Last entry before going to France on December 13^th 2005
The weather outside is frightful but the dividend increases in 2005 were delightful...as were the unrealized capital gains, even the gain we had to realize on Terasen. Oh well, gains are only half taxable.

As the date on the latest Dofasco takeover material is February 2006, I'm thinking I will sell our DFS into the market in January and realize that gain in 2006. That way, too, I do not have to bother reading all the takeover material.
Just maybe (I did) also, before we leave for France, I'll put in an order for some BCE around $27. BCE at 4.85% is very tempting as a parking spot. (I did and they bought is it for me at $26.99.
I've sold most of my gold shares into the current excitement (when gold is mentioned on 'The Current', it's, generally, not time to buy), but I'm keeping the last batch in case gold spikes while we're in France. Gold is protection against debasement of fiat money.

Housing Bubble: from Allan Ableson's column in Barron's of December 12 2005: " The great housing bubble is popping and the consequences are shaping up as dire, indeed. Not only is the value of the happy homeowner's house in jeopardy, but also obviously its ability to finance his free-wheeling spending; the end of the housing boom might even pose a threat to his job. On this score, the Anderson Forecast, conducted under the auspices of UCLA and released last week, bleakly predicts that the decline in housing will run a good several years, in the process reaping a grim toll on jobs -- possibly 500,000 in construction and another 300,000 in the financial sector."

Loblaw - As an initial position, we bought 300 shares of Loblaw this first week of December 2005. Even at just below $60, L is still expensive by G%D. And the yield, though historically high, is very low: what was I thinking. My bet is that the growth-type Street people (I love calling the Bay Street types 'Street people') will move into Loblaw again. When I don't really care...L is a long term hold. Loblaw has had a terrific record of dividend growth. I think dividend growth will continue but not at quite the same pace.

Manitoba Telecom - According to Larry MacDonald writing the lead column in the Investor's Digest December 16 2005 issue, CIBC World Markets telecom analyst Dvai Ghose has lowered his price target on MBT and "has concerns about the long-term sustainability of the dividend, given it consumers 90 percent of freee cash flow (adjusted for pension injections)". This sentence appeared in the December 1^st 2005 Report on Business: "The risk of a dividend cut at Manitoba Telecom Services Inc has increased significantly, warns Desjardins Securities analyst Joseph MacKay, who downgraded the stock to 'sell' from 'hold'."

My headline idea in December could be built around this thought: I expect 2006 might/will bring some 'excitement' in the markets. Don't worry. We have safety features built into our strategy. The secure dividend is our primary safety net. Price will only fall so far before investors notice the yield and buy our safe stock for the yield alone. Second, if the prices of our stocks do falter, the increasing dividend will bring the price up again...eventually. People who buy stocks with no dividend, just have hope as support and nothing to drive the price higher except the longing for good news. Does it really matter if our stocks fall a bit. Compute your cost prices. On Fortis, after the 4:1 split, our cost is $6.15. Does it really matter if Fortis , falls 20% from $25 to $20. temporarily? It will not affect the dividend. Still, I wouldnot think of buying Fortis at current prices, maybe not even if FTS was 20% lower. FTS' yield is ridiculously low. Low yields mean dear stocks: poor future returns.

A Great Drama Lies Ahead - Richard Russell - November 28 2005 "Inflation is picking up and a great drama lies ahead. Will Greenspan and then Bernanke have the guts to raise interest rates high enough to the "stop inflation"? The problem they face is that the US today is debt-logged to the tune of $40 trillion. As rates rise, pressure will increase on this incredible mountain of debt. If rates go too high -- and nobody knows where "too high" is -- $40 trillion of debt could begin to crumble and deflation would take over. In a battle between potential deflation and higher inflation, which do you think Greenspan/Bernanke will pick? Aw, you already know the answer -- and so does gold."

