Dividend investing strategies for the long run

 

Five spring times ago, the doomsayers were running roughshod. This spring, the principal worries are of how much longer a bull run for the ages can last, how big the next inevitable correction and whether some chips should be taken off the table in the face of daunting new uncertainties.

Though the Standard & Poor’s 500 index (commonly judged the best gauge of U.S. economic oulook as well as current investor sentiment) has pulled back from all-time peaks of just below 1900 to its year opening level in the 1850 range, it is still close to three times the scary 666 it bottomed at the despairing spring of 2009.

The pattern is the same with the Dow Jones Industrial Average. Resilience like this has to be impressive in the face of the Ukraine-Russia stand-off, an economic slowdown in China and assorted other worries.

Another big difference this spring is the “short term-ism” that has taken hold across the entire investment spectrum – from corporations anxious to meet their quarterly guidance forecasts, to research analysts constantly tweaking their latest estimates. There’s also wealth managers obsessed with outperforming their competitors and the benchmarks against which they are measured.

Michael Sabia, chief executive of the Caisse de depot et placement du Quebec, is urging today’s business model be changed away from short-term money making toward a greater focus on longer-term investment and company building. In his view, it’s the long term that should matter most of all.

How refreshing – and reassuring – to read Warren Buffett in his latest annual letter to Berkshire Hathaway shareholders advising against swinging for the fences: “When promised quick profits, respond with a quick no”.

He also reminds us that games are won by focusing on the playing field, not the scoreboard, and “If you can enjoy Saturdays and Sundays without looking at stock prices, why not also weekdays?”

Critics are quick to point out that Berkshire Hathaway has underperformed the broad market in four of the past five years, something the Oracle of Omaha readily concedes.

Even so, the Berkshire book value higher by some 90 per cent since 2009 isn’t all that shabby, nor Berkshire Hathaway’s (BRK.B) share price climbing to record highs at the $120 level. Clearly, Buffett and his worldly-wise vice chairman Charlie Munger are doing something right.

I have the clearest memory of Mr. Munger opining at the 2008 annual meeting that the then free-falling U.S. stock market was setting up for a 10 -to-15 year bull run. In this event there’d still be another five to ten years to go.

The 17 years it took the Dow to re-attain the 1,000 threshold it had triumphantly scaled for the first time in early 1966 is a graphic example of how long it can take to establish a long market base. The same with the S&P 500 taking almost as long to get back to its breakthrough threshold of 100. But, once re-established in late 1982 and early 1983, what springboards these new long bases were to become.

Not that the ensuing multi-year bull run wasn’t without its pullbacks or nail-biting crises; for example, the 20 per cent plus single-day collapse of the U.S. stock market on October 19th in 1987. However, a pothole like this couldn’t stop an irrepressible road to new peaks of 5,000 and 1,500 in the spring of 2000. Only then did the tech bubble burst and finally usher in the bear market.

Thereafter, were to follow 13 tortuous years before the peaks of 2000 were regained and the next long base confirmed. Given this was as recently as a year ago, newly sprung stock markets could have a long way yet to run.

In Canada’s case there’s the tough re-balancing and de-leveraging of a lagging and still heavily commodity-dependent economy. Nonetheless, Canadian equity markets, whose benchmark S&P/TSX Composite rose recently to a five year high of just under 14,500 still trails its all-time 15,000 peak of mid-2008.

A time-honoured adage holds that the trend is the investor’s friend. The great financial crisis and near-depression of 2008-09 came perilously close to triggering a rare trend reversal. However, lessons learned – that was more than five years ago, and today’s mounting market-driven trends could once again be auguring well for investors – everywhere.

Concomitantly, corporate balance sheets the world over, have been considerably strengthened, and treasuries are flush with cash. Given such underpinning, even if earnings were to slow – one of today’s main headline worries – long-term investment commitment would continue to be justified to great world-class corporations, of which Canada has its goodly share.

King Dividend

A recent article in the business press intoned how it might be time to move away from “King Dividend”. I couldn’t disagree more.

First, there’s the cushion which dividends provide – with the added prospect of rising yields on cost as successful corporations raise their annual payouts to shareholders.

Note for example in the accompanying table how the dividend on a Bank of Nova Scotia share purchased on January 1, 2003 has risen from 84 cents to a current $2.56, for a 9.7 per cent yield on cost – and counting!

Each of the ten selections also has a dividend reinvestment plan where shares may be continuously increased, helping investors compound their way to wealth?

My Canadian Dividend 6-Pak, which are among the current best dividend stocks to own, comprised of Artis REIT, Bank of Montreal, BCE, Inter Pipeline, Power Corporation of Canada and TransAlta, also fits this wealth-income scenario ideally.

