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Lucky Chapter 13: “What’s the Measure?”

by Orion on December 5th, 2011

With the TSX continuing on it’s unpredictable roller coaster ride (up almost 500 points in one day last week after days of significant drops), this seems like an opportune time to remind ourselves of the “game plan”.  While the investment strategy of this blog is  more focused on dividends than capital gains, buying at a good (i.e. low) price is still very important.  In this chapter, the OG explains why.

Chapter 13   “What’s the Measure?”

Numerous times over the last year friends have asked me “What’s the measure of a successful investment stategy?”  Especially now, in a volatile market – what measuring stick tells you that you are progressing, and actually achieving your goals?

First – be assured, it’s not the value of your portfolio.  That will always go up and down to some degree with the market.  The measure of your success is much more basic and secure than that…

But before discussing the measure of success, I’d very briefly like to re-iterate the object of our strategy

The Object: Good Canadian blue chip dividend-paying stocks

If you’ve read this blog from Chapter 1 you should know that the object of our strategy (for the most part) is to buy good Canadian large cap dividend-paying stocks — preferably with a DRIP reinvestment discount (that’s a mouthful , but every word is important).   Check past chapters to more fully grasp the concept if it’s new to you.  The rationale is that the compounding dividends of good companies, over the years, has proven to be the most successful  investment strategy for investors.  Consequently, most of our blog feedback has been from those who have watch lists comprised of such companies.

The Measure of a Successful Investment Strategy is Twofold

The first measure of the dividend compounding strategy is yield to cost.  The second is the dividend stream. They work together.

Yield to Cost

Consider Fortis – which we profiled last chapter.  Its annual dividend is $1.16 – paid at that level no matter what the gyrations of the share price.  So… if you bought FTS at $30 its yield to cost would be 1.16/30 x 100 = 3.86%.  But if you bought it at $25 your yield to cost would be 4.64%.  In other words, the lower the price you can buy it at, the higher the yield.  It’s just a ratio of the dividend to the cost. Thus the first measure of your success would your best yield to cost for each of your investment holdings.

What brought this home to me is found on pages 173-175 of Derek Foster’s book “Stop Working”.  On those pages, in table 1 he presents a portfolio of 7 holdings, including the number of shares for each, and the dividends paid by each.  The annual total income from the portfolio is $18,845.

The next two tables show the same 7 holdings, with the same number of shares for each, and the same income.  The assumption is that the dividend remains the same in both table 2 and 3.  However, what makes the two versions of that same portfolio so different is the cost he paid for his shares.  In table 2 he paid more than three times the value of for his shares, compared to the prices of the third table.  In table two he paid $325,500, and in table three he paid only $103,500 (which is entirely possible as we look at the 5 year price charts for stocks).  And, as noted, each version still pays the same total dividend amount: $18,845.

To me, those 3 tables was the graphic illustration which led me to become a more patient investor.  And simply, it’s just a matter of paying the most favourable yield to cost that you can execute in building your portfolio.  I know at the ShareClub I belong to, everyone takes a lot of pride in the lowest prices that they’ve paid for each of their holdings.

The Dividend Stream

After reading the above explanation you should understand that the dividend stream for the two portfolios is the $18,845 annual income.  And, as you can imagine, the dividend stream was built, purchase by purchase over some unnamed period of time.

What I do, on a quarterly basis, is a comprehensive calculation of my dividend stream, to date.  Given that I’m an “older guy” the time line to build my dividend stream ends when I ‘want to/have to’ take an actual cash income rather than continue to compound my dividends within my portfolio.   In that I’d like to net at least 5% per year (if not 7-10%), I have a pretty good idea what level of dividend stream I should achieve in the few years I have yet to build it.  In other words, I can measure my dividend stream as I go – against an income that I hope to take.

But the point is that building that dividend stream is easily measured, and the ‘achievement’ is an ongoing process of individual purchases until one takes that income.

In conclusion, if our purchases over time reflect a good yield to cost, and as a result build a good dividend steam, we can treat investing as a pursuit outside of the anxieties that rising and falling market prices engender.

OG

(Remember that this blog is for all of us, beginners and veterans.  All questions and comments are seen to be worth making – and answering.  In this blog we’re learning together. Over to you…)

From → investing

66 Comments
  1. Orion permalink

    Well stated OG. I believe this concept of buying for the highest dividend yield to be one of those “simple truths” that the average person just doesn’t seem to know. I invested for almost 10 years with an adviser, first with Edward Jones, then with TD Waterhouse, and I have talked to a handful of financial advisers over the years and I still did not get this simple concept until you shared it with me from your Derek Foster books and your involvement with the local share club. I don’t think any of those advisers were intentionally trying to hide this from me, but I also think that the institutions they work for would rather sell us their convoluted, managed investment products that make them more money, than let us in on the simplicity of dividend yields, discounted drips, and dividend streams, let alone the low cost of independent investing…

    • Orion permalink

      …and if there was any doubt that Canadian financial advisors are gouging investors with their managed investment products, here are some figures to back it up: http://www.theglobeandmail.com/globe-investor/personal-finance/home-cents/canadian-investors-gouged-by-fees/article2257327/ (a must read for anyone still on the fence about independent investing).

      Here’s the shocking revelation:

      With a 2.5% management fee on a $10,000 investment at a 5% annual compounded rate of return:

      After 10 years:

      The investor has $12,969.84; the money manager, $3,319.11.

      And 45 years:

      The investor has $29,493.18; the money manager, $60,356.90.

      Frankly I’m more than a little stunned by this… If the math is correct, this is much MUCH worse than I had ever suspected.

      If you’re interested, it looks like there’s a movement afoot to deal with this shocking situation: http://faircanada.ca/.

  2. Excellent references, Orion. Thanks.

    It’s robbery, and it’s shocking! We all leave too much to the “experts” who then take advantage of us.

