Investing Comments

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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.

Buying Companies, Not Stocks

Tuesday, November 11, 2011

I had just reviewed Finning International Inc (TSX-FTT). See blog entries dated November 2011, click here or here. The one that caused questions was part 2 when I talked about stock price and was this company a good buy or not. I had also been talking about a book review by The Loonie Bin Blogger on the previous Saturday. See this at blog.

My comment on the above book review had to do with how you view your purchases in the stock market. Are you buying a company or a stock (and, of course are you gambling)? I still think that your view of the stock market determines very much how you look at the stocks you buy. But today, what I want to discuss is between buying a company and buying a stock.

When looking at the current price of Finning International yesterday, I commented on the fact that it passed two of my tests regarding whether or not the current stock price is a good one. What I found was that the stock price was reasonable considering the current Price/Earnings Ratios and the Graham Price.

When I looked my other two tests, the results were different. The dividend yield was currently higher than the 5 year median dividend yield. Looking further, I could see that the dividend yields have been unusually high over the past 5 years. The 10 year median high dividend yield was lower at just 1.56%, than the current dividend yield of 2.32%, so this put the current yield in a more favorable light. So, really this test is fine.

However, you cannot say the same thing about the Price/Book Value Ratio test. Here I got a 10 year median P/B Ratio of 2.37 which is 23% lower than the current P/B Ratio of 2.92. This suggests that the current stock price is not low. I probably just hinted at the problem rather than really stating it with talking about the book value going down and the Dividend Payout Ratios for earnings going up.

The problem is that they are not only maintaining their dividends but are continuing to increase them when they are not doing well in earnings. Yes, I know, companies are reluctant to stop dividend increases, and heaven forbid, reduce dividends. The main reason for this is that investors tend to punish them heavily as far as stock price is concerned, when this occurs. But, I believe that this has a great deal to do with the lack of foresight with dividend investors. Also, I believe it also has to do with the fact that they are buying a stock, rather than a company.

I dislike my companies to muck around with my dividend payments as much as the next person. However, I do like the companies I invest in to act prudently. The question, to me, is Finning International acting prudently? Or, are they gambling, that business will improve and future earnings will once again be good coverage for their dividend payments?

Far be it for me to criticize a relatively good company. However, I do think that Finning International is not acting prudently. It is not that I think their gamble will not work, because it probably will. If I had stock in this company, I would be holding rather than selling. However, I do think that they are not acting prudently and they that their action might well delay the recovery of Finning International when the economic climate changes for the better.

As a dividend investor, I expect that from a diversified portfolio investing in dividend paying companies that my dividend income will go up over the long term. My experience has been for this to happen. My dividend income has never decreased, but the increases have slowed down when we have recessions. Some companies lower their increases, some stop increases and some decrease or suspend their dividends.

I, of course, review companies when they stop increases or decrease or suspend dividends. But what I ask myself is do I buy, sell or hold. Is a company doing the prudent thing for the long term viability of the company? I will sell if I think a company has difficulties that they cannot or cannot easily overcome.

However, if a company cuts or suspends dividends prudently in an obviously viable company, I will not sell. I have even been known to buy when I company has been unfairly punished for acting prudently. I want companies I invest in to act prudently. I am investing in a company and I am investing for the long term.

So getting back to Finning International as I said above, if I held the stock, I would probably not be selling as I think that it will recover just fine. However, I personally would not be buying this stock either.

Reasonable Stock Price

Friday, December 21, 2011

The first rule of investing is “do not invest in things you do not understand”. For dividend paying companies this could translate into do not invest in a company where you do not understand how they make their money.

In regards to Dividend Payout Ratios, do not invest if a company cannot afford their dividends. I am not talking about one losing quarter or year, I am talking about when a company time and time again has dividend payouts it cannot afford, or continues to pay dividends when it appears that they can no longer afford to pay at the current rate or even pay any. Pay special attention to DPR in references to Cash Flow.

Another mistake investors make is to look only at portfolio value. You should be looking at cash flow. It is only cash flow that you can spend.

