Friday, May 7th, 2010
It has been said that Shakespeare drew his inspiration for many plays from classic Greek dramas. If he were alive today, I don’t think there would be any shortage of inspiration for new projects!
Of course, the situation in Greece has been front page news this week and it has created some choppy waters for investors (it was another volatile day on the markets yesterday – but that was apparently caused by a trading error). Amid the headlines, and the increased market volatility, we thought it might be helpful to take a look at how the sovereign debt situation has evolved and why it is causing so much noise (and by extension, investor anxiety).
Each day, there seems to be a new take on the story and many of the headlines have been conflicting. For example, consider the following:
- Two EU Ministers: No Bailout for Greece – Wall Street Journal (Jan 18)
- Merkel Says Greece Doesn’t Need Financial Support – Dow Jones (Mar 22)
- Fears rise that Greece is days from defaulting – Associated Press (Apr 12)
- Greece begins talks on details of IMF aid deal – Reuters (Apr 22)
- EU: Greece loan package coming soon but worries persist – Globe (Apr 30)
- Greece swallows tough medicine in bailout – Globe (May 3)
- Analysts like Greek bank despite nation’s woes – Bloomberg (May 4)
However, as is often the case when it comes to complex issues, there’s usually more to the story than meets the eye. The situation in Europe is complicated and very volatile and many investment management teams are monitoring new developments closely.
Also, amid the noise, it should be noted that there have been other developments that, while not front page news, are noteworthy nonetheless from an investment standpoint.
For example, the U.S. dollar has strengthened which has benefited U.S. dollar denominated investments, and global bond spreads have widened, creating potential investment opportunities.
Another important note is that many of our favorite dividend growth stocks have returned to profitability. Regardless of the happenings in the world economy, when our dividend growth stocks are making money, we will be rewarded accordingly… But, it will take faith in our philosophy and time for the markets to catch up to us .
Tuesday, April 6th, 2010
The importance of global diversification is often discussed as important as an investor in today’s global economy, and with the MSCI World Index and EAFE (Europe, Australasia and Far East) Index both up about 27% in U.S. dollar terms in 2009, that message remains important. However, over the past few years, we’ve been reminded of the great investment opportunities in Canada.
More Than Just Resources
Canada has not gone unnoticed by investors abroad. A report last week indicated that Canada has benefited from record net inflows of foreign investment in Canadian securities.
By extension, demand for the loonie has also increased, and this is one of the reasons why the Canadian dollar currently sits near parity with its U.S. counterpart.
Foreign investors purchased $109 billion worth of Canadian securities in 2009, and another $11.8 billion in the first month of 2010. They were particularly keen on Canadian corporate bonds in 2009, purchasing nearly 80% of net new corporate issues. Meanwhile, Canadian investors were noticeably more conservative – nearly all bonds issued or backed by the Government of Canada stayed in Canada.
There are good reasons for this renewed interest in Canadian investments. Canada has a highly educated workforce, a rock-solid financial system, and one of the strongest economies in the developed world. What’s more, the Canadian stock market has delivered some of the best returns in the world over the past 10 years. (Could this be a warning sign though?)
All of these points underscore the importance of having Canadian exposure as a core holding in a well diversified portfolio.
Friday, December 19th, 2008
We’ve recently come to recognize the herd mentality that’s been corralling the minds of retail investors and how this has led to a ‘bubble’ in U.S. Treasuries. This phenomenon reflects the extreme risk aversion that’s moving the markets these days and how people are more focused on return of investment than return on investment.
Even though the yield on Treasuries is at historically low levels, investors are willing to sacrifice the returns they need for the sense of security they want. Unfortunately, this fixation with ‘safe’ assets doesn’t make much sense within the context of long-term goals.
Let us now look at the other side of the Treasuries phenomenon. In their quest for certainty, many investors may be unwittingly ignoring dividend yields on stocks, which have become more compelling as a result of the downturn in global markets.
The Dividend Yield
As dividend investors, we have recently noticed that the dividend yield on the S&P 500 Index is greater than the yield on U.S. Treasury bonds for the first time in 50 years!
Case in point, the dividend yield on the S&P 500 as of the end of November was about 3% versus the yield on the 10-year Treasury which today, is about 2% (the 2-year Treasury is yielding about 0.70%). What’s more, this isn’t just a U.S. phenomenon. In Europe, the yield on stocks also currently exceeds the yield on government bonds.
Of course, dividends are a key part of total returns (price appreciation plus investment income, including dividends). The fact that dividend yields are high relative to Treasury yields right now makes the case for dividend-paying companies that much more compelling.
If we look back to the period between 1974 and 1982, the performance of the S&P 500 was sluggish on a price return basis. But if you look at what happened as markets began to recover, including dividends in the returns that investors earned as they emerged from a period of economic uncertainty and capital market weakness (i.e. looking at total return) made a significant difference.
Herding To Safety
Today, the desire for safety runs the risk of driving ‘the herd’ off the edge of the proverbial cliff as people abandon their long-term goals in favor of short-term stability. But despite what the headlines might suggest, the world isn’t two- dimensional.
That is to say it’s not just risky assets or safe assets. To see the total picture, including why dividends need to be a key consideration in the investment process, is a starting point to having better, more robust conversations in today’s uncertain environment.