    So make a point of telling your friends. Make Christmas gifts of Canadian MoneySaver, or “Stop Working” by Derek Foster.

    Get them to read and participate in this blog. We welcome all levels of learners.

    OG

  3. Rena Fey permalink

    Or, how about inviting a friend to a ShareClub meeting?

    Or, just seeking out the ShareClub in your area? Meeting the people at a ShareClub should make it obvious that the members aren’t out to sell anything, or take advantage of anyone.

    Rena Fey

  4. Senior Citizen, back to your comments on the Alta oil economy. I have a suggestion for a small cap, Alta-based consumer-discretionary business which has nothing directly to do with oil… It’s certainly not even close to a dividend aristocrat — or what one might expect for this blog. However, considering our discussion at the end of Ch 12, it might be a reasonable choice for a small investment.

    It’s Liquor Stores N.A. (LIQ). It’s a $340M company comprised of 236 retail liquor stores in Alta, with a smattering of acquisitions in BC, Alaska, and Kentucky.

    It’s median price over 5 years is $15/shr, where it stands right now. And while it’s price is relatively stable, it was as cheap as $13, 2 mos ago — which is where I’m setting my buy target in this crazy market. Its current yield is 7.3%, and has a DRIP w. a 3% discount.

    As for solvency (at such high yields), its payout ratio is reported to be 70%; however I find it to be closer to 80%, with annual EPS exceeding annual Dividends: $1.29 to 1.08. Its Balance Sheet for the last 5 qtrs shows an average of $493M Total Assets to an average of $180M Total Liabilities, thus showing a high working ratio of assets over liabilities. I like that!

    Once again, as with small cap companies, due diligence is required. First, LIQ was an Income Trust, so this is the first year of operations as a corportation. Secondly, it also has a corporate objective to grow through acquisitions, and it has already ventured into the US (the financials show that while the Canadian stores grew at 7.1%, & the US stores grew only 1.2%). And, thirdly, if SC and I are wrong, and Alta should go bust… folks there might swear off the booze, leaving us flat.

    What do you think, SC?

    OG

  5. For a small cap company it looks good but if it expands into the US market, watch out.The US market is alot more competitive then Canada.lt could be a mistake going there.The Canadian market is more regulated, plus with the booming markets of the alberta, BC and Saskatewan, there is more room for growth.The US economy is going to be bad news for the next couple of years.Also if you buy this company, you have to buy 200 to 300 units since it pays a monthly dividend.To share in the discount you have to get a large enough dividend to buy a whole share.
    Watch the companyfor a few months to see what the economy is doing.

    sc

  6. You’re right SC. A “small investment” for one might be large for another. All of us would have to weigh that against ‘what we can afford’, and whether that would be ‘too much spent (for the size of our portfolio)on the Consumer Discretionary sector’.

    But let’s say we do…

    For exampmle, if LIQ’s dividend pays .09/mo, one would have to buy at least 200 shares to comfortably reinvest in one share at $15(ie: 200 x .09 = $18). So for 200 shares you’d have to pay $3,000. What’s too much for you?

    You also mentioned above that the US economy is likely to stay worse than the Canadian for some years. And, by phone you mentioned that Kentucky is the heart of moonshine country. Good point. Those folks sure aren’t going to pay for taxed liquor when times are tough. If LIQ makes more acquisitions in Kentucky we’ll know just how smart their management might be.

    OG

  7. l usually buy about 500 shares at a time of these companies.l like to watch for a while and research them to see what analyses have to say about them plus any business news about them for the past few months.l am now checking out 3 different companies.1 liq, 2 vsn.3 npi.

    sc

  8. I like the three you’re checking, SC.

    Briefly, I looked at VSN, and while it’s current yield is almost 7%, with an amazing DRIP discount of 5% — I’m a bit wary. For example, the payout ratio of EPS to Dividends paid is very high, and the margin between total assets and total liabilities is relatively narrow (compared to LIQ, above).

    Maybe with long term contracts this mid-stream energy company (sort of like AltaGas) might be OK. Like LIQ and NPI, it was an IT before this year, so its history is a bit short.

    OG

  9. John Boy permalink

    Where’s the Santa Clause rally? I was hoping to sell some duds. But it’s already Dec 12 and the market is making me sea-sick.

    Like I said awhile back, the basic TSX pattern is still one of lower highs and lower lows since April 5. Eight months with no bottom yet.

    John Boy

  10. Hi JB,

    I hear you, JB. Not much to indicate a Santa rally.

    But, despite current market volatility, Shoppers is creeping back up to the price I bought it at almost 2 yrs ago. While it’s made a whopping 2% dividend, I’d like the cash to buy better yielding stocks — if and when the opportunity arises (of course, I expect that it will).

    Because those overpriced telecom and utility dividend aristocrats are still out of reach I keep going back to former Income Trusts for yield. Just did a due-diligence review of Waterfurnace Renewable Energy Inc (WFI). Seems like a very good “green” company, with strong financials, but treading water while it waits for the housing market to pick up.

    Will tell you about it when time allows in the next week or so.

    OG

  11. SC, the prices of gold and silver are falling significantly. But isn’t the market wisdom that they should increase as a response to fear and uncertainty?

    OG

  12. Normally the answer is yes,but with this sudden and sharp a drop across the board for all sectors of the market, plus bonds giving little returns, people are getting margin calls .This means they have over leveraged themselves and are forced to cash in assets/Also people are wanting to retain value so they rush into the currency of the world–US$.This is why most currencies of the world are falling so sharply against the US$.The canadian $ has dropped .03 cents in the last few days.Also commodities have dropped because of a global slowdown.
    This could be a good time shortly to cherry pick good companies that are stable but have fallen in the general panic.Pick wisely and carefully.

    sc

  13. Thanks for the explanation, SC.

    The higher financial realms of margins, and cashing in assets because of over leveraging isn’t so easy for the average DIY investor to understand — and I’m only ‘beginning’ to… Hard also, with all the noise from ‘goldbugs’ (forecasting the continued assent of gold) to believe that the safe haven of gold would be given up for the ’safer’ haven of the US dollar.

