Category Archives: Investing

News from Waikiki Beach.

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Balcony

I am on my annual vacation in Honolulu (on the island of Oahu) right now and one thing I like to do whenever I travel is check out the local business news. Here are some excerpts from the business section of the Honolulu Star Advertiser.

  • The neighbour island economies are continuing to gain on Oahu, setting the stage for the statewide economic expansion to continue through at least 2015, according to a forecast released today by the University of Hawaii Economic Research Organization.
  • Cargo shipments between Honolulu and six neighbour island ports started 2013 on a down note, falling 3.9 percent in the first quarter of this year compared with the same period a year earlier.
  • The states long-suffering construction industry hit bottom and began to recover last year. Private building permits, a precursor of future building activity, grew by 30 percent to 35 percent across all counties in 2012, although from extremely low levels.
  • By 2015 the next construction cycle will be in full swing with industry payrolls growing by more than 10 percent a year.

 

 

High yield stocks.

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I have written a lot about buying dividend paying stocks, holding them for life and collecting an every increasing stream of income.

So why not just buy the stocks that pay the most money in quarterly dividends?

Remember yield refers to the total annual dividends collected as a % of the share price. So if a stock costs $100 and pays four quarterly dividends of $2.00 each ($8.00 annually) the stock would be said to have an 8% yield.

8% of $100 = $8.00 paid out as a $2.00 dividend every 3 months.

When stock prices fall, dividend yield raises. If our example stock dropped from $100 to $50 the yield would jump from 8% to 16%. The stock would still be paying $8.00 a year in dividends, but that amount would now represent 16% of the share price.

16% of $50 = $8.00 paid out as a $2.00 dividend every 3 months.

This math is pretty simple, but illustrates why you should be cautious if you see a high dividend yield. It usually means the share price has recently dropped and the dividend yield spiked.

Stable companies that pay dividends usually pay somewhere in the 3%-5% range. If you see a dividend yield higher than this you should usually do some more investigating.

jazzair

Right now there is a company called Chorus Aviation that is in the financial news. The stock pays a mouth-watering 25% dividend yield. The reason the dividend yield is so high is because the stock has lost half its value in the past year. The company has already cut its dividend in half once and there is a good chance it will cancel it all together (if they don’t go bankrupt first).

Chorus halves dividend as Air Canada arbitration continues. 

At one point I was looking at both Le Chateau and Yellow Media because they had an attractive 10% dividend yield. Both companies have since stopped paying a dividend and Yellow Media is on the verge of bankruptcy (who uses the Yellow Pages anymore?).

So don’t be tempted by high dividend yield. Instead focus on companies that have a long history of paying a consistent dividend that they slowly increase over time.

One of my favourite dividend paying stocks that I own is Bank of Nova Scotia. It currently pays a dividend yield of 4.08% and has increased its dividend in 42 of the past 45 years. Even more important is that they haven’t missed a dividend payment since 1833.

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Bank of Nova Scotia dividend history.

Based on this history, I am pretty confident that that dividend income will still be there by the time I retire and want to collect it.

Remember, I am not a certified financial advisor. You should use the information on this site to give you investing ideas only. You should then consult with a financial professional before making any investment decisions.  

A better way to buy a condo?

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If you want to make money by investing in condos, there may be a better way.

Macquarie Capital Markets Canada did a comparison between investing in apartment REITs versus condos. They compared returns from investing in a Calgary condo to the Alberta focused Boardwalk REIT. Then they compared returns from investing in a Toronto condo to eastern Canada-focused CAP REIT.

In both cases they found the REIT investment came out ahead consistently in recent years.

REITs pool the investment money from many people then buy apartment buildings (or shopping malls depending on the REIT) and distribute 90% of the profits to shareholders in the form of monthly distributions. It’s a way to profit from real estate without having to pay a down-payment, closing fees, monthly maintenance fees or deal with tenants.

Lessons from Telsa Motors.

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Many people are afraid to have anything to do with the stock market. They all know someone who lost money buying stocks, or read stories of market crashes and are glad they never invested any money.

One of the main reason people lose money in the stock market is that they just can’t stop buying high and selling low. When it comes to real estate and stocks, most people are only interested in buying when the price has been driven up.

Shorting a stock.

When someone thinks a stock is a good buy and will continue to go up, they are said to be “long”. When someone thinks a stock is too over priced and will fall soon, they will often “short” that stock.

Shorting stocks is too complicated for me, but basically it works like this. Instead of buying low and selling high, someone who shorts a stock will borrow shares to sell today (at what they figure is a high price) and then have to buy shares later (when they hope the price has dropped) to “cover their short position”.

Someone long hopes to buy low and then sell high.

Someone short hopes to sell high and then buy low.

Short covering driving up shares of Tesla Motors.

What’s happening today with Telsa Motors is a text-book example of how people behave irrationally and lose money in the stock market.

