Posts Tagged ‘dividend-paying stocks’
Back in August 2011, I posted Don’t Panic.
I took a look at investor psychology in the face of negative sentiment on the markets. In It was the best of times (for dividend investors), I outlined how well dividend-payers did over the last few years. The markets have done very well for the dividend-centric.
So what’s an investor to do, now?
Interesting U.S. market stats
Bob Pisani, of CNBC, points out some interesting information regrading U.S. markets:
Most notable among the trends was a near-record pace of fund flows last week into equity funds.
Stock mutuals saw $19 billion come in, the highest since 2008 and the fourth-biggest in the 12-year history of tracking the data, according to Bank of America Merrill Lynch.
The latest American Association of Individual Investors survey registered a 46.4 percent bullish reading during the same period, well above historical averages, while those expecting the market to be lower in six months fell to 26.9 percent.
Finally, the CBOE Volatility Index, or VIX, a popular measure of market fear, is at a subdued sub-14. A declining VIX usually means rising stock prices.
(Read More: Why VIX’s Recent Plunge May Be Bad for Stocks)
About the only areas showing caution were safe-haven money market funds, which saw assets grow to $2.72 trillion on an influx from institutions, and commodities, which had outflows of $570 million.
The most popular reason among traders for all the optimism is basic relief that the U.S. made it through the “fiscal cliff” scare relatively unscathed.
If that’s the case, the looming debt-ceiling battle and a likely lackluster earnings period could offer perilous counterweights.
So, what’s an investor to do?
The reality is, if you know who you are as an investor, and more importantly, where you want to be, none of this should rattle you. But it should make you think. Trading the media is something some do, and some do it very successfully, but most don’t. And that’s why investors must plan.
When planning for a year, plant corn. When planning for a decade, plant trees. When planning for life, train and educate people.
— Chinese proverb
Warren Buffett plans. Why not you? After all, planning is a form of self-reflection and self-education.
The metric of the past and planning for the future
It may be wise for investors to reassess their investing plans, to decide if their plan is capable of meeting their goals and then have the courage to sail on the course they’ve charted. If past is prologue, then the last couple of years have rewarded the longer-term planners for wading through the ‘what ifs’ and ‘maybes’ and sticking to the fundamentals.
The market hasn’t had a 10 per cent correction in a while in the U.S. While we all watch, we have to wonder at the market’s resilience while remembering why we hold assets that act as ‘insurance’ against revaluations. Any correction should be incorporated into your plan and taken advantage of. But a 2 or 3 per cent drop from an all-time high is hardly a correction. Having some cash on hand when markets have hit recent highs is rarely a bad idea.
The market hasn’t seen a traditional correction in almost three years. Majority sentiment would have seemed against this phenomenon three years ago. We will have a correction at some point. No one can be sure of the degree of the next correction. But does this alter your planning?
Planning empowers you in the face of ‘peril’
It’s best if you incorporate the possibility of a correction into your plan. Because, at some point, the stock markets will correct.
In a world gone into overdrive, where the short-term seems like the long-term to some, authentic long-term planning may be the most valuable commodity.
The markets are like anything else with respect to planning. And the markets are one of the best barometers of human psychology. ‘Perilous counterweights’ need to be part of your planning.
We’ve all heard that in the long-term risk gets reduced by time-in-the-market. In the meantime, knowing your tolerance for risk is crucial. What we can learn from the period from August 2011 to now is that risk happens in so-called ‘safe’ investments, too.
The broad markets have outperformed cash. At some point, markets will correct. Maybe that process has started. Markets correct. This is part of what makes a bull market healthy. And corrections are the reason why we should use proper asset allocation in our portfolios.
One thing is sure. It was better to be in-the-market than it was to be in cash in the time period we looked at above.
No one owns the patent on the future. No one ever knows the exact nature of the next correction. It’ll be interesting to see what the next six months holds …
A plan we can live with is part of what keeps people happy as investors over the long-term. So that we can sleep and dream of sheep.