With HDGs, the yield is no support. On Monday, December 5, Loblaw went roaring through the 1.4% yield barrier. (L went through the $60 price level at the same time too.) Late the week before, L went through it's previous yield ceiling of 1.26%. At this level of yield, there is not much protection...we could even say no protection. We are not used to that. Usually when our higher yield stock prices fall, the yield becomes significant and investors buy for the yield. This precept does not hold with high dividend growth stocks though. It's a good lesson to learn and keep in mind.
I was having a stout with a person new to our strategy last week. When he saw our results ( I used Fortis' numbers as my example), he wished he had switched from mutual funds to the dividend growth strategy earlier. Why didn't he? He, like many others, thought the dividend was insignificant. It's true, the dividend is, and seems, small initially. But, with dividend growth, it builds up. After a decade, even with lower dividend growth rates, the income becomes significant and, of course, by then, the capital has grown hugely too. The Fortis example below documents what can happen...and Fortis was never really a high dividend growth stock. Generally, there should be a stock split every decade...at least...seven years is more typical. I suppose, if one was good at Math, it could be worked out with the rule of 72. In 1958, I failed two Upper School Math courses: Algebra and Trig. I could relate to Geometry, and so passed it, but missed first year university Calculus. My mind does not work like that. Sometime, I wonder, if it works at all:-)

L - On Friday December 2 2005 at the close, with a price just below $60, Loblaw hit a new high yield of 1.4%. L's previous peak yield was 1.26% in the summer of 2004 when most of our yield were higher. This, then, is a company specific problem. It's tempting, but L is now in uncharted territory and risky. And 1.4% is still not much of a yield for taking the risk, is it? (It would take some four years of double digit growth for L to reach a yield of 3%). And the double digit growth may no longer be there to propel the shares upward. It's the Walmart factor, competition in the food retail industry. (Walmart is now the largest food retailer in the States). Without good capital growth resulting from excellent dividend growth and driven by earnings strength, is it worth the risk? Decisions, decisions. Is not investing fun? (Weston's yield is a skiff higher at 1.59% with a dividend of 1.44 / $90.50.
As an aside, I was doing some work at the Queen's library this week on yields back in the year1970 and noticed that the industry group they had Weston in back then was: biscuits. With this project, I'm trying to find out how our stocks held up in the last long sideward market from 1966 and subsequent 'crash' in 1973. It will be a while before I finish the project, it takes a morning's work to do half a year of high and low prices and dividend for the 20 companies, but the 15 minute walk up to Queen's from the lakeshore here is good for me.)

Growth of Dividend - Growth of Capital - Here's an example of dividend growth in action. We bought our first 500 Fortis shares in March of 1995 at $24.62 a share...some $12,300 in total was our cost (Fortis' dividend was $1.69 a share, annually, back then giving us a yield of 6.9%) In 2005, Fortis shares split 4:1. So, in the fall of 2005, ten years later (you have to be patient with this strategy), Fortis mailed us our new 1,500 share certificate as a result of split. (Yes, those particular shares were registered.) We now have 2,000 shares of Fortis so our cost is (24.62 / 4 =) $6.15 per share. As I key this in early December 2005, the price of FTS is close to $25...about what we paid for our 500 shares originally. Now our 2,000 shares are worth $25 times 2000 = $50,000. But that's not all. In early 1996, I thought Fortis was still a good buy, so we, luckily, (there's a lot of luck to investing) added to our position with another 500 shares. These additional 500 Fortis common shares (preferred shares don't grow) are now valued at $50,000. So, we have $100,000 in Fortis...just one stock in a portfolio of some 10 stocks. All, but one of these common stocks, have done the much same thing (Refer to my February 2005.
Report for more examples)
We are not selling. This investment yields 10.4% (.64 / 6.15). Fortis' dividend after the split is 64¢ a share. We have 4000 shares now. Our annual income from the Fortis shares is 4000 times .64 = $ 2,560. That's about what we paid for our original 500 shares. Maybe our yield is more than 10.4%...I wish I was good at Math. In 2006, if Fortis increases its dividend again, and I expect it will (though not as much as the 2005 dividend increase of 12.5%) our income will go up again too. Can you think of a better retirement asset? With common stock, we don't get the guarantee of a bond. (You lose the guarantee of a bond if it's held in a mutual fund.) But with common stock that grows its dividend, we get capital growth. Bonds don't usually provide capital growth if held to maturity. They would if you bought the bond when interest rates were high and then they fell, but that 1980s - 1990s bonanza is over.