The stock has doubled in price in the last month. It’s gone up 50% in the past week alone. It’s now more over valued than 98% of U.S. stocks with a price-to-earnings ratio above 227. According to Thomson Reuters, Tesla Motors is 30 times over valued compared to auto makers GM, Ford and Porsche.

What’s driving the price up? The company recently beat earnings estimates by bringing in a first-quarter net income of $11.2 million (a year earlier they reported a loss of $89.9 million).

Another big factor driving the stock price higher is that it was one of the most heavily shorted stocks. Many investors who shorted the stock are now being forced to cover their short position by buying shares (to pay back the ones they borrowed) at this higher price.

This high volume of shares being purchased to cover short positions is creating more demand for the stock and pushing the price higher.

Did we learn nothing in 2008?

Dividend bubble?

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In the late 90′s people were pouring money into internet stocks. Then the dot-com bubble burst and between 2000 and 2002 the Nasdaq (the market that trades in tech stocks) lost 78% of its value.

Next came the housing bubble where low-interest rates (and the banks lending money to anyone with a pulse) led to a huge run up in real estate prices. By 2009 the bubble had burst and there were almost 4 million foreclosures in the U.S.

And while the Canadian real estate market hasn’t popped, sales of single family homes in Vancouver where I live are down 47% from 2011. Prices to follow?

widening US and Canada house price gap

There are some that are now speculating that dividend paying stocks are a bubble because of their popularity and recent run up in prices. Unless central bankers start raising interest rates, I think stable companies paying increasing dividends will be in a bull market for some time.

Conventional wisdom was that you should take the number 100, subtract your age and that is the percent you should have in stocks. The rest should be in bonds and fixed income. The problem is that with rock bottom interest rates, those bonds are now paying almost nothing. Retired people who relied on that income are now in shock as the bonds they held roll over at todays rates.

The U.S. can’t raise interest rates either without crushing the already fragile real estate market and increasing the interest they pay on the national debt. With the national debt spiralling out of control, will they ever be able to afford to raise interest rates?

So retirees now have a choice: Learn to live on 1/3 of what they used to, or venture out into dividend paying stocks. As money has been flowing back into dividend paying stocks, the prices have been pushed up.

Here is an example of a few popular Canadian dividend stocks.

Bell – 1yr return 16.55%, dividend yield 4.88%, total return = 21.43%

Telus – 1yr return 23.87%, dividend yield 3.64%, total return = 27.51%

Royal Bank – 1yr return 15.09%, dividend yield 4.13%, total return = 19.22%

Scotiabank – 1yr return 11.16%, dividend yield 4.11%, total return = 15.27%

TransCanada – 1yr return 15.15%, dividend yield 3.73%, total return = 18.88%

Fortis – 1yr return 0.57%, dividend yield 3.68%, total return = 4.25%

Enbridge – 1yr return 19.15%, dividend yield 2.64%, total return = 21.79%

 

Diversity.

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A friend emailed me the other day because she had watched a show about the retirement crisis in the States and she wanted my opinion.

Click here to watch: The Retirement Gamble.

The show seemed to have two main themes:

  1. People knew nothing about investing.
  2. People were losing money in the stock market.

The first one is very easy to fix. Read.

If you are reading this blog, you probably don’t have this problem, but many people I meet who don’t know anything about investing also tell me they have never read a single book on the subject. All the information is free at the library, but still people don’t bother.

If your work offers you an RRSP or a 401K and you don’t understand how it works there has never been an easier time to get the information you need. Spend 15 minutes a night googling the subject and you will have all the information you need.

The second one is also easy. Diversify.

On the “Retirement Crisis” program, they showed a couple that had $1.5 million invested in high-tech internet company stocks. The stocks were going up in value by as much as $30k a day. Then in the year 2000 the market crashed and they were left with $500k.

They said they didn’t know it was a bubble. They were earning $30k a day. That seemed sustainable to them???

Next it showed a single mom who in 1999 used 100% of her money to buy stock in the computer company she worked for, Comdisco. Well, you can guess the rest… sobbing, tears…

Never put all your eggs in one basket.

To me diversity is the #1 way to protect your money. There all kinds of rules of thumb about how much to invest in what based on your age, but just keep it simple and don’t put all your eggs in one basket.

Try to diversify your investments between different countries and asset classes.

  • U.S. based stocks, mutual funds or ETFs.
  • Canadian based stocks, mutual funds or ETFs.
  • International based stocks, mutual funds or ETFs.
  • The home you live in, a rental property, or a Real Estate Investment Trust (REIT).
  • Gold, silver, or any precious metal (a good hedge against inflation).
  • Your small business.
  • Classic cars, fine art, vintage wine (what’s your hobby?)

CBC casting “any race except caucasian”.

 

 

 

Money making robots.

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What if you could buy a robot who would go off to work every day and give you the paycheck? What if this robot got regular raises at work so every year you got more income from this robot? And what if, once you bought this robot, there were no ongoing maintenance costs?

