Connolly Report April 2005 Vol XXV No. 2 p.576

“I advise holding an asset that, though almost universally reviled today, will surely be prized tomorrow. It pays a low but fast rising return, and has a sexy four-letter ticker: CASH.” James Grant Forbes March 14 2005

“What Charlie and I would like is a little action now. We don't enjoy sitting on $43 billion of cash equivalents that are earning paltry returns. Instead, we yearn to buy more fractional interests similar to those we already own or – better still – more large businesses outright. We will do either, however, only when purchases can be made at prices that offer us the prospect of a reasonable return on our investment. Warren Buffets's Letter to Berkshire Hathaway Shareholders of March 2005 p.17 (Also read pages 16,19 and 1 of this 2004 “Letter”. (There was a link on dividendgrowth.ca to this Letter to Shareholders under Patience.)

Jeremy Siegel's new book The Future for Investors is sensational. I'm putting it on top of my investment book list along with The Intelligent Investor by Benjamin Graham. The Future for Investors is about how “The power of the basic principle of investor return is magnified when the stock pays a dividend” p44. On page 242, Siegel distills the portfolio implications of his extensive research into three directives. His first directive concerns dividends. “Dividends: buy stocks that have sustainable cash flows and return these cash flows to the shareholders as dividends.” (The second one concerns international investing.) Here is his third directive. “Valuation: accumulate shares in firms with reasonable valuations relative to their expected growth and avoid IPOs, hot stocks or other firms or industries that the consensus believes are the 'must have' investments.” Siegel computed the return for every stock in the original S&P 500 from 1957…a massive undertaking (pages 264 to 291 summarize this fascinating data). He establishes that what we do, invest in dividend paying stocks “with modest expectations for growth”, “far outperform those with higher expectations”. Siegel also proves that what we don't do, get excited about growth stocks, is the correct approach too. Growth stocks “fail to deliver good returns for investors” p5 because investors expect growth stocks to deliver superior returns: hence growth stocks are over priced. “Investors will receive a superior return only when earnings grow at a rate higher than expected, no matter whether that growth rate is high or low” p42.

How does all of this translate into practical use for us. I see it this way. We value stocks using yield. We (used to) put the stocks we follow into a list in the order of yield. Stocks near the bottom of a list sorted by yield are the ones investors are excited about. As investors become dazzled, the price increases and the yield declines. Hence, to obtain value, I look to higher yielding common stocks¹ further up the list. To follow Siegel's directives, and without recommending any specific security, when buying and seeking superior long term performance, one would prefer TransCanada over Enbridge, Aliant over Telus, Canadian Utilities over Fortis, Sun Life or Great West over ManuLife and, perhaps, the highest yielding bank (currently CIBC at 3.6% but Graham -29%). ¹Only stocks with good dividend growth, however. This eliminates like TA, EMA and LB.