Of course, the thing I want to talk about today is paying a reasonable price for a stock, and hence the title of this article. You are lucky if you pay a really low price for a stock, but although this is very nice, it is not what is always possible. However, I do suggest that if you cannot pay a reasonable price, you should forgo buying a stock and for a more reasonably priced one.

What I look at to determine is a stock price is reasonable is Price/Earnings Ratio, Graham Price, Dividend Yield and Price/Book Value Ratio. You have to look at relative as well as absolute price. I personally think that relative ratios are more important than absolute ratios. I consider absolute ratios only when the relative ratios are way out of line. Other people use different tests than I do, but I am comfortable with the method I have.

Looking at the P/E Ratio to determine if a stock is at a good price is one of the most common things that investors do. Looking at a 5 and 10 year median P/E Ratio can give you a good idea what is considered to be a relatively high or low current stock price. A reasonable P/E ratio can vary by stock, the sort of company a stock is or type of market we are in.

A particular stock may have a premium or higher P/E Ratio than others in its particular industry. This would be because investors think a stock is a “best in class” stock. An example of this would be Enbridge (TSX-ENB), which some analysts have suggested it should have a higher P/E than other pipeline companies. Tech stocks often have higher P/E Ratios than other companies. Our current market is quite low currently, but some companies and sectors are harder hit than others.

To see yesterday’s P/E Ratio and Dividend yield for the TSX index, go to TSX Money, click on TSX Market Activity and then “Indices & Constituents”. Reuters is also an interesting site as it gives, not only a stocks P/E Ratio, but also the current P/E Ratio for the Industry and Sector a stock is in. See Reuters. For Canadian Stocks, put “TO” after stock symbol, so Emera (TSX-EMA) would be EMA.TO. (Please note that Reuters is very much American market orientated.)

I have already talked about P/E Ratios. See my site for information on Price/Earnings Ratio. As I understand Price/Earnings Ratios, 10 and below is consider low, 15 – 20 is considered normal and 25 or 30 is considered high. This is just a rule of thumb. I generally compare a stock’s current P/E Ratios, using earning estimates for the year with the 5 and 10 year median P/E Ratio of a stock. I like a stock to be around the median P/E Ratio and this I think would show a reasonable price.

The Graham Price is named after Benjamin Graham who is famous for writing book called “The Intelligent Investor”. I have also written about this subject before see my site for more information on the Graham price. Here again, what I like to see, for a reasonable stock price is the current difference between the stock price and Graham Price to be close to the median difference. So, if the 10 year median difference between the stock price and the Graham Price is 5% and there is a 1% current difference, the stock price would be reasonable. On an absolute basis, you would want a stock price at or around the Graham Price.

The next test I use is the P/B Ratio. I look at the 10 year median P/B Ratio and compare it to the current P/B Ratio. Ideally, you would want to see the current P/B Ratio around the same as the current P/B Ratio which would point to a reasonable stock price. A good or cheap stock price would be if the current P/B Ratio is 80% of the 10 year median P/B Ratio. On an absolute basis, a current P/B Ratio of 1.00 shows a very good stock price as it means that the stock price is equal to the book value of the company.

The last thing that I look at is the Dividend Yield. Dividend yield depends on the philosophy of a company. Some like to and can give out good dividends. The problem if the dividend is too high is that the company will have no money to expand. However, if the company is a mature company, it may have no need for expansion money and can distribute most of the cash it earns.

Personally, I like to see a company’s dividend yield that is higher than the 5 year median dividend yield and this would point to a reasonable current stock price. A very good stock price would be when the dividend yield is higher than the 10 year median high dividend yield.

A couple of points I look to make here. I also like companies that increase their dividends consistently (but not necessarily yearly) more than the rate of inflation. (Background inflation tends to be at 3% per year; so basically, I want a company with 5 and 10 year dividend growth at 3%, at the least.) However, if a company is paying out a dividend yield of less than 1%, I would question if the company is really a dividend paying company. On the other hand, if the yield is too high, you would have to wonder if the dividend is sustainable.

Before you buy a stock, you need to check out Dividend Payout Ratios. Analysts talk about DPR for Earnings at 60% and below and DPR for Free Cash Flow at 80% and below and 40% or lower for Cash Flow. The best companies have cash flows that are higher than earnings. I have talked about DPRs before, see my site for more information on Dividend Payout Ratios.

