Wednesday, November 5th, 2008
A few weeks ago I wrote an article titled Panic or Profit and many folks thought I was just spouting theory. While that may be, the recent evidence of my “theory” has been proven at least half true thus far.
According to the Globe and Mail, panic sticken investors in Canada pulled a record $8.45-billion from the mutual fund market in a stampede for the exits. It was the worst month for net outflows since the Investment Funds Institute of Canada (IFIC) began collecting data in 1990, and nearly doubled the previous record posted in September, which saw net outflows of $4.5-billion.
Panic Selling
Of course many will be inclined to argue that those who pulled thier funds from the market in early October were smart and can now re-invest at lower prices. While this is true, the figures shown are net outflows for the month – so we’re not talking about trading or churning of these funds. This data is a decent representation of those investors who panic-sold.
Further to this point, most seasoned traders, who would be more inclined to recognize the market conditions and sell their holding to re-invest at a later date are likely not invested in mutual funds, but rather individual securities.
One such example of an individual who panic-sold is Norman Bambrick, a 72-year-old retiree in Port Perry, Ont. He bailed out of his bank fund after seeing his $200,000 investment in two accounts take a $12,000 haircut in 10 months.
“The funds didn’t work out for me and I cashed them,” Mr. Bambrick said.
“I had a feeling that they were headed for a disaster,” he said. “I had no confidence in them.”
What is even worse about this example is that the gentleman suffered just a 6% loss to his portfolio. This is an indication that he has received some incorrect advice about his risk tolerance and the investments that he holds.
Understand Your Risk Tolerance
If Mr. Bambick could not tolerate a 6% loss to his portfolio, he should not have been invested in those vehicles. At 72 years old, with such a low risk tolerance and relying on his portfolio for income, Mr. Bambick should likely be invested in Guaranteed Investment Certificates (CD’s in the USA) and Fixed Income securities only. Fortunately, that is exactly what Mr. Bambick did with the proceeds from the sale of his funds.
While this example is of an investor who was not likely in the appropriate asset allocation for his situation, it is still an example of panic selling. When we sell out of fear instead of understanding our fundamental reason for selling we often lock in losses. And, by the time we get up enough “courage” to return to following our original investment plan (when general market sentiment turns positive), we have often missed out on the initial upside gain.
The moral of the story is this:
- If you were lucky/smart enough to cash out before the downturn – don’t be too late to re-invest those proceeds because prices are much more attractive now.
- If you panic-sold during the downturn get prepared and develop a plan that is comfortable for you. Don’t miss out on potential gains when the market turns the corner.
- If you have been holding throughout, stick with your plan because this time is not different and equities will rebound as market uncertainty eases and we return to the fundamental valuations.
I personally fall into category number three and have been buying dividend growing stocks and some index ETF’s over the past 5 weeks.
Which category are you in?
Posted in Investment News | 6 Comments »
Monday, October 27th, 2008
As we saw on Friday, the current financial crisis has investors all over the world living in fear now. And this time, it’s the government who is helping businesses to bring down what is crippling markets – the credit crunch precipitated by the U.S. housing collapse.
Governments in North America, Europe and Asia have provided bailouts to troubled financial institutions, liquidity to money markets and guarantees to banking systems. And all of this is in addition to drastic interest rate cuts. Fortunately, there are some very encouraging signs that these initiatives finally are starting to work.
Some Good News For A Change
Indications that credit is starting to flow
- The rate at which banks lend to one another known as the London Interbank Offer Rate (LIBOR) decreased from a peak of 6.88% earlier this month to less than 1.3%.
- The spread between 3-month LIBOR and U.S. Treasuries (the risk-free rate) decreased from a record high 4.65% earlier this month to 2.7% on Friday. A narrower spread means that banks are more willing to lend to each other.
Good news for U.S. housing
- U.S. fixed-mortgage rates decreased helping more borrowers qualify
- Variable rates continue to decrease due to Fed rate cuts
- Oil and gas price declines result in more affordable heating costs for homeowners as we head into the colder months
- Data from August and September shows reduced inventory of U.S. homes. The 10.6 months supply of homes in August slipped to 9.9 months supply in September
- The FDIC and the U.S. Treasury are working on a proposed plan to prevent avoidable foreclosures by offering guarantees to lenders and companies that service mortgages
Despite these encouraging signs, we will continue to see volatility as investors react (or is that overreact?) to every new piece of information released.
Facts About Stocks and Recessions
There’s a lot a worry about the recession now. But what’s important to remember is that equity markets tend to be leading indicators of the economy.
Looking back through history, equity markets have typically retraced prior to, and in the early stages, of recessions. Once equities have reached their lows, they tended to rise quickly preceding the broader economic recovery.
So, make sure you don’t let yourself fall into the mob mentality or you may find yourself missing the upturn in equities.
We don’t know exactly when the recovery will commence, but over the long-term equities has still been the top-performing asset class. And out of all the equities, the dividend growers have been the most stable.
Posted in Investment News | 4 Comments »
Monday, October 13th, 2008
Why Do We Invest When We Have No Control?
Even during the most trying times for the market, it is important to understand why it is that we are investing our hard earned cash into public companies of which we have little to no control over.
It’s true. We are buying pieces of companies, in the form of common stock, that we have no control over the operations of the company.
