Tuesday, November 25th, 2008
As I came into the office today, I was reminded of what time of year it is. Every year a very large tree is set up and decorated in the lobby of the building. Years ago it was a Christmas tree but as times changed it became known as a holiday tree. This year, in order to spare the slaughter of an innocent tree, it’s a 10 foot steel cone covered in green, prickly plastic. So, as I walked past the holiday cone I was reminded about what’s coming later this week in the U.S. – Black Friday.
Black Friday
Black Friday is so named because it’s the day that retailers finally move into “the black” for the year and it’s the day that marks the unofficial beginning of Holiday shopping. It’s also the busiest day of the year for most retailers in the U.S. and a day that many items go on sale as businesses compete for those gift shopping dollars. Seasoned shoppers will do their research by scouring through local papers then line-up early in order to get the best deals – after all, if you can get the same item at a lower price, why wouldn’t you?
Strangely, when it comes to investing it seems that people want to pay more. Mutual fund sales show this time and time again. When markets are close to their peaks, mutual fund sales are strong, but when markets are close to their bottoms, mutual fund sales are weak. But who can blame investors? If we look at markets in the U.S., the S&P 500 Index is currently at levels similar to 10 years ago and while Canadian markets have faired somewhat better, it’s still been an ugly 10 years.
A Lesson In History
In 1974 the S&P 500 Index dropped from a closing value of 99.74 on March 13 down to a closing value of 62.28 on October 3 losing over 37% of its value (note that the index is based on price only and does not include dividends). And much like today, there were several events that were weighing on the minds of investors, such as:
- The energy crisis following the OPEC oil embargo
- The resignation of President Richard Nixon following the Watergate scandal
- The loss of Vietnam war
- An economy in recession
What investor would want to be in the market at a time like that?
Well, as it turns out, a very astute one. The table below shows the returns of the S&P 500 Index following October 1, 1974.
S&P 500 Index
| From Oct. 1, 1974 |
1 Year |
5 Years |
10 Years |
20 Years |
| Annualized return of index |
38.13% |
16.86% |
15.63% |
15.11% |
| $10,000 invested |
$13,813 |
$21,793 |
$42,723 |
$166,942 |
The most important thing an investor can do right now is to learn from history. Although there are some differences between any two periods of time, there are examples of times in the past with many similarities to what we are seeing today.
Those past times represented outstanding investment opportunities in equity markets. No one knows exactly when the market will be at its bottom, but if you’re buying right now, you know for fact that it’s not at its peak. And, like many consumer goods, the market is on sale.
Posted in Stock Studies | 7 Comments »
Thursday, October 16th, 2008
As a dividend growth investor, I am frequently asked why I don’t invest in high growth stocks and, more importantly, why I believe investing for dividends is a more appropriate strategy.
In bear markets there are great buying opportunities for dividend growth stocks that are offering yields above their historical averages. Opportunities to buy great dividend growth stocks at above average yields is a great way to finance your retirement and increase the compounding effect of your future income from these stocks.
Here are the 3 most essential reasons that I prefer dividend investing:
1.) Dividends offer investors fantastic flexibility.
Dividends give you tremendous financial flexibility throughout your investing life. While you’ve got an income from working, you can reinvest those payments to speed the process of compounding your wealth. Once you’ve decided to retire, the cash thrown off by dividends spends just as well as any other source of money!
What is even better, a rising dividend payment can help you fight inflation by providing you more cash every single year.
2.) You can’t fake money in your pocket.
Dividends also have the added bonus of being exceptionally difficult for companies to fake. After all, it’s difficult to convince lenders to loan money to a company if that company is going to turn around and hand it over to its shareholders.
As a result, to sustainably make and increase those dividends, the business needs to generate serious cash on both a regular and repeatable basis.
3.) Dividends are paid from the company’s cash flow.
Perhaps most important, a company’s dividend payment comes from its operational success and not from the panic, hype, or analyst interpretations that influence its stock price. Throughout these rocky market periods, dividend payments allow us to make money even when the stock price moves lower.
Why Invest In Dividend Paying Stocks?
- Quicker compounding.
- Increased financial flexibility.
- Cash in your pocket without selling.
- A hedge against inflation.
- An check on the company’s accounting.
- Cash Flow in a down market.
With all of the benefits of dividends, it’s obvious why they can be an integral component of one’s portfolio.
Did I miss any benefits of dividends? If so, let me know in the comments!
Posted in Investor Education | 3 Comments »
Monday, August 25th, 2008
A concept that I’ve explored lately in this recent volatile market is reversion to the mean, which suggests that prices have a tendency of eventually moving back towards their long-term historic averages.
A good example of this could be the price of oil. After rising 47% in the first half 2008 and hitting a record high of $147 per barrel on July 11, the price of oil has dropped more than 20% in less than eight weeks as supply-demand dynamics adjusted (Not including the speculative bounce last week). Albeit $120 oil can still be considered high by historical standards, the point is that dramatic increases over short periods of time represent imbalances that are likely to self-correct.