Despite the steep dividend cut at TransAlta necessitating a re-think on my part (not about TransAlta itself, but its “eligibility”), this high-quality package was returning a total 9.0 per cent year-to-date at latest count, when it yielded an average 5.0 per cent.

In summary, dividend stocks and their corresponding dividends matter a whole lot and dividend investing strategies work even more effectively when the (rising) dividends paid by successful companies are reinvested to compound the growth.

Energy Excelsis

In January, The Economist wrote the most telling of cover articles on today’s onrushing waves of technology and cheap and abundant energy.

Led by the rising petro-state of “Saudi America” the fracturing (“fracking”) of the world’s abundant shale deposits is promising to make North American oil and gas extraordinarily cheap, thereby portending cheaper fuel costs, revitalized and newly competitive industries, and resurgent worldwide economic and job growth.

An energy boom that is good for America should also be good for the world. Canada, with its vast oil sand and natural gas reserves and their highly desirable natural gas liquid content (propane, butane, ethane) is in the forefront of this 21st century global revolution.

There’s also a plethora of pipelines, infrastructure-building, and international energy partnerships to add to the immense investment appeal of Canada’s entire energy sector.

Another revealing Economist headline “A pipeline runs through it” reminded not just of Keystone Xl and its vital importance, but also of the huge scope for continental energy sharing.

All of which explains why I’ve persevered with my duo of Encana Resources and Cenovus Energy, whose latest annual reports tell of dynamic industry leadership and mounting progress.

A re-booted Encana is also soon to spin out its Western Canadian royal oil and gas business – to add to investor interest and underlying asset recognition. Then there’s Suncor Energy, whose enviable cash flow and dividend payout strength exemplifies how oil sands seniors can be a great place for dividend lovers – along with Cenovus, Canadian Natural Resources and others who have also raised their payouts to date in 2014.

Two additional Canadian oil and gas recommendations are Husky Energy, a blue chip stock I now favour all the more strongly and Baytex Energy Corp., a business risk with intriguing all-round possibilities.

More equity building

For the more broadly growth inclined there’s my Canadian Equity 6-Pak – Bank of Nova Scotia, Brookfield Asset Management, Canadian Pacific Railway, Enbridge, EnCana/Cenovus (half allotments) and Thomson Reuters.

While the payment of dividends (though with a lesser emphasis) and regular rebalancing are also mandatory requisites of this more growth-focused 6-Pak, there may be only one representative per sector; e.g. Bank of Nova Scotia representing the financials.

Year-to-date the Equity 6-Pak return is running at 6.4 per cent (capital appreciation 3.9 per cent, dividend yield 2.5 per cent), which is somewhat less than the benchmark S&P/TSX index, but these are early days yet.

For investors wanting more than a model portfolio with only six stocks, and perhaps also with additional industry reach there’s no shortage of world-class Canadian corporations to choose from (always remembering individual holdings must be large enough to be meaningful).

Thus, my recommended Canadian Dozen for 2014 (see November/First Report 2013) reached out beyond my Canadian Equity 6-Paks to include Husky Energy, Suncor Energy, Manulife Financial, Teck Resources, TD Bank and TransCanada Corp.

A strong recommendation added this year is Brookfield Property Partners (TSX-BPY.UN, 21.42): Now that its merger with Brookfield Office Properties is complete, all of Brookfield’s worldwide commercial properties will be under one roof, with a five per cent yield while you wait.

Potash Corp. of Saskatchewan (TSX-POT, $38.30), the world’s largest fertilizer maker (potash, nitrogen, phosphate) is another I’m keeping a close eye on as Russia’s cartels come unstuck, a new management takes over and farmers must inevitably commit to fertilizing their fields afresh after last season’s record prairie crops.

In the box on page eight, there are also two dark horses, Bombardier Inc. and Sherritt International. In each the downside would be limited to $4.00, but with potential upsides much more than this. Perhaps one, not both would be best when some business risk can be afforded.

Think long term

In his all-time classic, The Intelligent Investor, first published in 1949, Benjamin Graham explained how investing isn’t about beating others at their game; instead it’s about controlling yourself at your own game as “Mr. Market” keeps serving up prices for you to decide whether or not to act on.

In another classic Stocks for the Long Run, first published in 1993, Jeremy Siegel develops how holding good stocks over long periods of time works out best, with irrational en passant market fluctuations providing opportunities to do that much better.

The common link in both – investing is most successful when the approach being taken is long-term.

 

- Michael Graham Ph.D.

 

 

 

The MoneyLetter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846