December 2004 -
Since my December issue will be a few weeks late, here are a few current thoughts before we leave for the Dordogne. Other
than that Tellier leaving Bombardier, there is not much going on, or much to buy, so relax and enjoy Christmas. If some
steep market drop makes the front pages of the papers, perk up and investigate the stocks on your 'could be a good buy at
the right price' list. Certainly do not sell or be concerned if the market drops: our portfolio, remember, has a defensive tilt
already. If the market breaks up into new high territory, on the other hand, get out your cull list. You could sell 100 shares
of this or that to get your money back. Then you could never lose. Careful investors don't need an iron-clad guarantee of
capital back: they need the reasonable assurance of income growth from which capital growth will follow.
Dividend-paying common stocks do well: from S&P's Outlook "Through November 30, dividend payers in the S&P 500
have posted a total return of 14.4% vs. 7.8% for non-payers." I wish data like this was available in Canada.. I've tried to get
it from the TSE, FP Data Group and S&P. Yarrick Clerouin, journalist section investir, Les Affairs calls me every now and
then for some dividend data because he can't get at it either. Yarrick called again yesterday. His questions are always most
interesting and different than the usual ones journalists pose. I'll have to walk up to Queen's, find the next issue of Les
Affairs and read what he said about dividend investing.(I'm also looking for a copy of the article in the October 2004 issue
of the International Bank Credit Analyst about dividends...can't find it anywhere.)
This is the way the New York Times put much the same thing in their November 14 2004 issue:
"INVESTORS who shun stocks that dole out seemingly trivial dividends of 1 or 2 percent may want to take a second look.
For more than two decades, dividend payers, often pokey but stable enterprises, have generally done a better job than other
companies when it comes to enriching their shareholders. This year is no different. Through Thursday [Nov 11], the
dividend-paying stocks in the Standard & Poor's 500-stock index posted a total return of 13.8 percent, according to S.& P.,
versus a gain of 3.8 percent for the nonpayers - often flashier, high-tech companies that aim for huge growth. Indeed, since
1980, a period that embraces the longest bull market in history, dividend payers have outperformed nonpayers by almost
three percentage points a year, on average, according to Howard Silverblatt, a market equity analyst at S.& P. "
I have yet to select 'the idea' for the front page. The basic message is this: We are in rally in a secular bear market. It has
been stronger than I expected. Strong rallies in a bear market are not an outlier. In December too, on average, stock prices
are up 75% of the time. Hence, prices are high, yields low and value is in short supply. One should not think of buying in
these circumstances. Well, perhaps there's at least one exception...see below, under patience.
If you are being tempted to buy, get a copy of Barron's December 6th and read Johnathan Laing's column for some
comments by Morgan Stanley's chief economist Stephen Roach. Unfortunately the item is not an interview so a lot of it is
paraphrase and hence not as reliable. Here's the second paragraph: "Roach fears an apocalypse could loom, sparked by the
dollar's collapse, if skittish foreign investors decide to stop financing the excessive spending of American consumers and the
U.S. government. On the heels of such a debacle, he says, the U.S. stock and bond markets, the domestic housing market,
and ultimately the export-dependent global economy could go into free fall."
I have a small percent of my portfolio in gold. I had a bigger position until late November when I sold positions in Barrick
again and in Kinross. I'm still holding Goldcorp. I plan to buy back into Barrick gold shares again but I don't think I'll get the
same low price as I did last time. The reasons for buying a few gold shares are simple: gold is a play on the American dollar
falling (The cover of the Economist of December 4th was, in this regard, neat.) The other reason for buying gold is its good
correlation with the stock market, but the correlation is negative. If the market goes down, gold should go up. At that point,
I plan to sell the gold shares and buy dividend-paying stocks at a lower price. But then one never knows, does one?.
Actually, dividend stocks are becoming so popular, they might not go down very much at all when the overall market does.
