Posts Tagged ‘dividends’
Investing: ‘What ifs’ and ‘maybes’ lose out to long-term planning
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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It was the best of times for dividend investors
In my last post, I discussed the complicated world of dividend payments.
(It may help to refer to my last post on dividend-payers and its predecessor before reading this new one.)
Continuing from the previous, when it comes to dividend payments, what we have to remember is:
Since the dividend payments have already been paid and taxed (if held outside a registered account), then your adjusted cost base (ACB) for accounting purposes, and, more importantly, for paying taxes on your investments, already takes the dividend into consideration.
What the charts and ACB don’t tell you
When you look at charts, since they don’t add the dividend amounts on to the listed return, it looks like you made less than you did. You have to take the return on the investment plus the dividend it paid to get a real picture of your investment.
In a great year, like this last year, it doesn’t matter as much, but in years where the stock only appreciates a little, say 1 or 2 per cent, a 4 per cent dividend looks great.
If you bought 100 shares, originally, and reinvested your dividend payment each time it was made, those payments will become part of your ACB. Let’s use a very simple example to review how this works.
Okay, one more time, from the top
If you held 100 shares and received four dividend payments that equalled 1 share each, you’d now hold more shares:
100 + 1 + 1 + 1 +1 = 104 shares
If the share / unit price were $62, your investment would be: 104 shares x $62 = $6,448. The dividends paid in 2013 will be taxable. In the example above, three of the dividend payments will be taxable on your 2013 tax statement while one of them would have been paid the year before since it was paid in 2012. (Again, this is only true if the investment is held in a non-registered account.)
In Paid for faith and paid to wait: Have you thought about this regarding your dividend paying investments?, I discussed what happens with dividend-paying stocks. Key is the way dividends are accounted for (in a non-registered account, e.g., outside of an RRSP or TFSA).
When a dividend is paid (refer back to the example above), it becomes part of your cost when reinvested because you have bought new shares or units. So, in the above example, where you hold 104 shares, all of those shares are you’re ACB.
$6,448 becomes your ACB. Not the $6,200 of your original investment. The $248 of dividend payments are added to your cost.
This works in your favour at tax time:
If held outside of a registered account, the dividend payment is tax preferred and you’ll pay a lower rate of tax than if it were normal income. For example, you’ll pay a higher tax rate on your salary, on GICs and other deposit investments which pay out normal income.
Let’s take a quick look at history … Way back in December 2011, I posted about the favourable climate for dividend-payers – especially U.S. dividend stocks. You’d be a happy investor right now if you’d made investments in quality dividend stocks back then — U.S. or Canadian.
It was the best of times (for dividend investor returns): the irrefutable metric of the past
As always, the future is unwritten, but the past is fact because we can measure it. I began this series of posts a while ago. If we update it to the time of writing, we find:
One of the most conservative of indices, the Dow Jones Industrial Average (DJIA) returned approximately 33 per cent since that time. The broader S&P 500 returned about 47 per cent (although the index does have a lower dividend payout and is somewhat ‘growthier’). Still, it was indeed one of the best of times for dividend-payers.
Royal Bank? About 62 per cent.
Even more impressive? Those returns quoted above don’t include dividend payments. Your return including those payments would’ve been even higher.
Here’s a chart showing dividend activity for Royal Bank over the same period of time:
For Canadian investors, it might be interesting to consider that the Canadian dollar dropped in value over this time as well. If you held U.S. investments, the strength in the U.S. dollar added to your return on those investments. Since its recent peak in July 2011, the Canadian dollar has dropped from $1.05 U.S. to about 90 cents U.S. (a drop of approximately 16.7 per cent if you want your 90 cents to grow back to 1.05).
The change in currency added about 6 per cent to the DJIA’s return for Canadian investors and about 8.6 per cent to the S&P 500.
Not bad.
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This work and all work on this blog is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.
NB: Royal Bank stock used for illustrative purposes.
