Handling the Risks of Investing in Stocks: Part 2

Summary

  • Buying stocks is a risk and reward game. We try to maximize the rewards and minimize the risks.
  • In the first part of the series, I discussed the risk of capital loss and volatility risk which come from investing in stocks, and ways to counter those risks.
  • In this part of the series, I’ll discuss valuation risk, the risk of market crashes, and individual risks.

Read part 1 of the article.

3. Valuation Risk

No matter investing for growth or income, overpaying for a company will not only reduce your returns but also increase your risk.

For example, during the internet bubble, Cisco Systems, Inc. (NASDAQ:CSCO) reached an all-time-high of $79. The price of buying at extreme overvaluation is an inevitable hard crash. To this day, it hasn’t come near that price.

graph showing Cisco's overvaluation in the internet bubble

Cisco was extremely overvalued in the internet bubble.

To counter valuation risk:

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Handling The Risks Of Investing In Stocks: Part 1

Summary

  • Buying stocks is a risk and reward game. We try to maximize the rewards and minimize the risks.
  • In the first part of the series, I’ll start by discussing the risk of capital loss and volatility risk which come from investing in stocks. And ways to counter those risks.

If I’m not better off investing in a stock, why bother the time, effort, and the cost of capital? I have the opportunity cost of not being able to use that money, while I’m holding that stock.

1. Risk of Capital Loss

Stocks on major exchanges can be bought and sold easily. However, the flip side of this liquidity is that it’s also very easy to sell at a loss. Some make a better investor in real estate because it is less liquid, even though one usually needs to get a mortgage to buy a house because the investment is much bigger.

When investing in a stock, there’s a chance that the company could go bankrupt. However, the odds are in the investor’s favor if he or she invests only in companies whose rewards outweigh the risks. So, the more likely scenario is to sell at a loss emotionally after the price of the stock goes down.

If that happens, then, you need to ask yourself why you sold at a loss. Did you no longer believe in the company you chose? Did something change from the story of when you made your purchase? Or was it due to emotion?

To counter the risk of capital loss:

  • Record why you bought the company in the first place.
  • If it’s for a short-term trade, decide the holding period and at what price range you plan to sell. Do that ahead of time without emotions.
  • Know thyself. That is, know your temperament, risk level, time horizon, experience, and test the waters if you have to.
  • Buy at reasonable valuations.
  • Have an investing plan and update the plan as you go.

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Morningstar Individual Investor Conference this Saturday

If you didn’t know already, Morningstar’s Individual Investor Conference is coming soon. The live online conference starts at 9 a.m. Central Daylight Time. Topics covered include:

  • Making Money Last in Retirement
  • Model Portfolios for Retirement Savers
  • a couple sessions on funds
  • Morningstar’s Dividend Playbook

To see a summary of what each of the above sessions is about, check out the agenda page.
If you’re interested, you can still register at http://register.webcastgroup.com/L4/?wid=05795010620

Canadian Dividend Stocks to Buy Now: March 2015

Dividend stocks are attractive because they pay an income whether the market is going up, sideways, or even going down. Here are some dividend stocks which you can consider. The stocks I’m about to mention pays 115% to 165% more income than the index iShares S&P/TSX 60 Index Fund (TSE:XIU), which pays out a yield of 2.6%.

High Dividend Canadian Companies

This list shows the current yields, and I believe are good starting yields to start buying into these companies if they are a fit for your portfolio.

Buy Northern Property REIT for Income and Capital Gains

Northern Property REIT logo

Northern Property REIT (TSX:NPR.UN) is a real estate investment trust which owns housing properties, such as rental apartments and town homes. It collects rent from a diversified portfolio of properties located across seven provinces in Canada.

Northern Property REIT has paid a monthly distribution for 12 years and have never reduced it. So income investors can have a peace of mind owning it for current income. Right now, it pays a monthly distribution of $0.1358 per unit with a yield of 6.9%.

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Stay the Course: See Compounding Results in the Early Years of a Dividend Growth Strategy

Summary

  • I’m in my late twenties, and in the early years of my compounding journey with my dividend growth portfolio.
  • How do I stay the course in being invested and receiving a growing income while the market goes up and down everyday?
  • I have 2 spreadsheets to track my growing dividends. One for the anticipated dividends and another for the actual dividends received.

In the first 10 years, it’s hard to notice the effects of compounding. However, after that, it really starts to take off. A dividend growth portfolio could eventually run itself without you having to contribute new money if you employ an income growth strategy. That’s why it’s time in the market that matters. Time and the rate of compounding is what makes compounding work. Of course, contributing as much as you can regularly to the portfolio and buying what’s priced at a value matters just as much.