    From all I’m reading in the financial news, it seems (as you say, SC) that the market will continue to decline.

    So stay tuned, and be ready.

    OG

  14. Waterfurnace Renewable Energy Inc.

    In the lull between greater volatilities, I thought you might like to read about a ‘green’ investment with a lot of promise.

    Waterfurnace Renewable Energy Inc (WFI) is a small cap ($203M), former Income Trust which trades on the TSX. It’s Canadian, but its origins and head office are in Fort Wayne Indiana. It also has global divisions in South America, Europe, Asia and Australia. Currently WFI trades at about $16, and pays an annual dividend of $.96 — yielding about 6%. There appears to be no DRIP.

    I like the fact that its business is the manufacturing, distribution and installation of geothermal systems for residential, commercial and institutional buildings. In the last year WFI was selected by Corporate Knights Magazine as one of the 10 outstanding Clean Technology Companies in Canada. So it’s green, green.

    However, what I’m suggesting is that WFI is a company to keep on your watch list — not to buy at the moment. This is not so much because it is a small cap company, or that its fundamentals are questionable. To the contrary! But the sales and installation of geothermal systems in Canada drop off during the winter months, and the share price is likely to decline for the next 2 qtrs. As well, its highest profit margin is in residential installations and the US is in a protracted housing market slump.

    Finally, I’d just like to know more about this company… specifically: 1) how much of its business might be dependant upon ‘fickle federal funding’ or ‘stimulus money’ for renewable energy; and 2) from what country it derives most of its revenue.

    As for its fundamentals, despite a difficult market WFI’s assets have been modestly and steadily increasing over the last year. In fact, on Nov 9/11 WFI announced a 9% dividend increase based on increasing profits. As far as I researched, WFI has increased its qtly dividend from .17 to .24, steadily from 2008 through 2011.

    What impressed me most was the consistent working ratio of Total Assets to Total Liabilities over the last 5 qtrs: assets have been maintained at 2.5 times liabilities. So it would appear that, barring depression, its dividend is safe.

    My last concern, though, is for WFI’s falling share price. At $16 it’s at the lowest in 5 years (It’s been as high as $30 four times). This may well have been due to the CEO’s prediction in the Q3 report that for 2012 he expected an “overall industry decline of 10-15% for residential geothermal heat pump sales in the USA”. Given its Assets to Liabilities, I’d say WFI has lots of room to withstand an ailing economy. However, I’d like to see some signs of economic recovery, as well as some bottom support for WFI’s share price before I invest. I’d give it until the spring when its seasonal business should begin to pick up.

    In conclusion, put WFI on your watch lists.

    OG

  15. John Boy permalink

    Very interesting review of WFI, OG. As you’ve been saying it would be good to invest in some alternatives to the resource and financial stocks.

    The TSX continues its downward trend through Christmas. No Santa rally, and a lower low to come if the pattern continues. What will be interesting is that the Q4 reporting begins after the first week in January. If earnings disappoint, I would expect the TSX to go lower than 11,000. It hasn’t been that low since the summer of ‘09.

    Have a Merry Christmas. Talk to you in the New Year.

    John Boy

  16. Hey now, JB, we seem to have had 3 straight days of higher values on the TSX, and this is the 22nd of Dec… Could this be the famed Santa Rally???

    But did you read Dr. Doom’s predictions for 2012 in the Financial Post? Much like my other bearish guru, David Rosenberg, Nouriel Roubini notes absolutely everything that can and will go wrong around the globe — yet falls short of forecasting an actual depression. I figure this bear’s hedging.

    But who cares anyway, according to the Mayan calendar, Dec 21/12 ‘is’ doomsday. Take that, Mr. Roubini. You’ve been up’d.

    Best of the Season to all.

    OG

  17. Rena Fey permalink

    Thanks for a good year of information exchange, OG, SC, Orion, et all. Have a good Christmas and New Year’s.

    Rena Fey

  18. Newbie permalink

    Hello OG, SC, and everyone.

    I figure I’m speaking for a lot of people who read this blog and are a bit shy to reply, or to ask questions. But I like the open feeling you’ve managed to offer to us new DIY investors.

    As for my comment today, I find that once in awhile it’s good to just read through OG’s posts at the beginning of each chapter. For me it covers the step-by-step instructions for self-investing, and also the basic idea of dividend investing.

    All the best for Christmas and in the new year. I’ll try to comment and question more often in the new year.

    Newbie

  19. Doris permalink

    Hi Oval bloggers,

    I just wanted to say that I’m also one of your silent blog fans.

    If I were to add something it would be that I believe women are naturally more in sync with dividend investing than men. From my experience when men (younger and middle aged men) discuss investing they are looking for the next best thing. Most often it’s a mining or a tech company. Most of them never mention dividends. It’s always about growth.

    So I figure that Newbie is a guy, because of his earlier reference to investing in gold stocks. And, obviously, Rena Fey is a woman who has begun, very carefully, to learn more than it takes to invest in ETFs.

    John Boy is a guy, but he seems to have cooled his jets a bit after Senior Citizen’s strong cautions a couple chapters back.

    All in all, it’s been interesting, informative, and fun.

    Thanks to all of the participants, and heaven help us all in 2012.

    Doris

  20. It’s Christmas day, 2011. Amidst all the family visiting I took a look at TSX. After all, we had 4 straight days of ascending values and I wondered if we might possibly be seeing a new trend. John Boy, take a look. There have been two higher lows, despite a pattern of descending highs. It is different than the previous pattern you’ve noted.

    SC, do you place any credence in the technical study of charts and their patterns? Is this some sort of cross-over or something?