Image: Flickr, Daily Dividend.
Related:
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Paid for faith and paid to wait: Have you thought about this regarding your dividend-paying investments? <<JohnBlog – johnrondina.wordpress.com
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Help! I can’t understand if I’ve made money with my dividend-paying investments! << JohnBlog – johnrondina.wordpress.com
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The grand parade of future dividends << JohnBlog – johnrondina.wordpress.com
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One stock is the loneliest number when it comes to investing << JohnBlog – johnrondina.wordpress.com
Paid for faith and paid to wait: Have you thought about this regarding your dividend-paying investments?
In Help! I can’t understand if I’ve made money with my dividend-paying investments! I blogged about the difficulty some investors have with dividend payments. What are dividends? How do they function?
Using the dividend data from my previous post …
If I made money, why doesn’t it show?
It does. You have to understand what’s happening when you get paid that dividend.
(You might want to review the previous post above.)
Here’s what it looks like:
Each time your dividend of .63 cents per share is made (.63 cents x 100 shares = $63), your $63 dividend payment is subtracted from the share or unit price of the investment. If the share price was $62 when the dividend was issued, and the dividend was issued at .63 cents then the share or unit price is now:
Share price – dividend issued
New share price:
$62 – .63 cents = $61.37
The new share per unit price is $61.37 ex-dividend (after the dividend payment is made).
Paid for faith = Paid to wait
Some people have trouble understanding this change in the stock or unit price of the investment. The point is, the company has paid you for your faith in investing in it. (In our time of give-it-to-me-right-this-second, faith in the long-term future is a sadly diminished concept.)
The company has also paid (most probably) millions of other shareholders, so the share or unit price must go down by the amount paid out as a dividend. This affects your Adjusted Cost Base (ACB).
The dividend has been paid to you. You’ve already received it. It’s your choice whether you reinvest it into that same investment (over the long-term a good strategy) or take it in the form of cash and buy another investment with it — or spend it. However, spending this cash goes against one of the mantras of investing, which is, reinvesting your capital for the long-term.
What are your goals?
Cost is relative
Because you were paid the dividend amount, and if that amount is held outside of a registered account, e.g., an RRSP, the dividend payment becomes part of your cost:
$62 + a dividend payment of .63 cents as above makes your ACB: 62 + .63 = $62.63.
If you received four dividend payments of .63 cents that would be 4 x .63 = $2.52. Now your ACB would be $62 + $2.52 = $64.52.
Time in
This is where people get confused. Because the ACB includes the dividend payouts, the payouts that are recent skew your cost base. The new dividend investment hasn’t had time to make much money, and so, it reduces the “look” of the performance of your shares.
Sometimes, especially if it’s a new investment, it looks like you’ve made less than you have.
Remember:
- That dividend payment may add to your ACB, but it is money you “made”, money you didn’t have before
When you have a newer investment or in a declining market, this effect is amplified. But if you have a quality investment, this is short-term thinking. Resist short-term thought.
Declining market? New investment?
- Your dividends are being paid out, and you’re buying at cheaper prices if you’re repurchasing stock / getting new units of a fund during a correction (the difficulty is trying to understand when the correction will end)
- With a new investment, you haven’t had much time to profit, so the dividend payments are going to add to the ACB and make it look like you’ve made less than you have unless you remember you received that dividend payment every month, quarter or year
- If you project out over three, five or ten years, you get a lot better idea of how those extra shares you reinvested in through your dividends increased over time (assuming an increasing market)
- Even if you received your dividend as cash, you still got something you didn’t have before
Think like a business owner when it comes to your investments.
Life, business, investing – it all moves in cycles. Have the patience to wait, and the wisdom to filter out hype and noise.
Like the recurring circle of kids on their way back to school in fall, there are certain near-immutable laws and cycles that investors must consider.