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Having difficulty understanding if you’ve made money with a dividend-paying investment?
So many investors look at their statement when it arrives and think:
I haven’t made any money! (Cue gnashing of teeth.)
But is it true?
Let’s say you hold investments that are of a dividend-paying nature. How do they operate?
Well, whether you’re investment is a mutual fund, an ETF or a stock, if it pays dividends, and you don’t really understand how dividends work, you’ll be confused.
Paid to wait
First, it’s important to separate your original investment from your dividend payments (distributions).
Dividend payments might be:
Most dividends come in quarterly payments.
In this example, I’m going to use Royal Bank, a widely-held Canadian bank stock. It doesn’t matter what dividend-payer you use. It’s also the same with an ETF, a stock or a mutual fund. It’s only the terminology that changes (e.g. shareholder or unitholder).
Royal Bank pays a dividend of .63 cents quarterly. If you hold 100 shares of Royal Bank, you’ll receive a payment of approximately .63 cents four times per year per share.
Why “approximately”? Because depending on the health of the company, it may raise or lower the dividend. For example, Royal Bank raised it’s dividend payments this year. It’s first two dividend payments were .60 cents, and the last two were .63 cents.
To make things easy, let’s assume Royal Bank had made four dividend payments of .63 cents:
4 x .63 = 2.52
In my example, the dividend payment would be $2.52 per year. If the stock were valued at $62.00, that yearly dividend payment would be equal to 4.06 per cent (or one year’s dividend payments). Our example is very close to Royal Bank’s dividend yield (currently 3.94 per cent).
Let’s imagine the Royal Bank illustration above was a mutual fund. If the fund paid a dividend of $2.52, the dividend payment amount would be subtracted from the unit price each quarter.
Each time the dividend was paid (.63 cents), the unit price of the fund would be subtracted by the dividend payment.
But wait! Wasn’t there a dividend payment?
Because your Adjusted Cost Base (ACB) changes when dividends are paid out. If the unit price of the fund did nothing, for example, ended the year at the same price it began it, your investment would look like it hadn’t made any money. Superficially, at least.
But it would have, because, when you receive the dividend, you get more shares / units. Your 100 original shares will increase in number.
Didn’t that fund pay $2.52 for the year? And wasn’t that payment supposed to be 4.06 per cent? And so, didn’t you, as an investor, make over 4 per cent on your investment?
And every time the dividend was paid out, didn’t you get additional shares in your investment?
But the four dividend payments, when made, count as dividend income if they’re held outside of a registered account. The dividend is reinvested into the fund. So, when your payment of .63 cents per share is made, for accounting purposes, it’s considered new money and a new investment.
In a future post, I’ll give you an example of what this looks like, and a key error less-experienced investors make in understanding their investments.
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“Increases dividend”: a sound byte that should be but isn’t cutting through the leaden bad news we’re surrounded by. Companies are raising their dividends, still, headlines are full of bad news coming out of Europe.
Here are some of the names increasing their dividends:
Disney, Chevron, GE, BCE, Ford (resumes paying dividend), Agrium, Enbridge, Iamgold (by 25 per cent), National Bank of Canada, Laurentian Bank … the list goes on.
Does this return of shareholder cash signal a more optimistic future? Shouldn’t we reward these companies with positive press for doing something that will contribute to shareholders and the economy ultimately?
Income-lovers jump on dividend-payers. Why?
When a company’s increasing dividends, and some have increased more than once this year, management’s saying, “Hey, our operations are strong enough to keep this dividend going for a long time.” Companies are careful about cutting dividends, and so, this makes them cautious about raising them.
When a company cuts its dividend, it becomes kind of a corporate leper. Confidence is lost. Reputation takes a whack. Investors run for the hills.
Because of this, most companies don’t trifle with raising their dividends. They do some hard forecasting before making increases.
The dividend parade continues
While people focus on bad news, opportunity sits there. Why do investors focus on daily bytes that create a horrorshow of headlines?