To make it even better, lets say the government taxed robot income lower than human income. Now imagine upon your death, you could give this robot to your kids where it would continue to earn increasing income and need no maintenance.

These robots exist. I own thousands of them. I bought them directly from the company that makes them. The price of the robots go up and down, but I don’t really focus too much on that, I just collect as many as I can and get excited when they mail me their paycheck every month.

The robots I’m talking about are shares of dividend paying stocks.

Let’s take a look at one “Robot” I own as an example. The company Fortis has increased its dividend for 39 consecutive years which is the longest record of any public corporation in Canada. Fortis sells gas, electricity and natural gas in Canada, two Caribbean countries, Belize and Upstate New York. It also own hotels and commercial real estate in Canada.

Ten years ago shares of Fortis were selling for about $15 and today as I write this they are trading for $33.82. The more exciting thing to me though is that ten years ago the annual dividend was $0.50 a share and today it is $1.24.

This means that anyone who bought a “robot” (a share of the company) 10 years ago paid $15 for it and is getting over 8% of their purchase price back in cash every year.

If you bought a share of the company 20 years ago, they cost $7.16 and today you would be getting over 17% back in cash dividends every year!

I am not making a stock recommendation and suggesting you run out and buy Fortis stock. I am suggesting though that you focus your investing on companies that have a long history of increasing their dividends.

Now back to collecting my robot army…

Click here to view Fortis Inc.’s dividend history.

 

Fear is sexy.

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I haven’t written anything in a while because I have been too busy with work. I have been reading every day though and one story jumped out at me that I think sums up the reason people are so confused when it comes to saving and investing.

Three weeks ago I saw headlines popping up online that said things like, “The risky move Mila Kunis makes with her money” and “Mila Kunis rotates from cash to stocks”.

The fact that it’s news when an actress decides to buy shares in a company and the headline is splashed across yahoo with the same excitement as the latest school shooting should tell us two things.

  1. People fear owing real businesses (stocks) and love real estate.
  2. People buy high and sell low.

If Mila Kunis had bought a house at 2006 it wouldn’t have made headlines even though she would have been recklessly buying in an over-inflated market which would soon lose almost half its value.

In 2009 when the stock market was low and there were great, solid companies selling at discount prices and paying high dividends, Mila Kunis thought is was best to avoid the stock market and keep her money safely in the banks (where it would lose value due to inflation).

Since 2009 many stocks have doubled in price and we are in the middle of a bull market (markets rising). Historically the stock market averages a return of around 7%. I own 3 mutual funds through my actors union. In the past year they have all returned between 11% – 13%. Almost double the average expected return.

Click here to read: Mila Kunis rotates from cash to stocks

To be continued…

How to research a mutual fund.

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A friend of mine just invested some money in her RRSP right before the 2012 deadline. She told the salesman at the bank that she wanted a mutual fund that held a mix of Canadian blue chip dividend paying stocks.

So far so good. The Canadian market has lagged behind the U.S. market and I believe that most blue chip Canadian stocks are fairly valued right now. Plus because she is buying dividend paying stocks in her mutual fund, she should receive an interest beating return on her investment while she waits for the Canadian market to bounce back.

Let’s take a look at what I could find out about her mutual fund by just punching the name of the fund into google and clicking on the fund’s website.

The first thing I did was click on the “at a glance” tab and looked at the fifth item on the left hand side “manager expense ratio”. The MER for this fund is 1.05%. That means that if the fund earns 4% in a year, the fund will deduct 1.05% in fees and your return will be 2.95%.

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The second tab I clicked on was “holdings” and here is where I got a big surprise. If you look at the bottom of the page “Top Ten Holdings” you will notice that this mutual fund invests 99.7% of it’s money in one exchange traded fund, the “BMO S&P Capped Index ETF”.

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Well if this ETF is so great that they chose to invest almost all of their money in it, let’s go check it out…

So again the first thing I did when I went to the ETF’s website was click on the “at a glance” tab and went down the left hand side to the eighth item “Maximum Annual Management Fee”. The maximum fee for this fund is 0.150%.

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  • Instead of buying a mutual fund that buys an ETF, why not cut out the middle man and just buy the ETF?
  • Why would I choose to pay a management fee of 1.05% annually instead of 0.150% knowing that the difference in fees will result in thousands of dollars compounded over time?
  • Is this typical that this fund invests all its money in one ETF or am I just seeing an anomaly because the fund manager couldn’t find a better investment at this time?

Now, I’m not saying this is a bad mutual fund, but these are the types of questions I would ask the salesman who tried to sell this fund to me.

It’s interesting that when I clicked on the historic annual returns for both the fund and the ETF, the ETF generally beat the mutual fund by about 1% annually. Is it a coincidence that the mutual fund has about 1% more in annual fees?

Also mutual funds are easier to buy. You write a check and hand it to the salesman at the bank. To buy an ETF you must open an online brokerage account and then place an order to buy shares of the ETF on the stock market. Maybe for some people 1% is a small price to pay to have someone else do this for them.