Young fund managers - The local office of CIBC Wood Gundy held their 10^th annual Christmas Reception last night...free drinks and finger food. As treasuer of our condo, I received an invitation. I would not have gone except that it was just across the street...I didn't even wear a coat and I was back in time to hear Mary Lou's last night on As It Happens...certain things are important. In the five minutes I was there, I saw the local MP pressing the flesh and some 200 other investors, who still deal with a broker. I doubt CIBC would invite those of us with discount accounts. The reception featured a portfolio manager from AIM Trimark funds and was parcially paid for by AIM Trimark. The portfoilo manager had lots of initials after her name including an MBA and a CFA, and she said all the right things, had the correct numbers up on the big screen, but she was young. I would not want her managing my money. She was not even a twinkle the last time the markets got into serious trouble...the early seventies. There are not too many advantages to old age, but perspective is one of them. This fund manager was touting the importance of global investing...for diversification with value price stocks...all the usual tosh. Would she say she would buy an expensive security? Do her stocks have dividend support for protection in 2006? What happened to mutual funds in 2000 will happen again. But our stocks went up last time fund values dropped hugely.

Weston dropped some $5 on Wednesday November 30. The market did not like what Galen said yesterday...mounting competition.."sales are soft". I was thinking of buying if WN got to $90. Now that it's there, and got there so quickly, I not sure. There's no rush, Tom, I tell my self. And there was no 2005 dividend increase for Weston, remember. Maybe they know something more than we do. Be cautious is my instinct now. (See below too)

"My own instinct is to hold everything I have that is throwing off dividends and interest, but to put all new money into T-bills and gold and patiently await developments." Richard Russell , age 81, November 28 2005

Clawback - The Clawback got more attention this week (late November 2005) with enhancements to the dividend tax credit. I'm not at all concerned about 'the clawback' of old age security pensions. It currently kicks in at $60,806 net income. (Notice that's net income, not total income. Depending on your deductions, there's a difference.) People say if you are close to $60,806 in net income you should not buy dividend-paying common stock because of the 'gross up' mechanism. That's tosh. Income from income trusts are already "grossed up": no one says don't buy income trusts because the income is higher. And in any case, if you do go over the $60,806 of net income, they only clawback 15 ¢ on the dollar. The clawback does not become zero until $98,850. I'm going to continue to grow my income and capital both inside my RRSP and outside it, regardless. There are just too many variables involved in projecting retirement income accurately. Anyway (no 's'), only 5% of Canadians receive reduced amounts. If you are receiving income at that level, there are more important things to think about. And I think people at those levels of income should have these benefits clawed back.

Tax on Investment Income - a comparison - income trusts versus real Canadian companies:
If a person has $10,000 in income from an income trust, full tax is paid on it: there's no tax credit. In the highest tax bracket, according the example in the government's news release of November 23 2005, the tax on this trust income is $4,641. The income trust investor, in the highest tax bracket, gets to keep only $5,359 of the $10,000.
In contrast, the investor in common shares pays only $1,353 in tax after a dividend tax credit of $2,946 on a grossed up amount of $9,263 under the proposed enhanced dividend tax rules. That's quite a difference. I'm smug with the way I invest.
Rob Carrick ended his long article on 'Trusts versus dividends' in his Saturday November 26 2005 Report on Business column with this paragraph: "Dividend stocks are the way to go for those who would sacrifice some yield for safety. Starting next year, that sacrifice will be easier to make." And remember, if you have little other income, there's no tax to pay on dividends from eligible Canadian corporations at all. Why would you even think of interest bearing instruments or fully taxable income trusts; or American stocks, for that matter; if you don't pay tax on Canadian dividends. Not enough people think.
On the topic of security, included in his column, Carrick had this sentence. "The vast majority of trusts haven't been around long enough to establish the same level of reliability as banks and utilities in terms of their distributions." This argument sways me.
James Daw's column about this topic in the Toronto Star of Friday November 25^th had comments from a number of advisors on the dividend tax enhancement. One of these comments was particularly adroit:-) Wisely, Dawe included some calculations by Heather O'Hagen of KPMG about how the change would affect investors in the middle tax bracket - between about $36,000 in net income and $71,000. In this bracket, in Ontario, tax on eligible Canadian dividend could go down to only 4.35%. In effect, dividends will not be taxable for most of us. In other provinces, the tax on dividends in 2006 will depend upon whether the enhanced treatment (moving their credit from about 5% to 13%) is adopted provincially. In Eastern Canada, dividends are more heavily tax.