How I Stay the Course in the Early Years of Compounding

When I started using the dividend growth investing strategy, I didn’t expect it to be so slow in showing results. For example, on a given day, I only receive a $10 dividend pay check. I soon forget about it because it’s so small! You don’t feel the compounding until a decade down the road.
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Why Warren Buffett Sold Exxon Mobil And Bought Suncor Energy

Summary

  • Berkshire Hathaway sold out of its stakes in Exxon Mobil and ConocoPhillips.
  • And added more shares of Suncor Energy.
  • Reason 1: US dollar to the Canadian dollar is at decade’s low.
  • Reason 2: The Canadian Dollar is correlated to the oil price.
  • Reason 3: Suncor Energy is a quality company priced at a value.

Overview

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) reported its Q4 2014 moves. It sold out of its stakes in Exxon Mobil (NYSE:XOM) and ConocoPhillips (NYSE:COP). However, it added mores shares of Suncor Energy (NYSE:SU).

Some Reasons Why Mr. Buffett sold some US big oil companies but bought Suncor Energy

Reason 1: US dollar to 1 Canadian dollar is at Decade’s Low

It currently takes ~$0.80 USD to exchange for ~$1 CAD, which is at the decade’s low. That means, around this exchange rate, Berkshire Hathaway would have bought the Suncor Energy shares at a 20% discount based on the foreign exchange rate alone.

Reason 2: Canadian dollar is Correlated to the Oil Price

The oil price’s lowest points were in 2009 and the present day, which matches the low points of the Canadian dollar compared to the US dollar historically. So, there’s a correlation between the oil price and the Canadian dollar. Low oil price implies low Canadian dollar in comparison to the US dollar, and vice versa. If one believes, oil price will head higher again, then one should also believe the Canadian dollar will head higher again.
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High Dividend Stocks Priced at a Value: February 2015 Watchlist

When I say “high dividends”, I mean companies which are paying 1.8x (or 80%) more dividends than the index. For example, SPDR S&P 500 ETF Trust (NYSEARCA:SPY)’s Friday closing yield is 1.83%. So, a company paying out a high dividend would be one that pays at least a yield of 3.3%. Likewise, on the Canada side, iShares S&P/TSX 60 Index Fund (TSE:XIU) had a yield of 1.93%. So, a Canadian company paying out a high dividend must pay at least a 3.48% yield.

For February, I identified some high dividend/distribution companies in the US and a Canadian retail REIT that I’ve added to this month. Canadians can consider getting monthly income from this Canadian REIT.

High Dividend US Companies

This list shows the current yields, and I believe are good starting yields (with respective to the company’s historical yields) to start buying into these companies if you believe in the future of these companies.

  • AbbVie (NYSE:ABBV) – yield: 3.38%
  • Philip Morris International (NYSE:PM) – yield: 4.83%
  • Chevron (NYSE:CVX) – yield: 3.79%

Chevron was in the last watchlist: Dividend Stocks at a Value: January 2015 Watchlist. Since that article, Chevron’s yield has drop due to price rising a few dollars. Long-term income investors shouldn’t sweat the small changes in price though, as Chevron is still attractive at a yield of 3.79%.

AbbVie

AbbVie logo

AbbVie is a global biopharmaceutical company hardquartered in Illinois. It was spun off from Abbott in January 2013. It has around 25,000 employees and 7 research & development and manufacturing facilities around the world. AbbVie’s focus is on immunology and virology diseases. Currently, Humira, AbbVie’s top drug, makes more than 50% of the company’s profits. Fundamentally, both Morningstar and F.A.S.T. Graphs show it is priced in the fair value range. Technically, it is bouncing off of a recent bottom. Currently marked as in the fair value range by Morningstar, AbbVie is certainly worth considering on a pullback.

Philip Morris International

Philip Morris logo

Philip Morris is a leading global tobacco company, owning 7 of the world’s top 15 international brands, including Marlboro. Philip Morris holds 28% of the global market, excluding China. Other than to provide products to adult smokers, and to generate superior returns for shareholders, Philip Morris also has the goal of reducing harm caused by smoking by developing products which are close in look, feel, and taste to the conventional cigarettes but seem to be less harmful.
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Is Kinder Morgan A Buy Now For A Dividend Growth Investor?

I started buying shares in Kinder Morgan (NYSE:KMI) since January 2014 with my starter position bought at $36. So far, it has done well for me as a dividend growth investor. Its quarterly dividend grew from $0.41 per share to $0.45 per share, which is an annual growth of 9.75%. Not too shabby for a starting yield of 4.56% and 14.4% unrealized gains. Adding on dips would have added to the profitability of this position.