As we are in a bull market rally in cyclical bear market, exercise extreme caution before you invest. To help out and slow
down the process of buying, I try to assume, or make myself believe, the price of the stock I'm buying is more likely to go
down, not up. Some of the stocks I bought in June 2004, I've sold. Of course, as is often the case, prices of the stocks I sold
have gone higher since I sold them. It always an internal row between fear and greed. Fear that if I don't sell the price will
surely fall and greed: trying to squeeze a few extra dollars on the upside. Greed is easier to control in a bear market, but it's
still there. It seems to be making me sell too early.
Nevertheless, playing the game is fun and we can't really lose too much buying and selling the kind of stock we follow. If
you buy a good dividend-paying stock at a reasonable price and the price falls after you buy it, it's only a matter of time until
it rises again (the dividend remember and especially its growth). In the meantime, the yield is very good...better than any
fixed income instruments you can buy: five year GICs, for instance, pay 3.15%. (I'm learning more about fixed income
investment by being treasurer of our condominium. I have not dealt with a broker in years. It's intriguing, especially as he
does not who I am yet, and because the portfolio is triple digits.)
I'm thinking, as I write this, of the BCE I bought earlier this year (TCR April 2004 p.551) as a place to park money temporarily. I
got some at $27.60, then $27.44 and finally at $27.03. BCE's price dropped farther, to $25.75. By then, though I had my
allocation to that stock (I think 5% to 10%, roughly as an opening position in any stock) It's no big deal that a
dividend-paying stock goes lower after you buy it. It happens to me regularly. It just means you guessed wrong. Think of
the odds on guessing the exact bottom price. This is all part of what makes investing such a rewarding and pleasant hobby. If
prices never fell, I used to tell my business students, the game would be no fun. They had a bit of trouble with that concept,
but if you consider it for a minute, it's true. At best, when you actually get right down to clicking the CONFIRM button for
your preciously earned $5,000, it's a guess as to whether the stock you have selected has bottomed, or topped, as the case
may be. No one can know about short term price fluctuations. Certainly, do not think I know because I collect a lot of data
on dividend stocks. The person who is buying from you, for one, thinks you are wrong. He or she believes the price is going
to rise or that the stock is a good buy for some reason...maybe for a reason you have not thought about, or heard about.
But back to BCE. Canada's biggest telecom firm is back above my average price (BCE just announced its first dividend
increase in a decade.) so I could sell anytime with a wee gain...a liquid asset. Meanwhile it's yielding something like 4.4%. At
this point I'm thinking I might sell our BCE when (if, if VOIP takes off) it gets above $30 again. That would make my return
(yield plus appreciation) on BCE just over 10%. I reckon that's a good return in a bear market. However, if an outstanding
buy comes along in the meantime, I'd sell BCE in a flash and buy it. Outliers are rare, though, by definition.
I wish, as Treasurer, I could buy good, safe, dividend-paying common stock for the hundreds of thousands of dollars in our
condominium corporation's reserve fund portfolio. It's not allowed. Most people think stocks are risky so there are laws
prohibiting buying stocks in certain circumstances. Most stocks are unsafe. Our dividend-payers, if purchased a value price,
are not chancy if there has been a recent dividend increase. Section 155(5) of Ontario's Condominium Act says something
like this "a bond, debenture, guaranteed investment certificate, deposit receipt, deposit note, guaranteed by the Government
of Canada, or the government of any province in Canada; and is issued by an institution that is located in Ontario insured by
the Canada Deposit Insurance Corporation (CDIC), or is a security of a prescribed class..."
