Investing Comments

See copyright and disclaimer information.

This Blog is for Educational Purposes

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. For a list of the stocks for which I have put up spreadsheets on my web site click here.

Dividends and Special Dividends

Friday, February 26, 2010

Jennifer Dowty wrote a column Dividend Paying stocks that I found very interesting. Jennifer is Associate Vice President and Portfolio Manager MFC Global Investment Management of Manulife. See her Bio. The title of the article in Investor’s Digest was Dividend Stocks: Buy, Hold and Collect. The Investor’s Digest is a publication of MPL Communications. See publications on theirsite.

Her picks were stocks that not only increased their dividends, but also have special dividends. She said she screened over 600 companies to come up with 12 picks. There are only 3 on this list that I know about and have reviewed. Over the next while, I will be doing spreadsheets on these stocks and reviewing them.

Special dividends are great, because they can add considerably to the return you receive on a stock. However, there can be problems with them. The first is that you cannot depend on them. The problem maybe just as you really need them, they are not paid. Special dividends are only paid if a company can afford to pay them. Therefore, the chances they will not be paid in a recession are quite large.

The following were Jennifer’s picks: Armtec Infrastructure Income Fund (TSX-ARF.UN), Computer Modelling Group Ltd. (TSX-CMG), First National Financial Income Fund (TSX- FN.UN), Genivar Income Fund (TSX-GNV.UN), Gluskin Sheff + Associates Inc. (TSX- GS), Keyera Facilities Income Fund (TSX-KEY.UN), Le Chateau Inc (TSX-CTU.A), MCAN Mortgage Corporation (TSX-MKP), McGraw-Hill Ryerson Ltd (TSX-MHR), North West Company Fund (TSX-NWF.UN), and ShawCor Ltd. TSX-(SCL.A).

Dividends are often paid based on earnings or cash flow. For example, a company decides to pay out a certain percentage of its earnings. This can cause dividends to rise quite substantially in good times. The problem also is that in bad times, the increases are lower or non-existent. Dividends could also be lowered or stopped. If you have been following my blog, you would have seen dividends in the first year of our current trouble increase still quite well. However, in 2009, dividends increases were much fewer and some of my company’s lowered or temporarily stopped their dividends.

Other things can affect dividend payouts as well. The most common is the Asset/Liability Ratios being too low. Often when companies borrow money, they sign debt covenants. Basically, they agree to have A/L ratios at a particular level. That preferred ratio is usually 1.50, but it could also be at another ratio. That is why I show Liquidity (Current Asset/Current Liability) and Asset/Liability Ratios on my spreadsheets. A low ratio can affect the payment of dividends.

Another think that could affect dividends or their increases is that the company needs money for some reason. It could be that they want to expand their business or they might want to update or need to repair some existing facilities. If you are depending on dividends you should paid some attention to a company’s announcements and also read some of their annual statements that refer to future intentions.

It is great to review someone else’s picks. You never know what gems might appear. Besides, the world continuously changes. In 50 years time, what are great stocks now might no longer exist. Same as the stocks of 50 years ago, few are around or are the same anymore.

Investing In What You Do Not Know

Monday, February 22, 2010

Personally, I do not think that you should be investing in Mutual Funds or ETFs without an understanding of how stocks and bonds work. I would think that the best why of gaining knowledge is to invest in some stocks or bonds, even if on a very small scale. Some people can read to understand these investment vehicles of finance, but hands-on practice is still probably a necessity. There is nothing like practical experience to learn something.

It is not so much that you should not invest in what you cannot afford to lose, but what you cannot afford to lose in the short term. There is going to be fluctuations in the short term. You should plan on a 3 – 5 year period to exit a Mutual Fund or ETF portfolio. So, if you are retiring in 3 – 5 years, you should be putting into cash the money you will need at retirement. I live off my dividends, so I have cash and future dividends to last roughly 5 years. The interest on cash and MMF funds could make you cry. However, this is better than having to sell assets at a loss because you need the money to live on.

