Third Quarter 2012

  • Since 1970 “global stock prices have risen by a tepid 1.4% per year in real terms, while the total return, including re-invested dividends, has risen by a much greater 4.5%” after inflation, according to MSCI data compiled by mrb partners. DIVIDENDS HAVE ACCOUNTED FOR MOST OF THE RETURN ON STOCKS. Look at those numbers again: 1.4% on price and 4.5% with dividends. If the stock you buy does not pay a dividend, is it really worth investing for 1.4%? If you buy a stock that does not pay a dividend, the only way you can make money is to hope the price goes up and then sell the sucker, sorry, the stock, to someone else.

5.3% - According to Société Générale, the real (after inflation), annualized equity return for Canada since 1970 was 5.3%. Over half of that return was dividends, most of the rest was dividend growth and a wee bit was multiple expansion (price change). Ask yourself if you should, going forward, buy a stock when does not pay a dividend.

BANK DIVIDEND INCREASES - In late August 2012, five of the big banks increased their dividends (details are outlined inside for subscribers). I do not own bank stocks, but my wife owns BMO common shares purchased in 1987 for a split-adjusted $6.90 a share. With this week's increase of 2¢ a share* per quarter, which really does not sound like much, her BMO now yields 2.88/6.90 = 42% on cost. If you do not yet believe in yield on cost consider this: $9,660 was paid for the BMO common stock and now it pays $4,032 a year in dividends. BMO is getting close to paying half as much each year in dividends as was originally paid for the common shares. It's the income from an investment down the line when you are retired that matters. We never buy preferred shares or bonds. Why not? There is no income growth. Dividend growth is our focus. Dividend growth drives stock selection. Dividend growth drives price growth too…Louise's BMO shares are currently valued at $81,200. If I was better at Math, I'd compute the average annual return on this BMO. But that number does not matter. It's the $4,032 a year Louise likes…spendable cash automatically deposited into her direct investing account ($1008) four times a year. Have you converted to dividend growth investing yet? * * put her over $1,000 a quarter from this stock alone. (The August 2011 Connolly Report contained a table showing 22 of the stocks we own with the buy date, the start yield and yield on cost, the start dividend and the dividend Aug'11, the % div up and % price up and the buy price and price Jiune'11.)

“The flight from risk” was the title of a recent report by CIBC World Markets. Ideas from the report were picked up by Barry Critchley for the Financial Post of July 19 2012. Canadians have $800 billion in mutual funds (TC: What's 2.5% MER of $800b?). Equity funds are experiencing redemptions, bond funds sales are up. Hence the title: The flight from risk. ♣ TC: Folks are being switched by their for-profit advisors from equity to bond funds. The 'advisor', naturally, does not want to lose his/her annual fleece, sorry, fee. So, when clients express concern about volatile stock prices or the portfolio value being well below the clients high-water mark, advisors will recommend bond funds. Bonds 'sound' safe. It's the be-seen-to-preserve-capital gambit. What a world! No mention will be made that inside a mutual fund bonds lose their guarantee of redemption (because there's no longer a maturity date). Advisors can't really advise, anyway: their function is to generate fees. Stephen Jarislowsky says “Everyone is a predator of the investor.” ♣ Dividend growth investors, in contrast, focus on the income our common stocks provide and don't worry about the portfolio value as much. They know that dividend growth will eventually drive capital growth. So far this year, our dividends, are up 8.5%. Over the last five years our income rose 6.7%. The ten year figure is exactly ten percent. It's the growing income we want in our retirement. ♣ It's only been set up two years, but I have yet to sell stock in my RRIF to finance the compulsory withdrawals. Again it's the income that matters. Those who have mutual funds and are given the line about the a guaranteed withdrawal plan. But they start eating into capital right away because funds are not noted for providing income. This is one of the big differences between dividend growth investors and fund owners. The guaranteed withdrawal plan is certainly guaranteed…to eat capital. Dividend income is not guaranteed, but in the last two decades, only a couple of our dividends have been reduced. Telus' dividend, for instance, was reduced from $1.40 to 60¢ in 2002. Telus' dividend is now $2.44. Back in 2002, Telus was selling for some $10 a share. Now T is over $60 and pushing it's high before the financial crisis hit. The take-away: dividend growth investors don't have to sell to finance retirement. Ah, but you say, Telus fell to $30 in early 2009. True. But we did not sell, so we did not lose. Someone who bought T about the time of the dividend reduction at $10 is now making 24% on that money. Do the math 2.44 / 10 = 24%. Don't believe it? Put it this way. You invested $10 and that investment now pays you $2.44 a year in real cash. That's a fabulous yield when ten-year Canada bonds are paying 1.62%. And the 24% is not counting the increase in value of the shares. After reading this, if you don't consider dividend growth investing, you are, well, in my view, dumb. is littered with examples like this. And we don't get very many losers. The few that we do have (I bought Sun Life in 2005 at $39. SLF is now $22 but it's paying 3.3% on its $1.44 dividend) are made up for by the sensational winners.

third_quarter_2012.txt · Last modified: 2012/10/06 15:29 by tom
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