2005 Comments on Assorted Topics
Dividend mutual funds - I received some promotional material from National Bank Securities yesterday aimed at investment advisors. It is interesting, sometimes, to be on those mailing lists and see how the material is slanted. They think I'm a 'normal' advisor.
As is my practice, I looked at the pages on their dividend fund.
The average yield on the common shares they own is 1.33%. Not much in the way of income there: it's below TSE yield. And here I though considering the low yield of a HDG common stock was foolish. They must have some non-dividend paying stocks in their dividend portfolio if the average yield is that low. Portfolio securities were not listed in the brochure.
Preferred shares comprise 31% of the portfolio, not much in the way of growth possibilities there, or in the 14.7% in bonds. Income trusts occupy 11.5% of the portfolio. National Bank Securities touts this as a “true dividend fund”. Hello!
Dividend Tax Credit - A lot of our stocks shot up immediately after the announcement of changes to the dividend tax credit on Wednesday November 23 at 5:00 p.m. Aren't you glad we already a lot of dividend-paying shares. BCE, for instance, was up some $3.00 in as many days. By the end of the week, prices had settled down, somewhat. The avearge price increase on the week, of the stocks I follow, was 96¢. The biggest price increases were generated by the banks, all up at least a couple of dollars. RY topped the list at $4.39. Most high yield common shares increase in price by about a dollar…TransCanada $1.15, for instance. Our high dividend growth stocks, in contrast, gained less than a dollar each, with the big food retailers coming in with negative numbers. Loblaw, for instance was down 82¢ on the week.
I'm going to look around for duds (poor dividend growers) in my portfolios to sell and switch more money into HDGs.
Enbridge - I hate to admit that I even hesitated at the channel when I was flipping channels on the television a few weeks ago, but I heard Jim Cramer mention the word Enbridge so I stopped. I listened to that ?%&*# for a few minutes. He thought Enbridge was a good buy. That puts Cramer in his place for me as ENB is 'below' in our list…overvalued. The list helps us not make errors…stops us from buying overvalued common stocks and losing our margin of safety. From August, I still remember a sentence in a Richard Russell column: don't tell me what stock to buy, tell me when to buy it. It's true. We know which stocks to buy: it then becomes a question of timing. Someone asked me the other day what I thought of TransCanada. It's a fine company. Whether I would buy TCPL at current prices is quite a different question.
Weston - Weston's stock price has fallen about $20 from its high ($115). I'm working on a yield chart for WN. Weston's yield is rising (WN is about 1.5% as I key this on November 21) but it's still not near the 1.65% it was in August of 2004 when there were a number of good buys among our stocks. Look at yield charts of various different stocks in a number of past report…yields went up in the summer of 2004: the summerof 2004 was a good time to buy. I'll have to take the yield back to 1999 to see what Weston's yield was at that market peak.
Weston did NOT increase its dividend in 2005 although its dividend was more in 2005 than in 2004. Interesting. (WN did not increase its dividend in 2001 either, or in 1994, for that matter) At about $90, Weston's yield with its current dividend of $1.44 would be about 1.6%. Right now WN is about $96. I have not previously followed Weston. I wonder what's going on. I'll have to do some digging. Weston's G%D is an expensive minus 43%, meaning that at 20% dividend growth it would take two years to make up the margin of safety. I can't believe I am looking into a stock with a yield of just 1.5%. Things have changed. If you are going to hold a stock for the long run, dividend growth begets stock price growth.
Third quarter results came out November 22 and were $1.41 a share versus $1.24 a year earlier. Performance from Loblaw has been weaker than expected. Remember, with these growth stocks, it's all in the expectations. Scotia McLeod has reduced its target price for Weston to $97 but expects a dividend next year of $1.60 a share…up from the current $1.44
November 19 2005 - It's going to be interesting, in the months ahead, possibly weeks, to see whether the prices of our HDGs stocks fall in price enough to push through their ceiling yields. They might, but the yields of early 2000, just before the tech bubble burst and our stocks started to rise, should be the limit of the price fall. Look to yield charts of just about any stock in past reports to see what I mean. As I say, it will be interesting to see what happens. I'm kind of looking forward to it as it will not really affect us too much. With all the debt (the American national debt is some $8 trillion alone; American household debt is close to $10 trillion), 'they' will not be able to raise interest rates very much. They'll have to inflate their way out of the debt. Lucky we are into dividend growth stocks, eh!
