Investing

Investing Idea - Dividend Growth

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MashGhasem wrote: Thanks. Interesting read. Liked her comment on RRSP's.

One thing that keeps coming up with dividend investors is the low portfolio yield. I don't understand why so many people have such low yields. Hers is only 3.4%. After all these years and after all those div hikes why only 3.4? That means she either didn't invest in purely dividend payers at the start (she did mention she started with mutual funds) or she's way too diversified. Even the safest assets (take the big 5 banks) are paying 4-5.1% and this is after the recent run-up!!

Even if she's talking real rate of return after inflation, it's still too low.
A lot of the low yield stocks grow those dividends every year by a decent rate, double-digit returns many times. So the initial investment keeps producing a growing income beyond inflation, even though the yield at anytime you buy is low - most likely because the stock price appreciates too.

So it is not a 3% annual return. It is a dividend stream that starts at 3% and grows, say, at 7% per year. Buy $100,000 of it and the year one dividend is $3,000. Compound the 7% growth for 30 years and the year 30 dividend is about $24,000. If the stock still yields 3% you've got a big capital gain. If it now yields 6% at year 30 because interest rates went up, the stock part is you've still got a quadruple in capital gain. Dividend growth is the main driver of returns beyond inflation.


Rod
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I think 3.4% is a good yield if you have a balanced portfolio.

My Canadian portfolio is about a 4.5% yield but its really heavy on utilities/pipelines and Banks. After buying IPL and NPI recently I probably need to cut myself off from these type of investments :).

I'm slowing balancing that out with buying index funds and US stocks where I buy in sectors like tech and healthcare. My overall portfolio with the index funds and some stocks that don't pay a dividend has a 3.6% yield.
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MashGhasem wrote: Thanks. Interesting read. Liked her comment on RRSP's.

One thing that keeps coming up with dividend investors is the low portfolio yield. I don't understand why so many people have such low yields. Hers is only 3.4%. After all these years and after all those div hikes why only 3.4? That means she either didn't invest in purely dividend payers at the start (she did mention she started with mutual funds) or she's way too diversified. Even the safest assets (take the big 5 banks) are paying 4-5.1% and this is after the recent run-up!!

Even if she's talking real rate of return after inflation, it's still too low.
She is referring to current dividend yield on market price, not original cost.

As for RRSP's she points out an issue that is one of the many reasons I do not like RRSP's.

You are forced to withdraw at age 71 even if you don't need the money.

Another issue I have is most people spend the refund that results from RRSP withdrawal when they should really be investing it. This is because a % of the RRSP contribution, ie the refund (subject to a differing tax rate later when you withdraw) is being held by you as a steward for the government within the RRSP. You must pay it back the refund when you withdraw, along with returns from that portion. Only if your tax rate is lower at the time of withdrawal do you benefit, but it is not certain that it will be.

Also, if the investment was held outside the RRSP any capital gains and eligible dividends remain so and are not taxed as are capital gains and eligible dividends within the RRSP when they are withdrawn.

However, people are hypnotized by the refund each year and the size of their RRSP when they only own a portion of it. For my money its far better to invest in a TSFA and invest in broad-index ETFs outside an RRSP for the long term.
Last edited by eonibm on Mar 24th, 2019 8:47 pm, edited 1 time in total.
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rodbarc wrote:
Seth Klarman summarized it best:

"Most investors strive fruitlessly for certainty and precision, avoiding situations in which information is difficult to obtain. Yet high uncertainty is frequently accompanied by low prices. By the time the uncertainty is resolved, prices are likely to have risen. Investors frequently benefit from making investment decisions with less than perfect knowledge and are well rewarded for bearing the risk of uncertainty. The time other investors spend delving into the last unanswered detail may cost them the chance to buy in at prices so low that they offer a margin of safety despite the incomplete information."

I think investors would be much better off if all the effort they put into predicting macro events and situations that they can't control were instead focused on the actual business that they were investing on, and learn that discipline, not intelligence, is what allows them to succeed, by not letting greed make them overpay or over-allocate and by not letting fear make them missing opportunities when good businesses are fairly priced. I firmly believe that anyone can learn and do it, since it mostly involves a mindset change.
But Benjamin Graham said:

“I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.”
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Thanks for that!

Taken from the article: "Is there anything you’d do differently during your accumulation phase?

When I retired, half my portfolio was in RRSPs [registered retirement savings plans] and half in unregistered accounts. I wish I had done more investing outside of RRSPs. With the mandatory withdrawals from RRIFs [registered retirement income funds], I am now paying more in taxes than what I avoided through RRSP contributions."

That sucks. Looks like too big of a RRSP portfolio isn't actually ideal in retirement.
"Portfolios are like a bar of soap. The more you touch it the smaller it gets" - Preet Banerjee
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ECBomb wrote: Thanks for that!

