Third Quarter 2013

  • If you still hold mutual funds, you could own one hundred stocks or more. Financial advisors call this diversification. It's ludicrious. You mimic the market. If the market is up when you retire, you're lucky. If not, you might have to delay your retirement…work longer. Anyway, among the stocks the funds hold are some good dividend ones. You'll also own stocks that do not pay dividends. Think about this data. Since 1996 stocks that have increased their dividends at least once a year provided annual returns of 19.6% to 2007. Non-dividend payers lost -2.3% a year. Perhaps it's time you switched. The market is high: it's a good time to dump funds. there's another dividend growth example at the very bottom of this page: Ensign Energy Services from 1995.

How dividend growth investors are different:

♣ Dividend growth investors focus on the income our retirement pot throws off, not the size of the pot. Ours is a whole different way of thinking. We can ignore volatility: price fluctuations really do not matter. If prices fall, we can buy more income. We like bear markets! We think of our common stocks as infinite-duration bonds with rising coupons…long term holds.

♣ It's not so much which dividend growth stock you buy, but the price you pay for them that's important. And notice, it's dividend growth we are after, not just yield. Dividend growth builds wealth. Purchasing high yield common stocks or preferreds will not build wealth. You have to have something that will generate price growth. Dividend increases drive price appreciation. Here are some examples: dg_vs_g_07.pdf

♣ Stock selection techniques make the Connolly Report unique. Over the last 30 years, to determine if a stock is value priced or expensive, three main stock valuation measures have evolved. 1. yield and yield difference (Charles Dow used yield) 2. variation from Graham's price (Ben Graham's 1949 book The Intelligent Investor C-7) 3. cyclically adjusted price to earnings (Shiller's C.A.P.E, not the forward p/e used in the industry). In a minute or two, any stock can be valued against averages for these three metrics to determine if the common stock being tested is expensive. As I key this in July 2013, for instance, Enbridge is very expensive because ENB's average yield is 75 basis point below its average, its Graham per cent difference is really negative ($44 vs $14) and ENB's cape is way above the average of the common stocks in my list. It's a simple, yet profitable, strategy, really.

♣ We have experience (since 1981), the discipline to stay on track and patience. We do a lot of waiting. We wait for the right price and once we buy we wait for the dividend to grow. And after a couple of decades, we have hundreds of thousands of extra dollars and a growing income to buffer us from the world's problems. Dividend growth investors do not have to eat into capital when we retire as mutual fund holders do.

♣ With dividend growth investing you do not have to be worried about your money lasting through a longer retirement. Two things. First, your income will be growing. Second, your capital will be growing as the dividends rise. With this strategy, you can spend some capital and still have way more than what you started with. We use some of the additional capital to buy a new car every now and then.

✔ Buy The Investment Zoo by Stephen Jarislowsky. Begin the process of change. Take control of your investments. Say goodbye to mutual funds fees. Send for a copy of the current Connolly Report. Your $10 bill to our daughter could mean early retirement for you: Denise Emanuel, 306 Kingswood Road, Toronto ON M4E 3N9

Example: Royal Bank could have been purchased in the mid-1970s for $1.89 a share (adjusted for four stock splits since then). With dividend growth, by 2007 the owner of those shares would be getting more in dividends from these RY shares than the price paid for them. Royal Bank's dividend is now $2.52 a share for a YIELD ON COST of 133%. And, and this is the kicker, a $26,000 initial investment in 1975 would have grown to $2.5 million. John Heinzl's Report on Business column of June 22 2013.

“The difference between an undervalued stock and an overvalued stock is really one of psychology, it's how investors feel about companies and as investors are more optimistic, they tend to overprice the stock.” Tim Bert of Cardinal Capital Management in Winnipeg. TC: For example, think of TransAlta and Dollarama. TA has a yield over 8% as I write this on August 18 2013 and Dollarama's yield is less than 1%. One's not popular just now, the other is. If you buy a popular stock, you over pay, usually, so your chances of doing well are lessened.

What a difference a 2% fee makes - Each dollar invested in the TSX 30 years ago would have grown to $13.94. That's an average annual return of 9.2% according to Norm Rothery's column in the ROB last month. However, if you invested by way of a mutual fund with a 2% annual fee, that $1 would only have grown to $7.94. “Yes, even that seemingly small fee would have chopped the long-term return almost in half”, Rothery says.

  • If the stock you purchase does not have dividends, you can only get your money back by selling the stock. In the meantime, any profits are only paper gains.

Ensign Energy Services (ESI) - If you bought Ensign Energy Services today (September 12 2013) at $18 with the 43¢ dividend your yield would be 2.43%.

  • If you purchased ESI in 2005 at the then price of $12.18¹, with the 43¢ dividend per share now, your yield on cost would be 3.53% today (.43 / 12.18).
  • If you had bought it in 2000 for $5.29¹, your yield on cost would be 8.1% now.
  • And finally, if bought Ensign in 1995 for 90¢ a share, your annual dividend, at 43¢ would be just about half your cost, for a YOC of 48%. It takes a while, but if things work out (i.e. the dividend keep growing), wow is dividend growth investing ever worth it. I picked ESI at random. I'll do a few more from time to time from the energy sector. Oh yes, I should have mentioned the price rise from 1995's 90¢ to today's $18 is 1900%. Some have trouble with the concept of YOC, but few would argue with a stock going from 90¢ to $18. Dividend growth investors get both, increasing income and growing capital. How good will you be at waiting for your dividends to grow. Set up a dividend growth portfolio well before you retire and you'll be set for retirement…a growing income and increasing capital. We use some of our increasing capital to buy a new car every now and then. In a way, the car is 'kind of' free.

¹ Prices and dividends adjusted for stock splits in 2006 (2:1) and in 2001 (3:1).

third_quarter_2013.txt · Last modified: 2013/09/14 13:50 by tom
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