Investing

Investing Idea - Dividend Growth

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Hi Rod,

Do you any thoughts on NYSE: LOW? Why isn't FASTGraphs showing its estimated EPS for next year? It does look close to fair valuation given the recent earnings miss and pullback.

Thanks.
Last edited by cn_habs on Sep 26th, 2016 11:46 am, edited 1 time in total.
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cn_habs wrote: Hi Rod,

Do you any thoughts on LOW-U? Why isn't FASTGraphs showing its estimated EPS for next year? It does look close to fair valuation given the recent earnings miss and pullback.

Thanks.
Hey cn_habs,

Do you mean NYSE:LOW? There's a TSX: LOW.UN but that's a closed ended low volatility investment fund with a 5 mill market cap.
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It feels like CTC.A is returning to (moderately) fairly valued, so it might be a good time to enter if you don't have any of it.
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What do you guys think of PJC.A? It's on Rod's list, seems fairly valued, but the earnings decline is making me unease about whether to enter or not.
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513263337 wrote: What do you guys think of PJC.A? It's on Rod's list, seems fairly valued, but the earnings decline is making me unease about whether to enter or not.
Here is my approach when considering adding into companies that reported weak results:

Every purchase must be thought as a long term partnership with the business. How many declining quarters / years PJC.A had? What is their corporate guidance regarding earnings and cash flow and market consensus? These are rational answers that should remove any unease feeling, specially after weak results.

"The secret is to distinguish between a temporary interruption in the business operations versus a permanent impairment of capital." Marty Whitman

No business is capable of generating perfect long-term operating results. Inevitably, there will be a bad year, a bad quarter, or even a few bad years or bad quarters. However, a weak quarter or year does not necessarily imply that a sound business model is no longer valid. Businesses are competitive, economies are cyclical, and good managements respond and adapt. That's why I wait at least 5 years of declining earnings and estimates of continuing declining before I decide to sell.

Market consensus estimates declining earnings for this year and a recovery for next year. Last earnings call and recent investor's presentation offer insight to their projects and priorities. This would be 2nd year that PJC.A would report lower earnings. So it's a good company to partner with. However, I think it's still overvalued. I wouldn't buy at these levels. Their historical P/E for 10-years, which was a period of good growth, was 16.9. I'd wait to add that at those levels.

CTC.A has better estimates and a better valuation.

Rod
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treva84 wrote:
cn_habs wrote: Hi Rod,

Do you any thoughts on LOW-U? Why isn't FASTGraphs showing its estimated EPS for next year? It does look close to fair valuation given the recent earnings miss and pullback.

Thanks.
Hey cn_habs,

Do you mean NYSE:LOW? There's a TSX: LOW.UN but that's a closed ended low volatility investment fund with a 5 mill market cap.
You are right. I did mean NYSE:LOW.
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rodbarc wrote: ...
Thank you Rod. One more thing I'm hoping to get your perspective on:

Right now there is a big disparity between market valuations with its fundamentals (as you also noted in the other thread). Also with the US election ahead of us and a potential Dec rate hike, I'm concerned about what it would do to my DGI holdings.

Let me first say that, 1) I understand this is a long term investing/"partnership" strategy not a short term trading one, 2) and also I trust that even if a market correction drags my holdings down with it, my holdings are more likely to bounce back because I know I bought them at fair valuation (not over). With these said, I'm still thinking if there is anything I can do to better position for a correction. So I'm wondering what is your opinion on any of the following strategies:

1) Sit tight. Do nothing. Investing and short term trading don't mix. If market correction hits, buy on the cheap. I'm not comfortable with this approach because even though I know discipline is a good thing, but if we know a correction is coming it is ridiculous not to do anything to protect it.

2) Reduce holdings of these DGI stocks NOW, to attempt to buy them back at lower prices once market correction hits. This is something I (emotionally) don't want to do.

3) Short (inverse ETF) the general market as a hedge, since I have more faith in my DGI holdings' valuations than the general market. The down side to this strategy is that in order to hedge full exposure, a large amount of capital/margin would be required for such hedge.

4) To overcome the shortcomings of #3 (shorting) and to save on capital requirement, buy OTM puts of the general market. The challenge with this is that it's hard to accurate hedge the full exposure because of volatility changes and time value etc, as well as the difficulty to time the expiry correctly.