Whatever the stock does, the dividend payment’s in your pocket
When investors sit down to look at their statements, even if their accounts are registered, the ACB appears to make it look like they haven’t made money in the short-term. But often, they have.
Remember, if the investment paid out a dividend this year of, say, 4 per cent, you made that 4 per cent. The investment would have to drop 4 per cent (of course, there are management fees to mutual funds and ETFs, and you have to subtract those*) for you to break even.
To sum up:
- Remember, the share price will be reduced every time a dividend payment was made by the amount of the dividend payment (but you still received that payment in cash or through the purchase of more shares)
- You now own more shares because of the dividend payments
- Because you own more shares, if the price of the investment continues to go up, those additional shares will increase in value
It’s important to note that during real dividend payments (rather than our example), there may be more variation because of the numbers involved, but this example will give you an idea of how dividend payments operate and what a stock or unit price looks like ex-dividend (after the dividend has been paid).
In a year like this last, the returns have been excellent (the Dow Jones Industrial Average and S&P 500 are up over:
- 26 and 30 per cent respectively since the low of June, 2012, and that’s without including dividend payments**).
You can expect to have made money even on some of the new money invested through the new dividend payments into new shares or units.
In my next post in this dividend series, get an example of what this looks like, including a chart.
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This work and all work on this blog is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.
Image: Flickr, Daily Dividend.
* Mutual funds subtract these fees before flowing gains to investors
** At the time of writing, and, in U.S. dollars
Related:
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Help! I can’t understand if I’ve made money with my dividend-paying investments! << JohnBlog – johnrondina.wordpress.com
-
The grand parade of future dividends << JohnBlog – johnrondina.wordpress.com
-
One stock is the loneliest number when it comes to investing << JohnBlog – johnrondina.wordpress.com
Help! I can’t understand if I’ve made any money with my dividend-paying investments!
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:
- Monthly
- Quarterly
or,
- Yearly
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.
Why?
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?
Yes.
And every time the dividend was paid out, didn’t you get additional shares in your investment?
Yes.
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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Is it better to have invested, and lost, than never to have invested at all?
Well … 
It certainly helps you achieve your investment goals if you own investments that have a chance of getting you to your destination.
Take a look at the following charts and ask yourself two questions:
- If you had bought during the major dips, would it have benefited you?
and
- How would you have done with your money in low interest instruments according to the charts below? *
Example fund vs. 1-year GIC
Example fund vs. 5-year GIC
It’s clear that the most conservative investments wouldn’t have served you as well since the inception of this fund. What investors would do well to remember is that GICs lock your money in until maturity while mutual funds, ETFs and stocks are more liquid, generally.
Not to mention:
- If you had bought during the dips
and
- If you had rebalanced regularly
… you’d have done better than the chart shows since you would have lowered your cost or ACB and generally bought lower and sold higher.
So …
Do you have a plan, a strategy?
What is it?
Remember a few weeks ago when the news about Europe was so bad that optimism seemed naive?
I’m paraphrasing myself from a previous post. I talked about learning to harness your fear. There are always reasons you can find for Armageddon if you look hard enough.
People want stability. At times, markets and the business cycle are anything but stable. Above, you can see that during the worst stock market correction in most of our lives, an example of a balanced, dividend-based portfolio outperforming the most conservative of investments, GICs, by four times or more.
When the doom and the gloom gets really thick, many investors feel paralyzed. But that’s exactly when great investors look for opportunity.
During the doom and gloom, markets often decide to have a good bounce.
Isn’t that counter-intuitive?
Actually, it’s pretty normal. If there were no walls of worry to climb, there’d be no bull markets. In “Wait a minute. There’s some good news re the markets?” I blogged about how investors often miss the opportunity in the end-of-the-world-as-we-know-it scenarios.
I posted some stark stats in “Why you should consider new investments now”.
Since we’re supposed to be strategic about long-term investing, let’s ask ourselves a question again:
When the market takes a substantial dip, is there more chance that it’ll rise or keep falling on average?