Taken from the article: "Is there anything you’d do differently during your accumulation phase?

When I retired, half my portfolio was in RRSPs [registered retirement savings plans] and half in unregistered accounts. I wish I had done more investing outside of RRSPs. With the mandatory withdrawals from RRIFs [registered retirement income funds], I am now paying more in taxes than what I avoided through RRSP contributions."

That sucks. Looks like too big of a RRSP portfolio isn't actually ideal in retirement.
It’s an envious problem to have, and you really only know it’s a problem once you are at the end. Only in hind sight once you have your nest egg in front of you can you think “shucks if only I didn’t save this much in my RRSP”.
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CheapScotch wrote: But Benjamin Graham said:

“I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.”
And then Nobel laureate Robert Shiller disproved it, arguing that you need to account for the impact of investors who are susceptible to headlines and fads. In presenting a Nobel to Robert J. Shiller, of Yale, the prize-giving committee recognized a contribution that challenged a piece of received wisdom — the idea that financial markets are efficient, in the sense that they accurately reflect all available information, and, apart from some short-lived aberrations, generally get prices right. During the 1980s and 1990s, when Shiller (often working with his frequent co-author John Campbell, of Harvard) wrote the papers that the committee cited in its announcement, the efficient-markets hypothesis, the theory that embodied this sunny view of Wall Street, was sweeping all before it and being used to justify a hands-off approach to financial regulation that eventually led to disaster. Shiller, in showing that the stock market bounced up and down a lot more than could be justified on the basis of economic fundamentals such as earnings and dividends, kept alive the more skeptical and realistic view of finance that Keynes had embodied in his “beauty contest” theory of investing.

Today, after the inflation and bursting of two speculative bubbles in the course of a decade, it might seem pretty obvious that financial markets sometimes go haywire, and in a big way. But thirty-odd years ago, when Shiller began publishing papers that contradicted the efficient-markets hypothesis, such talk was regarded as heresy in parts of the American economics profession. Shiller stuck with it, extending his research from the stock market to the bond market and the real-estate market. (His most important articles were collected in his 1992 book, “Market Volatility.”)

There are ALWAYS going to be market inefficiencies. The Efficient Market Hypothesis disregards all the investors who are making short-term and long-term trades for reasons that have little to do with company performance. Thousands of traders are buying and selling based on minute movements in prices. Some investors are wildly overreacting to market news while others have decided to keep buying stock in a company no matter what happens. In other words, there’s nothing efficient about the market.

What happens in December to justify the markets declining 17%? Nothing. Earnings were excellent. 70% of SP500 companies exceeded estimates. But the market dropped significantly. Was that efficient? Then it recovered and we're now trading at October's level. Nothing happened to justify it, since earnings season was already over, and the recovery started before the first main companies start to report. Was that efficient? 2008 crash was due to asset price collapse, and it was a recession driven by financial crisis. Yet, many companies that continued to grow earnings and dividends, unrelated to that sector, companies that had no debt and which their businesses were not affected by the recession, had their stock prices slashed in half, trading way lower than it's deserved. Was that efficient? In 2000, many companies with no earnings, no profits (aka pets.com) was trading at hundreds multiple earnings. Stable companies, that never traded at multiple earnings, were all heavily inflated, like Walmart and Cisco, great companies that despite growing profits and dividends every year after 2001, were terrible investments if purchased at 2000, because the market was so overvalued. Was that efficient?

If you believe that the market is always efficient, then there are no bubbles. There is no overvaluation. There is no undervaluation. The price is always right. Every investor would buy or sell a stock for the exact same reason. Investors and traders would always have the same goals, right?

The efficient market theory also doesn't consider that when you buy an undervalued stock, your return is actually HIGHER than the actual business growth. Because it was trading below the intrinsic value of the business. If a stock is undevalued by 10%, and the business grows by 5%, and stock price eventually follows earnings.... the return of who bought it when it was undervalued by 10% is much higher than the 5% growth of the business.

Lastly, the efficient market theory forgets that any business, public or private, derives its value based on the underlying performance that the business generates. These value drivers include, but are not limited to, operating results such as earnings, cash flows, sales (revenues) and dividends. Common sense tells us that the true value of a large multinational business, or any business for that matter, cannot possibly change as quickly or as much as daily price quotations would indicate. Companies report results only 4 times a year, and a business cycle takes around 5 years. It takes time for the intrinsic value of a business to change. Yet, stock price moves a lot every day, for reasons completely unrelated to the business itself.

Superior returns come from quality and valuation. You can't have superior returns if you choose to ignore valuation - and the efficient market theory suggests that the valuation is always right at anytime.