    OG

    • Sometimes charts work and sometimes they do not.The problem with the markets is their volatility.This market is the most volatile in history, which makes charts unreliable at times.ln less volatile times charts do help
      but times are unpredictable.l think the best way is to look at companies that are part of the basic infrastructer and make money in the worst of times like utilities,energy, etc.When markets panic even these type of companies drop and this is the time to buy some.There is no set way to look at the market all the time that always works.When the market settles down charts will help again,but now there are too many unknowns that make the market so wild

      sc

  21. Thanks SC. I agree. Charts this volatile are unprecedented. Everything seems so precarious: the environment, politics, and the economy. What happens on one side of the world is felt almost instantaneously on the other.

    One thing that does seem to stand out on the charts, is as JB has suggested: all the main stock exchanges have declined dramatically in 2011. Shanghai and Nikkei 225 are back to where they stood in March ‘09 — just after the ‘08 crash. And the TSX is down to late ‘09 levels. The only dubious looking chart is the US SP500 which shows a recent incline. However, with the residential housing market still in decline and unemployment at such high levels, what real hope does the US have for recovery in 2012?

    As I’ve been saying, hang on to your cash. There will be more buying opportunities in 2012. And as SC says — keep your eyes open for those dependable companies whose products sell in both good and bad times.

    OG

  22. As you may have gathered in your readings there are schools of investors who study charts for “signs”, and have built very complicated explanations for what those signs portend for investment decisions. “Candle-sticking” is the basis of one of those technical schools. The ‘Elliot Wave’ school is another. If you follow them, you’ll inevitably be lead to website sales houses and financial advisers bent on their own gain.

    For the most part I compare them to astrologists, or ‘oracles’ who throw sticks or read animal intestines — to know what stocks to buy. As with all religions, I treat them with a very sceptical mind.

    That said, I believe that the following terms add some useful understanding to charts. For explanations I’ll use the examples of WFI and SC, both of which are discussed previously in this blog.

    Remember, the review of WFI, above? While I felt the fundamentals were good, I noted that winter was a slack time for sales and installations of WFI’s thermal heat systems. As well, I noted that as long as the US residential housing market remained flat or in decline, WFI might struggle. Well, regarding charts, what I’m looking for before I buy WFI is share price “support”. For, as the price is now declining sharply, who knows where the bottom lies? And when investors start buying again, the price will begin to rise. It’s just a cause and effect relationship to point out that there’s no point in buying when a stock is in free fall until there’s some indication of a bottom (ie: support). Remember from the title of this chapter — to buy WFI at a good low would mean that your yield is increased.

    Similarly, (but in reverse) when I want to sell a stock, I look for share price “resistance”, and eventually a “breakout” at the top of a price rise. Resistance is simply a ceiling above which share price has trouble rising above.

    I can use my Shoppers Drug Mart (SC) example here. I bought it at $43 — after which it fell to $34! And while I want to sell it because its yield is only 2%, as it approaches that $43 price level it keeps on dropping back. That’s because many other investors bought it at from $40-42, and they’ve sold off each time it reaches that level. So, if you look at its price chart you will see that Shoppers has ‘resistance’ to rising much above $42.

    When I bought Shoppers, two years ago, from the 5 yr charts I had expected it to rise above $50, and to make me a capital gain (while I collected the 2% dividend yield). But, so much for the charts in this case! Much to my surprise the Ontario government cut pharmacy profits and handling fees on generic drugs to make them more affordable to consumers — just after I bought Shoppers. So now it’s not likely to “break out” above my purchase price of $43 for a long time.

    So it goes — and I’m glad for the consumers. And I’ll still make my 2% while I wait to sell it at $43.

    Now you can add the terms ’support’, ‘resistance’, and ‘breakout’ to your practical knowledge and use of charts.

    OG

  23. As l said before,charts are fine in steady times but there are too many unknowns thatare affecting markets and with the extreme volatility.investors are extremely jitterly.This means that one bad comment or event has a larger affect thab it use to.This is why charts are not as reliable.Once things have settled down the different chart gurus will show you how their chart methods predicted what happened, but by then it is too late.lt took years for this mess to be created and it will take years to fix it one step at a time.l may not even be around when this mess in europe is all sorted out.For this reason l say be careful and do not be in a rush.

    sc

  24. Welcome Doris,

    Sorry you had to wait a few days to see your comment on the blog.

    (If you missed Doris’ first comment [see the pink symbol above], it’s because it usually takes Orion a few days to scan for new participants, and then publish what they have to say. He’s not retired like some of us.)

    Glad to hear from another silent partner. We hope you will continue to comment and ask questions. Please know that no question or comment is naive or foolish. It’s how we all learn. In fact, it’s an ongoing theme of this blog. Don’t be shy!

    I believe you’re correct in your observation that women take more naturally to dividend investing than men. Actually, Senior Citizen calls it “boring” investing — but swears by dividends as the best means to making good returns.

    And, of course, neither Senior Citizen nor myself pretend to be young guys — though both of us can tell you stories about our misadventures with growth stock investing.

    Let us know more about ‘where you’re at’. And, thanks again for the comment.

    OG

  25. Rena Fey permalink

    It’s so nice to hear a similar voice. Hi Doris!

    You’re right, I’ve graduated from ETFs to individual dividend stocks, but at my own pace. I’m older and can’t afford to make mistakes. I can also use the extra 1-2% I can make without having to pay ETF management fees.

    But, what’s made it possible for me is that OG has given me the basis for my own due diligence reviews, and SC has added the benefit of his years of experience.

    In the human interest category, both you and I know how many women end up single and in poverty. It’s my goal to avoid that pitfall.

    Rena Fey

  26. Hi Rena Fey,

    You mention the extra 1-2% gained by not paying ETF management fees. Add to that “special dividends”, splits, and DRIP reinvestment discounts.

    In selecting the better companies you can double the income you would make by buying individual stocks rather than ETFs.