5) To overcome the shortcomings of #3 (shorting) and #4 (OTM puts), consider buying longer-term (to avoid the expiry issue) deep ITM puts or writing deep ITM calls of the general market, so that it almost behaves like a stock. The challenge with this is that the bid/ask spread on these un-popular options are usually wide.
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cannew90 wrote: rodbarc: The idea
" My objective is dividend growth, so that I can live off the perpetual growing income without harvesting the principal. Therefore, beating the index is not the main goal for these ports (because I will never sell these companies) but I will compare with that since I believe that acquiring a solid business at sound valuation that keeps growing earnings, it will produce better results than index investing. The exception for me to sell a business is only if fundamentals deteriorate. I will track earnings yearly to monitor the portfolio. "

Late joiner to this thread, but fully support the concept. In fact we have been retired 10 years with a 100% Cdn Equity portfolio (almost all 19 holdings are on your list). Our income more than exceeds our expenses so we continue to reinvest 60%-70% of our dividends with full div reinvestment.
Good work
This is great news and speaks to this model. I think there is a lot of fear surrounding this model as the vast majority prefers flat index investing.

Would you like to add more detail, explain the 19 holdings and/or what you bought in at to encourage others on this forum that dividend investing is a good idea? I think most forums don't really believe in it.
hi!
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cannew90 wrote: rodbarc: The idea
" My objective is dividend growth, so that I can live off the perpetual growing income without harvesting the principal. Therefore, beating the index is not the main goal for these ports (because I will never sell these companies) but I will compare with that since I believe that acquiring a solid business at sound valuation that keeps growing earnings, it will produce better results than index investing. The exception for me to sell a business is only if fundamentals deteriorate. I will track earnings yearly to monitor the portfolio. "

Late joiner to this thread, but fully support the concept. In fact we have been retired 10 years with a 100% Cdn Equity portfolio (almost all 19 holdings are on your list). Our income more than exceeds our expenses so we continue to reinvest 60%-70% of our dividends with full div reinvestment.
Good work
Well done! Compounding is a great force, making this strategy very powerful.

Rod
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513263337 wrote: Thank you Rod. One more thing I'm hoping to get your perspective on:

Right now there is a big disparity between market valuations with its fundamentals (as you also noted in the other thread). Also with the US election ahead of us and a potential Dec rate hike, I'm concerned about what it would do to my DGI holdings.

Let me first say that, 1) I understand this is a long term investing/"partnership" strategy not a short term trading one, 2) and also I trust that even if a market correction drags my holdings down with it, my holdings are more likely to bounce back because I know I bought them at fair valuation (not over). With these said, I'm still thinking if there is anything I can do to better position for a correction. So I'm wondering what is your opinion on any of the following strategies:

1) Sit tight. Do nothing. Investing and short term trading don't mix. If market correction hits, buy on the cheap. I'm not comfortable with this approach because even though I know discipline is a good thing, but if we know a correction is coming it is ridiculous not to do anything to protect it.
This is the best approach when investing. How do you know that a correction is coming? When? The inability to time with precision is what makes the approach of "do something" a mistake.

Never mind that the market can stay irrational for a long time (to the point that by the time it's fairly valued again, it's already at a higher price than you sold for, not to mention the missed dividends). You don't invest in the market (because you don't index). And you don't invest in the economy. You invest in individual businesses that were chosen individually, and had their valuation examined separately. If you acquired a good business at a fair price, why would you sell it? Why would you interrupt the relationship with the business because of the daily quotes that are simply there for your convenience? Why would the economy or market sentiment influence a sound business purchase done at a good price? Is there a rational explanation? Is that fear of seeing lower prices to potentially never return? You did your due-diligence regarding quality and valuation, so it's an unfounded emotion. Is that greed that if you sell now you could buy again later at a better price and therefore maximize your profit? That's the goal of trading (short term trades to maximize capital appreciation), not dividend investing for the long term.

Having said that, why does feel wrong to not do anything? Remember, you're not selling until the business deteriorates. Ideally, you will never sell it, so you can live perpetually off the dividends.

These are the common ground from well known investors;

"Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world." -Charlie Munger

"We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely." - Warren Buffett

"The hard part is discipline, patience, and judgment. Investors need discipline to avoid the many unattractive pitches that are thrown, patience to wait for the right pitch, and judgment to know when it is time to swing." -Seth Klarman

"Every investor should be prepared financially and psychologically for the possibility of poor short-term results." - Benjamin Graham

Stock prices in the short run can be driven by strong emotions such as fear and greed. The intrinsic value of a business is driven by fundamentals and can be calculated within a reasonable degree of certainty. Therefore, it makes no sense to interrupt an investment due to market price oscillation.

The superior return from a good investment should come from buying good companies at a sound valuation - not from being successful at timing the market in trying to fish the bottom.