Basically, we are saying “Here, you guys take my money to invest in your business and I will sit back and wait for you to do a good job so that I can get a return on my investment”. When we think of it this way, investing in common stock makes little sense – if any sense at all.
Many investors prefer to invest in their own businesses whereby they have control over the operations of the company, and thus, the outcomes of the business. This makes intuitive sense, but what we as dividend growth investors are trying to do is to produce constantly growing retirement income of the completely passive variety.
So What’s The Difference?
The major difference is that while we lack control of the companies that we buy stocks in, we also relieve ourselves of the responsibility of running those companies profitably. This creates a passive and growing income stream.
We all know that running a businesses takes a lot of time, skill, effort, and energy – as well as a little luck. This is time, energy and skill that most of us do not have. However, we can participate in the efforts of others by purchasing dividend growth stocks and reaping our small, but growing, dividends.
Work One Time, Get Paid Forever
Theoretically, and many times practically as well, we can input one unit of work and get paid forever. Indeed, our main goal as dividend growth investors is to work once (evaluating and purchasing a dividend growth stock) and get paid forever in continuous dividends…ideally with annual raises!
The title of this article states that our retirement income is on sale. While this is true, we do have to be very careful to do our due diligence in bear markets to pick out stocks that have been unjustly beaten down and whose dividends and future earnings are likely to increase.
Easier Diversification
While having control over one’s own business can be profitable and offers the ability to make changes to react to market conditions, it also concentrates the investment.
As much as we preach about diversification and asset allocation in our stock portfolios, it is easy to forget the need for diversification when we talk about our own businesses.
Investing in the stocks of dividend growing companies allows for the diversification of funds among several high quality companies that meet the requirements of our dividend growth model. This diversification will allow for multiple consistently growing income streams which is an ideal way to fund retirement.
Why Now?
The current market has given us dividend growth investors the opportunity to identify our favorite dividend growth stocks and purchase them (some at prices we have not seen in our lifetime).
I’m not calling a bottom for stocks here, but I am confident that we are closer to a bottom than we are to a top at this point. Regardless of the direction of the market tomorrow, there are stocks out there that have been unjustly beaten down and are offering consistent and even growing dividends.
For more on how to find these stocks, check out my article on how to choose dividend growth stocks and then stop by The Dividend Network for stock analysis from the top dividend bloggers on the internet.
Posted in Investor Education | 7 Comments »
Saturday, July 12th, 2008
The Board of Directors of Colgate-Palmolive Company (NYSE: CL) declared quarterly cash dividends of $.40 per common share, payable on August 15, 2008, to shareholders of record on July 24, 2008.
For those of you looking for a dividend that is as close to certain as you can get, look no further as Colgate-Palmolive has paid uninterrupted dividends on its common stock since 1895.
Colgate on the Defense
With the turmoil that has been the stock markets in the past weeks and months, many investors (at least those who haven’t gone to 100% cash) are turning to defensive stocks to assist in preserving capital. With a Beta of just 0.31, Colgate (CL) is one of the least volatile dividend stocks on the market.
In addition to a healthy dividend and price stability (in relation to the market), Colgate also offers some excellent growth numbers for a company of such extreme size. Colgate boasts a Return on Assets (ROA) of 17.03 and a Return on Investment (ROI) of 29.07; both of which trump the industry numbers quite handily.
Colgate Dividend Data
With many dividend stocks struggling with earning this year, the management of the company’s dividend payout ratio is of particular importance. Colgate has a dividend payout ratio of just 43.4% of earnings, which will allow for some flexibility in earnings capacity without sacrificing the dividend rate in the short term. A dividend payout ratio of below 60% is a relatively conservative guideline for investing in dividend growth stocks.
When investing in a good dividend growth stock, one of the criteria that I use is to set a purchase price for a stock when its dividend yield is around 25-30% above the 5-year average dividend yield. Colgate’s 5-year average dividend yield is 1.88% and the current yield is 2.27% – a yield that is 20% higher than average.
Another criteria that I use is that the dividend growth rate must be greater than that of the S&P 500. Otherwise a dividend growth investor would be more prudent buying the entire index to mitigate risk. The dividend growth rate for the S&P 500 is currently at 11.0%, while Colgate features a dividend growth rate of over 14% – a healthy 3% points higher than the index.
Buy What You Know -Colgate
Unless you have been living under a rock for the past century, you will recognize Colgate-Palmolive as a leading global consumer products company. The company is very successful in its focused niche markets of Oral Care, Personal Care, Home Care and Pet Nutrition.
Colgate sells its products in over 200 countries and territories around the world under some of the world’s most recognized brand names as Colgate, Palmolive, Mennen, Softsoap, Irish Spring, Protex, Sorriso, Kolynos, Elmex, Tom’s of Maine, Ajax, Axion, Soupline, and Suavitel, as well as Hill’s Science Diet and Hill’s Prescription Diet.
Stock Summary
As investors looking at Colgate (CL), we have a stock that is quite a bit less volatile than the broader market with a beta of just 0.31, a greater than average dividend yield at 2.27% that is growing at a faster pace than the index. In addition, the company has features an excellent return on investment and wide array of well branded products that people still need to buy regardless of economic conditions.
Full Disclosure: The author does not own shares of Colgate-Palmolive at the time of writing.
Posted in Investment News | 4 Comments »
