Stocks - The Best Buys 2

[Enoch Root]

Two issues with a high dividend stategy:

1) dividends are taxable when received, as opposed to capital growth which isn't taxed until realized (buy and hold indexes, and you have virtually zero turnover)

2) because interest rates have been at historically low yields for some time, investors have largely switched to dividend stocks. This has, IMO, resulted in popular dividend stocks becoming over-priced, relative to other securities. It may be a while before that gets normalized, but I do believe it will happen sooner or later.

I think a diversified buy and hold strategy is best for most investors. There is a very simple way to outperform the markets: dollar cost averaging. All you have to do is save regularly (pay yourself first), and buy a diversified portfolio. The math will take care of the rest. And it doesn't require significant time or expertise.

[Shazam]

Presumably people are purchasing said stocks in tax sheltered accounts.

Just my opinion, but interest rates will never surpass nominal levels ever again. That doesn't mean buying just dividend stocks is a good idea.

[Enoch Root]

Originally Posted by Shazam

Presumably people are purchasing said stocks in tax sheltered accounts.

The sheltered accounts of individuals account for only a tiny portion of investable assets. Tiny. The trend to dividend stocks is wide sweeping, and includes professionally managed money.

Just my opinion, but interest rates will never surpass nominal levels ever again. That doesn't mean buying just dividend stocks is a good idea.

Never is a very long time. It wasn't that long ago that the popular view was that interest rates would never be able to sustain levels under 6%.

Interest rates plummeted world wide when governments realized that debt burdens were killing them. There was a global commitment to lowering debt, reducing deficits, and fighting inflation.

Recently, we are seeing a bit of a return to deficit spending, and somewhat less concern about inflation (complacency is probably a better word). If these trends continue, and inflation rates start to rise, along with debt levels, interest rates will respond. Not likely to happen quickly, especially in any significant level. But never say never.

Also, if dividend stocks are over-priced, we won't need to see increased interest rates in order to have dividend stocks under-perform going forward.

[Shazam]

Originally Posted by Enoch Root

The sheltered accounts of individuals account for only a tiny portion of investable assets. Tiny. The trend to dividend stocks is wide sweeping, and includes professionally managed money.

I have no idea what you're trying to say. "Professionally managed money" manages a lot of individual accounts.

Never is a very long time. It wasn't that long ago that the popular view was that interest rates would never be able to sustain levels under 6%.

People have been lending money for a very, very, very, very, very long time. The historical rate is around 5%. So you're actually better off thinking that 5% is the normal rate and everything else is an aberration.

Interest rates plummeted world wide when governments realized that debt burdens were killing them. There was a global commitment to lowering debt, reducing deficits, and fighting inflation.

Recently, we are seeing a bit of a return to deficit spending, and somewhat less concern about inflation (complacency is probably a better word). If these trends continue, and inflation rates start to rise, along with debt levels, interest rates will respond. Not likely to happen quickly, especially in any significant level. But never say never.

QE was a different way to introduce liquidity back into markets, that has limited inflation to mostly real estate. This was a bit of an unexpected side effect as in Japan, where QE was introduced, real estate is not treated anything like it is in other first world countries.

But the last thing a bunch of indebted gov'ts are doing is raising interest rates. Besides they can just QE more.

[Enoch Root]

You said "presumably people are purchasing said stocks in tax sheltered accounts". Sheltered accounts make up a tiny portion of investable money. Not enough to move the needle with respect to the valuation of dividend stocks.

Yes I know interest rates were low a long time ago. I was simply making the point that peoples' perceptions are biased towards recent events, and 'never' is a long time.

Too much QE would trigger more inflation. We don't really disagree here - governments want low interest rates, due to high levels of debt. I am just saying that things do change. And we are already seeing the pendulum start to swing back a little bit.

[Slava]

Originally Posted by Enoch Root

Two issues with a high dividend stategy:

1) dividends are taxable when received, as opposed to capital growth which isn't taxed until realized (buy and hold indexes, and you have virtually zero turnover)

2) because interest rates have been at historically low yields for some time, investors have largely switched to dividend stocks. This has, IMO, resulted in popular dividend stocks becoming over-priced, relative to other securities. It may be a while before that gets normalized, but I do believe it will happen sooner or later.

I think a diversified buy and hold strategy is best for most investors. There is a very simple way to outperform the markets: dollar cost averaging. All you have to do is save regularly (pay yourself first), and buy a diversified portfolio. The math will take care of the rest. And it doesn't require significant time or expertise.

Good post and I would add that I think dividends are more uncertain than a lot of people think.

[Regorium]

Originally Posted by sa226

In my ongoing quest to have a comfortable retirement while not having to do much work, in the past 12 years I have gone from Mutual funds to pure growth investing to 90/10 index investing with a horizon of 20+ years.

Now im slowly moving into pure dividend growth investing.

I think its the perfect balance of decent forecastable returns with a fairly hands off but involved approach. With a 20 year horizon, the power of compounding returns with reinvested dividends is pretty enticing.

