Personal Finance 101

Are Dividend Investors Idiots?

In a recent article by John Heinzl (Globe and Mail) he asks himself if, as a dividend growth investor, he and all other dividend investors are idiots? Heinzl outlines the feelings that we typically have every so often as dividend investors. That is, missing out on the “multibaggers” that everyone is talking about around the water cooler at work.

Here is a quote that sums up how us dividend investors might feel at the moment:

…Because when everyone else is doing the logical thing and shoveling money into growth stocks that are shooting to the moon, only a big fat idiot would stubbornly sit on a portfolio of boring dividend stocks that are, for the most part, doing jack squat.

It’s interesting that he mentions high flying stocks like Potash Corp. and Research in Motion as being the ones that he missed out on, while he talks about owning our favorite dividend growers - banks, insurers, pipelines and drug makers.

How Far Can You See?

When investing in dividend growth stocks , it isn’t about making a killing this week or this month.

• It is about investing for the long haul and watching your dividend income rise consistently year over year while your “investor” counterparts are searching for the next hot tip.
• It’s about holding onto that dividend paying stock and not worrying about the stock price, as long as that dividend keeps growing.
• It’s about protecting your hard-earned money from inflation and making your money work for you.
• It’s about knowing the company can’t fake a cash dividend.
• It’s about money in your pocket.

Over the long term we know (and Heinzl reiterates) that dividend growing common stock prices also out perform those stocks that pay stable or no dividends.

So What Now?

There is a famous saying from Warren Buffett that goes something like this:

“Be fearful when others are greedy, and greedy when others are fearful”

Of course this is easier said than done, otherwise we’d all be running a multi-billion dollar company like Berkshire Hathaway.

While it may take some serious resolve to start loading up on some of our favorite dividend payers, most notably banks stocks, sticking to a long term plan will make you rich in the long run.

So, to echo the words of Mr. Heinzl I’ll end with this quote:

Am I going to sell my dividend stocks to buy these high fliers now? Hell, no. If anything, I’ll be adding to my existing positions, and reinvesting the extra dividends in even more shares to take advantage of the magic of compounding.

So, don’t worry about the water cooler talk and stick to your plan. Soon enough you’ll be saying goodbye to the water cooler forever when the compounding effects of your rising dividend income begins to exceed your salary!

Here’s to your wealth!

Posted in Investment News | 6 Comments »

Bank Stocks - Learning From The Past

With many dividend growth investors heavily weighted in financials, I thought it would be prudent to take a look at the downside risk of the Canadian bank stocks that I own.

With Canadian bank shares down 24% from their 52 week highs I wondered if these are these levels where the stocks should be bought?

Most analysts in Canada are not suggesting to add to positions in financial stocks right now which leads me to believe that they expect even lower valuations in the future.

Here are some of the reasons that we might see bank stocks heading lower.

1. Net interest income for banks is likely to remain lower over the next quarter…at least.
2. Capital earnings are likely to be lower than in past years.
3. We may see even further write-downs.
4. Higher loan losses are expected with those stockshaving exposure to the United States credit market.

For banks stocks in general, there is a theory that investors default to the price to book ratio in times where credit losses rise rapidly and capital market earnings become difficult to predict.

According to analysts, the Canadian banks traded at an average 1.65x book in the fall of 2002, which coincided with rapidly rising loan losses and difficult equity markets. Do those conditions sound familiar?

A decline from current earnings multiples to 1.65x book would suggest 20-25% of downside risk…Yikes!

If these valuation levels are reached, it will most certainly mean exceptional dividend yields for investors.  Not only that, the upside potential for capital gain will be significantly higher for the long term.

Do you think that bank stocks will decrease another 20-25%?

Posted in Investor Education | 2 Comments »

When Opportunity Knocks…Will You Answer?

Buy Low Sell High

If you have heard it once, you have heard it one thousand times. This age-old advice is the epitome of the saying “it’s easier said than done”.

In recent weeks, my favorite sector, the financial sector has taken a beating. Many of my favorite stocks are now boasting dividends in the mid to high single digits. These dividend yields are quite a bit higher than the average yields for these companies, not to mention that some of the largest banks in the gargantuan US economy are selling at 10-12 times earnings!

Enter Investor Psychology

Even though I have a long-term investment strategy and believe in the future prospects of companies such as Citigroup (C) and Bank of America (BAC), I still have a hard time pulling the trigger when all of the news outlets are forecasting nothing but doom and gloom.

Money is made when one is brave enough to accept a risk that few others are willing to take. We must be willing to step out on a limb and believe in our strategy from time to time, for there is no reward without risk!

Brave or Stupid…You Decide

A recent article in the Globe and Mail outlined the following, which I thought was a spectacular move and outlines some of my own thoughts:

Bill Miller, the famed mutual fund manager at Legg Mason, might describe as predictable, but illogical, market psychology.

Studies repeatedly show investors place too much weight on information that’s (a) recent, and (b) dramatic. The multibillion mortgage writedowns at U.S. banks are both.

Mr. Miller, who beat the Standard & Poor’s 500 for an incredible 15 consecutive years, has been getting enthusiastic lately about U.S. financial stocks. At the moment, he looks foolish and stupid. Two years from now, he’ll be thought of as brave and wise.

What Mr. Miller is referencing is a common strategy known as contrarian. Being a contrarian is just as it sounds. Contrarian investors buy solid stocks that have fallen out of favor with investors, mainly due to recent news and “panic”.

Mr. Warren Buffett actually played a contrarian role the last time that the financial sector was out of favor in the early 1990’s. Buffett took a large stake in Wells Fargo when everyone else was running far and fast from the financials. If you take a look at a 10 - year chart for Wells Fargo, you’ll see that Buffett looks Brave and Wise now, not Foolish and Stupid!

Are you prepared to look foolish and stupid for a few months in order to look as brave and wise as Warren Buffet in the future?

If so, you too could be taking double digit dividends to the bank 10 years from now!

Posted in Investment News | 7 Comments »