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”.

 

 

 

Stop investing. Zombies are taking over the world!

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In BC where I live, the savings rate is negative 8%. The average Canadian household’s debt to disposable income is 165%. We owe $477 billion in consumer credit debt (up 5.5% on an annual basis).

65% of Canadians have an RRSP and only 47% have opened a TFSA (even though you could currently shelter $25,500 worth of investments from taxes by opening one). Of the people who have opened a TFSA, 80% of the holdings are in a savings account of some kind (which actually lose money since the interest rate they pay is less than inflation).

So why is it that people aren’t saving and investing for the future? Well, if you believe pop culture, there is no future. Here is the plot of the latest offerings from Hollywood…

Oblivion – Tom Cruise is sent back to earth to extract vital resources after it’s surface is devastated after decades of war.

After Earth – One thousand years after cataclysmic events forced humanity’s escape from Earth, Will Smith crash-lands on the now unfamiliar and dangerous planet.

Pacific Rim - When legions of monstrous creatures started rising from the sea, a war began that would take millions of lives and consume humanity’s resources.

World War Z – Brad Pitt is in a race against time to stop the Zombie pandemic that is toppling armies and governments, and threatening to decimate humanity itself.

And my person favourite is the movie Elysium that I was lucky enough to work on when they shot in Vancouver. This one should be a favourite with the Occupy Wall Street crowd. In the movie the rich one percenters live on a pristine man-made space station and the rest live on an overpopulated, ruined Earth.

I find it ironic that Matt Damon plays the poor everyman who is a victim of “the privileged”. Matt Damon went to Harvard University, reportedly earns $24 million a year and lives in a 8,890 square foot mansion worth a reported $15 million. The film was shot in Canada and Mexico to avoid paying taxes.

 

 

 

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…

Canadian house prices to remain flat for 10 years.

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TD Bank has added it’s voice to the chorus of people predicting Canadian real estate will remain flat or fall in price over the next 10 years.

Yahoo finance reports:

“The “special report” from one of Canada’s largest banks makes the case that gains in housing prices have been exceptionally strong over the last 10 years, even when accounting for a sharp drop during the 2008-09 recession. But now is the time for a bit of a payback.”

Read the full article here: Canadian house prices to remain flat over 10 years, predicts TD bank

To understand how overpriced real estate is in Vancouver, I find it useful to compare the price of homes here to those in other cities.

Click here to see the only “house” selling for $400k in Vancouver right now.

And below is what $400k will get you in another U.S. town.