Rod
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:

Investing strategy based on dividend growth

Trading strategy based on Graham principles.
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rodbarc wrote: ...
If you believe that the market is always efficient, then there are no bubbles. There is no overvaluation. There is no undervaluation. The price is always right. Every investor would buy or sell a stock for the exact same reason. Investors and traders would always have the same goals, right?

--
Superior returns come from quality and valuation. You can't have superior returns if you choose to ignore valuation - and the efficient market theory suggests that the valuation is always right at anytime.

Rod
Fortunately I read this blog post this evening, which is very salient to this ongoing discussion between you and @CheapScotch - https://t.co/CSu70vkHy3
The average number of stocks that outperformed over 10-year time horizons was around 43% while the median was 41%. But it was rare that this number exceeded 50% for very long. In just 22% of rolling 10 year periods was the number of stocks that outperformed the S&P 500 at 50% or higher.

You can see the number got as high as 70% or so in the early-1980s and as low as 25% in the late-1990s.

The shaded regions on the graph are recessions during this period. Interestingly, the number of stocks that outperformed the market increased during every recession but one on this list (the 1990-1991 downturn).

Over 40% is not a great number but it’s not the end of the world for stock-pickers. Most assume picking the big winners is the key but it’s likely more important to somehow screen out or avoid those distressed stocks that can be so damaging to performance.

What makes this hurdle even higher for stock-pickers is when you add trading fees, spreads, management expenses, and other frictions involved in the portfolio management process.

Benchmark indexes don’t have these inherent frictions, which makes them difficult to beat.

Beating the market is not impossible but the data shows why so many fail at this task.
Image

I think it eloquently highlights both the arguments FOR dividend growth investing and FOR indexing.

On the one hand, a DGI investor (myself included) would argue that only those companies that are high quality (i.e. top tier) are able to initiate and grow a dividend over the long term (in essence, screening out losers - those at and to the left of the median line above). DGI also generally means long holding periods limiting turn over that cuts down on spreads, fees and management expenses (assuming one holds stocks rather than etfs or mutual funds). You can also control your entry points (i.e. limiting downside by buying at a reasonable valuation) which serves to limit long term losses.

On the other hand, if the vast majority of stocks in an index are losers, and the behavioural data shows investors generally are over confident and make bad decisions, why look for the needle and instead just buy the whole haystack, which will also limit downside. It is simple, easy and effective.

Ultimately, I enjoy practicing both methods and I don't necessarily think one is "right" or "wrong" but this is the Dividend Growth Investing thread so I wear my DGI hat when in this thread. @Germack has a wonderful indexing thread that shows the long term power of that approach as well (couch-potato-investing-last-14-years-tr ... 89988/190/)
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treva84 wrote:

I think it eloquently highlights both the arguments FOR dividend growth investing and FOR indexing.

On the one hand, a DGI investor (myself included) would argue that only those companies that are high quality (i.e. top tier) are able to initiate and grow a dividend over the long term (in essence, screening out losers - those at and to the left of the median line above). DGI also generally means long holding periods limiting turn over that cuts down on spreads, fees and management expenses (assuming one holds stocks rather than etfs or mutual funds). You can also control your entry points (i.e. limiting downside by buying at a reasonable valuation) which serves to limit long term losses.

On the other hand, if the vast majority of stocks in an index are losers, and the behavioural data shows investors generally are over confident and make bad decisions, why look for the needle and instead just buy the whole haystack, which will also limit downside. It is simple, easy and effective.

Ultimately, I enjoy practicing both methods and I don't necessarily think one is "right" or "wrong" but this is the Dividend Growth Investing thread so I wear my DGI hat when in this thread. @Germack has a wonderful indexing thread that shows the long term power of that approach as well (couch-potato-investing-last-14-years-tr ... 89988/190/)
Right on... why limit investment styles/approaches!!
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rodbarc wrote: And then Nobel laureate Robert Shiller disproved it, arguing that you need to account for the impact of investors who are susceptible to headlines and fads. In presenting a Nobel to Robert J. Shiller, of Yale, the prize-giving committee recognized a contribution that challenged a piece of received wisdom — the idea that financial markets are efficient, in the sense that they accurately reflect all available information, and, apart from some short-lived aberrations, generally get prices right .......
You are really going to town on debunking the efficient market hypothesis, even though Benjamin Graham's support for it was clearly qualified, so this really is another strawman you are setting up here. EMH is complex, comes in more than one form (weak, semi-strong, strong), and has many proponents and detractors,

https://en.wikipedia.org/wiki/Efficient ... hypothesis

However, I was hoping to draw your attention to the part of Graham's statement which I put in bold type; to repeat:
but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost.
Why are you promoting investing based on Graham's principles when he himself is saying they probably no longer work?
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CheapScotch wrote: You are really going to town on debunking the efficient market hypothesis, even though Benjamin Graham's support for it was clearly qualified, so this really is another strawman you are setting up here. EMH is complex, comes in more than one form (weak, semi-strong, strong), and has many proponents and detractors,

https://en.wikipedia.org/wiki/Efficient ... hypothesis

However, I was hoping to draw your attention to the part of Graham's statement which I put in bold type; to repeat:



Why are you promoting investing based on Graham's principles when he himself is saying they probably no longer work?
Because Graham principles have continued to work since he said that, proving that statement wrong. Buffett, which continues to apply Graham principles, is the proof of that, and his methods are well documented and followed by many individuals that choose to not index. Me included. Other variations were well documented by Greenblatt, Lynch, ONeil, Piotroski, Fama and French, all of them using the principle that valuation matters, because it does. There are enough supporting factors today to demonstrate that the markets are not efficient, I demonstrated a few, regardless of what anyone says, I gave you supporting data. Happy to discuss flaws in that data if you see any.

Forget what one individual said at one period and focus on the logic about quality and valuation concept. Efficient market theory ignores valuation. I demonstrated above why. If you believe that valuation is not important or that it's impossible to calculate, then that's your belief, and you will always be limited to market returns. This thread (and many others here) shows that it's possible to calculate that to allow one to not only have higher returns, but also tailor their portfolio to meet their goals and risk tolerance. It's the inneficiency of the market that allowed me to have a growing portfolio income in 2001 and 2008, even though the income produced by the market declined. It's the inneficiency of the market that allows me to have a different return on my portfolio (sometimes better, sometimes worse), even though I am invested in the same companies of the index. I demonstrate how I do it, so if you see any flaws in the methodology or how it doesn't work, I'm happy to discuss that, regardless that not everybody does it and regardless that the efficient market theory is out there. If you want to have a better performance than the crowd, you must do things differently from the crowd.

It's up to each individual to understand what that entails and the pros and cons of each strategy. Anyone willing to put time and effort can do it. We can agree to disagree if you think it can't be done or if you think that it doesn't work.

As I said before these are 2 different strategies, and one is not better or worse than another. They are just different, each one with its pros and cons. Both are doable and can be implemented by anyone willing to do so. The best strategy for an individual is the one that aligns with their goals, risk, timeframe and understand their downsides - this is valid for any strategy, regardless if it's active, passive, investing or trading. In the end, the most important skill (that many don't realize how important that is) is discipline and temperament, and that's unrelated to the strategy being used.


Rod
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:

Investing strategy based on dividend growth

Trading strategy based on Graham principles.
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CheapScotch wrote: You are really going to town on debunking the efficient market hypothesis, even though Benjamin Graham's support for it was clearly qualified, so this really is another strawman you are setting up here. EMH is complex, comes in more than one form (weak, semi-strong, strong), and has many proponents and detractors,

https://en.wikipedia.org/wiki/Efficient ... hypothesis

However, I was hoping to draw your attention to the part of Graham's statement which I put in bold type; to repeat:



Why are you promoting investing based on Graham's principles when he himself is saying they probably no longer work?
Logically speaking, it is impossible to have 'anything' 100% efficient. If market was truly efficient, there will be no arbitrage and no money to be made because everyone will know the true value of the stock and would be unwilling to buy or sell for any price except for the true value. There will be no distortions in the perceived value. If there was no distortion, price will stay 'stagnant' and will only change when real factors change. If market were efficient, there should not be any spread between BID and ASK.

With technology, the only thing that has changed is how fast information is dispersed and becomes available and this creates an illusion of efficiency. High-frequency trading is actually capitalizes on imperfection and inefficiency in the market place using technology.

Constantly fluctuating stock Prices reflect evidence of:
People getting carried away by booms and asset bubbles (e.g. US house prices in 2000s, Dot Com Bubble and Bust.
Irrationality of human behaviour in making economic decisions e.g. herding effect e.t.c

There is also a clear empirical evidence that stock prices do not reflect value. e.g. low P/E stocks have greater returns which should not be true if market were to price the stock according to true intrinsic value.
That is if market were efficient then low-PE stocks would not outperform market. History clearly shows us the opposite.

If market were truly efficient, there will be no need for 'equity analysis'. CFA profession won't exist. There will clearly be no need for any type of analysis. The fact that there is a huge market for 'equity analysis' and there are firms that provide billions of dollars in advisory services is a clear evidence that market are inefficient and the information is not available to all in the same shape, form and manner (this creates arbitrage or imperfection, an opposite effect of 'efficient market'),
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If market were truly efficient
, there wouldn't be any market :)
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Hi Rod,

What do you think of the value of bombardier stock BBD.B?

Thank you!
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Jackson75 wrote: Hi Rod,

What do you think of the value of bombardier stock BBD.B?

Thank you!
It is not on his list...enough said

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