Financial Jungle

It’s that time of year! My wife and I are taking the next 3 weeks off travelling…. this time we are visiting Bejing, Shanghai, X’ian and Guilin. I’ll try to write a few posts here and there, but most likely they will have a lot to do with China. It’ll be tough being out of the loop with the stock market, as I’m so addicted to reading every piece of financial articles within my sight. The only “fix” I’m bringing with us is today’s Globe and Mail.

In addition to keeping my mind off work, I’m also bringing my new Canon Rebel XTi for a serious test-drive on this trip. You’ll notice the new Flickr plug-in on the left sidebar. If you’re into photography, please visit my Flickr account periodically and leave a few comments and suggestions.

Take care!

… and I wrote pig in a complementary sort of way.

I just returned from my first go-karting experience organized by my employer, who’s rewarding us for a job well done on some key projects. The race was quite refreshing and fun, but more exhausting than I had anticipated. I’m still feeling my tense muscles in my arms and legs, which may take a couple of days to recover. What’s worse is that I have nothing to brag about for my agony, since I finished near the bottom of the standings.

One tip I did learn from this adventure is that people who excel on the race track also excel on the corporate ladder, and they tend to be ruthless go-getters who don’t play by the rules. Who can blame them? Breaking the rules is the rule of the game if you’re determined to celebrate your victory prominently on a podium surrounded with champagne and beautiful models. So what if you’re given a warning when you deliberately knock an opponent off the track? What some see as barriers are opportunities by others. Warnings are free low-blows to your opponents. Go ahead. Take some risks. Bump the person in front of you off the track. If the referee doesn’t catch you, do it to the next opponent. How did I end up buried in the dust? Because I completed the race with these squandered free-passes in my pocket; my arsenal was filled with fully loaded weapons when the war was lost.

Don’t get me wrong. I love my co-workers. At the end of the day, this was a successful event. Everyone was blessed with a few great laughs, and no one took amiss for their karts spinning helplessly off track. But my colleagues better watch their back; when the race is on again, it doesn’t behoove to be Mister Nice Jungle Guy.

The timing of Canadian Capitalist’s post on Employee Stock Purchase Plan (ESPP) is impeccable, as I need to make a quick decision this week on whether to participate in my own ESPP.

I must have scorned 4 or 5 consecutive invitations to enroll in my employer’s ESPP. I work for a technology company with a very erratic earning history - the type that deserves no place in a conservative dividend-paying portfolio. Nothing against my employer, but the stock may be more suited for a growth-oriented portfolio. Another reason is I want to soften my reliant on the company I work for; losing both your job and your investment is a double-whammy.

Although I must confess, the ESPP is seducing me with a 15% discount to the market price at either the beginning or the end of the vesting period - which ever is lower. Sounds like easy money. I wonder if I should relax my investment philosophy to accommodate this enticing offering, even though I’m not keen on keeping the stock for the long haul. One strategy is to sell the shares as soon as they’re vested as I have no desire to hold the stock without the discount protection, but there is a one-month delay between when the vesting period expires and when my trading account receives the shares. I.e. there’s a risk that the stock will fall 15% during the month, which I peg at about a 20% probability of that happening. Still pretty attractive odds, in my opinion.

My heart tells me to forgo the 15% discount and buy dividend-paying stocks the old fashion way, but I hate to pass up good odds. Am I the only one with this dilemma?

The online credit card applications are now accepted to provide credit cards to customers. Almost all business owners are getting a great help from the debt management services offered by financial institutions. Special debt relief plan and different services are offered by modern banks to get people out from too much debt pressure.

As any dividend investor will attest to, the regimen of successful dividend investing involves building a watch list of terrific companies with a long history of rising dividends, but only buy when they are cheap. How do you know when they’re cheap? There is a number of matrices out there at your disposal, but the 2 simplest are:

• Buy when P/E is trading near the historical low.
• Buy when yield is trading near the historical high.

