. Banks mess things up every decade or so. BNS* was 8.9%, BMO 8.8%, CIBC 8.3% and Royal Bank was 8.2% on $14.12 price in 1982 and the 1993 dividend of $1.16. RY's dividend was up from $1.00 a decade before. RY's price was up from $14.12 to $25.37 over those ten years. The price gain is NOT included in the yield on cost. Return is composed of two elements: income and capital appreciation. Besides the growing income, dividend growth investors also get capital appreciation. We get both. That is why our wealth grows. This February 1993 Connolly Report also included this statement: “Income growth - increasing the amount of spendable dollars your portfolio earns each year -must be the most important goal of any investment plan.” Mal Berko (TD was not in my list then, nor was GWO or Power.) Unfortunately, Royal Trustco was. RYL was on top of the list, then in yield order, at 12.3%. Not good. Enbridge, then called Inter Provincial Pipeline, was second at 8.5% yield in 1993. Do not reach for yield. Royal Trustco was in trouble at that point and its stock soon became just about worthless. RYL was my worst mistake. Ship happens! Thankfully, it's rare with the good commons I follow.

* Had you purchased Bank of Nova Scotia in 1990 though, after it got into trouble yet again, at a price half way between BNS's high and low price in 1990, $3.64 a share, your yield, because the dividend grew from .25 a share to $1.96, by 2010 would be 53%. Twenty years is a long time, but a 53.6% yield means a comfortable retirement. And, here's the icing on the cake: your capital would have grown from a split-adjusted $364. for 100 shares, to $3,659 per 100 shares. Unbelievable, eh! Do the math to check. I do not expect BNS's dividend to rise this year (2010). Ask me if I care? We are getting 53% on our money. I expect BNS's price to fall in 2010. Ask be if I care? I don't! I'm not selling. Would you sell an investment that is paying you $196 every year and that you paid $364 for? I think not. So, if you are not going to sell, the price does not matter. What a strategy dividend growth is. Buy an hold good dividend-growing common stock (never preferred).

  • A Poor Financial Plan – One finds individual financial plans regularly in the press. While you can often garner a good idea or two from the columns, most plans, in my view, are next to useless because the financial planner is usually just toeing the industry line, hawking mutual funds and not thinking outside the box. In the Report on Business of May 8 2010, there was one with the headline “Time to shift away from risk”. The subject, an engineer, was age 57 and had lost her job. Among other things, her non-registered portfolio has $65,000 in dividend-paying mutual funds and $215,000 in dividend-paying stocks. Her locked-in retirement account of $230,000 has 60% stocks and 40% fixed income. Her house is free and clear, but she has an investment line of credit of $52,000. You can read what ‘the expert’ said, if you like.

I was interested in what this financial planner did not say. This planner, and most don’t, does not understand dividend investing. No mention was made of dividend income or dividend growth. All those dividend stocks she already owned, and there was no mention of the essence of dividend investing: her yields are probably very high already and her income will grow as retirement progresses. And, with all that dividend income, she will most likely not be paying any tax at all, even on her OAS and CPP. What an error. The headline was off-putting too. In the actual newspaper it was “Time to shift away from risk” On the web site it was “Time to shift some investment holdings. If early retirement is the goal, a move away from market volatility is key.” Volatility is not risk. Volatility only become risk is you have to sell. This person at age 57 does not need to sell. Dividend stocks provide income. Why would you sell assets that provide a growing income? Culling maybe, but wholesale selling, no way, even though the market is overvalued. It’s the income that counts: the price of the stocks is irrelevant as she should not sell. What's important is the sustainability of the dividend. Dividend eliminations are very rare. Folks need income in retirement: dividend-paying common stocks provide it. Forget about all that GIC income ladder bunk. In the long run, GICs are not really secure: they have lost value every year since 1932.

  • GUARANTEED PRODUCT* The headline over Fabrice Taylor's May 5th 2010 ROB column stated, “The guarantee is not worth the price”. You lose with guaranteed products: “Not principal, but opportunity. You should not buy them.” TC: That's quite clear, isn't it. I also advise staying away from financial planners who peddle these products. You'll get your money back, but that's usually about it. The income is not guaranteed. And, you do not even get the dividends from the package. People* who are sold principal protected notes only have the potential of price gains and there are clauses which restrict gains too. *I used the word 'People', not 'Investors', notice. Life is perilous: guarantees are expensive.
  • Here's something to think about. If your stock does not pay a dividend, you are left with only one way to realize a return: hope the price goes up and sell your shares to someone else. I well remember the 1970s. The market went sidewards for years. Colleagues who had been sold mutual funds in the late 1960s, were devastated (mutual funds are sold, not bought). I began the Connolly Report after that in 1981, looking for a better way. I found it. Now I do not focus on price: it's the income that counts, the dividends. With the sideward market that looms ahead, dividends will provide most of my return. Some sixty three per cent (62.8%) of the return from the stocks in my list for the period 1998 to 2008 came from dividends. (a stock by stock report on this is inside The compound annual growth rate (CAGR) of the common stocks I follow (never preferreds…they are not) over this decade was 9% per year. Have you done this well? And prices were not high at the end of 2008 either: the data is not doctored. Nine percent a year beat the market too…by quite a lot. Investigate dividend growth investing. The last decade was not dismal for dividend growth investors. The Dow, at just over 10,000 as I key this in May 2010, however, is much the same as it was then, just over 10,000.
second_quarter_2010.txt · Last modified: 2010/05/28 10:42 by tom
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