Is it boring as hell? Yep. I've come to realize that im never going to find the next apple, so this is going to be my new approach.

I tried to do this by investing in dividend darlings like Crescent Point Energy.

Definitely learned an expensive lesson about dividend investing. A lot of times, a high dividend is generally a good indicator of the level of risk you're actually taking on.

For example, even a strong company like Enbridge with a relatively high dividend is indicative of the level of risk that the company takes on. You're betting that you're not going to have a PG&E situation, and the high dividend is the reward you get for taking on that risk.

[DoubleK]

Thoughts on Questrade?

I'm currently with TD direct and I'm not super happy with it.

[Slava]

Originally Posted by Regorium

I tried to do this by investing in dividend darlings like Crescent Point Energy.

Definitely learned an expensive lesson about dividend investing. A lot of times, a high dividend is generally a good indicator of the level of risk you're actually taking on.

For example, even a strong company like Enbridge with a relatively high dividend is indicative of the level of risk that the company takes on. You're betting that you're not going to have a PG&E situation, and the high dividend is the reward you get for taking on that risk.

Yeah and I guess that's part of what I mean when I say there is perhaps more uncertainty for investors with dividends than what many think. It depends on the dividend policy of the company and it varies widely. Some are paying high dividends to attract investors, some have a set dollar or percentage of profits, and still others vary things. The you get some paying stock dividends, some offering DRIP where others don't and things like that. It's definitely not as simple as "I'll just buy a bunch of companies paying north of 6%/year and call it a day."

[TorqueDog]

Originally Posted by DoubleK

Thoughts on Questrade?

I'm currently with TD direct and I'm not super happy with it.

What don't you like about TD Direct? Are you using the thinkorswim platform?

I'm with Questrade, I like the desktop application for trading, pretty easy to set up and customize to how you like it across several monitors. I've dealt in stocks, but I'm primarily into options trading at this point in time, and I'm comfortable with how their pricing tables work. Order entry I find a little awkward for options strategies but that might just be the fact that I'm new at it.

Their mobile app leaves something to be desired. When the app tombstones in iOS (ie: you leave the app, go to something else, and come back to the trading app later), functionality gets screwed up like the app lost connection. I found switching to QuestWealth and back to my margin account gets the app working again, but still kind of a crap app... it's just a web app with push notifications anyway as far as I can tell.

Commissions are pretty cheap which I can get behind, but nothing like the free trades a lot of online US brokerages are offering now. Snap quotes are live, streaming Lv.1 market data costs money but is refunded once you hit a certain threshold of commissions.

Buying OTC/PINX are very hit or miss. Apparently even if you find the symbol, there's a suffix you need to add onto the end of the stock symbol for the trade to execute, I remember dealing with this on Questrade's platform years ago. Of course, the person I spoke to in their chat had no idea and insisted the symbol wasn't available to trade electronically (which a Skype room full of traders I was chatting with were happy to call BS on).

Any specific questions you have about the platform?

[station]

Re dividends I think it’s important to screen for at least 5 years positive dividend growth rather than current yield. There are some banks and utilities that have decades long streaks of yearly dividend raises (through several recession cycles) so those are way more stable than say an energy company that may drop from 6% to 0 in a downturn. I try to hold a mix of dividend all stars and a few lower yield companies on a growth curve that will hopefully turn into future dividend all stars.

[sa226]

After re-reading my first post, I realize that I sounded like an investing magazine talking about the hot new idea.

let me clarify a tad.

Of course there is risk with dividend investing, there is risk in the stock market. Also, the sky is blue. You have to do your due dilligence and research and select the right stocks to fit your strategy. You don't just jump into Enbridge because of its 6% yield, when thats clearly not sustainable. You want to seek out stocks with at least a 4% yield and a sustained history of raising its dividend in the ballpark of 8 to 10%. Also a payout ratio of ideally less than 75%. You also want to dig into where that payout ratio is coming from. Maybe its sustainable maybe its not. These parameters narrow the window greatly. You need to keep tabs on the company to make sure that they arent slashing the dividend, or cranking up the yield either. Those are signs of trouble.

It definitely relies heavily on a lengthy time horizon, the compounding doesn't really start to show until 7+ years.

The issues are diversification and taxation. The TSX isn't all that diversified, and we're subject to some additional taxation with US dividend stocks. Plus, even on the S&P companies with the sustainable yield and growth are limited as well, furthering the hit on a well diversified portfolio. While there are contribution issues with tax sheltered accounts, there isn't growth issues.

As a fake example, lets take Telus. Closed today at 46.01. Has a 4.89% yield.

Lets take a 15year horizon with an initial purchase of 225 shares for 10350$. Say over that time the stock grows a conservative 5% annually, and the dividend growth is a conservative 5% annually. With dividend reinvestment that initial 10350$ is now worth over 44000$ for a 10% roi. Not too bad for fairly conservative numbers.

Obviously you wouldn't just set it and forget it, you have to do the work and you can't just chase yield.