Income Trusts - “higher-quality business trusts are pretty much as risky as junk bonds”. I took this sentence from the front page, lead column in the Report on Business of Thursday November 17 2005. The sentence was attributed to analyst Barbra Gray who follows income trusts for independent investment dealer Blackmont Capital. That's quite a sentence, eh…the good ones are riskier that junk bonds.
The headline of the column was “Ranks of ailing trusts swell”. Apparently, 22 trusts have trimmed or suspended their payouts since May of 2003. Wow! And here, with prices of trusts down so much since September, I was thinking of buying one. I changed my mind when I discovered the one I had thought looked good was not rated. I'd better stick to what I know best…dividend growth stocks. Yields on HDGs are much lower than those of income trusts, but 'real' companies grow and so yields will grow as will capital. The chances of getting both these features from many of Canada's 230 income trusts are slim. (Link to my previous thoughts on income trusts)
Actually, the ROB column by John Partridge was well done. Among other ideas, it contained a list of danger signals: “a ratio exceeding 2 per cent of debt to earnings before interest, taxes, depreciation and amortization (EBITDA); an estimated 2006 payout ratio exceeding 90 per cent of distributable cash; and a pretax yield of more than 12%”. McLean and Partners Wealth Management used these danger signals or 'red flags' to peg 83 income funds most likely to cut or suspend distributions. It would be an interesting list to see if you owned a fund, eh. I've found a few good ideas on the McLean web site before, but I doubt this list of 83 trusts would be there. I plan to check when I log on to upload this page Friday evening.
BCE - (Nov 18) I'm having second thoughts about BCE (see below, my November 3rd comments on BCE). When you consider what they're paying on Canada savings bonds this year, did I see 2%, the yield on BCE at prices around $27 look good. The window of good prices on some of our HDGs, which was open in October, seems to be closing. BCE could be a good place to park money while waiting for value in dividend growth stocks. I'm trying to be patient. Opportunities will present themselves again. Be ready will a little list of purchases. There are a couple HDGs still close to their yield ceiling…not as close as they were a few weeks ago, but close.
I went on the internet this week and did a three month price chart for each of our stocks…including some HDGs. I divided the results into four lists: ones that did not really buckle in October 2005 (CU, Emera, BMO, Laurentian and TransCanada); a long list of stocks which faultered a bit, but have since just about fully recovered; a list of four or five which buckled a bit and have not yet fully recovered, a couple of which I am still watching - a 'powerfully great' short list - and a couple/few which still have low relative prices. BCE and MBT are in this list along with a couple of HDG food commons which are not yet in my main list. I'll now have to check historical yield and Graham's price on them.
Nov 12 - I was keying in the weekly yields this morning, I noticed that Power Financial and Canadina Utilities have the same yield. For a buyer, that's a no brainer decision. It goes back to what I was saying in my last report. Some HDGs are more reasonably price right now compared to our old line commons. If all yields are low, what do you lose by opting for the higher dividend growth common?
Power Financial was mentioned in Rob Carrick's column in the Report on Business today (Nov 12 2005) as an example of good dividend growth…in his “Alternative to the [income] trusts' column. His other two alternative suggestions were high-yield bonds and a mix of income-generating funds. I'd select neither of those. I'm 100% dividend stocks…well except for a lot of cash right now. I might address this topic in my next report…the risk of being in common stocks right now as the market's advance seems to be tiring.
Richard Russell had some great words about dividends in his November 7 2006 dissertation (dowtheoryletters.com).
“As for the method of determining when the market is overvalued or undervalued, Charles Dow used the yield on the D-J Industrial Average. Dow believed that when the yield on the Dow reached 3.5% or less, stocks were overvalued, and when the yield on the Dow increased to around 6% or more, stocks were undervalued.
Dow's test for overvaluation has proved to be too liberal. It turns out that in this modern age, a Dow dividend yield of 2% or less is required before the stock market is deemed to be dangerously overvalued. But a Dow yield of 6% has held up as the measure for stocks that are seriously undervalued.
It's significant that Dow chose stock yields rather than stock earnings for his measurements. And I agree with Dow. Earnings can be manipulated, earnings can be adjusted, earnings can be stated any number of different ways. Earning can be almost anything a corporation wants them to be. But dividends are objective and clear-cut. If a corporation sends out a dividend cheque for $1.25, there's no mystery there, there's no adjusting, there's no lying. That dividend is $1.25 in cash – period. Furthermore, if a company pays out $1.25 at the end of each quarter, the company doesn't want to pay out that dividend once and then cut or omit the dividend the next quarter. Nothing hurts a stock as much as reducing or omitting its dividend. That's an admission of trouble or failure. And nothing benefits a stock as much as raising the dividend on a regular basis.