513263337 wrote: 2) Reduce holdings of these DGI stocks NOW, to attempt to buy them back at lower prices once market correction hits. This is something I (emotionally) don't want to do.
I wouldn't either. This falls into the fear and greed example I gave above, and it's hard to succeed constantly because no one rings the bell when the market tops.
513263337 wrote: 3) Short (inverse ETF) the general market as a hedge, since I have more faith in my DGI holdings' valuations than the general market. The down side to this strategy is that in order to hedge full exposure, a large amount of capital/margin would be required for such hedge.
Shorting the market implies that you are right on the market direction from when you buy until you sell it. That hedging piece is trading, it's a quick profit while your investments continue to produce growing dividends. Apples and oranges. I firmly believe that trading complements investing, but we're talking about 2 different strategies implemented at the same time, for 2 distinct goals. You're investing in dividend growth to produce a reliable, dependable and consistent growing stream of income. You're trading to maximize short term profits and minimize drawdowns, but you can't guarantee that there won't be a losing period. These are 2 strategies that are not related. Short term trades are not the reason to mitigate temporary losses when investing, because one shouldn't care about their investing portfolio gyrations.
513263337 wrote: 4) To overcome the shortcomings of #3 (shorting) and to save on capital requirement, buy OTM puts of the general market. The challenge with this is that it's hard to accurate hedge the full exposure because of volatility changes and time value etc, as well as the difficulty to time the expiry correctly.

5) To overcome the shortcomings of #3 (shorting) and #4 (OTM puts), consider buying longer-term (to avoid the expiry issue) deep ITM puts or writing deep ITM calls of the general market, so that it almost behaves like a stock. The challenge with this is that the bid/ask spread on these un-popular options are usually wide.
I find this a poor strategy. Buying puts are the same as buying insurance if the price goes down. When investing, you don't care if prices go down in the short term. You wouldn't invest in a business if you have concerns that prices might go down in the long term. The put would hurt your total return. And as a trading strategy, it carries a lot of risks.

Again, there's no trading that mitigates the risks of investing. The best way to mitigate that is to buy a quality business at a sound valuation.

We can't control price fluctuations, but we can control the quality of the companies we purchase. The higher the quality, the more confident I am that the company will bounce back on any price drops.

There's nothing wrong with trading in the short term (provided you employ a robust backtested strategy and have the discipline to always execute it consistently), but it should not be done as a mechanism to manage investment risks. Remember, trading carries its own risks.

Trading and investing should be done separately, as it involves different goals and time-frame. Hedging because one cannot tolerate volatility leads to lower returns in the long run. One should develop the temperament to understand the differences in stock price and operating results.

"On an interview with Charles Munger in 2012:

Q: How worried are you by the declines in the share price of Berkshire Hathaway?

A: Zero. This is the third time Warren and I have seen our holdings in Berkshire go down top tick to bottom tick 50%. I think it is in the nature of long term shareholding with the normal vicissitudes and whirly outcomes in markets that the long term holder has the quoted value of his stock go down by, say 50%. I think you can argue that if you're not willing to react with equanimity to a market price decline of 50% two or three times a century, you are not fit to be a common shareholder and you deserve the mediocre result your going to get, compared to the people who do have the temperament who can be more philosophical about these market fluctuations."



Rod
Last edited by rodbarc on Sep 26th, 2016 10:26 pm, edited 1 time in total.
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:
Investing strategy based on dividend growth

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513263337 wrote:
rodbarc wrote: ...
Thank you Rod. One more thing I'm hoping to get your perspective on:

Right now there is a big disparity between market valuations with its fundamentals (as you also noted in the other thread). Also with the US election ahead of us and a potential Dec rate hike, I'm concerned about what it would do to my DGI holdings.

Let me first say that, 1) I understand this is a long term investing/"partnership" strategy not a short term trading one, 2) and also I trust that even if a market correction drags my holdings down with it, my holdings are more likely to bounce back because I know I bought them at fair valuation (not over). With these said, I'm still thinking if there is anything I can do to better position for a correction. So I'm wondering what is your opinion on any of the following strategies:

1) Sit tight. Do nothing. Investing and short term trading don't mix. If market correction hits, buy on the cheap. I'm not comfortable with this approach because even though I know discipline is a good thing, but if we know a correction is coming it is ridiculous not to do anything to protect it.
After Rod's reply, there really isn't much to say, but I do have one thing to add that may help you.