9. I will update our list of lower yield, higher dividend growth stocks in the December issue. I have the draft done. This
supplementary list was included in TCRs of April and June 2004 p.555. I recently bought one from that latter list,
actually...now priced closer to $4.50 compared to $5.50 in June. It was #2 in that June list which was sorted by G%D
(Graham price percent difference from current price), now it's #1. The stock had no dividend increase in 2004...talk about
risk, eh! I have worked out 2004 dividend growth for the rest of the stocks in that list for this small table. The highest 2004
dividend growth was Leon's at 42.9%, there was one dividend reduction in 2004 from .05 to .0325, and two dividends that
remained the same. (I'm removing Finning from the list because of their Caterpillar connection. My first cousin who is now
in Hebron with the Canadian Peacemaker team tells me Caterpillar's new machines are being used to bulldoze Palestinian
homes in the occupied West Bank.) Some of you told me you bought the common stock which was #1 in that June list. I
didn't. Drats! It's up from about $25 in June to over $30 now. Oh well...one can't win 'em all. The biggest price increase
since June in that list of higher dividend growth common stocks was CNR at about $12. Next closes at $11 or so was AIG.
The only other one in the list with a positive G%D was Leon's. LNF had a whopping 43% dividend increase this year and
LNF's price is up some $5 since June too. As of December 10 2004, there are four stocks with a positive G%D. I plan to put
the lists of higher dividend growth stocks in both orders: yield and G%D. Side by side they are most interesting and very
similar. Of course, both being value metrics, they should be similar...theoretically.
Is G%D is better value indicator than yield? Maybe not. Laurentian Bank, in our main list, has a positive G%D. LB has
dropped a couple of dollars since June. One never knows. The market is yet to get excited about LB and until that happens
it will go no where. Buying value is one thing: having value recognized by the Street people is another. I can't find one
analyst recommending Laurentian Bank. As a contrarian, that's usually a good sign for me. Eventually, when Raymond
McManus gets things back on track, LB will come about. 'Eventually', though is hard to define. Year end results were
released December 9th.
I have half a page written on Russell Metals including a chart of RUS's dividend record over the last two decades. The ideas develop into a short summary of how to research a common stock you know nothing about and which discount brokerage accounts facilitate such research. I have accounts at four discount brokers. Two of them, I have found, have poor stock research material: CIBC and Royal Bank. (To give you an idea what I think of Russell in a nutshell at current prices: Russell's Graham percent difference is -51%. Compare that figure to the average of our list.)
I've been updating our long term position charts. These really do give us good general guidance. Perhaps I'll include two of
these charts in my December issue: one pointing out a stock near the top of the list (possible consideration for purchase) and
one near the bottom. For instance, the stock at the bottom of the list in the last issue shows up as being way out of position
in its graph. One would be inclined to sell such a stock: their dividend record has been less than stellar. But then, as always,
it always depends upon your own investment objectives. And you could easily hold the position that the price may increase
more. I certainly don't know what's going to happen to price in the short term.
"After sustained periods of high real returns, the chances of poor equity returns become very high... over the past 10 to 30
years returns have been persistently above average in both the US and UK markets. As a result we know, without certainty
but with a high degree of probability, that returns over the next 10 years or so will be very poor." Andrew Smithers
http://www.smithers.co.uk (try the link to Smithers below)
12. If I owned any mutual funds I'd be thinking of selling them into this bear market rally. Do not take this as a
recommendation to sell a security. I do not, and cannot, make such recommendations. I'm simply making a statement about
my own fiances. As I have no mutual funds, have never owned any mutual funds and would never buy a mutual fund, it's a
rather stupid statement. Still, I get asked this question quite often: "Should I sell such and such fund?" I reply "How has it
been doing?" Since early 2000, the reply is usually "Not good". I don't need to say anything more, do I? Often I reply with
something like, "dividend-paying stock have been going up since the market crashed. Do you own and dividend stocks?"
Most people don't sell though. They wait until the price goes down still more, and then sell. Partly it's because of the exit
fee. Imagine charging people withdraw their money from your institution. I hear about the deliverance fee from people who
are considering selling their funds. My retort is simple. If you have $25,000 in a fund family, you are paying some $625
every year just to stay in the fund, and its value could go down more. It's probably cheaper to pay the redemption fee and
get out now. Eat the redemption fee: save the annual fee. Most people don't realize how high the annual fee is. Why? The
yearly fee is not shown on fund statement. Imagine. Mutual funds charge an annual fee and don't tell their unit holders how
much it is.