You've probably heard a hundred analysts offer a hundred methods of knowing when the stock market is overvalued or undervalued. My own acid test is the dividend yield. Right now the dividend yield on the Dow is 2.53%, and the dividend yield on the S&P Composite is 1.86%. The stock market today is struggling to ward off the bear forces of contraction, rising bond rates, and deflation delivered to the US from China, India and the former Soviet nations.
So far, the US economy has held together. But the cost of our “prosperity” has been the creation of an ocean of debt, and this in turn has raised suspicions about the ability of the US to address its debts and deficits on a continuing basis.”
HDG - We put an order in today for another HDG mentioned on the front page of my last report. In the back of my mind, however, I still have the feeling that better prices will be available in the not too distant future. But, at the same time, these three HDG stocks are trading near the ceiling of their previous yields (refer to charts in my last report). As long as their dividend growth continues, I say to myself, the price should, at the very least, stay firm. Still, I'm holding a fair bit of cash for future purchases as I expect the cyclical bear market to continue.
Bill Gross's November 2005 Investment Outlook (available at the pimco.com site) was most interesting I loved his paragraphs on Bush Junior and hope Bush Junior's number will indeed be called over his attack on Iraq. The American economy, with all its debt, is more sensitive to increases in interest rates than it ever was before. The yield curve is flattening. GDP growth might be 2%, at best, in 2006.
Returns from equities - There was an interesting sentenceon the front page Report on Business of Thursday November 10 in the lead column about pensions. It said deficits of defined-benefit pension plans “have ballooned in the past few years due to low equity returns and rock-bottom interest rates”. How have your equity returns done in the last few years…actually since the tech-telecom crash in early 2000? Mine have done very well. Those pension plans must own the wrong type of stocks,eh! And low interest rates have not bothered us because we have grwoing dividends. Our yields are increasing, not decreasing. Our retirement financing is unfolding the way we planned it. YES! Pity the poor people who still buy GICs or Canada savings bonds. They get the guarantee of their money back…and little else.
Interest Rates - Ten Year Treasury - Have you noticed how the rate on the 10 year Treasury has risen since the beginning of September? Keep watching this metric and our 10 year Canada rate. As Richard Russell said in his November 8 2005 letter, “It's hard to do well in the markets when interest rates are rising.” Why? It's simple. Rates on bills and bonds compete with stocks. If rates on bills and bonds become more attractive, stocks become less attractive. Not for us, of course, but for the great unwashed. We know that when interest rates are high, it's a great time to buy stocks…their prices are lower.
Inflation - How well has Greenspan down at controlling inflation? Here's what Richard Russell says: “In the 18 years that Greenspan has reigned on the Fed, the purchasing power of the dollar has been cut in half. That's right – in half.” Nov 3 '05
November 3 2005 - BCE - In my June 2004 report (page 555), I mentioned I parked some money in BCE . My purchase price then was $27.44. When BCE rose to over $31 earlier this year, I sold. Do I plan to buy BCE back, now that BCE's price has dropped again? No. Why not:
1. I'm not convinced BCE has bottomed out (my October 2005 report, front page: VoIP). Well, maybe if BCE fell to $26.
2. BCE has a strong dividend, which will support the price, but BCE has no record of dividend growth to grow the price.
3. There are a couple of HDGs reasonably priced right now: these are a good alternative. Why park money in BCE when you can get superior dividend growth at a half decent price price?
4. The market does not seem to like BCE: until that reverses, BCE's price won't go anywhere.
5. There must be another reason….(see below too)
The Report on Business of Friday November 3 had an interesting column about BCE. The headline was: “BCE downgraded amid 'disappointing' 3rd-quarter results”. The analysts were expecting 56 cents a share 3rd quarter profit. BCE's profit came in at 50¢. Analysts have lowered their ratings and target prices. All for 6¢ a share. What a system, eh!
November 2 2005 - Richard Russell “The market has had every chance to go down, and it has resisted. That suggests (is this too obvious) that it wants to go higher.”