Using The Reversion Theory In Your Portfolio
Within the context of recent history, many people might associate reversion with a downward movement so the first thing that comes to mind is something that’s overpriced. However, if we turn this concept over in order to highlight value as well. For example, while oil has soared to new heights, at the other end of the spectrum global equities have been punished and U.S. stocks in particular have struggled amid the credit crunch and a deteriorating economic backdrop.
Over the last 12 months, the return on the S&P 500 Index has been about -11%. Consider however that the average annual return on U.S equities over the past 25 years is 11.4%. On this basis, investors (especially those sitting on the sidelines in cash) might want to ask themselves whether they think stock prices in the world’s largest and most diverse economy will stay at current levels indefinitely, or whether it’s more reasonable to think that at some point, they’ll revert to more historically normal levels.
Analysts spend many hours and a boat-load of money determining what they perceive as fair value for equity markets. Their valuation models incorporate long run averages for inflation, interest rates and growth and based on current levels for these factors, U.S. equities appear to be trading below fair value. Another way to interpret the reversion theory essentially is a version of the “stocks on sale” message.
Reverting To Positive Returns
If U.S. equities are trading below where they should be based on historic averages for similar environments, then it follows that at some point, they should move back towards fair value, meaning stock prices should eventually rise.
Now, I am NOT forecasting what the price of oil will be or where U.S. stocks will be trading six months from now or when reversion will happen – I’ll leave that to the “experts” . The message to take from this is that amid 200 point swings in the stock market or $10 spikes in oil prices, it’s prudent to think about where prices are in relation to historic long run averages.
In a volatile market it becomes very difficult to predict which individual stocks are going to be most successful. However, buying a broad index such as the S&P 500 will offer significant exposure to a US equity market that has become oversold and is valued at well below historical averages. Not to mention that the S&P 500 has a dividend growth rate of about 11%. So, buying this index offers you an average of 11% raise each year while we wait for valuations to return to the mean.
Posted in Investor Education | 5 Comments »
Friday, July 4th, 2008
Growing Dividend
As a spin-off of the successful Duke Energy, Spectra Energy Corp (NYSE:SE) has had a rather successful first 16 months in business and has recently declared an 8.7 percent increase in its quarterly cash dividend
on its common stock, from $0.23 to $0.25 per share. The dividend is payable September 15, 2008, to shareholders of record at the close of business August 15, 2008.
Spectra has what appears to be a very assertive, yet stable, long term growth plan that is focused on organic growth and project development. This includes a very lucrative joint venture with Conaco Phillips and already transports some 12% of the natural gas consumed in the United States.
With these facts in mind, let’s take a look at what the Chief Financial Officer (Soon to be CEO at the end of 2008) of Spectra Energy, Greg Ebel has to say to investors looking to purchase stock in the company:
I think the key reasons are, first and foremost, a home grown stable of expansion projects that give visibility on earnings growth to the better-than-the-pack earnings growth and opportunities they see. Also, solid dividend growth opportunity, sound financial management and overall a relatively safe harbor in what is a somewhat dodgy financial market situation and economic situation we see out there today.
A Closer Look At Spectra Energy
Spectra Energy is one of North America’s premier natural gas infrastructure companies serving three key links in the natural gas value chain: gathering and processing, transmission and storage, and distribution. With very solid transportation contracts into the foreseeable future, there is little concern for profitability and optimism for increasing shareholder value. However, any lagging demand for natural gas would certainly be a concern for the company moving forward.
Spectra Energy owns and operates critically important pipelines and related infrastructure connecting natural gas supply sources to premium markets. Based in Houston, Texas, the company operates in the United States and Canada approximately 18,000 miles of transmission pipeline, 265 billion cubic feet of storage, natural gas gathering and processing, natural gas liquids operations and local distribution assets.
Spectra Energy Corp also has a 50 percent ownership in DCP Midstream, the largest natural gas gatherer and processor in the United States.
Why Pipeline Stocks?
It has been said before, but pipeline stocks are like railroads for natural gas. Simply put, the demand for natural gas is up and correlates somewhat with oil prices, but the upside with pipelines is that they do not have the competition from other forms of transportation. In order to move and significant volume of natural gas a pipeline must be used.
Pipelines are traditionally managed very conservatively, as is Spectra Energy, and make their money through cost-of-service contracts and other required services. This means that cash flow is relatively stable and predictable when compared to the market as a whole. This can be referenced by viewing the Beta coefficients of pipeline stocks which show significantly less volatility than the broader markets.
I have stated before, and I will state again that pipelines are great recession proof stocks.
On top of preserving and likely growing capital, investors can collect a healthy (and growing) dividend yield.
Spectra’s current yield is 3.28%.
Spectra also boasts Return on Equity and Return on Investment numbers that are markedly abov ethe industry average at 17.1% and 5.76 % respectively.
For those of you looking to preserve capital during these rough market times and collect a solid dividend, I highly recommend pipeline stocks. Along, with Spectra Energy I suggest looking at Trans Canada Pipeline (TRP).
Full Disclosure: The Author does not own shares of Spectra Energy, but does own some Trans Canada Pipeline.
Posted in Dividend Hikes | 2 Comments »