In “Don’t Panic”, I also talked about managing fear while investing. Learning to harness your fear is important in sports. Imagine you’re taking a penalty. It isn’t easy to stand there and score in front of 70,000 people.
Why should it be any different when you invest?
What’s the market going to do?
No one knows. There are a lot of educated guesses, research, charting, but no one knows.
Accept it.
Just as, if you decide to start a business or enter into any kind of relationship, there’s no 100 per cent satisfaction guarantee.
Business, economic news, the process of investing, continues to flow. It’s a river. There are rapids. There are waterfalls.
There may even be a couple of Niagaras out there.
But if you look at history, you’ll see that there were always those who pushed and went further. For every time you encounter end-of-the-world-scenarios, you’re going to see that someone steps up, looks at the recent correction in the market and says:
Hey, there may be some value here.
Accept the psychology of the market. But get a plan.
Is the bad news over?
Here’s what I said in that previous post:
We’ve come through a tough time. We’re not out of the woods yet, but if you’ve been sticking to a sound investing plan, you’ve taken advantage of the weakness in the market.
The bad news about being an inactive investor in 2011
If you had been sitting in cash only:
- You missed a very nice rise in the bond markets
and
- A great opportunity to reallocate investments to stocks
You might have taken advantage of a great time to buy equities at lower prices and participated in the rise of the bond markets.
Or, you might have asked the more unlucky question:
What happens if the world ends?
It might be better to ask:
What happens if I think strategically about my investments?
What happens if the world doesn’t end?
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A simple way to arrive at the right asset allocation for your portfolio
Plan like a pension fund manager when it comes to your investment portfolio
Asset allocation: Diversification is king
Click here for articles about dividends/dividend-payers.
* Example fund chosen out of large bank balanced funds with a dividend bias. Fund used purely for illustrative purposes with a time period of less than ten years since the effect of the financial crisis should have been greater during this period.
Chart source: Globeinvestor.com
The grand parade of future dividends
“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.
What should the average investor focus on? The parade of companies increasing their dividends, or the end of the world scenarios that continue to make headlines?
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.
Surprise, surprise: BMO Scotiabank increase dividends
BCE profit climbs on strength in wireless, media (not to mention the dividend increase)
CN is the latest to increase dividend with management sounding confident about the Canadian economy
TD and RBC continue the grand parade of dividend hiking
JPMorgan raises dividend and buys back $15 billion in shares
Wells Fargo raises dividend and plans share buybacks over next two years
Apple finally issues dividend, but it’s puny
Cash, corrections, the end and feeling fine
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.
Where?
- Dividends
- Mergers, acquisitions
- Buying back shares
- Towards hiring the most important resource, people, as the economy improves
Part Two is here.
Bad news, gold and dividends: When it’s pouring through the roof – what’s pouring into your portfolio?
In “Gold Riot”, I wrote about gold , discussing how it might be overvalued. My post was a little early.
We recently saw a couple of interesting days in the gold market while silver corrected heavily. It’s rarely a good time to take a position in a commodity after an enormous run up. After all, when investments get sold off, there are some powerful players out there, and they can cause some big price movements. For example, Goldman Sachs.
Some investors are now taking positions at better prices, still, the behaviour of gold and other metals has melted some hearts. Newbie investors heavy on silver must have had some palpitations during the spectacular volatility.
With everyone talking about gold, and with it seemingly pouring bad economic news at the moment, how do dividend stocks fit into the picture?
My focus is more on average investors than speculators, and the average investor generally has less of a stomach for volatility. Many investors aren’t even aware there’s quite a difference between gold stocks and gold bullion and how they both perform. There’s a lot more volatility in gold stocks, and gold stocks’ performance is based on the outlook of the underlying companies. (For more on this, see the above link “Gold Riot”.)