“Of course the other item that bothers me is the steady rise in interest rates. Eventually this will impact on both the economy and the stock market – impact more than the fed is planning on…In general, this is one of the most puzzling stock market I've seen in years.” Richard Russell November 2 2005
October 30 - Have you noticed that three of the HGS stocks I mentioned in my October 2005 report, of the six with the 'close to high yields' on the front page…are now yielding even more and pushing their yield ceilings. I bought one of them on October 30 and am considering another. I'm also watching to see if they push though the ceiling, so to speak. In other words, are these stocks 'safe' in a crunch? The other three: Empire, Sun Life and MFC have been relatively flat with regard to yield over the last few weeks: prices have held up well considering the drop in the market since late September.
The chairman of the Federal Reserve, “sets a rate [of interest] to advance a particluar policy agenda: stimulating growth, cleaning up after a hadge fund, beating back inflation or, as in 2002-03, conquering an imagined deflation”. So say James Grant writing a three page article in Forbes of October 31 2005. Interesting, eh, Grant's use of the word 'imagined'. The first part of Grant's sentence is worth rememberig too. As I read it, according to Grant, Greenspan was wrong to lower rates in 2002-03, in other words. Now Greenspan is making up for his error. But a housing bubble was created. Things are seldom as simple as they seem. I'm still not certain that the deflation threat is over. As Richar Russell put it in his October 31 2005 remarks: “Today's Federal Reserve is mortally afraid of deflation or even of “too little inflation.” The reason the Fed is so afraid of deflation is because America is floating in debts and deficits.”
October 25 2005 - BCE - For the first time since I began keeping records of 'position in the list' in early 1980s , BCE is up to position #2 in the list. BCE is out of favour, and has been for some time…for good reason. I'm usually interested in stocks which are out of favour. This time I'm not. Jarislowsky's sentence on page 93 of The Investment Zoo is one reason. VoIP is another. BCE poor dividend growth record is another. It would be a mistake to intrepret “above” normal position in the list to mean 'buy': consider/look into, perhaps, but never an automatic buy.
VoIP - I received some promotional literature from our local cable company today. They want us to buy their digital phone service and say we can save up to 25% off our phone bill. They want $49.99 a month for their phone service. This pricing, in my view, is not much of a threat to telecom incumbents.
One of The Investment Zoo's important messages for me was 'keep on the straight and narrow' with dividend-growing common stock. But it's hard to tow the line: 1.You must be convinced dividend growth is the best strategy. 2. It really is dull way to invest: there's little activity. 3. Results are years in the making 4. The street hype, for alternative products is hard to resist, higher current yields, for instance. 5. I'm thinking…Oct29'05
“Safety and value are qualities conferred not by the nature of an asset but by the price at which it is acquired.” James Grant, Forbes Oct 28 2002. I love that sentence.
POOR DIVIDEND GROWTH
That being said, if you bought your Transalta in 1999 at about $14 (at the time when TransCanada reduced its dividend) your yield, on TA's cost to you, is now, with the $1 dividend, 7.1%. That is a great yield, in the current low interest rate environment. I'd be inclined to hold my Transalta in those circumstances…but realize the yield won't grow: it's static, like a bond. And just a safe in my view.
If you purchased Transalta in 2003 or 2004 for $16., the yield is still 6.3%. Not bad either. But there is very little hope of dividend growth in the future.
I began to think of selling TransAlta after doing my portfolio review: February 2005 Connolly Report, page 570. With poor dividend growth, Transalta's yield with my purchase price of $21 was still only 4.7%. (I sold my original TransAlta into the excitement of the California energy crisis in 2001 at close to $29 and bought it back again in 2002 at $21…too early, as it turns out.). There has not been much dividend growth with TransAlta (two cents a decade), or growth of capital…until recently. So, I decided to take advantage of TA's rising price this summer and sell some TransAlta. My logic for this is further discussed in my April 2005 issue on page 578 where I compared Transalta to Sun Life. If I switch to Sun Life (SLF), or some other HDG, my initial yield and income from the shares will be lower, but eventually (within five years, hopefully) I'll receive more income and more capital growth.
So, as James Grant says, a lot depends upon what price you paid for the asset. A lot, too, depends upon your need for income, diversification views, personal preferences and risk tolerance. Some people think TransAlta's dividend is at risk because earning only barely cover the dividend. I don't agree. But then, that's what makes the market.