Another thing you might want to consider is the company’s debt rations. I have also talked about this before. See my site for further information on Debt Ratios.

Another thing that I should point out is that the current P/E Ratio and the current Graham price use the earnings estimates for this year in their calculations. The Dividend yield and the P/B Ratio use no estimates.

I do not wait around for a stock I like to get to a reasonable price. If I want to buy, I will buy something else. There is always something at a reasonable price.

Stocks that Raise their Dividends

Wednesday, September 7, 2011

Stocks that Raise their Dividends What I want to talk about today is stocks that raise their dividends yearly or on a regular basis. I follow some dividend lists that show stock that have raised their dividends yearly for a number of years. Both the qualifications for these lists and the stocks on these lists are always changing.

However, just because these lists are changing, it does not mean that they are not useful. They are an excellent place to start to look for dividend paying stock that increase their dividends on a regular basis. The dividend lists that I follow of Dividend Achievers (see resources) and Dividend Aristocrats (see indices).

As with using other filters to find good stocks, you have to be very careful about stocks on such lists. Most stocks are fine, but there are always ones that are not. There are also fine stocks excluded from these lists. I think that Indxis had recognized some problems with their lists because now they not only have a Canadian Dividend Achievers list for Canada, but a Select Canadian Dividend Index list.

However, they do not do this for US, UK or International stocks. The lists for other areas only have achievers lists. The new Canadian Dividend Index has more stocks as they are including banks and other financial institutions. They include all large companies that have increased or maintained their dividends for the last 5 years.

The other interesting thing about the Indxis lists is that for US stocks, they must have increased their dividends year for 10 years. Other areas, including UK, Canada and International stocks must only have increased their dividends for 5 years.

One stock that I feel is problem stock that is on these dividend achievers lists is AGF Management. I do not think that this company has recovered from the 2000/1 bear market. The result of their continuation of increasing dividends is higher Dividend Payout Ratios. (See my site for information on Dividend Payout Ratios). Their 5 year median DPR on earnings coming into 2001 is 16.82% and for cash flow was 7.15%.

The 5 year median DPR coming into 2010 on earnings was 67.38% and on cash flow was 27.71%. The DPR for the financial year ending November 2010 on earnings was 79.23% and on cash flow was 51.14. The DPR for the financial year ending November 2011 on earnings was 91.74% and on cash flow was 47.04%. I will shortly being reviewing this stock as it is one I follow. I held this stock from 2001 and sold some in 2006 and the rest in 2008 and made a total return of 2.09% per year.

I really bought this stock at the wrong time. The median 5 year dividend yield was 4.83%. I sold because I thought that this stock was going nowhere and I did not see that it was going to recover fully anytime soon.

Just because a stock is not on such a list also does not make it a bad dividend payer and also if a stock is removed, it does not make it a bad dividend payer. I held onto all my bank and other financial stocks after they were removed from the dividend achievers lists because I believed that in the long run, they will serve me well. They are now recovering and starting to increase their dividends.

Personally, I rather have a stock stop dividend raises or even cut the dividend if it is the best for the long term viability of a stock. For example, I bought TransCanada Corp after they decreased their dividends in 2000. I had had my eye on this stock for some time, but thought it was overpriced. It did get into difficulty but it had a plan. It took a few years to recover to the old dividend rate, but it did.

I have written about dividend stock before. See my site for my blog entry about buying Dividend Growth Stocks. Also see my site for my blog entry on buying Dividend Paying Stocks.

Living Off of Dividends

Thursday, September 7, 2011

When you are living off your portfolio how you invest in stocks changes. Also, because I am taking money from my portfolios, I make sure that I have enough dividends and cash to cover money withdrawals over the next 5 years. I look at each account separately. I have a Trading Account and two RRSP accounts. I never want to be in the position of having to sell any stock at an inopportune time.

Also, what I am basically doing is selling in the RRSP accounts and buying in my Trading Account. I have budgeted to take out 4% of my portfolio each year. When this drops below 4%, I still take out budgeted amount from my RRSP accounts, but that means that I can increase investments in my Trading Account. Currently, I am taking out 3.1% of portfolio.