I have talked to a lot of people who have invested in Mutual Funds and ETFs because they do not understand the underlying assets. They seem to think that all gains made is due to them, but all loses are a catastrophe and are someone else’s fault. They wonder where their money has gone, but they never asked where it came from when the value of their assets went up. Markets normally fluctuate. The capitalistic market place is boom and bust. It has always been. It may have been caused by stupidity in Wall Street this time, but if it were not, the bust would have been caused by something else. This is also looking at investing in the wrong light. What you need to look at is the long term, and in the long term, equity investment is good.

And, there is nothing wrong with investing in Mutual Funds. (I would not do this personally, but that is another story.) The point is if you are not willing to do the work to properly invest the money yourself, the next best thing is to pay someone else to do your investing. What I disagree with, is for a person to allow someone else to invest for them into something they do not understanding. If they had at least some understanding, the current recession would not have been a surprise. Recessions are common. We have them all the time. With any sort of historical perspective, investors would know that.

My guess is that most people, who are complaining about losing money in this latest recession, invested in things they knew nothing about. If you cannot afford the risk of the whole market, you should be in stock that used to be called “widows and orphan” stock. I do not believe they still exist, but you can buy conservative, dividend paying stock. They would be low risk stock from well know firms that pay good dividends. These are unexciting stock and they are generally ignored, especially in bull markets. Most mutual fund companies call funds containing these stocks “Income Funds”. I do not know why, but they do.

So, please, if you are investing in Mutual Funds and ETFs, get some education about what it is you are investing in. Do no invest with no knowledge and then whine about your investment when things go wrong. It is annoying. But I guess the real problem is, I have heard this all before. Every recession it is the same whine about investments going sour.

It seems to be every decade we have a recession and every time people who have invested in what they do not understand whine about how it is not their fault they lost money, it is someone else’s fault. If investors learn nothing in this recession and do not take responsibility for their investments, I will hear the same whine in the next recession also. It is annoying.

So, What If The Volitity, Bear Market Is Not Over

Thursday, January 15, 2010

There have been 5 and 10 year periods in the past when the stock market has had little in the way of capital gains. What have I done? I have collected dividends. Some years the only returns you receive are dividends. This is the reason that I buy dividend paying stock.

The economy can go to hell in a hand basket, but can you image that you will not buy food, or not use electricity? Can you image that everyone will be unemployed and there will be no cars on the road? I cannot image this will happen. Even if we have a huge terrorist attack, and even if our economy takes a lot longer to recover, I cannot image these things happening.

My investment suggestion is to buy good dividend paying stock and wait things out. If things work out better than a lot of the scenarios that I have been reading, how can you lose with such stock? You may not get the big score, but you will also not lose your shirt either.

The think is no one can predict the future economy or the stock market. The problem is, like the weather, there are far too many variables to consider. Also, with the economy, big things can come at us from somewhere out in left fields that no one really expected. So, if you want to invest, get yourself some nice little dividend paying stock from a company that makes real stuff. You can then wait and see how the future will unfold. The thing to remember is that life always goes on, no matter what happens.

The other thing to talk about is probably gold. I know a lot of people are pushing it. What I do not like about gold is that is it non-income producing asset. The other thing is that in the past, gold has all of a sudden, made huge moves. People are pushing gold like they did in the last gold bull market. Then, all of a sudden, the price of gold dropped. This is not a conservative investment.

At least with other resources we use them. We use oil for cars, trucks and airplanes. We use other metal to build things. However, we like gold because it is pretty and it does not tarnish. Gold’s price has a lot to do with how we feel about it. It also has a lot to do with how we feel about our currency or the US’s currency. It is more emotional than the stock market.

I know Asian people like to keep gold as a store of value, but they generally keep it in coins or jewelry. They also have this habit as they have had a much longer history than we have, especially when it comes to currency. It was autocratic rulers that muck around with their currency and this is why they like gold. People of the democratic form of government do not tend to treat gold in the same way. This applies especially to those of European descent.

So, again I will say, to wait out the current economic situation, buy some nice dividend stock of a company that makes real things.