The bottom line is:
- Corporations continue to pay shareholders
- The news is what it is
Investors may have some suspicion regarding the business intelligence they get, but, are they to believe that the managements of all these corporations raising their dividends are so out-of-touch with the world economy that the opportunity these same managements see is misguided?
Fact over fiction
- The U.S. economic news is improving
- The S&P 500 is a bargain
- So, too, is the S&P TSX 60
- Historically-speaking, the markets look full of potential if you’re focused on dividend-payers that consistently grow their dividends
- Dividend-payers allow you a margin of safety regarding a recession in Europe and what it might do to the markets while allowing the average investor the opportunity to participate in good news
While the future’s unwritten and it’s difficult to predict markets or economic activity consistently, following a diversified strategy brimming with dividend splashes is one that you can have some long-term confidence in.
Brian Wesbury of First Trust Advisors says, stocks are “the cheapest we’ve seen since early 2009 or the early 1980s … equities have priced in the end of the world.”
What happens if the world doesn’t end?
Share the wealth
Since I blogged about this back in December, there’s been a steady increase in dividends. Here are a few of the notable increases as companies continue to decide that their financial footing’s more than steady enough to give back to shareholders.
Apple finally issues dividend, but it’s puny
Thinking about contributing to an RRSP, a TFSA, an RESP or other investment account? Now may be one of the best times since 2009 to fund any of these accounts, especially if you have over ten years for your investment to bear fruit.
Because, at the time of writing:
- In Canada, the S&P/TSX Composite is down 20 per cent over six months
- In the U.S., the S&P 500 is down about 17 per cent
- Any good news out of Europe causes some nice upward movement on Canadian and U.S. equity prices, suggesting there may be some upward momentum if Europe gets its act together regarding a solution to the debt crisis
- As the two most common areas for Canadian investors to put their money to work, Canada and the U.S. present compelling values for stock investors compared to six months ago
- The S&P/TSX Composite is down about 10 per cent over one year
- The S&P 500 is down about 5 per cent over one year
- The iShares DEX Universe Bond Index is up over 7 per cent since its low within the last year
While nobody wants negative returns (unless you’re looking to buy at cheaper prices!), this current equity correction doesn’t look as bad over one year, and looking at returns over that time frame provides some perspective. Over one year, the declines don’t look as dramatic, and that takes some of the fear out of equities.
Fixed income has outperformed. Looking at this outperformance in a rebalancing context, shows stock is currently cheaper.
No one is sure what the future holds, but what is sure is that stocks are a better deal than they were, and bonds aren’t as attractive.
Do yourself a favour: If you’re nervous about markets do some gradual, strategic buying. If you don’t have a plan regarding your asset allocation, get one.
Fear of losing may keep you from winning. Fear is a motivator, so if fear is keeping you from being a strategic investor, consider that fear should also keep you focused on your plan.
Investors have to accept that they will never know exactly what the market is going to do — and then plan accordingly.
Take comfort in the fact that someone like Warren Buffett recently invested $4 billion in the stock market.
Markets will either go up, down (or sideways) in the short-term. If you stay with a balanced portfolio, you have limited downside risk. But if you stay completely out of the market, expecting the four horsemen of the apocalypse, you may be disappointed if the horsemen don’t arrive.
A good long look at a stock chart after the 2009 market bottom (and such a chart can be found in one of the above links), might help you steel yourself, too. Markets had quite an increase until the latest correction began.
The planning you do now will serve you well when the market next moves into a bull phase and increases.
In times of volatility, you might want to focus on conservative dividend-paying investments
Written by johnrondina
October 6, 2011 at 5:08 pm
Posted in Uncategorized
Tagged with asset allocation, Canada, Canadian investors, dividend-paying stocks, invest, investing, Investment, IShares, market volatility, Percentage, rebalancing, rebalancing your portfolio, Registered Retirement Savings Plan, RESP, S&P/TSX Composite Index, Stock market, stocks and bonds, TFSA
Squabble, squabble, squabble: What happened to collaboration?
