Third Quarter 2014

Here's why you should start dividend growth investing with individual stocks when you are young, in your 30s or 40s, say. Inside this site this morning I linked a column by John Heinzl about how a money manager in Windsor selected dividend growth common stocks. His method was a bit different than mine. We are always looking for new ideas. Read for ideas, and then think. Anyway, the example given was TD. One hundred TD shares were bought in 1983 for $4,000. The income from those shares in now more than the purchase price ($4,512) as the investor held and held and held those TD shares. With splits that person now has 2,400 TD shares. You want to buy individual shares, though. Mutual funds and ETFs, even if they hold dividend stocks do not work. It is the income you want when you retire…for spending. You do not want to eat into your capital*. And if the income from your common stocks bought years ago is high when you retire, you will be less tempted to buy higher yield (read riskier) stocks when you are retired. * By the way, those 100 TD shares bought for $4,000 are now worth close to $200,000. Suppose you tucked away 100 shares of different dividend growth shares every year while you worked. You'd be able to retire years earlier, eh. Look into dividend growth investing. And there is no tax on the gains as you hold and hold and hold for decades. Fund gains are taxed every year. Switch now.

Rob Carricks's Saturday September 20th column was about Canada's top dividend payers over the last five years. For subscriber inside this site, I linked the column and in a paragraph for each of the stocks, provided three measures of expensiveness each. One of Mr Carrick's high dividend growers might be a buy even though the market is still expensive. I have been studying dividend growth for over thirty years. We (subscriber inputs over the decades) have discovered not only how dividend growth quietly builds wealth but how to tell which dividend growth stocks are expensive. We test our stocks against valuation measures developed many decades ago by Charles Dow and Ben Graham (The Intellegent Investor). About Us.

If you own mutual funds, you should read this column about hidden fees:

  • When they clean up trailers fees and reveal the true cost of having a financial advisor/planner/wealth manager, those of us who provide truly independent financial advice will finally be properly compensated. CRM2 (Client Relationship Model) is coming none too soon (July 2016). I'll be retired by then, though. People hesitate to pay $50 a year for on-line access to my efforts on dividend growth because they believe their wealth managers are looking offer them for free. They are not. The difference is hundreds of thousands of extra dollars even on modest portfolios.

If you are interested in some ideas about what's going on with 'Investing in Retirement', read this Economist column.

Once you've read the column, consider these ideas. I've been following dividend growth stocks for thirty years. Dividend growth investors do things differently. We do not need to convert out pot into income at some future retirement or target date. And certainly not into an annuity. We begin to set up our income flow by buying individual stocks with a good record of dividend increases years before retirement. As the years go by, our yields grow. When we actually retire there is already a substantial growing income flow from our common stocks. We can, but might not need to, eat into our capital. The caveat: we have to do it ourselves. But it's worth it as the extra cash amounts to tens of thousands of dollars with a modest portfolio and hundreds of thousands with larger portfolios. Mutual funds, even dividend funds or dividend ETFs, don't work. Funds are not noted for providing income, let alone rising income. Dividend growth investors measure results by income flow. Unlike bonds, our yields rise.

I could give you 50 Canadian examples. Here are just three. CNR's dividend in 2003 was 17¢, now it's $1.00 per share per year. BNS's dividend in 1990 was 25¢, now it is $2.56 a share annually. Saputo's dividend in 1998 was 5¢, now it's 88¢. Who cares about the price of the stock, or a market fall for that matter, when the common stock provides retirement income like this. There's a retirement bonus: as the dividend goes up, so does the stock price. Go beyond thinking just dividends: think dividend growth. Buy only dividend growth stocks. The Connolly Report provides data on Canadian 50 stocks which have raised their dividends for at least five years. Send $10 for a sample copy (see the About Us page. My August 2014 issue (out in mid-August, when we get back from Nova Scotia) will list good dividend growth stocks in order of 'the percent difference between the current price and Graham's price'(The Intelligent Investor), so we can discern which stocks are less expensive as we near the market peak. Begin your transformation into a comfortable retirement.

How much of a return can you expect? My quick method of estimating return for dividend growing common stocks is adding yield and dividend growth. Yield + Dividend Growth Take Telus as an example with a 4% yield and 8% dividend growth over the last five years: 4% + 8% = 12%. Most folks can't reckon with this method, but it about equates with the 13.1% cited by Morningstar for its return over the last 30 years on the leading Canadian dividend payers (Number Cruncher July 17 2014 link just below). We have held some of our stocks for 30 years: it works. Actually, I really don't give a “&-?!#~” whether people believe 'YLD + DG = Return' or not. You hold and you hold and keep holding…unless the dividend growth stops. Dividend growth stops now and then. We sold our lifeco stock, for instance, when it's dividend growth stopped. Dividend reductions, however, are a different matter. With the fine stocks I follow, there's only about one reduction a decade. Three so far this century (TRP, T and MFC).

“Ultimately”, Burgundy Asset Management maintains, “what counts are the cash flows you earn from an asset and the rate at which these cash flows grow.”

third_quarter_2014.txt · Last modified: 2014/12/19 10:35 by tom
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