I'm far from a tax professional, so I don't know how the differing taxes affect those returns, but investing methods based purely on favorable taxes, also isn't the greatest idea.

Heh, l seem to sound like an investing magazine again.

I can't really speak to inflated prices on dividend stocks due to interest rates, but yes, your entry point could affect long term returns. But with a long term horizon, those things do have a higher chance of evening out.

Good discussion.

[Slava]

^ I feel like the US dividend withholding tax is blown out of proportion. Depending on the account you have in Canada, it's a non-factor. But even so, let's say you buy a company that pays you a dollar in dividends. The IRS holds back $0.15 and you get $0.85...which isn’t an enormous deal for the added diversity and opportunities south of the border.

[Enoch Root]

sa226: You make some good points.

One thing people like about dividends is that they provide more consistent, less volatile returns (which is part of what you were saying). And they allow for reinvestment, which can be a means of further diversification.

At an aggregate level though - and theoretically - investors should be indifferent to dividends (pre-tax), because it comes down to 2 choices: either the company retains its earnings, and reinvests the money; or it pays out a dividend and the investor then has to reinvest the money in another company.

But in practice, it is a little more complicated than that because different companies, of different sizes, in different geographic locations, and in different industries with different products or services, are going to have different return expectations. Also, different dividend strategies can send different messages to investors.

However, if we consider a simple, long-term investor, who's goal is to maximize long-term return, then they should be dividend averse. Because of taxes. Of course, if all of your assets are registered, then taxes don't matter. But when taxes do matter, dividends should always be an inferior strategy to capital gains (all else equal), because they incur a higher tax drag. And the more you can reduce turnover, the greater that tax drag differential will be.

[Enoch Root]

Originally Posted by Slava

^ I feel like the US dividend withholding tax is blown out of proportion. Depending on the account you have in Canada, it's a non-factor. But even so, let's say you buy a company that pays you a dollar in dividends. The IRS holds back $0.15 and you get $0.85...which isn’t an enormous deal for the added diversity and opportunities south of the border.

Withholding tax does provide another level of tax drag. If you want US stocks (and most people should), it's part of the deal. However, persuing a dividend strategy with US stocks does face a pretty significant headwind.

[Slava]

Originally Posted by Enoch Root

Withholding tax does provide another level of tax drag. If you want US stocks (and most people should), it's part of the deal. However, persuing a dividend strategy with US stocks does face a pretty significant headwind.

Oh yeah, 15% is no joke. But you know how it is. In Canada we have some financials, energy and materials and that's pretty much it. You basically need to invest in the US (and have been giving away returns if you haven't for the past 6-7 years), so you take that haircut on the dividend and get that exposure.

And if you can locate these holdings in the RRSP, there's no withholding tax, so obviously it becomes even more attractive.

[Enoch Root]

Originally Posted by Slava

Oh yeah, 15% is no joke. But you know how it is. In Canada we have some financials, energy and materials and that's pretty much it. You basically need to invest in the US (and have been giving away returns if you haven't for the past 6-7 years), so you take that haircut on the dividend and get that exposure.

And if you can locate these holdings in the RRSP, there's no withholding tax, so obviously it becomes even more attractive.

Well, I think people should invest globally, not just Canada and the US. But that's another discussion.

[OMG!WTF!]

Thought I might start posting some day trades. Win lose or draw. It's a bit late to post anything today but there was a good one about 15 mins in. CUR at 1.81. Was out at 1.94 but should have waited for a more obvious signal to exit. Up to 2.05 now. Also GE was a small winner...odd to see a more liquid stock like that behaving unusually. Probably going to quiet down before the fed announcement today.

[DoubleK]

Originally Posted by TorqueDog

What don't you like about TD Direct? Are you using the thinkorswim platform?

Thanks for your post. Sorry it took me so long to respond, life got in the way.

Originally, I was just investing with TD through a normal RRSP/TFSA account through my branch. Last year, I was approached by their wealth planning arm through TD Waterhouse to move my accounts there. I was under the impression that it was self-directed with more flexible options interms of my investments, ie not limited to their e series mutual funds. I subsequently found out that TD Financial Planning (which I have) and TD Direct Investing are separate entities. My advisor has to make all changes to my account, I don't have the ability to do it myself, I can't even add to my monthly contributions without contacting them, something I was able to so before.

I'm not looking to day trade or even buy individual stocks. Just simply limit my fees and index the cheapest way possible. I'm adding about $1500 a month combined between TFSA/RRSP.

What platform should I be looking at?

[bluejays]

About time this thread got bumped. Sold most of my shares with exception of a couple losing income trusts and Dollarama. I need it for a home downpayment but it couldn't come at a better time. There are so many thoughts out there. Some say no recession and instead a big rally, and others think a huge downturn in the markets. I can't think of a more polarizing time among experts. Personally I do think a minor correction because of jobs/ trade uncertainty/ O&G/ outstretching of credit is on the way in the next few months.

Anyway, what's everyone's perception of what's the outlook?