    OG

  27. Doris permalink

    OG, I understand drip reinvestment discounts, and have a notion about splits, but what is a special dividend?

    Doris

  28. Hi Doris,

    A special dividend is a reward that a company might use when they are doing well to keep their investors onside. For example, I have 200 shares of Corby Distilleries (CDL.A). Recently they not only raised their qtly dividend from .14 cents to .15 — but they also announced that on Jan 3/12 they are giving an additional special dividend of 1.85 per share to CDL.A investors of record as of Dec 15/11.

    Just to show you the benefit of this special dividend: the regular annual dividend of .60 on 200 shares would amount to $120. That’s a 3.83% yield, as I bought CDL.A at 15.66. But the special dividend at 1.85 X 200 shrs equals an additional $370 — or THREE TIMES what I would have received from the regular dividends in a year. So, altogether for 2012 I’ll receive $490 in dividends. That’s a dividend return of over 15% in one year against the initial purchase price of $3132.

    Furthermore (and previously), on Feb 4/06 CDL.A split, giving 4 shares for every 1 share. (Usually when a stock splits the regular dividend is reduced accordingly, but with 4 times the number of shares — there is a quadrupled potential for capital gain.)

    ETFs won’t do any of these things for you!

    And as an investor, I will be pleased to keep CDL.A as a part of my portfolio.

    I hope this is a fairly graphic example of the ‘additional benefits’ in buying individual dividend stocks over ETFs.

    Senior Citizen, if you have any further examples, clarifications or corrections on this please feel free.

    OG

    • l do not have examples of special dividends,but other ways that dividend paying companies reward investers are by stock splits that OG mentioned and stockbuy backs by the company.Companies do this to lower the price on theit stock so more investers will be able to buy their stock.ln reverse stock buy backs are done so that the company can supply shares to share holders thru the drip plans,but they want to reward the stock holders with more shares without diluting the total number of shares available.Another reason for drip plans is the lower cash that companies have to pay out for dividends.This also allows companies to finance their growth without having to bottow.This is another of the reasons why companies offer discounts when you reinvest your dividends.

      sc

  29. Thanks, SC.

    Pardon my ignorance here. SC, but the buyback concept isn’t entirely clear to me — especially as to how DRIPs work within that concept.

    So far I’ve understood buybacks as the company simply buying its own stocks back from investors in order make the remaining fewer stocks more valuable (as compared to the company’s net profits/earnings per share). And I figured that it was only an indirect and mostly theoretical benefit — as it would depend on whether or not new investors would then drive the share price up by attempting to buy the fewer stocks remaining on the market. Am I right on this?

    And I didn’t understand how DRIPs worked as part of the stock buyback concept. Is it that by offering DRIPs (ie, reinvestment plans) companies don’t have to make large new stock issues through the investment dealers, but simply ’sponge up’ those stocks which remain on the market from past new issues?

    Over to you again, SC…

    OG

    • Companies get permission from the administrators of the rules to buy back their stock on the open market.They ask for the right to buy back certain amounts over a set time limit.They can buy back this amount if they want to.
      Usually companies like our banks or imperial oil ask to buy back 5% of their shares over a couple of years.This is where companies who do not wish to dilute the profits/
      share ratio.These buy back shares are yhen passed out thru the drip programs to share holders or as a bonus to key personal in the company as stock options.

      sc

  30. Thanks again, SC. I just didn’t realize that buybacks could be utilized in so many ways by the companies.

    From the discussion, above, on the ‘added’ benefits of investing in individual dividend stocks over ETFs, I’d like to offer the example of an Enbridge and “splits”. Besides having raised its dividend each year for 16 years, ENB has split 2:1 on two occasions in the last 10 years: in May ‘05, and May ‘06.

    I bought it in May ‘06 — just after the split, at $30. It’s share price is now $38: a 26% capital gain.

    If I had bought it prior to the split I would have had twice the shares for a capital gain of over 50%!

    What ETF would ever do that?

    OG

  31. Correct that: Enbridge split twice: in May ‘05 and May ‘11.

    OG

  32. John Boy permalink

    And I take it, OG, that you bought ENB after the May ‘11 split?

    JB

  33. You are correct, JB. A pretty nice capital gain in only 7 mos. Wish I had held it prior to the split.

    OG

  34. Orion permalink

    As always, these comments continue much further than where the initial post/chapter left off. A few of these points could easily be new posts. :)

    Informative as always though. Thanks for all the contributions!

    Hope everyone had a good holiday and a best wishes for the New Year!

    …and lets hope the markets settle down a bit with somewhat more predictable and sustainable growth.

  35. You are right, Orion. That whole last discussion on the benefits of dividend investing over ETFs could be a chapter in itself.

    In fact, after 13 chapters it sort of ‘ties up’ much of what I have to say about investing.

    OG

  36. FYI, I just noted Corus Entertainment raised its dividend 10%, today, Jan 10/12. Not strictly a dividend aristocrat, the Co. has raised its dividend regularly over the years, and split 2:1 in ‘08, before the crash.

    Its business is TV and radio specialty programs, and its largest stockholder is Shaw Communications.

    Corus’ financials look particularly good, with Assets significantly outweighing Liabilities over the history I reviewed. Its dividend yields over 4%, and it has a DRIP, and a drip discount of 2%. While its current price is a bit high at over $21, Corus is going into its second qtr, which is traditionally its least profitable qtr. A 10 yr history shows corresponding share price drops during Q2 (ie: beginning now…).

    If one could purchase it at about $18, the yield plus the dividend discount would total about 7%.

    Check it out.

    OG

  37. John Boy permalink

    Hi OG, SC, et al.

    First I should say to Doris that I am, indeed, a man. As well, you are right to say that SC did “somewhat cool my jets” earlier in this blog. But it was much appreciated.