CIBC - August 4, 2005 -Without admitting any wrong-doing, CIBC settles to the tune of $2.4 billion dollars (about a year's profit) for its alleged role in the Enron fraud. Being down a year's profit probably means no dividend increase next year.
Is it time to buy CM? Maybe the question is: Would/should you buy into such a bank? Your guess as to the timing of any purchase is as good as mine at this point. I last bought CM at $40.60 in September 2002. That's my metric. As I write this, CM is down some $10. Just because a stock falls $10, does not mean it a good buy.
The Investment Zoo by Stephen Jarislowsky - If you are sitting on huge capital gains on common stocks bought years ago, buy The Investment Zoo and read page 104. You will not regret for a second the $29.91 purchase price…a couple dollars more than a nice bottle of Shiraz. Buy extra copies of The Investment Zoo for your children/grandchildren too. I bought copies for my sister and Louise's new sister. It's the best general investment book I've ever read. Young people and novice investors must read it: experienced investors will find ideas galore. (You certainly will not find The Investment Zoo recommended by mutual fund salespersons.) Start off reading pages 7 and 8, then Chapter 7 and Chapter 10 and these pages too: 23, 33, 46-47…more in my August 2005 report. The Investment Zoo is loaded with wise counsel from an investment manager with some 50 years of investment experience. And it's Canadian. It's so good, I've started to read The Investment Zoo again.
The Future for Investors by Jeremy Siegel, 2005 (Crown Business, a division of Random House)
Why the tried and true triumph over the bold and new. A book report I'm working on - April 1 2005
April 2005 - page 1 - storm clouds
“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
You can find James Grant's columns (this one was titled 'That Tricky Yield Curve') at
http://www.forbes.com/grant
After mentioning Grant's statement on holding cash, I quoted a few lines about Berkshire Hathaway's $43 billion in cash. The message I received: stocks are expensive. The short-term yield graphs on page 2 convey the same message. At the same time, the message from The Future for Investors is that dividend-paying stocks do well in the long run. I have no intention of selling my good dividend growing common stocks. I just don't want to buy more when prices are high.
I heard a labour leader say that $62 billion in dividends were paid out by Canadian companies in 2004. That's a lot.
These next two items I originally intended for my April report: they did not fit. I put in more short term yield graphs instead.
Funding the Golden Years
Barron's cover story in their March 21 2005 issue was a three part, nine page feature on 'Funding the Golden Years'. Always on the look out for ideas, I read it carefully. I didn't find many new ideas.
While the column included statements like “For most folks, dividend stocks are probably the best bests” and “investing for dividend yields remains a thoroughly appropriate strategy for income hungry investors”, there was only passing mention of increasing dividends on some stocks. You can spot the columnist naivety easily. There was no mention in this Barron's feature about the significance of dividend growth and increasing dividend income as the origin for capital appreciation. No dividend growth data was included in their table of sixteen stocks. And this from one of America's preeminent business journals. Our thinking is well ahead of the curve.
A table accompanying the column summarized “eight ways to pick up some more income from your retirement portfolio”: exchange traded funds on a dividend index (I'm not aware of one in Canada), mutual fund of dividend stocks, municipal bonds (different in Canada), emerging-market debt, REITs, CDs (GICs to us), Canadian royalty trusts, real return bonds.
April 1 2005 - Graham Data - refer to the above update figures.
In my supplementary lower yield, high dividend growth list - sorted by Graham%Difference as of March 25 2005 - CAE is #1 with a positive difference of 29, Bombardier is #2 ( BBD.SV.B ). Both BBD and CAE announced dividend reductions in early 2005. The five with positive G%D are, in order: CAE +29, Bombardier +15, Sun Life -6, Atco -8 and Empire -8. Sun Life is the lowest G%D at -6%difference of life insurance companies. The life insurance company with the highest yield is GWO at 2.8%. Which value metic do you consider more valid? Should two or more metrics line up before you buy?
If the Graham number really indicates overvaluation , I would not be a buyer…especially after just reading The Future for Investors where Siegel says in big bold print on page 74 “Lesson One: Valuations are Critical”.
Value Line's Edition 8, page 1206, has initiated coverage of ManuLife.
Some S&P stock reports are available through CIBC Investor's Edge. Example: Sun Life
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BROKERAGE ACCOUNTS - March 14 2005 I'll add to this again before too long.
“Anybody who listens to his broker…is doomed to make less money than the averages.”
Stephen Jarislowsky, May 1986