If you’re like me, you’ll find it daunting to decipher the historical dividend payments and earnings to arrive at the highs, lows and averages. Fear no more. There is an excellent little tool that you must throw into your bag of tricks. It’s called, BigCharts. Not only does BigCharts show off the dividend growth of your favourite dividend stocks, it presents the rolling dividends, rolling earnings, historical P/E ratio and historical yield in neat little charts. Forget tables. They’re too discrete. Aspired dividend investors will want historical yield presented in a continuous graph in order to experience or feel the personality of the stocks over a long period of time.

Let’s take an example. Judging from Royal Bank’s historical yield, it’s currently trading at an attractive level yielding a historical high, 3.5%. Simply by gliding BigCharts’ cursor along the 10-year historical yield chart, you can quickly reckon and appreciate the rare but brief moments when Royal Bank traded near this seemingly tantalizing level over the past decade. If history repeats itself, the bargain price won’t remain on the table for long, and probably won’t return for several years. For full disclosure, I bought a bunch of Royal Bank shares yesterday.

One quibble I have with BigCharts is its fragile runtime on Internet Explorer; the Java applet crashes whenever I enter a Canadian stock symbol. It seems to work better on FireFox, so I downloaded a copy just to run BigCharts. Don’t forget to prefix “ca:” in front of your Canadian stock symbols. i.e. “ca:ry”.

Another thing to watch out for is that BigCharts uses trailing 12-months but my preference is forward yield. Nevertheless, the method used is irrelevant as long as it’s consistent. Royal Bank’s forward yield is 3.81%.

Please check it out and let me know what you think. If you have an even better tool, please share.

I’ve added a new category in Financial Jungle called “Dividend Increases”, where I’ll record all dividend raises from my portfolio. Dividend and distribution increases tend to resonate well amongst the dividend investing community, and a constant stream of positive feedbacks should motivate everyone to stay on course.

North West Company is a retailer in rural communities and urban neighbourhoods across Canada, Alaska and now, Hawaii. This income trust recently improved their annual payout from $0.88 to $1.08, or a 22.7% pay raise! This represents a 5.08% yield based on Friday’s closing price of $21.58, or a 7.37% yield based on my purchase price of $14.65.

Who says income trusts are boring and slow growing investments?

• Hold on to your belly and have tissue paper standing by. You might cry from laughing too hard while reading Blain’s 50 Ways You Know You’re An Emotional Investor. Ah, those were the good old days. These 50 items don’t apply to me no more. Yeah, right.
• If you want free advice from the world’s greatest investor, go check out Get Rich Slowly’s post on Q&A session with Warren Buffett. Many curious students are probably asking the same burning questions that you might have. Get inside the mind of this jewel, and learn about risk-taking, moats, branding, diversification, international investing, REITs and many more.
• Derek Foster, a Canadian dividend investor who retired at a tender age of 34, followed up with a new book, “Lazy Investor”, after his successful publication of a national best seller, “Stop Working: Here’s How You Can”. You can have a cursory view of his investment philosophy here. His $600k portfolio contains a mere 17 stocks, which include the likes of Royal Bank of Canada, Manulife Financial, RioCan REIT, Canadian Oil Sands Trust, Johnson & Johnson and Wal-Mart.
  

  Focusing on dividends changes one’s perspective on the stock market, he writes in The Lazy Investor. Instead of fearing market corrections, dividend investors welcome them as an opportunity to add to their positions at a lower cost. In effect, they get to purchase a stream of income at a discount.

• 20 timeless money rules - Money Magazine collected the best advice from some of the smartest investors (and other people) who have ever lived.
• Yes, buy growth stocks, but don’t overpay. Buy 3M, but shun Research In Motion. The Motley Fool explains that investors should seek unappreciated growth. You want to snap up some rotten growth stocks while the rest of the market is napping. When the market sets the expectation bar so low to the ground, all the businesses have to do is to roll over it to get the market cheering with pom-poms.
• Financial Planning and Personal Sanity shares a real life American story on how subprime has destroyed both the marriage and solvency of a young Seattle couple. This serves as a reminder to not rush in to the market with a high ratio mortgage because you’re afraid to be “priced out forever”. There’s also a link to an article demonstrating why Vancouver, with a P/E ratio of 26.81, is the 6th most over-priced city in the world.
  