    My questions for OG and SC today have to do with portfolio evaluations and dividend streams for 2011. Given that the TSX about 16% from the spring until the end of the year, how did your portfolio value stand up?

    Also, in the spirit of the blog (and this chapter),in a falling market were you able to add much to your dividend stream?

    Did you sell any laggerts during this recent rally?

    Finally, can you estimate how much cash you keep available for possible bargains in the coming year?

    Thanks,

    JB

    • At the end of the year my portfolio was up about 6%.l had enough cash available to pay all my costs for the year and extra in the form of money market to take advantage of good buys on the market.l sold off some companies that were bought years ago that did noy do well
      These former income trusts companies stopped paying dividends and were tying up money that could be better used elsewhere.My income from dividends increased since most of my dividends are in companies with drips and a majority of them offer discounts when l reinvest.
      l keep 10 to 15% of my portfolio in cash or money market funds.lf l need more cash, l bought bank preferred shares below their issue price a couple of years ago and now l can sell them at good capital gains.l
      sold some of them last year to write off the capital gains on them against capital losses on some former income trusts
      lf you have a large enough income from wages.that you have cash to spare for investing, then you do not have to keep as large a cash balance in your portfolio.Since l have been retired for many years and do not have va large pension,my wife and l have to live off our investments which have done well for us.
      As l have said in the past,certain opportunities occur in the market and you have to be able to take advantage of them.When taking advantage do not go overboard hoping for a home run.l took advantage of the preferred shares years ago which l am able to still use.Now there is the opportunity of blue chip companies offerig good dividends plus discounts,take advantage of this.These discounts can end suddenly.ln a short time of a couple of months last year rbc,telus,na,bmo,cancelled their discount.Bmo is offering the discount again since they had a bad quarter.l believe the discount is 3% plus a dividend rate near 5%.

      sc

  38. Thanks for the question JB, and thanks for your response SC. Lots for us all to digest there. I wish I had bought (and kept) more preferreds. They’re the secret to maintaining overall portfolio value, aren’t they SC!

    I believe my portfolio grew only about 3%, which I feel is pretty good in light of the TSX drop (and my lack of so many preferred shares as SC). But what I feel especially good about is that my dividend stream grew tremendously due to buying some good dividend stocks during those deep dips in August, October, and early December.

    I still have about 15-20% in cash, waiting for discount deals with the dividend aristocrats. From my reading of the economy (being naturally bearish), I figure that the rough ride will continue through 2012 — largely due to European sovereign debt, and US political brinkmanship over the deficit throughout this election year.

    Unfortunately I haven’t been able to sell Shoppers yet (because I bought it too high, and because the dividend is too low)… but I’ll let you know.

    Cheers,

    OG

  39. Preferred are worth having if you can buy them at the offer price of $25 or below their offer price and if the preferred are from blue chip companies.lf interest rates are fluctuating wildly, then you have to be careful about buying preferred.

    sc

  40. John Boy permalink

    I like the fact that preferreds balance a portfolio.

    If I’m right, preferreds act like bonds, most often rising and falling oppositely from stocks. Thus they would become a bargain, for example fall below the $25 offer price, when stock prices are rising. Am I right?

    But I’m not what interest rates have to do with it.

    JB

  41. As I understand it, JB, rising interest rates (as imposed by the Bank of Canada) directly diminish the returns of lower interest and dividend paying products (ie, many stocks, most bonds, and most preferreds).

    And the reason that increased interest rates are imposed at all is to ‘dampen down’ an inflationary economy which is expanding too quickly. So you can expect that at such times the values of growth stocks and commodities are increasing dramatically. Accordingly, by then investors have jumped on the capital gains bandwagon, selling off their lesser paying products. It’s a case of supply and demand. But at the same time, it offers the astute investor a ‘buying opportunity’.

    For example, from the 5 yr charts you can see that in the summer of 2010 the prices of most preferreds had dropped to the $16-17 range. Essentially, they were out of favour because of the stock market recovery through ‘09 and ‘10.

    However I wasn’t so aware of preferreds; and by the time I met Senior Citizen (and the Share Club) in the fall of 2010 preferreds prices had risen to $20. By then European debt was threatening continued stock market recovery. Yet $20 was still a good bargain in view of their $25 issue price. That’s when I bought in.

    Hope that helps. Any comments, SC?

    OG

  42. When interest rates rise,preferred shares usually drop in price.When interest rates fall preferred shares usually rise in price since they have a set amont of dividend return.The reason why preferred from the banke were gold mines to buy during the dark days of 08,09,and
    2010, when interest rates dropped,so did the price of bank preferred shares.This was opposite to what they should have done.This is why l bought 1000’s of them.The contagion from banks in thev US and europe caused people to panic plus some large mutual funds were having huge redemptions and had to sell preferred shares to pay off their share holders.One example of this was the Caisse of Quebec which needed billions of$ for their pensioners of Quebec. This was arare opportunity to buy these preferred and the only time that l have seen this happen.
    Thru experience and learning you will learn to recognize
    an opportunity like this.For me this was something that l could afford to buy without exposing my portfolio too much.

    sc

  43. Thanks, SC. Nice to have experience enough to recognize those market opportunities when they arise.

    The one further comment I’d like to make regarding preferreds is that their dividends are eligible for the Canadian dividend tax credit. So, as with regular common dividend stock, you can hold Canadian companies’ preferreds in a non-registered account, withdraw what you need for income — and pay less in taxes than you would when taking the same income from your RRSPs.

    For more on preferred stock see Chapters 2 and 5.

    OG

  44. Doris permalink

    Hi Guys — and Rena Fey,

    I guess I figured right about you John Boy.This comment comes from your mention of the TSX down trend and the Santa Claws rally. As far as I can see, that rally did happen between Dec 15 and Jan 3 with a rise from 11,500 to 12,200. That’s 6% over about 3 weeks. But it has been at that level for the last 2 weeks. Even with the downgrade of the Euros, it seems to have calmed down from the last few months.

