OPTIMISM #5 - April 30, 2020

Dear Clients and Friends,

First of all, congratulations for not cracking under pressure, not selling when the prices fell.  And cheers to those who bought more shares on sale.

The market is recovering nicely, even though there is no sign of any news of tangible improvements in the oil issue, world affairs, economic trends or whatever. 

As I have said before, the market is more emotional and less rational than one would think.

·“Price is a creature of the market's mood.” Benjamin Graham (Warren Buffet’s teacher)

It’s remarkable how negative the news headlines are, even after four days of share price increases.
Is the media even paying attention?

When I tell people things will get better, they ask me how I know for sure.  I say that it’s a bit like owning a sailboat. 

Exactly when it will get windy I don’t know, but I know with complete certainty that it will.

I have an advantage over many of being colour blind, the red/green type. 

I can’t see the difference between the green gains and the red of losses on my screen. 

Seeing red flowers on green bushes such as bougainvillea is hopeless, and traffic lights can be a problem as well.

·“Dividends are much more secure than prices.”

I was chatting with my brother-in-law John, who offered a great analogy. 

He said seeing your Scotiabank shares at $55, well under its true value of about $77, “is like having someone offer you a few hundred thousand less for your home than its worth. “It’s just an offer.  You would be unwise to accept it”.

I have stolen a few more great comments from a favourite site of mine written by a friend Tom Connolly:

  • Aren't you glad we sought quality? When the tide goes out, dregs are exposed. Modern Portfolio Theory's is being exposed too.  None of our quality holdings have cut dividends.
  • Be aware that reduced distributions by mutual funds are commonplace. Canada's biggest fund, RBC's, for instance, cut their dividend distribution from $1.29 to $1.17 in 2017.
  • According to Neils Jensen's The End of Indexing:  He was correct, just a bit early.
Passive investing in ETFs as we know it, is over.  Now we'll have to paddle a bit, not sail. 

Rowing means careful selection of companies that will do a bit better than average going forward, perhaps in a low growth world.

Total Return:

  • from 1970 to 1979 was a tough time for investors.  Annual returns were almost entirely from dividends.  6.75% total:  1.6% from capital gains and 5.14% from dividends.
  • During the Depression, 1930 to 1939 returns were -5.26% per year from capital gain (loss) and 5.1% from dividends.
Figures are from Barron's list of 200 years of payouts by decade March 4, 2002

  • In 1982, the S&P 500 was at the same value as it was in 1962. With all the spending to keep the economy going, bonds will not be safe either.
What's secure? Solid companies that can hang in there: QUALITY.

RCI.B's (Roger’s Media) dividend in April 2020 did not rise (declared Jan 22). In April 2019, it did.  What message are they sending us?

Telus' dividend rose on Jan 2, 2020 to .29125 from .28125 in November last year (data adjusted for March 2020 2:1 split). 

Which Telco seems more optimistic about its future?

Loblaw - We will be watching in early May 2020 for a declaration of an increase in early July, or perhaps no increase.

There will not be a decrease. Loblaw's last year's increase was in July, announced in early May.

Big Bank Dividends Will Hold:



PORTFOLIO RISK - I read a column the other day where the author stated that a portfolio was most vulnerable to risk right after you retire. What's risk? He said it is a market tumble. So, for investors depending upon price, the portfolio is vulnerable. But is that the risk? If you have been building a dividend growth portfolio for a good number of years before you retire you have built up some great yields with the dividend growth.

A substantial portion of retirement cash flow should come from dividends. All the rest, for us at least, has come from the increase in share price driven by the dividend growth.

Nothing really changes when you retire. We should not really have much if any, of a decumulation stage (capital keeps growing). Most likely, you will not touch your original capital for years, if ever. Someone with an ETF likely does not have that choice.

Things are very quiet on the ETF front just now.

The Financial Times has quite the column on ETFs on Easter weekend.

Trillions (with a T) of ETFs world-wide were sold.

The middlemen/wealth managers took their fees.

Hundreds of thousands of people will never buy stocks again.

One needs growth to build wealth. Yield alone will not move the needle.

So, the criteria #1 is years of continuous dividend growth, years and years.

But more than just that; we want stable, secure dividend growth.

Dividends are much more stable than stock prices. We win, remember, because we do things differently. Quality companies rarely reduce their dividends.



“Beating the market modestly leads to immodest wealth.”  Buttonwood

Charles Ellis' great book is called Winning the Loser's Game for that reason. (D for discipline, H for hold and L for long-term).

“We do not want ordinary dividend stocks.” Stephen Jarislowsky puts it this way on page 106 of his The Investment Zoo: “I am risk averse, so I want all my stocks to be of high quality”.


DIVERSIFICATION:  Wide diversification DOES NOT provide more security.

Quite the opposite, in fact. Wide diversification is hazardous to returns.

Compare the market return over the last decade with just about any of the quality dividend growth stocks you hold.

John Bogle (Founder of Vanguard ETFs) pointed out, “It looks like Wall Street compensation is going to be very close to its all-time high this year, for doing WHAT, one asks?

For creating a whole lot of 'innovation' products that are designed to enrich the marketers and not the buyers, and that's what the industry is all about.” The Atlantic Feb 2010

The 4% rule for us is own the best 4% of companies. For the others, it's 'you can eat 4% of capital a year in retirement'. Which resonates more with you?  As our capital continues to grow during retirement, we, typically, do not have to touch our original money.

Investing is much like driving.  It’s scary in the beginning, even when you are white-knuckling at 30 kms an hour. 

But if you stick with it each day, through sun, rain, snow and fog, (aka if you manage its risks sensibly), you will soon be driving comfortably on the highway at 110 km/hour.  How does that happen? 

My job is to get you driving safely and comfortably on the highway.  Retirement is a long trip.  There are risks, but this is the most sensible way to get there. 

Have a great week. Summer is coming.

Derek Moran R.F.P.