I plan to go into the topic of why people don't sell in a future report. There is a lot of psychology to investing. You have to
know yourself and be able to control yourself too. The latter is the hard part. This is the reason boomers will not be able to
retire as early as they thought they could. In the years ahead, the market will, most likely, provide below average returns.
Unless they switch to dividend growth stocks soon, the solid dividend payers will not have time to work their magic. It's my
view that some people will switch to our dividend stocks over the next few years. (Certainly I have been flooded with
requests to subscribe...too many for me to handle.) Many who switch won't have the patience to hang in until dividend
growth enhances the yield on their original investment. 'Twas ever thus. Behaviour control (emotion control, if you like) is
the key to successful investing, in my view. If you can't pay your credit card on time...forget investing on your own. Another
good recent example I happened to hear about the other day was on Dr. Phil's program. Apparently he sent his staff to
homes of people trying to lose weight. They found products in their cupboard they should not be eating. Well hello! Few
people can control their behaviour. Or notice the kind of beer most people drink...that swill that's advertized. But we can
control ourselves, can't we. And we're slim too, eh. Above average, in all ways:-) And, if we live in Ontario and are into
beer, we drink naturally brewed Creemore. The Creemore truck comes to Kingston every Tuesday morning. Certain things
are important.
On page four of my December issue there will be dividend increase data for Fortis 5.6%, Power Financial 11.0%, Corby, BNS 6.7%, CIBC 8.3%, Banque Canadien National 10.5% and Royal Bank 5.8%. I told Yarrick Clerouin of Les Affairs that I thought dividend growth would not be a high in the years ahead but that corporations were flush with cash and dividend increase were 'the thing to do' now. If the price of the stock is not going up, investors want something from their investment: dividends. (Some investors like buybacks, but if they are not 'net' there's no benefit for shareholders.) Payout ratios are historically low now too (In the States just over 30% payouts vs an historic average of close to 50%). There is room for dividend increases. And, it seems, a willingness on the part of corporations to pay them. Think Microsoft, for example. Here's one thing I like about dividends. If the company pays out a lot in dividends they are going to be more careful spending the rest of it...less chance of foolish investments.
Professor Jeremy Siegel - interview in Money Magazine - some terrific ideas
http://money.cnn.com/2004/11/30/markets/siegel_0412/index.htm
Here are a couple of sentences to give you a feel for Siegel's thoughts:
"If you'd invested $1,000 in 1957 in the 100 stocks in the S&P with the highest price-to-earnings ratios, and re-balanced
annually, you'd have had $56,700 by 2003; if you'd bought the 100 stocks with the lowest P/Es, you'd have had $425,700.
[The S&P 500 index was created in 1957.]
My research finds that investors consistently overpay for growth. I want people to think about investing this way: the great
growing companies are not often the ones that give you the best returns. The tried and true triumph over the bold and new."
Jeremy Segel - he has a new book coming...YES!
17. Yield charts...First thing when we get back will be updates to my weekly yield charts. Those gives me a close up picture
of what's going on. I'm sure there are more efficient ways to do it, but preparing the data by hand lets me spot trends easier.
I'll let you know in the report if there are any stocks in our list with increasing yields, other than Laurentian. As of December
10, there are three possibilities. Look back to the front page of my June 2004 report. That was the WHEN TO BUY issue,
remember, with the chart of the average yield of the list giving the signal. I enlarged that chart on purpose. It was good that
the charts spotted the good time to buy once this year. Anyway (no 's'), half way down that page there were two little lists.
One of stocks that were close to yields where, in the past, they have been good value. The first stock in that list is still
there...charts of it were inside on page 3; the second is still there too, but the other three have all risen substantially in price
since then - they no longer have buy range yields. One of these will be featured in my December issue. The other list, of
stocks with historically low yields, it still valid, and too it I would add Fortis. Another little test question: when one finds
historically low dividend yields on the common stock they own, one might consider: a) buying b) selling c) holding d) other.
(I miss making up reliable test questions, but not marking the papers.)