    OG, and SC, is this the calm before the storm?

    I can also understand SCs caution about commodities. Look at Encana and natural gas prices.

    To let you know, I opened a BMO Investorline account and I’m hoping to buy some dividend aristocrats if the price goes down. Thanks to the blog I don’t mind taking my time to buy them.

    Doris

  45. Natural gas may be nearing its low now that cold weather has come.lt might pay to watch encana.it is a blue chip company and could become a good buy in the future with a 4% plus dividend.There isa better chance that there will be growth in this stock.lf the cold weather continues this company price should grow.lf you buy this company,it is a long term playof 3 to 4 years.lf you buy any shares just nibble at it depending upon how much that you have to invest.

    sc

  46. Hi Doris,

    Good to hear you’ve opened your discount brokerage account. It’s a big and sometimes scarry step for most people to break away from the financial advisers. Yet, with a patient approach you’ll do your buying at much better prices — with far less fees.

    Let us know how you’re doing.

    As for ECA, I have quite a few shares: some at that 4% yield SC mentions, and more at about 2.5%. You certainly won’t do wrong to buy ECA at current prices.

    Keep us posted on how things go. And ask whatever questions you wish as we go along.

    OG

  47. One has to wonder when David Rosenberg sees a ray of hope… Could it be that RRSP season is upon us? Certainly, one can’t forget that this bear is also the chief economist at Gluskin Sheff & Associates. And I would wager that it would pay Gluskin Sheff a whole lot more in fees to invest their clients in the stock market rather than the bond market.

    In the Globe yesterday (Jan 19/12) Mr. R says, “At their current low levels, the market’s relatively modest P/E (price-to-earnings) ratios bolster confidence that this market is unlikely to take a devastating plunge” (Hmmm… maybe not — through RRSP season anyway) . But isn’t this logic a bit like the chicken and egg? Lower P/Es could also go lower, couldn’t they Mr. R? Isn’t it also a reflection of investors’ lack of confidence that P/E is so low?

    But the wily Mr R simultaneously plots his escape route back to bear-ism in his conclusion, by saying, “The key going forward will be how corporate profits perform in the low to no-growth environment I see ahead”. From the early reporting, corporate profits have already ‘disappointed’.

    So much for putting our idols on pedestals. …And let’s see what how the reporting continues.

    OG

  48. Rena Fey permalink

    OG, there does seem to be a slight change in the TSX pattern which JB and you have been referring to. The current high is higher than the one Nov 30, and the lows have been getting higher since Oct 4. Maybe Mr R has a point.

    However, like you say, it makes sense that RRSP monies are likely to drive prices up for awhile. It is hard to wait, though. I was all geared up for the bargains.

    Rena Fey

  49. Hi Rena Fey,

    Yes, the rally seems to continue. But while many analysts (even some of the perennial bears) cautiously support economic recovery, the fact is that there is little volume behind current trading; the 10 year bond yield is still under 2%; and unemployment is higher than a recovery should indicate. Companies just aren’t spending. And, as Senior Citizen has said — there’s a lot of fear in the market.

    Notice that none of the analysts are so confident that they don’t add that growth will be very slow, and that there will be serious volatility for the year.

    If you read back to earlier chapters I did a study on TSX price variation over the last decade. What I found was that, on average, every 2-3 mos there was a significant dip or a peak. For example: on average each year there was 1 peak or valley of more than 16%, two from 8-16%, and likely 2 more from 4-8%. And that’s just normal (ie average) volatility…

    Now, however, is the time when we should learn to practice a certain discipline — which is to refrain from buying too high. Many of the dividend stocks that we’re seeking are widely desirable, and as a result are still quite high. Most likely (unless there is some very bad news) they’ll go even higher as the financial houses put RRSP monies into their mutual funds.

    But sooner or later, Rena, (probably within 2.5 mos) there will be that bad news, with exaggerated fears — and whoops, another deep dip. That’s when you’ll find the bargains.

    OG

  50. John Boy permalink

    I just looked at the Globe’s Calendar for reporting for this week. There are many big leading US companies on the list, including Apple, Haliburton, Macdonalds, Yahoo, AT&T, Verizon and Johnson and Johnson. Also, there are some big Cnd companies such as CN and CP. Many of these are seen to be bell weathers of the economy.

    Let’s see how it goes.

    John Boy

  51. Sometimes an individual sector will decline, despite a rally — as has been the case with energy over the last while. A particular stock on my watch list, Keyera Corp has just fallen 9% in the last three weeks, from over $51 to just under $47. Mind you it was as low as $34 a year ago, but Keyera is a very well respected stock, and in much demand.

    Besides that, its dividend yields 4.39% at a price of $46.52; and in the last year KEY raised its monthly dividend 13%: from .15 to .17. It also has a DRIP with a 3% discount. Thus at about 7%, your investment should double in 10 years.

    The downside is that you can’t nibble at this one. Because it’s a monthly dividend it would take an investment of about $14,000 to be able to buy a share each month (.17 x 300 = $51).

    I haven’t looked at KEY’s financials lately, but from reading the blog you could probably do that for yourself now. When I did a review of it in May ‘11 its payout ratio was a low 60%. You should also, check the financial news for any negative stories. I haven’t heard of any, but I haven’t looked.

    FYI the “Independant” Chairman of the Board is Peter Lougheed, past long-time premier of Alberta. I usually like what I hear from him, as he stands out as a kind of ‘red tory’ — politically caring about more than just the bottom line.

    So, if you’d like to share something about Keyera Corporation we could all benefit from , it would be most welcome.

    (Just because I can’t nibble at this price level in order to take advantage of the DRIP discount, I’m going to wait — and hope that it declines further.)

    OG

  52. I just noted that my total portfolio value is now back to where it was last May, before the 7 mos decline of the TSX. What’s interesting to me is that the TSX isn’t yet near the value it was at that time: only at about 12,400 — when it was about 13,800 last May (fully 11% down).