I am following the 8%, 4% income withdrawal from portfolio theory. That is I am trying to earn 8% on my portfolio each year and take out 4%. One implication of this is that the value of my portfolio will grow at 4% each year. Another implication is that I can withdrawal 4% more from my portfolio each year. However, I have only been increasing my budget by 3% each year to give me some leeway for future unexpected expenses.

As I have said when you are living off your portfolio how you invest in stocks changes. I have been asked what I would buy at this time of volatility in the market. There are a couple of problems. First I cannot legally advise on what stocks to buy because I do not have the certifications. Another thing is what I may want to buy may not be suitable for others. I am not building a portfolio.

I am generally fully invested. I am also taking money out of my portfolio rather than making new investments. Also, where my money is coming from in investments is from my RRSP accounts. Each year, usually in December, I transfer money from my RRSP accounts into my trading account. Of course, most of this money is needed for spending in the following year.

Currently, when I buy, I look to see if it is a good idea to buy more of some stock I already own. I do have a fair number of stocks and I would rather increase one I have than get a new one. What I pick may not be best in its category, but I do not want to have too many stocks.

Too many stocks can hamper portfolio management. So, this can be a trade off in deciding what to do. Do I get a new stock at a really good price or an old one that may be relatively more expensive? Usually if an old one is at a reasonable price, I will go with that. Of course, if none of my current stocks are reasonable price I would go for a new one. This does not happen much. I usually have some stock selling at a good price.

When you are starting out to build a portfolio it is probably best to build up shares in only 2 or 3 stocks, until you have a reasonable size investment in each before branching out. Although you would want each stock in a different category and, for example, categories like Financial, Utility and Consumer Staple would be good.

I also may look at some stock to fill in my portfolio in some area where my relative investment has gone down. For example, the percentage of my investments in Financials has decreased from 30% to 27% over the past year, so I may look there. Also, my investment percentage in Info Tech and Telecommunications has also gone down.

I would currently probably not be buying any utility stocks as my percentage in utility stocks has gone from 18% to 19%. Although, I must admit that my most recent purchase was of Emera because I have wanted some more of this stock, but it was overpriced. One of the recent dips in prices got the stock price in the reasonable category, so I went for it.

Dividend Payout Ratios

Friday, July 29, 2011

Most important question to ask on dividend paying stock: “Can the level of dividends be sustained?” Also, once you have a company, you need to focus also on its ability to pay their dividend rather than on the stock price. I have found that the value of my portfolio has fluctuated a lot, but my dividend income has not. In fact, my dividend income has only increased since I held a basket of dividend paying stock.

If you just concentrate on your portfolio value, it might drive you crazy and you might just sell when you should not. I have found that in recession, some companies cut or eliminate dividends, some keep them level and other increase them. Overall, my dividend income has still increased. So, what you should be looking at is cash flow. When you look at dividend cash flow, you have to look at it over a 3 month period to get Cycle 1 to 3 of dividend payments. Or, you can look at dividend cash flow over a 12 month period.

Of course, when a company I own cuts or eliminates dividends, I check on the long term viability of the company. You have to ask yourself if you should buy more, sell some or all or just hold on a stock on such a company.

I look at Dividend Payout Ratios based on earnings and on cash flow. If I see some problems I might investigate the company further. I know that some analysts look at DPR based on Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO) and Free Cash Flow.

I look at such things sometimes on a short term basis and for REITS, but I do not like to do this on a long term basis for a company. When a company cannot provide a positive EPS higher than the dividend over the long term, it suggests to me that the company is mortgaged to the hilt and not a good long term buy. You should be aware that there are many analysts that seem to disagree with this.

Getting back to my main theme, it is all about whether or not a company can afford to pay their dividends. A company’s ability to pay dividends will ultimately lead to higher stock prices over time.

Like the Investopedia site, most sites give a definition of Dividend Payout Ratio using Earnings. See Investopedia. I do not think that this is a bad thing to do, but I also feel that you should go beyond this. As I had already said, I look at DPR for both Earnings per Share (EPS) and Cash Flow. If I see problems, I look beyond this on an individual stock basis. Also, for REITs, I look at a DPR on Funds from Operations (FFO). (I used to also look at FFO for the old income trust companies.)