With this comment, you are letting your fear cloud your thinking and rationality. You yourself know the rational thought but you are letting your emotions sway you towards an irrational decision. If you're having fleeting thoughts of making emotional, irrational decisions now, what's going to happen when your holdings drop by 30-50%?

Now, I don't bring this up to try and put you down, rather, it's something you can work on while you're sitting there doing nothing. Behavioural finance is a very interesting thing, and the more insight you have into your own mind, the better an investor you will be.

While you are sitting there doing nothing, I'd suggest getting a few books from your local library about Behavioural Finance. One I greatly enjoyed was Investing Psychology by Tim Richards - it is very practical and it makes you a better investor immediately.
Buy right, hold tight. Keep calm and go long.
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^^^ This. Treva84 is spot on regarding behavioral finance.

One of the best papers in this subject is "Behavioral Portfolio Management" by C. Thomas Howard, a professor emeritus of finance and the CEO of AthenaInvest.

The paper's highlights include Howard's discussion of the failures of Modern Portfolio Theory, why volatility and risk are two entirely different things, and why the popularity of MPT has led to the failure of so many so-called low-risk strategies. "The investment industry has adopted this same volatility as a risk measure that, rather than focusing on the final outcome, focuses on the bumpiness of the ride. A less bumpy ride is thought to be less risky, regardless of the final outcome. This leads to the unintended consequence of building portfolios that result in lower terminal wealth and, surprisingly, higher risk. This happens because the industry mistakenly builds portfolios that minimize short-term volatility relative to long-term returns, placing emotion at the very heart of the long-horizon portfolio construction process. This approach is popular because it legitimizes the emotional reaction of investors to short-term volatility." He appends to this a great footnote comparing volatility to turbulence and risk to airplane safety.

Thomas later turned this paper into a book.

The paper is a must read to those in the process of building the temperament required for investing.

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

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masterhapposai wrote:
cannew90 wrote: rodbarc: The idea
" My objective is dividend growth, so that I can live off the perpetual growing income without harvesting the principal. Therefore, beating the index is not the main goal for these ports (because I will never sell these companies) but I will compare with that since I believe that acquiring a solid business at sound valuation that keeps growing earnings, it will produce better results than index investing. The exception for me to sell a business is only if fundamentals deteriorate. I will track earnings yearly to monitor the portfolio. "

Late joiner to this thread, but fully support the concept. In fact we have been retired 10 years with a 100% Cdn Equity portfolio (almost all 19 holdings are on your list). Our income more than exceeds our expenses so we continue to reinvest 60%-70% of our dividends with full div reinvestment.
Good work
This is great news and speaks to this model. I think there is a lot of fear surrounding this model as the vast majority prefers flat index investing.

Would you like to add more detail, explain the 19 holdings and/or what you bought in at to encourage others on this forum that dividend investing is a good idea? I think most forums don't really believe in it.
We floundered for years until I read an article by the Connolly Report with the opening line: "If a company does not pay a dividend, don't buy it. If it doesn't grow its dividend, don't buy it either."
I found his site, read his notes and eventually got him to accept us as a subscriber. We've followed his advice, though I did chase a few higher yielding stocks (which ended up costing me), but our core holdings grew and over the years more than made up for the few mistakes we've made. Initially, we did hold a much larger number of companies, but eventually reduced it too 20. We've recently sold our US holdings and are now down to 17. 15 are core and the other two one's I wish we did not buy, but they are producing income so we'll hold them. Coming up with 17 Cdn solid DG stocks wouldn't be hard and I do hold the banks, utility, comm, pipelines and one reit. That's about it.
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To add to to the behavioural finance discussion further, I recently discovered a blog that has a running list and more in depth posts of behavioural biases in investing (it was posted in an article in The Globe & Mail).

I thought I'd share it - http://www.psyfitec.com/p/the-big-list- ... iases.html
Buy right, hold tight. Keep calm and go long.
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rodbarc wrote:
Salomon1260 wrote: Hi Rod, how come TSE:MKP is now off your original list?
If I remember correctly, MKP was removed shortly after the annual review for the candidate lists in 2015, given that they kept posting lower earnings for 5 consecutive years, one of my criteria to sell them. Hence they were not purchased when I did the initial valuation for companies in the Financial sector. My exposure to that sector is done via HCG and MIC. The other disadvantage is that MKP has little coverage by analysts. Also, MKP earnings never made new highs after the peak in 2008, while HCG and MIC did.

Rod
Do you have any thoughts on this potential plan to risk sharing here? http://business.financialpost.com/perso ... bank-costs
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Thanks guys for the recommendation.