We’ve watched U.S. and European politicians do little. Squabbling doesn’t really count as a productive activity these days. Playing politics looks pretty selfish. Procrastinating looks plain stupid. The crisis in Europe is a serious issue that requires a serious response. Most probably, one that involves world-wide collaboration.
The markets are going to force politicians to get their acts together. This isn’t the time to think regionally. The global economy is here, like it or not. It’s time to act for the greater good rather than protecting one’s own backside.
We live in a global world. Interconnected, with dependencies that aren’t always transparent on the surface of things, a large event in any one country or region has far-reaching consequences. Yet too many politicians are shouting, “Mine!” Toddlers in daycare show more skill in sharing and thinking about their larger community.
Warren Buffett’s belief that increasing taxes on high income-earners is the way to go has become popular with many people. There seems to be a growing feeling of community amongst some individuals. A feeling that it’s time to share the wealth, and that tax cuts for the wealthy have gone too far.
Agree or disagree with Buffett’s belief on taxes, he`s a man that’s been, to understate the obvious, fairly successful at what he does. No wonder he has something like superhero status amongst Berkshire Hathaway’s shareholders and the followers of what’s become the “cult of Warren”. Not to mention that he’s one of the biggest philanthropists in history. He also advocates that the wealthy should follow his example. He counts Bill Gates amongst his admirers and a fellow in philanthropic efforts.
Project Band-Aid: (It’s [not] just a flesh wound)
Solutions in Europe have been largely plastic. But Band-Aid’s are short-term. Germany is coming under increasing pressure to be a leader in Europe rather than dwelling on its own self-interests. Take a look at the share prices of German banks or the MCSI Germany Index down 28 per cent year-to-date.
The market’s telling us you can’t have your cake and eat it, too. You can’t create markets, sell to them and leave them, according to investors. Not without paying for the engagement ring, at least. And the price tag is more than three months’ salary.
What investors would really like to see is a unified Euro bond. Perhaps leadership in Germany (and Europe broadly) needs to think more about the greater good (including Germany) rather than more national self-interests.
After all, why create a broader community in Europe if when crises appear leadership is going to become nationalistic? Marriages are for better or worse. If any one nation in Europe thinks it’s going to skate away from the Europen crisis, it’s sadly mistaken. The fact is the interconnectedness of financial instituitons, financial transactions and myriad moving parts is not going to ignore Germany. It’s punishing its stock market along with those of other European countries. And inaction and lack of adequate response will make this situation worse.
President Obama’s under pressure as well. American politicians have looked just as ridiculous as their European counterparts. The inability to collaborate, to forge solutions and move forward is getting a lot of press. Markets gave the Operation Twist strategy a big thumbs-down within moments, and today’s activity in the markets reinforces that.
So, wait a minute … Where’s opportunity?
- Corporate profits are near record levels
- Corporations are in better shape than some governments
- Corporate bonds look better than some nations’ bonds
- Global housing bubbles have burst already (largely)
In Canada, we are fortunate to have a strong bond market, but in the U.S. and Europe, there are more than a few questions regarding bonds. However, during the last few days’ extreme market volatility, investors still threw their money into the U.S. dollar and Treasuries – liquidity foremost in their minds.
Bonds and dividend yields
Bonds have done exactly what they were supposed to do in this correction. They have provided income and have risen dramatically as investors ran for cover. With bonds yielding very low rates of return (despite functioning as insurance in portfolios) in both the U.S. and Canada, the situation seems better and better for strong dividend-paying stocks long-term. Recently, we saw the S&P dividend yield rise above the 10-year Treasury. In Canada, dividend yields have also risen dramatically. Your dividend yield is paying you to wait. Not bad.
The economic situation may be deteriorating; still, it’s hard to imagine that GICs are going to be worthwhile as an investment for anything other than short-term concerns in the current environment of low interest rates.