Dividend payout ratios vary widely among companies. Stable, large, mature companies (like TSX-BCE or TSX-TRP) tend to have larger dividend payouts. However, with a more growth-oriented company it will tend to keep their cash for expansion purposes, have modest payout ratios. This would be companies like Saputo (TSX-SAP). In fact a lot of consumer stocks have low payout ratios.

Also, dividends are paid with cash and not with earnings. This is why a lot of analysts check the dividend payments against things like Free Cash Flow. See Investopedia for a definition of Free Cash Flow. Others check the dividends against Funds from Operations (FFO) or Adjusted Funds from Operations (AFFO). For a definition on FFO see Investopedia and also Investopedia for a definition of AFFO.

For an example of calculating FFO, see Investing Answers. This site also discusses the difference between FFO and AFFO. Some REITS pay as high as 90% of the FFO in distributions, but others keep the ratio lower (say 60%). If a REIT is paying 90% of the FFO, it is basically paying all its profits in distributions.

Analysts talk about DPR for Earnings at 60% and below and DPR for Free Cash Flow at 80% and below and 40% or lower for Cash Flow. The best companies have cash flows that are higher than earnings.

In the Investing Daily blog is an article on why you should use cash flow values in your DPR. See Investing Daily.

There are sorts of perspectives on this ratio and all sorts of blogs mentioning this ratio. See these articles by Dividend Guy, Million Dollar Journey, Dividend Money, The Market Capitalist and Dividend Ninja, Wiki Fool.

Debt Ratios

Thursday, July 28, 2011

I used 4 basic debt ratios. Two have to do with assets and liabilities and two have to with equity (Shareholders’ Equity or Book Value) and its relationship to liabilities and assets. These ratios are balance sheet ones. There are a lot of different ratios you can use. What I am trying with my spreadsheets is to use a number of approaches to get different views of a stock. With these debt ratios I use I am trying to see if there are any problems than need further investigation.

The first one is the Liquidity Ratio and it is Current Assets/Current Liabilities. This is also called the Current Ratio. The next is the Asset/Liabilities Ratio or Debt Ratio and it is Total Assets/Total Liabilites. Ideally, for both these ratios you are looking for one of 1.50. That is assets are 1.5 times the liabilities. These ratios are also sometimes called Balance Sheet ratios.

With the Liquidity Ratio you are looking to see if a company has the ability to pay off their short term debts. If the ratio is less than 1.50, you might also want to look at the ability of the company to pay dividends and fund their short term debts (unfundable from short term assets) from cash flow. Also, you may want to see a higher ratio (i.e. 2.00) if you feel that the company would have a hard time borrowing money on a short term notice.

Also, some people use what is called the Quick Ratio which is Current Assets-Inventories/Current Liabilities. This is useful on companies which may have inventories that cannot readily been turned into cash. Inventories could have old products in them, or items in the inventory could be not readily sold in the current business cycle. This is compared to an inventory of new products easily sold.

Investopedia has a tutorial on this subject on site.

Asset/Liabilities Ratios are one way of looking at debt levels. Other Ratios look at Debt/Asset Ratio (Liabilities/Assets). These ratios are used to measure the long term solvency of a company. The higher the ratio, the better off the company is. This ratio can measure the financial risk of a company.

If the Asset/Liability Ratio is less than 1.00, then you should carefully review a company. It could be pointing to a company in difficulties. This is because the assets of a company cannot cover the company’s liabilities.

The next ratio to discuss is the Leverage Ratio or Assets to Book Value (or Shareholders Equity). This ratio shows how much of a company’s assets are owned by the company (or its shareholders) and how much are leveraged or financed through debt. This ratio strongly depends on the type of industry a company is in.

Read definitions of this ratio at Dogs of the Dow investor glossary and at Investopedia.

Debt/Equity Ratio is another ratio I use. It is Total Liabilities/Shareholders Equity. This is also used to measure the long term solvency of a company. In the debt portion of this ratio, you may want to use just debt (short term and long term debt), or just use long term debt. It is important to realize that if the ratio is greater than 1, the majority of assets are financed through debt. If it is smaller than 1, assets are primarily financed through equity.