    I attribute the speedy recovery to my dividend stream. If I had been in money market holdings alone (which basically is equivalent to cash), I figure I’d be about 11% down in total portfolio value.

    Now, if the market rises again to 13,800 maybe I should take some capital gains — eh SC?

    Trying to keep my eye on the ball…

    OG

  53. John Boy permalink

    OG, I’m also watching Keyera. Today it’s gone down another dollar per share. However, what I wanted to point out is that KEY is a natural gas focused company. Though there’s no actual news that I can find on Keyera, I think that investors are selling off because nat gas is at a 10 year low, and there’s a lot of doubt about the Gateway pipeline ever getting approved. From what I can understand, Gateway’s main focus would be trasportation of nat gas to the west coast for processing into liguid nat gas, and then transported to Asia.

    If I’m right, KEY could fall even farther, since it’s been falling steadily since Jan 5, with no indication of a bottom.

    JB

  54. Key is looked upon as a hold or buy by many analysts.l thi9nk that you can find better places to put your money at this time.
    An answer to OG about taking capital gains,if the company is paying a good dividend and you like the company,keep it.You will not be able to time the market.
    many good companies are paying excellent dividends plus they have drip plans with discounts.Make use of these plans while they are available.If the stock market dropsm you will buy even more shares with the drip.
    Locking in profits does not always work since you have to pay taxes on the profits(capital gains).A person who stays with a company long term will end up with more money than a person buys and sells the companymsince they have to pay taxes each time you srll with a profit.

    sc

  55. Thanks JB and SC,

    I’m ‘holding off’ on Keyera for now. While it appears to be a good company, with a decent dividend and DRIP discount — natural gas is having its problems with too much supply, and environmental and political problems with its extraction (fracking) and transportation (pipelines).

    We’ll revisit this one if the share price returns anywhere near its $35 price of last year at this time.

    As for taking a profit if the market continues to rise, I expected that you would nix that one, SC. I wasn’t really serious — and you’ve just reinforced the ‘buy and hold’ this blog preaches. Thanks for that.

    We all should know by now that good companies, with good dividends, and bought at good prices are the object of our investing strategy.

    As for the taxes paid on capital gains, we should clarify that such taxes are paid on sales of stocks within non-registered investment accounts (as opposed to RRSPs and TFSAs).

    Thanks, JB and SC.

    OG

  56. Rena Fey permalink

    If I’ve got this right, we now have a backlog of stocks that we should keep on our watch list, and are waiting for better share prices and/or better financial fundamentals. As above, there is Keyera Corp, as well as previously mentioned LIQ, NPI, VSN, and WFI. Have I missed any?

    (Just to remind you older fellows.)

    Rena Fey

  57. Hi Rena Fey,

    You’re right, and I can probably add a few: CLC, MBT, BA, and LIQ. I’ve actually “nibbled” each of them during the dips in Oct and Dec/11. But with those you’ve mentioned for our watch list — I like them all.

    However, with WFI I’m hoping that there will be a drop in price due to the fact that its business (selling and installing geothermal heat units) is at a low during the winter. But it’s reporting for the period won’t come for another month or so…

    With NPI, their net income (profit) and earnings per share (EPS) compared to dividends paid over the last 2 qtrs was way down as they’re in the midst of a building cycle. But their balance sheet is good, and they have a reputation for completing projects on schedule. I’m just being a bit cautious in view of possible Euro contagion and all.

    With Veresen (VSN) I’m also cautious, as their share price (at +$15) is at a 5 yr high. At the same time their profit and EPS dropped considerably during the last qtr; yet simultaneously they announced a 5% DRIP discount… It would seem incongruous.

    I do find that Keyera (KEY) is very similar to VSN, but it’s just seen a 10% drop in share price to $45.73. Compared to VSN, KEY’s financials are much better, with EPS exceeding dividends, and a very good ongoing ratio of assets to liabilities. The drawback, as mentioned above is their shares cost 3 times those of VSN, and require a large investment (some $14,000) in order to take advantage of the monthly 3% DRIP reinvestment discount. And even then, the combined yield would be about 7.5%, as compared to VSN’s whopping 12%.

    Something worth considering in comparing these two somewhat similar former Income Trusts is that VSN’s dividend of $.08 is also monthly. So, to take advantage of the 5% DRIP discount, one would have to buy only 250 shares to make $20 each month. Such an investment would cost about ($16 x 250) $4,000. Certainly a more manageable investment than buying sufficient KEY shares for DRIP reinvestment purposes.

    So, it’s up to you, dear readers. KEY may appear financially more stable, but their shares are roughly 3 times the cost of VSN — and for a lesser total yield.

    As for me, I’m not even going to nibble just yet. I’m happy to keep my 15% cash holding for some “really good deals” in the future.

    OG

  58. Some other companies to look at are encana and emera.Encana pays a 4% plus dividfend but no discount.ln the next 2 to 4 years this company should have excellent capital gains.Their main product is natural gas from shale gas.The demand for natural looks excellent for the future in 2 to 4 years.They have a drip plan and pay a dividend every 3 months.Emera has a drip plan which pays every 3 months but the best part is the 5% discount they offer when you reinvest your dividends.

    sc

  59. emera pays 4% plus dividend on top of the 5% discount which equals over a 9% return on a utility.

    sc

  60. Excellent companies, SC.

    EnCana, as you and I have discussed, has always been a well-respected company, and the share price is at a 10 year low. And while nat. gas is having it’s problems, I don’t doubt that it will make big capital gains in the future. In the meantime, its dividend yield is 4%. Pays you while you wait.

    Emera is also a very highly rated utility. Its share price might be seen to be a bit high at the moment, compared to its past performance — but who can argue with the 9% return SC has just mentioned.

    OG

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