Archive for year: 2011

Are you ready to update your investment portfolio? Now is the perfect time of year to think about rebalancing, and try to figure out what you should do for next year. If you are looking for some portfolio help, here are some great insights from around the blogosphere:

1. Fixing a Broken Portfolio: Is it OK to Sell Low?: Mike at the Oblivious Investor takes a look at how you can salvage your portfolio. Great ideas on how to tackle a disappointing portfolio and then move on.
2. What Are You Buying?: Dividend Mantra takes a few minutes to tell you what’s on his watch list. It’s a great idea to consider what you are doing — and figure out what you should be doing next.
3. Would You Invest Everything in a 6% Distribution Portfolio?: Over at The Dividend Guy, Mike takes a look at a 6% distribution portfolio. As part of his post, he explores Canadian REITs, and their popularity. A great analysis of different portfolio options.
4. Ah, the real estate market…: Dividend Partisan shares his experience of finally entering the real estate market. A great look at real estate, and where it might going, as well as how to include it in a portfolio.
5. How small investors can drip-feed into Vanguard index funds: At Monevator, The Accumulator offers some information on how you can do better as a small investor. A great method for making the most of your investment with the help of drip-feeding.
6. Let The Dust Settle Before Getting Into Apple: Before you jump into Apple following the death of Steve Jobs, it’s a good idea to take a step back. Value Walk takes a look at how you should take a measured approach.
7. Medtronic (MDT) Dividend Stock Analysis: Over at Dividend Monk, Matt takes a look at Medtronic. A great analysis of a stock that you might consider a “reasonable buy” as an addition to your portfolio.

One of the essential strategies of dividend investing for stable income is buy and hold. When you are investing in dividend stocks, and you expect to build an income portfolio based on these stocks, you, by definition, buy these stocks and hold them for long periods of time.  However, it is important to understand that buy and hold investing isn’t about buying and then holding forever. It’s about buying and holding until the stocks in question no longer meet the requirements you have set for your income portfolio.

Why Buy and Hold Works for Dividend Investors

The main point of buy and hold investing is that you look for a stock with staying power. It should have solid fundamentals, and a certain amount of steadiness. A stock with good fundamentals, including competent management, reasonable profit margins and decent market share, is likely to make it through stock market downturns and difficulties.

Additionally, a good buy and hold stock often (but not always) makes a good dividend stock. A company on solid footing is not likely to cut dividends at the first sign of trouble in the stock market. Indeed, it is more likely to stay the course, aware that, over time, these short term fluctuations tend to even out a bit. This means that your payout is likely to keep coming, even during a recession or a stock market crash. Just look at the dividend aristocrats: These are stocks that continued increasing payouts, even during recessions, for 25 years. Some dividend aristocrats have been following this model for more than 40 years. It makes it fairly clear that these are stocks that do reasonably well, with solid performances over time, and well worth holding on to.

When to Sell a Buy and Hold Stock

Of course, even with some buy and hold stocks, the time comes to let go. Buy and hold doesn’t mean clinging tenaciously to a stock to the point of folly. Instead, it means holding on until it no longer makes sense to do so. As your goals change, you might need to shift your holdings. Additionally, you should also pay attention to the fundamentals of the stock. A change in the fundamentals may mean that it is time to sell a specific stock. This makes sense; then you can the money and invest in something else that makes more sense for you in the long term.

Frequent trades can eat into your earnings, and can cause problems when you are trying to build an income portfolio. Instead, you are better off saving money on commissions and making moves based on fundamental analysis, rather than making panic trades because of a stock market crash. Plus, you are more likely to meet your income goals over time with a buy and hold strategy. Choosing solid stocks to invest in, and building up your portfolio, will provide you with a better chance at creating a stable income stream as opposed to always changing what you hold in your portfolio.