  

  Moreover, Financial Planning and Personal Sanity highlights that the number of years of the average worker’s gross income it would take to pay off the benchmark single family home in Greater Vancouver is 9.4 years, far exceeding the historical average of 7. The previous 2 bubbles peaked at 8.1 and 8.8 respectively, so we’re living on borrowed time.

I wrote this list back in early April when Financial Jungle was relatively unknown. With readership growing, I decided to resurrect and update my top reasons to invest in dividend paying stocks.

1. Dividends set a floor price – Dividend stocks tend to trade within their yield range, and rarely do they yield much higher than Treasury bill. Last summer I purchased Bank of Montreal at $60.50 when it was yielding near the historical high of 4.1%. Not only did the yield defend the stock at this price point, BMO also distributed $3.25 worth of dividends since my purchase, and increased their dividends 4 times.
2. Dividends account for over half of the long-term real return – If you own 100 shares of BMO and receive 4% of dividends, you can DRIP your dividends to buy another 4 more shares. If you keep up the DRIP for 20 years, you’ll have a handsome 219 BMO shares in your portfolio. Even better, some Canadian corporations offer 5% discounts through DRIP.
3. Companies with long-term track records of stable and raising dividends show quality of the managements – Managements show commitment to shareholders by improving fundamentals and sharing profits.
4. Dividends cannot be manipulated like earnings – Dividends are real hard cash in your lap. Earnings can be faked by creative accounting.
5. A stable stream of dividends reward investors even during market down turn – Management pays you to wait even during market setbacks.
6. Dividends are more tax efficient than regular incomes and capital gains – In British Columbia, if you can make $66,000 in dividends, you pay $0 tax. In regular incomes, you pay $16,880 in taxes. In capital gains, you pay $5,097.
7. You can safely spend your dividends without harming your portfolio – If you think in terms of income streams instead of portfolio size, you can consume 100% of your dividends without hurting your portfolio. If instead you go for capital gains, consuming your capital during a depressed market will harm your portfolio immensely.
8. Receiving dividends are passive – Dividends and increases are given to you each quarter automatically without any action on your part. On the other hand, to receive capital gains, you must monitor the share prices continuously.
9. High dividend paying stocks have historically out-performed low-yield stocks – In David Dreman’s Forbes column (April 2004), he cited that between 1970 and 2003, the top fifth highest yield stocks returned 14.5%, while the lowest fifth returned only 8.8%.
10. Dividends are more predictable than capital gains – Suppose BMO averages 10% over the long term with 4% in dividends and 6% in capital gains. In a given year, you can count on seeing the 4% in your brokerage account, but the 6% capital gain is less dependable.

Bonus reasons:

• Your investment return depends on the company’s fundamentals, not the market’s temperament- You may think a business is wonderful and its stock is outrageously undervalued, but if market doesn’t share your excitement, your effort won’t bring you fruition, and you’re needlessly squandering away precious time. On the other hand, if dividends and dividend increases are your investment objectives, you don’t need the market’s blessing to celebrate. This is one fundamental advantage of dividend investing. When you buy dividend-paying stocks, there’s a strong linkage between your analysis and your reward, and this linkage isn’t compromised by market psychology.
• Dividend investing forces you to think in a healthy frame of mind in terms of buying low - I bought IGM last year. I bought it again this year. I will buy it next year, and possibly for the next 20 years. Why would I want my initial purchase to rise at the expense of penalizing my next 20 purchases? The next time you see dividend-paying stocks tumbling down, please come and give me a high-five.