By the way, what do you think of the recent policy by the Finance Minister and its effects on several of the financial/mortgage companies in this portfolio, like EQB, HCG, MIC?

I don't care as much about their short term price swings, but I fear that the new policy is going to have a negative impact on their core business prospect in the long run in an irreversible way. I believe in a good business but I'm not sure how much good business strategy / good management can help or turnaround a situation where revenue source is simply regulated away.
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513263337 wrote: Thanks guys for the recommendation.

By the way, what do you think of the recent policy by the Finance Minister and its effects on several of the financial/mortgage companies in this portfolio, like EQB, HCG, MIC?

I don't care as much about their short term price swings, but I fear that the new policy is going to have a negative impact on their core business prospect in the long run in an irreversible way. I believe in a good business but I'm not sure how much good business strategy / good management can help or turnaround a situation where revenue source is simply regulated away.
Can I add this to his request : TSE:FN

They just dropped SIGNIFICANTLY, likely due to the news. Curious about it since Jeenyus1 bought in and wondering about longer term than his near term.
hi!
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513263337 wrote: Thanks guys for the recommendation.

By the way, what do you think of the recent policy by the Finance Minister and its effects on several of the financial/mortgage companies in this portfolio, like EQB, HCG, MIC?

I don't care as much about their short term price swings, but I fear that the new policy is going to have a negative impact on their core business prospect in the long run in an irreversible way. I believe in a good business but I'm not sure how much good business strategy / good management can help or turnaround a situation where revenue source is simply regulated away.
Looks like this same discussion is happening in some other threads. I'll be following there instead.
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513263337 wrote: Thanks guys for the recommendation.

By the way, what do you think of the recent policy by the Finance Minister and its effects on several of the financial/mortgage companies in this portfolio, like EQB, HCG, MIC?

I don't care as much about their short term price swings, but I fear that the new policy is going to have a negative impact on their core business prospect in the long run in an irreversible way. I believe in a good business but I'm not sure how much good business strategy / good management can help or turnaround a situation where revenue source is simply regulated away.
I've posted my thoughts about these events here.

Rod
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Investing strategy based on dividend growth

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cn_habs wrote:
rodbarc wrote:
Salomon1260 wrote: Hi Rod, how come TSE:MKP is now off your original list?
If I remember correctly, MKP was removed shortly after the annual review for the candidate lists in 2015, given that they kept posting lower earnings for 5 consecutive years, one of my criteria to sell them. Hence they were not purchased when I did the initial valuation for companies in the Financial sector. My exposure to that sector is done via HCG and MIC. The other disadvantage is that MKP has little coverage by analysts. Also, MKP earnings never made new highs after the peak in 2008, while HCG and MIC did.

Rod
Do you have any thoughts on this potential plan to risk sharing here? http://business.financialpost.com/perso ... bank-costs
The government is looking to offset their risk by having the banks foot the bill when things go wrong, since they're profiting from it. I like how this forces corporations to be more responsible and less greedy.

This won't do much to curb housing prices, since investors, not the little guys (first timers), are the one driving it up. Foreign investors won't stop investing either, and since now the appeal for residential real estate got diminished, they seem to be targeteting commercial properties, from my anecdotal observation.

I'm not worried. The banks will complain that it will be harder to maintain their $1B profit every quarter. It means they will have to continue to improve their efficiency. Since the banks here are well managed, I trust that management will figure out a way of doing that - even if it includes raising their mortgage rates to historical levels, which is what one should be prepared to pay anyway, since history repeats itself. Banks also complained when SOX and Basel came along, and they all exceeded expectations, to a point that now the requirements are simply a baseline and used as a benchmark during earnings call to show how efficient they are. The same will happen with this.

I can't think of one single business that started to deteriorate or went bankrupt because of government changes like this or interest rates hikes. A well managed business can react and adapt to these changes and nowadays, it's supposed to be nothing but dynamic and aligned with conviniences driven by the technology around us - or they will fall behind. if a bank or lender struggles with this, they have a bigger problem going on.

There is no clarity how this will be implemented, and things are like this are done slowly. As usual, corporate guidance and market consensus based on how the banks are reacting will give a good insight to how they're reacting on this. HCG and EQB will have some pressure, and MKP will have a lot of pressure. HCG and EQB were ahead of the game and started diversifying early. MKP is trying to catch up and unless their change how their business model is structured, they will continue to deteriorate. All these events can add emotions when making a decision, hence my preference to simply look at operating results to define my watchlist and valuation to buy, provided a company continues to meet my quality goals.

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