While silver was making the headlines for all the wrong reasons, dividend-paying stocks have outperformed. “Get paid to wait” is the mantra of investors in dividend-payers. During difficult periods of volatility, those dividends are smoothing out some of the volatility in price movements. When comparing the iShares Dow Jones Canadian Select Dividend Index to gold as a commodity, gold still did pretty well if you bought early, however, many bought very late — rarely a good thing. It would have been better to wait for a correction.
iShares Dow Jones Canadian Select Dividend Index Fund, S&P TSX Global Gold Index and XIU (nearly a proxy for the S&P TSX 60)
Many investors don’t have the time or don’t want to spend the time glued to the markets. While nothing is ever guaranteed with any investment, dividend-paying stocks will give you a little more comfort. The highs may not be as high, but the lows are also not quite as low.
When news is uniformly bad, remember that stream of dividend payments pouring into your portfolio. The managements’ of dividend-paying companies believe enough in their businesses to share some of the wealth with you.
So how did these asset classes make out? Dividend-paying stocks returned more than 10 per cent while gold stocks were down 15 per cent over the last year. Gold stocks have disconnected from bullion for now as regards performance. It happens.
Bullion had a good return at about 18 per cent but with a lot more volatility than dividend-payers. Gold stocks are potentially even more volatile. My target audience is more the average investor, so I won’t over complicate this — gold bullion has had a lot of its recent increase because of bad economic news — this is a bit of a simplification. More is involved in the price of gold, but does the average investor need complication? What is important is that if the news outlook changes, so might the performance of gold.
Remember, if you own a broad-based Canadian equity fund, it probably has somewhere between 15 – 20 per cent of its holdings in gold or other mining stocks. How much gold do you want?
Better yet, how much gold does a proper weighting allow for? If you’re not a speculator, keep your gold holdings manageable at 5 – 10 per cent of your total portfolio. A good fund manager has a lot of intelligence when making decisions on gold stocks. Do you? If you’ve decided to hold a significant weighting in gold stocks or bullion, you have become a speculator. Do you have time to watch your holdings with the eye of a fund manager or a speculator? Probably not.
An investor holds shares in a business and shares in business ownership. The average investor would do better thinking like a business owner rather than a speculator.
Smiling through your dividends
Seeds that grow
(Please see update on U.S. dividend stocks at end of article.)
I recently blogged about why dividend-paying stocks deserve their place in your portfolio. If you enjoy high 
speculation, these may not be the stocks for you. You may get more of a kick out of the potential plunges that could affect your portfolio, however, since the financial crisis, the stomach for significant ups and downs doesn’t appear to be as high for the average investor.
If you’re looking to have a portfolio with:
- More protection against corrections
- Solid earnings that are shared with investors
and
- A history of outperformance during difficult economic periods
then dividend-payers are for you.
But let’s see if we can walk the talk regarding these investments. A quick look at the performance of dividend-payers over the last six months:
- The Dow Jones Canada Select Dividend Index is up over 15 per cent
- Over the same period of time, the DEX Universe Bond Index is down about 1 per cent
While there’s definitely a place for bonds in your portfolio, it’s hard to argue against the numbers above.
Dividend-payers have been kicking butt.
Interested in what dividend-payers can do for you portfolio?
Looking for a historical understanding of dividends in tough times?
Then go through the rabbit hole.
Follow up:
How about U.S. dividend-payers?
Dividends pay dividends
One of the most proven investments is dividend-paying equities.
When times are tough and growth is low, dividend stocks outperform. It’s an old maxim, but it’s great to see a recent report find exactly that, yet again.
Peter Buchanan of CIBC World Markets wrote that Canadian dividend stocks beat the S&P/TSX Composite Index by an average of five per cent in years of low growth – U.S. dividend stocks top the S&P 500 by more than nine per cent. The report reinforces the dividends in tough times philosophy.
It’s said that past is prologue.
Consider dividend-paying equities.
JohnBlog 