Read definitions of this ratio at Investor Words and Investor Words.

For this ratio, one of around 0.50 or below probably points to a company with no debt or very minimal debt. I just reviewed Computer Modelling Group Ltd (TSX-CMG) and its recent debt/equity ratio is 0.64. It has minimal debt. I reviewed it on my blog in June 2011. Click here or here to access its blog entries. See my spreadsheet at cmg.htm.

If it is high, the company is probably using debt to finance its operations. Utility companies often have high ones. I reviewed Enbridge Inc. (TSX-ENB).in April 2011 and its recent debt/equity ratio is 2.94. It heavily uses debt to finance its operations. Click here or here to access its blog entries. See my spreadsheet at enb.htm.

You would want to compare the current debt ratios to the historical debt ratios of the same company. You also want to compare a company’s ratios to similar companies in the same industry. These ratios only give you an indication on how a company is doing; you need to look at a number of things to get a complete picture of how well a company is doing. Also, the account methods a company uses can significantly affect these ratios.

Also, sometimes companies have what is called loan covenants that specify certain debt ratios that a company must maintain. If they do not, certain things must happen. Often, if they do not keep the loan covenants, dividends will be cut or discontinued until such time as the debt ratios meet the terms of the loan covenants. A company is said to have a “Clean Balance Sheet” if it has little or no debt.

There is a blog on accounting statements at Accounting Coach. This blog has a good articles on the Balance Sheet; the Income Statement; and the Cash Flow Statement.

Dividend Growth Stocks

Tuesday, July 26, 2011

Or, why buy SNC-Lavalin (TSX-SNC) and all that. Not only is SNC a dividend growth stock, it is a growth stock per se. It has grown its dividends over the past 5 and 10 years at 24%. Over the past 5 and 10 years it has increased its stock price by 18% and 30% (it got hit by the last recession). The company’s Dividend Yield is low at a 5 year median rate of 1.1%.

It’s Dividend Payout Ratios for earnings and cash flow is 25% and 21% per year over the past 5 year. Having a low DPR gives the company room for dividend increases and also room to spend on expansion. Also, because it is a growth company it can and it does get hit at recession times. Growth companies have been more volatile in stock prices than more mature or the value investment type companies.

I know that there is a lot of controversy on the “yield on cost” (YOC) concept, but there is no doubt that buying such stock can really boost your income and portfolio, especially if you are saving for retirement. My purchase price for shares in this SNC (accounting for splits) is $3.40. I bought my shares some 13 years ago. The current dividend on this stock is $.84.

Therefore, on my original cost, I get a dividend yield of 25%. One problem with yield on cost is that it is not taking inflation into account. If we include a 3% per year background inflation rate, my yield would, of course be lower at approximately 18%. But, I think the main point remains and that is you can make a lot of dividend income from investments in dividend growth stocks.

In a lot of ways, SNC is in a class of its own as far as being a great dividend payer and a growth company. However, there are a few other such stocks in Canada. But there are a few, as far as I can see, that have potential. They are shown below. Please note that any such lists are entirely subjective. Also, growth stocks do not remain growth stocks forever.

• Saputo (TSX-SAP),
• Metro (TSX-MRU.A),
• Home Capital Group (TSX-HCG),
• Toromont Industries Ltd. (TSX-TIH),
• Reitmans (TSX-RET.A),
• Finning International Inc. (TSX-FTT),
• Richelieu Hardware Ltd (TSX-RCH), and
• Leon's Furniture Ltd (TSX-LNF).

Some of the best “yield on cost” stocks I have, I have listed below.

• For Bank of Montreal(TSX-BMO), after 27 years, I have a YOC of 19.3%.
• For Fortis (TSX-FTS), after 24 years, I have a YOC of 16.2%.
• For Pembina Pipelines Corp (TSX-PPL), after 10 years, I have a YOC of 16%.
• For RioCan Real Estate(TSX-REI.UN), after 13 years, I have a YOC of 12.6%.
• For Royal Bank (TSX-RY), after 15 years, I have a YOC of 28%.
• For SNC-Lavalin (TSX-SNC), after 13 years, I have a YOC of 25%.