Hopefully, many investors have been following a strategic protocol of rebalancing their portfolios. If they have, they don’t need to worry as much about the volatility in today’s markets. They may have to wait for better returns, but at the same time, they’ll get paid to wait knowing they own solid companies with a history of dividend payments.
Holding dividend-paying equities is really important because it’s the end of the world as we know it. But it’s been the end of the world as we knew it so many times before. Past is prologue. Perspective is very persuasive.
In the end, dividends provide what more speculative investments can’t:
- A solid income stream
While the pain created by the Financial Crisis, and the current crisis in Europe is serious, investors who’ve followed prudent rebalancing strategies will be able to:
- Count bond and dividend payments as they sleep
And that’s probably the best measure of whether your portfolio accurately measures your ability to tolerate risk … being able to sleep at night.
It’s the end of the world as we know it (like so many times before), but from an investor`s perspective, a solid income stream might help us feel fine.
As if on cue, Warren Buffett announced today that Berkshire Hathaway would buy back its own shares.
Warren Buffett bought $4 billion worth of stock in the third quarter as markets slid, investors worried and pessimism gathered steam.
Written by johnrondina
September 26, 2011 at 9:13 am
Posted in Uncategorized
Tagged with asset allocation, Berkshire Hathaway, Bill Gates, Bond market, Canada, corporate bonds, Dividend, dividend-paying stocks, financial crisis, Germany, investing, investment portfolio, market volatility, Portfolio (finance), rebalancing, Stock market, stocks and bonds, Warren Buffett
It’s all about the cash (and being able to sleep at night) when it comes to the stock market correction: Finding optimism in the insomnia of the moment
Didn’t the Twist go out a long time ago?
Somebody should tell the U.S. government that half-measures hardly ever satisfy anyone. Doing the Twist may be the middle ground, but now is the time for leadership and focusing on one’s convictions.
Is the glass still half-full?
Cash on Corporate Balance Sheets
In “Too much cash on corporate balance sheets: So, does this mean we can expect higher payouts?”, I wrote about the Everest of cash sitting on balance sheets. Today, Thursday, September 22, as I write, markets are moving down aggressively suggesting the Fed’s doing the Twist wasn’t what the markets wanted. There’s still one overwhelming fact that we shouldn’t overlook:
• Corporations are sitting on mountains of cash
What are they going to do?
Since they’re not in the business of becoming money market funds, (though some companies are starting to look like balanced funds by the mounds of cash they’re hording [more on this in a moment], these corporations need to do something with all this cash. After all, just like investors sitting on GICs, corporations sitting on cash aren’t going to get much of a return on it.
Now, let’s Think Apple, for example.
Seems the apple’s full of cash. But Apple’s not a balanced fund. It’s a company. Not everyone’s enamoured of Apple’s strategy.
While a lot of this cash hording relates directly to our current economic times, it still raises the ire of many people. High unemployment, especially amongst students, doesn’t make people rejoice when they hear you’re sitting on $76 billion.
With that amount of cash on the balance sheet, it seems management at Apple’s got the Mayan calendar out and are waiting for the end of the world. If that’s their forward-looking scenario, an iPhone or iPad won’t be much use …
“Hi … Mom, dad, I just thought I’d say bye … The end is coming …”
Perhaps investors in Apple have more confidence in Apple’s future than Apple management does?
But let’s revisit what’s most important to remember:
• Corporations have to do something with all this cash
• And some are
Microsoft recently raised its dividend: One of many companies to do this. It’s about sharing the wealth.
The fact that Apple hasn’t issued a dividend seems like a strategic mistake. It will be interesting to see how long investors will tolerate so much cash on Apple’s books.
Since opportunity appears in times of crisis, it’d be foolish to forget that all this cash has to go somewhere eventually.
- Mergers, acquisitions
- Buying back shares
- Towards hiring the most important resource, people, as the economy improves
Part Two is here.