Summary

  • Kinder Morgan’s price is 3.5% away from its 52-week high. Is it a buy now?
  • Its dividends are expected to grow 10% a year through to 2020. That is $3.22 per share of dividends by the end of 2020.
  • Based on a 4.5% yield, Kinder Morgan will reach $71.58 by the end of 2020.
  • It’s reasonable to expect Kinder Morgan to have annualized returns of more than 13.5% with Monday’s closing price of around $41.20.
  • Kinder Morgan is truly an income growth machine.

My last article on “What I’m Doing With My Kinder Morgan Shares As A Dividend Growth Investor” was when it announced the merger of the 4 companies. Now, this is an update amidst the low oil price from a dividend growth investor perspective, whether as a holder or as a buyer at the current price.
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Ann’s Simple Income Investing Strategy

A friend of mine is starting to look into dividend investing, and has lots of questions about the subject. My attempt with articles about Ann, a simple investor, is to keep things as simple as possible.

Summary

  • Ann, our simple investor, looks forward to income, money received on a regular basis, because it can be used to pay down debt, pay bills, or to be reinvested.
  • A simple way to earn income is to buy shares in dividend-paying leaders.
  • Ann decides that her $11,000 investment should earn her a minimum income of $330 annually.
  • Ann ends up buying shares in 11 leaders in 11 sectors, earning an income of over $400, exceeding her goal.

Why Would You Want Income?

Money can be used for many things, including paying down debt, buying for groceries, paying for your children’s tuition, watching a movie, paying the utilities bill, paying for gas for your car… you name it!

Income is money received on a regular basis. Among the most magnificent thing income can do is that it can earn you more income. That is, by buying income-generating assets, you can use those generated income to buy more assets that would generate more income.
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Dividend Stocks at a Value: January 2015 Watchlist

A good dividend stock pays and even raises its dividend whether the market goes up or down. As long as you don’t sell the shares, you will always get a positive return (the dividends you receive) no matter how the market behaves. Recently, there has been a lot of volatility in the Energy sector due to oil price plummeting so an investor could value dig there to get a high starting yield and potential return once oil price goes up again…that is if one can stand the volatility and the possibility of more downside in the near-term. That’s why I like buying in small chucks at opportune times when a company on my watchlist is priced at a value. Dollar-cost averaging allows the flexibility of buying more shares at a lower price when the market behaves negatively.

For this month, I looked over my current holdings to see which dividend payers are good values to buy. There are also other good Energy companies to look into, including Exxon Mobil Corporation (NYSE:XOM), Enbridge Inc (TSX:ENB)(NYSE:ENB), TransCanada Corporation (TSX:TRP)(NYSE:TRP), Inter Pipeline Ltd (TSX:IPL), Suncor Energy Inc (TSX:SU)(NYSE:SU), Cenovus Energy Inc (TSX:CVE)(NYSE:CVE), Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ), and Vermilion Energy Inc (TSX:VET)(NYSE:VET).

Classic Dividend Companies

This list shows the current yields, and I believe are good starting yields (with respective to the company’s historical yields) to start buying into these companies if you believe in the future of these companies.

  • Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) – yield: 4.16%
  • Chevron Corporation (NYSE:CVX) – yield: 3.96%
  • International Business Machines Corp. (NYSE: IBM) – yield: 2.82%

Bank of Nova Scotia

Bank of Nova Scotia logo

Bank of Nova Scotia is the third largest bank in Canada. This Canadian leading bank provides financial services in over 55 countries. It’s medium-term objectives were met in 2014. The 2015 medium-term objectives is the same as 2014. For example, earnings per share growth is expected to be between 5 and 10%, while return on equity is expected to be between 15 and 18%.

A table for Scotiabank 2014 Medium-Term Financial Objectives Met
Source: Bank of Nova Scotia Q4 2014 Investor Presentation, Slide 5

Chevron

Chevron logo
Chevron is a large oil company, which pays an attractive dividend of over 3.9%, 20% higher than its 5-year average of 3.3%. It’s paying out 38% of its earnings for its dividends. Historically, this is at the higher end of its yield range, unless one wants to shoot for above 4.25%, which looks possible.
CVX Dividend Yield (TTM) Chart

CVX Dividend Yield (TTM) data by YCharts

If history is telling, then, having raised dividends for 27 years in a row, CVX will be increasing its dividend in Q2 of 2015 even amidst low oil prices. Additionally, Morningstar gives it 4-stars, meaning the shares are currently undervalued.
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