As shown above on stocks from my portfolio, there are other ways besides growth companies with low dividends and high increases to get good YOC. Take for example Fortis, a stock that provides a good dividend and good increases. The 5 year median dividend is 3.7%. The 5 and 10 year dividend increases are 14% and 9%. The 5 year median DPR on EPS and Cash Flow are 65% and 27%. This is a utility company and utility companies did better in the last recession than financials did.

The Globe and Mail recently had an article on this very subject. See New names among the dividend growth stars. One of the things that Tom Connolly, who was interviewed for the above article, said was that he was not selling his shares of companies that had not raised their dividends for a while. While I disagree with his holding on the Loblaw (TSX-L), a company I sold some years ago because I did not see an end to their problems, I have certainly held onto Power Financial (TSX-PWF), Sun Life Financial (TSX-SLF) and all my bank stock.

What I have noticed in recessions is that some sections of the market get hit much worse than other sections. In this past recession, insurance companies and banks, in fact all financial institutions got hit quite badly. The reason I did not sell was that I believe they will all recover and then continue on a great dividend growth stocks. The reason I sold Loblaw (TSX-L) was that I did not see it recovering in any sort of reasonable time frame.

I have followed dividend growth stocks for a while. There are two dividend lists that I follow of Dividend Achievers and Dividend Aristocrats (see indices). The main problems with such lists are that they are changing all the time. I do follow most of these stocks, see my website for stocks followed.

I had also followed Mike Higgs, an early blogger. He had his own ideas on what stock should be considered to be dividend growth stocks. On my stock index list, some 9 columns in, is one called “M”. Stocks with a “Y” in this column were ones on Mike’s list. Mike seldom changed the stocks on his list.

Also, he felt that the only way to judge if such stocks were currently cheap, was if the dividend yield was higher than the stock’s historical dividend yield. On my spreadsheets, in the dividend section, I usually have a “yield on low” row. This is the dividend yield on the low stock price of that year. Over to the right, I give the 10 year median “yield on low”. This will give you an idea on what sort of dividend highs a stock has had in the past.

My best advice is to not worry how well other people are doing, but only worry about how well you are doing. If you are making progress towards your investment goals, you are probably doing ok. There are always going to be bull markets and bear markets, so your portfolio value will fluctuate. But if you are looking for income and you are making progress in the long term in in getting higher and higher income, you are probably doing ok.

Also, if you have a good company, do not sell it off because it price goes lower than what you paid for it. If it is a good company, it will come back. The beauty of dividend growth stocks is that you can focus instead on the income you are collecting rather than on the portfolio value. There have been bear markets in the past and there will be bear markets in the future. It is just the way it is.

When markets go down there are temptations to sell your stock to buy back at a cheaper prices. This is called “Timing the Market”, and not even pros can get this right. You may get it right once in a while, but no one can do this consistently and it is a great way of losing money. Also, when you sell to buy later there are fees to pay and maybe taxes to pay, so it may not be as simple or as easy as it sounds.

I have statistics on the TSX going back to 1956 and there is only one 10 years period, 1974, when the stock market was lower over a 10 years period. The statistics do not include dividends, which can be a large part of your return. The TSX index has been lower after 5 years over the same time period 3 times, in 1974, 1977 and 2002. So, the thing to do is, invest for the long term.

For more information on this subject, see Investing for the Long Term. I believe the US had another 10 year period with a negative return just recently, but Canada has not. I believe there was 10 year loss period ending in 2009 for the US. We do somewhat follow the US markets, but not exactly. Sometimes we are hit by weaker markets than they are and sometime we get off lighter. The latest recession has been easier on Canada than US.

Also, buy what you know. You should understand how the companies you invest in make their money. I have a bias to financial and tech companies. I used to work in IT in the financial sector. I think you should also approve of the way your companies make their money.

I may follow a lot of companies now, but I started off investing in just 3 companies, BCE (TSX-BCE), Labatt and Bank of Montreal (TSX-BMO). I still have BCE and BMO. Labatt was bought out. Start small and with few stocks and get to know them. You do not need to have a balanced portfolio when you have little invested. You can balance your portfolio later when it has grown.