Over the weekend, the Financial Blogger Conference took place in Chicago. There were quite a few bloggers there, including bloggers that write about dividends. Here are a few posts from attendees, as well as those who didn’t attend. Plus, plenty of news on the Dividend Growth Index, picked by bloggers:

1. Dividend Growth Index Results: It was a true pleasure to meet The Dividend Guy over the weekend, and hang out. And to read about the results of the Dividend Growth Index. Look over the list. It might be just what you need to boost your portfolio.
2. Stock Picks for the Dividend Growth Index: Dividend Ninja (cool guy; met him at the conference) describes his three picks for the Dividend Growth Index. Learn more about the index, and why he picked the stocks he did.
3. Evaluating Vanguard’s New LifeStrategy Funds: Oblivious Investor is personable in real life, and just as helpful as on his blog. Read about his evaluation of Vangaurd’s latest fund offering. Insightful analysis, as always.
4. Dividend Monk’s Three Picks for the Dividend Growth Index: Read about Dividend Monk’s contributions to the Dividend Growth Index. Find out how he narrowed it down to only three choices — and why he picked what he did.
5. Michael Lewis on The Daily Show with Jon Stewart: Watch this episode of The Daily Show, featuring Michael Lewis. Value Walk shares the episode, which addresses bankrupt countries around the world.
6. Dividend Income – September 2011: The Passive Income Earner keeps it real by sharing his dividend income last month. A great post for catching up — and finding inspiration in your efforts.
7. I’m Back!: Dividend Partisan has been away, doing a military training exercise. I’m sure we all missed him while he was gone, and it’s great for him to be back, and share his insights from the exercise.

The Canadian Telecommunication companies such as Bell (BCE-N), Rogers (RCI-N), Telus (TU-N), and Shaw (SJR-N), are exceptional dividend paying stocks. As a U.S. investor, you can take part in four of Canada’s largest communication companies which will pay you a generous dividend yield. More importantly, you can buy these top Canadian companies without having to worry about foreign content rules, since they are all traded on the NYSE.

These are established and large cap companies, and for the most part are well managed. BCE and Shaw Communications however have accumulated more debt throughout 2010 to 2011, in large part due to acquisitions and service upgrades, among other reasons. Telus is the exception, with lower debt and a reasonable dividend payout ratio, and in my opinion the best of the Canadian telecoms to invest in.

Why Buy Canadian Telecoms?

If you aren’t investing in Canadian Telecoms, then you may want to consider them, even with their higher debt. These giant blue-chips are hybrids between technology and communication companies, and therein lay their strength and economic-moat. They are really utilities which actually own, maintain, and operate the communication infrastructure throughout Canada.

They make their money through cell-phone sales, cellular contracts, internet service providing, and basic telephone or cable services. Since these companies already have the infrastructure in place, and maintain it, the profit is in each subscriber – and a hefty profit it is. Canadians’ have learned to love but hate their telecoms, with their high fees and less than stellar customer service. But at the end of the day (like banks) people are left with little choice but to use them.

While it’s a very competitive sector, telecoms are more stable then tech only oriented companies. It really doesn’t matter whether the iphone, blackberry or android phone prevails. And it doesn’t even matter if the iPad wins over a Samsung tablet. Since the telecoms own the infrastructure, they simply provide access to wireless services, and sell end users cellular contracts with the latest phones or devices. It’s a win for telecoms regardless of what new hot product is out.

How Wide is the Moat?

The economic moat for these Canadian telecoms is extraordinary. Canadians pay some of the highest cell phone fees in the world!  Obviously that’s bad for Canadian consumers, but translates into profit for shareholders.  Many people believe the CRTC (Canadian Radio-television and Telecommunications Commission) governs the cell phone industry in Canada, but they do not. The cell phone industry in Canada is largely unregulated. As a result the big players (Telus, Bell, and Rogers) have pretty well locked down any competition and charged whatever prices they see fit.

Even with the smaller players such as Wind Mobile entering the stage, and undermining the cellular pricing market, the big three telecoms have held their ground. The reason is simple, the big three telecoms in Canada aren’t just cell-phone providers. They are diversified and well established communication companies with huge capital and resources available to undermine their competition.

How Resilient are the Telecoms?

During the recent market correction at the beginning of August, the Canadian telecoms performed remarkably well compared to other sectors. Looking at the beta of these companies, the answer becomes obvious. Any beta value below 1.0 means the company is less volatile than market index it is a part of. Therefore for most investors, a lower beta is preferable. As compared to the NYSE, Bell (BCE-N) has a beta of 0.771, Rogers (RCI-N) has a beta of 0.679, Telus (TU-N) has a beta of 0.453, and Shaw (SJR-N) has a beta of 0.597. These telecoms have a low volatility with a good dividend yield.

