Monday, November 10th, 2008
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 months, 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“.
Buffettology
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 15 – year chart for Wells Fargo, you’ll see that Buffett looks Brave and Wise now, not Foolish and Stupid!
Buffett also made recent headlines for his investments in Goldman Sachs and General Electric, not to mention a NY Times article in which he proclaimed that his personal portfolio is currently being invested in United States equities.
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 (and capital gains) to the bank 10 years from now!
Posted in Investor Education | 10 Comments »
Tuesday, September 30th, 2008
Where To Start Your Research
When starting your research for dividend growth stocks, much of the work has already been done for us. We just need to know where to find it!
Start out by reviewing the Dividend Aristocrats or Dividend Achievers lists to identify a broad category of stocks that have consistent dividend growth.
Once you have identified a list of stocks using the dividend achievers list, it is time to narrow it down to a few of the best dividend growth stocks.
Sector Selection
A general rule of thumb for dividend growth investors is to select one or two stocks in different sectors, such as insurance, utilities, financials, telecom, etc., with the higher than average dividend yield and a recent dividend increase.
Many dividend growth investors will require that the dividend increase be within the past year, the more recent the better. Dividend growth investors are of the philosophy that an increase in a company’s dividend means that the company is healthy and its future prospects are solid. Therefore, the amount that the dividend is increased should also be taken into consideration.
Dividend Growth Rate
The amount that a dividend is increased on a year to year basis is called the dividend growth rate. The philosophy of dividend investors is that the higher the dividend growth rate, the higher the prospect for the stock to increase in value.
For instance, Sun Life Financial (SLF) has a dividend growth rate of approximately 20% over the past 5 years. Over that same time, the stock has doubled in value from $20.00 per share to over $40.00 per share. If you had purchased Sun Life Financial 5 years ago at $20.00 per share, with the current dividend rate of $1.07, your yield on the purchase price would be 5.4%.
Not only would one be receiving these healthy dividends this year, but one could reasonably expect to get a 20% raise next year!
This is the basis of dividend growth investing; to produce consistent and inflation hedged income.
Due to the fact that the dividend growth rate can play such a significant factor in the future value and income potential of the stock, it is suggested that the investor find a middle ground when choosing stocks for a dividend growth portfolio.
The middle ground should consist of:
1.) A reasonable current yield, compared to its peers and itself historically.
2.) A recent dividend increase combined with increased earnings
3.) A high dividend growth rate compared to the industry.
Stocks selected from Mergent’s Dividend Achievers that display these factors should provide a great starting point to a dividend growth portfolio.
With the recent turmoil in the markets, now is an especially great time to search for financial services companies and banks that have strong balance sheets and are well capitalized. Consumer staples and health care stocks are also viewed as potential safe havens and opportunity stocks in this type of market.
I’d be happy to hear any comments or questions regarding this strategy and I hope to have more detailed information up here in the near future.
Posted in Stock Studies | 21 Comments »
Wednesday, June 18th, 2008
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 | 7 Comments »
Monday, January 21st, 2008
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.
- Net interest income for banks is likely to remain lower over the next quarter…at least.
- Capital earnings are likely to be lower than in past years.
- We may see even further write-downs.
- 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 »
Tuesday, April 17th, 2007
I recently came across a nice article from Motley Fool that gives a real life example of the power of choosing the best dividend growth stocks.
Not only can you receive a huge return in the form of capital gains, but those seemingly irrelevant dividends can supercharge your portfolio over the course of time.
Here is a live example of the power of dividend growth from a Motley Fool Reader:
“I bought Corus Bankshares (then called River Forest Bancorp) around 1985. My first year’s dividends were $196. Now, after 20 consecutive years of dividend increases and seven splits, I’m receiving $14,400 annually in dividends.”
That $14,400 in annual dividend payments comes off an initial investment of around $12,000. As long as Corus maintains its current payments, Howard will get back more money every year than he originally invested.
This is exactly why dividend growth investing makes so much sense for a patient and long term investor. Examples like these are the best motivators for young dividend growth investors to help us maintain focus and adhere to our original dividend growth plan.
Dividends Matter For Your Retirement income
The essence of dividend growth investing for me is simply to purchase income for my retirement now – this is especially true since yields are higher than their historical averages for stocks.
As the example shows, we can select great dividend growth stocks today and hold them forever while watching our annual income grow at a faster rate than inflation.
Posted in Investment News | 1 Comment »