Written by johnrondina
September 23, 2011 at 12:26 pm
Posted in Uncategorized
Tagged with Apple, asset allocation, Balance sheet, Canadian investors, cash, Dividend, dividend-paying stocks, dividends, investing, investment portfolio, IPad, IPhone, market volatility, Microsoft, Operation Twist, Portfolio (finance), rebalancing, rebalancing your portfolio, Security (finance), Stock market, stocks and bonds
In the face of the typhoon (market correction), bend like bamboo
What is it about market corrections? Wise, rational people can become wide-eyed pessimists and conduits of fear in the face of steep market drops. Can you remember a time when you sold investments during a market correction and it turned out to be a wise move?
Investors ruled by a forest fire of emotions, fanned by the media looking to report the latest, most sensational story, rarely make wise decisions. Often, when the market is hitting new record after new record, they’re buying. But when the market turns the other way, and suddenly high quality companies are on sale and can be bought at excellent discounts, emotion-ridden investors are running for the hills or putting their heads in the sand.
Here are some facts that you’d do well to pay attention to. The study tells the sad tale of how investors, suffering from a bad dose of “Oh, no! The world’s going to end!”, make some classic mistakes while investing. In fact, what may be the most important aspect of your investment plan, after asset allocation, is dealing with the forces of rampant negativity that rear their ugly heads every time there’s a market correction.
Glued to the media, wide-eyed and beset with your worst fears for the economic future? It’s time to go for a walk. Fund managers wait for corrections to go out bargain hunting. Wouldn’t you be happy if the suit or new pair of shoes you wanted to buy were now on sale? Because that’s exactly what’s going on now: high quality, dividend-paying companies are on sale.
Investors need to do themselves a favour:
- Develop a thicker skin
- Stop dwelling on the investment media during corrections
- Stop chasing investment returns
- Ask yourself: since everybody’s talking about gold bullion (or whatever the flavour of the month is) right now, do I really want to buy it?
- Get a sound investment plan
- Stick to your plan
- Buy or sell investments when your asset allocation veers away from your planned allocation, and do it regularly
- Remind yourself that great, stable companies are not going to disappear
Further considerations that you should bear in mind:
- Remind yourself that Warren Buffett (and other smart money managers) are looking for bargains rather than making rash, panic-fuelled decisions
- Aren’t all the companies you wanted to buy when they were more expensive, cheaper now?
- The economy’s gone through corrections dozens of times before – this won’t be the last time (e.g., Latin American bonds, the Asian Crisis, the Tech bubble, 9/11, [Remember when people were talking about the Canadian peso?], the financial crisis, etc.)
- If you’re buying in the midst of this correction, or any, remember, you don’t need to throw all your money in at one time – you can also buy gradually, giving you a cushion and better prices should the market go down further
- There’s a place in your portfolio for bonds – do you have any?
- Revisit your plan yearly
If you’re still spooked after a hard, meditative look at your investments, maybe your asset allocation is too aggressive. Should you reduce your equity holdings somewhat? Reducing stock holdings amidst any correction is tricky. You’re probably going to be selling at the worst of possible times – maybe you should revisit your asset allocation model when things calm down a bit? (Have I mentioned stick with your plan and re-evaluate your plan regularly?)
The time for strategic thinking is before a correction and during one. When it seems that investment losses are falling out of the sky, too many investors forget their planning. Many have heard Warren Buffett’s “Be greedy when others are fearful” philosophy – slowing down and taking a breath during the bad news feeding frenzy will help give you some perspective on where you’ve been, where you’re at now and where you want to be.
Written by johnrondina
August 16, 2011 at 12:18 pm
Posted in Uncategorized
Tagged with asset allocation, diversification, dividend-paying companies, dividend-paying stocks, emotional investing, financial crisis, gold, high quality companies, investing, Investment, investment goals, investment returns, investment risk, investors, market corrections, market drops, Market trend, Portfolio (finance), rebalancing your portfolio, Stock market, stocks and bonds, Warren Buffett