Bell Communications (BCE-N)

Bell (BCE Inc.) is Canada’s largest communications company, with over 30.17 billion in assets. BCE provides cellular service, both satellite and cable television, internet service, and of course phone landline services.  BCE currently trades at US $38.80 per share, has a PE Ratio of 15.11, and a debt-to-equity ratio of 101.31. The dividend yield is currently a very generous 5.4%, but the dividend payout ratio (DPR) of 80.93% is high for a big blue chip.

According to a recent Globe & Mail article, BCE has raised its quarterly dividend six times (a cumulative 41 per cent) since the fourth quarter of 2008. While most Canadians are enamoured with their biggest telecom, I have not purchased BCE because of the high DPR and high debt load, both increasing since the start of the year.  Nonetheless, BCE is a favourite among Canadian dividend investors.

Rogers Communications (RCI-N)

In second place for market cap among the Canadian telecoms, is Rogers Communications with a market capitalization of 20.73 billion. Rogers is Canada’s largest provider of wireless services, and also owns Fido (previously Microcell Communications). Rogers also provides cable TV, internet, and phone services. The company also provides broadcasting services, magazines, and sports entertainment. Rogers currently trades at US $37.93 per share, has a PE Ratio of 14.54, but with a very high debt to equity ratio of 266.01. The dividend yield is 3.80% with a dividend payout ratio of 54.78%.

Telus Communications (TU-N)

Telus Communications is Canada’s third largest telecom with a market capitalization of 15.98 billion. Like its competitors, Telus provides internet, phone, and provisions an extensive wireless service across most of Canada. It currently trades at US $49.25 per share, has a PE Ratio of 14.33, a debt-to-equity ratio of 88.94, and a dividend yield of 4.50%. The dividend payout ratio for Telus is 64.5%. In my opinion the solid DPR and lower debt, make Telus a preferable investment in Canadian telecoms, as compared to BCE and Rogers.

Shaw Communications (SJR-N)

Shaw Communications provides telephone, Internet, and television services as services primarily in British Columbia and Alberta (we use Shaw at home). Shaw has come under heavy criticism for its $69 million-dollar pension to former CEO Jim Shaw, its purchase of CanWest Global, and its family run board that leaves shareholders without voting rights.  It is one of the smaller telecoms with a market cap of 9.37 billion. It currently trades at US $21.52 per share, has a higher PE Ratio of 18.81, and a higher dividend payout ratio of 80.7%. It also has a higher debt to equity ratio of 166.7. Shaw is a monthly dividend payer, and with a yield of 4.30%, makes an interesting investment for income oriented versus growth oriented investors.

One of the ways that you can build up your investment portfolio is to look into income funds. Income funds provide you an opportunity to build a revenue stream, as well as add a little instant diversity to your portfolio.

What Are Income Funds?

Income funds are fairly straightforward. They represent a collection of investments that provide income. These can include dividend paying stocks, bonds and other investments that provide income. Many people find income funds attractive because it provides them with a source of income, while at the same time providing some sort of diversity. Many income funds look to dividend aristocrats and “safer” bonds like Treasuries when choosing what to include in an income fund.

It is important to note that most income funds are not going to show a lot of growth. They are not constructed to provide you with high earnings, but are instead meant to provide steady income. If you are looking for get rich quick investments, income funds usually aren’t the way to go. Instead, these funds are created to provide as stable a cash flow as possible.

Using Income Funds to Your Advantage

There are two main ways that you can use income funds to your advantage:

1. Create a source of income: The first, obviously, is to create a source of income for you. You can build up your investments in income funds over time, so that you eventually have enough shares to warrant larger payouts. Many people nearing retirement put a chunk of their nest egg into income funds in order to receive a regular payout – even as the value of the investment theoretically increases.
2. Reinvest dividends to build wealth: Another option is to reinvest your earnings in order to build wealth. Many income funds are set up so that proceeds you receive are automatically used to buy more shares. This means that you are basically getting free shares. This can increase what you own at a much quicker pace. This way, when you decide to start receiving payouts rather than reinvesting, you own more shares and receive more. Additionally, this can be a way to build the number of shares you have so that you get more if you decide to sell your investment later.

If you follow the reinvestment route, you can improve your retirement nest egg by keeping your fund in a qualified retirement account. You can receive a tax advantage by combining your income fund with your retirement account. It’s a great way to build your nest egg while reducing the amount of wealth eroded by taxes.