Has your income gone up by 935%?

Today I’d like to share with you some wisdom from someone who has been a dividend investor for more than 30 years.

In the latest edition of the Connolly Report (August 2014), Tom Connolly had this to say about investing:

“Focus on the growing dividend income, the increasing yields, is my message to you, in a sentence, after researching dividend income common stocks for thirty years. Dividends give stock intrinsic value. Dividend increases build wealth. In 1993, for instance, Royal Bank’s dividend was 29¢. Now RY’s dividend is $3.00. That’s up 935%. Talk about a great retirement asset. Think on this:Royal Bank’s dividend yield in 1993 was much the same in 1993 as it is now, some 4%. That being the case, what must have happened to the stock price? RY’s price grew too. By how much did the price grow? Yes. You are right. If the yield is the same now as it was, price growth must have been roughly the same as dividend growth.”

Mr. Connolly then continues with the most important piece of knowledge:

“I have learned, over the years, to add yield and dividend growth to estimate future return. Telus, for instance, has a current yield of 4% and a five-­‐year dividend growth rate of 8%. I’d estimate return to eventually be 12%. A lot of folks do not agree with this computation. That’s their loss. I’ve worked with dividend growth for thirty years now. It works. We have experienced it ourselves. We know. We hold, hold and hold good dividend growth stocks.”

Royal Bank’s dividend has increased by 935% since 1993, has your income increased by 935% since then? When you own a quality dividend paying stock that continues to increase it’s dividends….the simplest thing to do with those shares is to…hold. Hold, and continue to earn increasing income.

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Another way to grow your portfolio without any effort on your part

Man lying on sofaBesides dividends, there’s another way to grow your portfolio. Stock buy backs. A stock buyback is when a company buys back some of its own shares.

A buyback doesn’t mean a company will come knocking on your door to buy your shares, it simply means a company will place orders on the stock market and over a period of time buy back some of its own shares from other investors.

What does a share buyback mean for you? A share buyback reduces the amount of outstanding shares on the market. Reduced supply usually results in an increase in the share price for the remaining shares.
Bank of Nova Scotia recently announced that they will buyback 1% of their outstanding shares by the end of May 2015:

“…enable [Bank of Nova Scotia] it to purchase up to 12 million of its Common Shares. This represents approximately one per cent of the 1,216,689,705 Common Shares issued and outstanding as of May 23, 2014. Scotiabank believes that the purchase of its Common Shares at market prices may be an appropriate use of its funds to generate shareholder value, as well as for capital management purposes.”*

So if you own shares in BNS, sit back, relax, and continue to collect dividends, while BNS buys back 12 million of its own shares.

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Tech Bubble, Housing Bubble, IPO Bubble, Stock Bubble?

Old light bulb isolated on whiteBubbles, bubbles, everywhere, when a bubble gets big enough it will burst. Speculative investors get excited whenever there’s a stock bubble of any kind. There’s the excitement of making it rich very quickly. Should you invest when stock prices are soaring?

The quick-rich euphoria then trickles down to the everyday Joe, and then your friends and neighbors start talking about stocks. Have you been to a party recently where so and so talked about investing in Tesla, Twitter, Facebook, or the latest social media IPO? It’s easy to get caught up in the hype, and start buying stocks without doing your homework.

Problems arise when bubbles burst and you’re left with huge losses.

In the book, Investing the Templeton Way the authors Lauren Templeton and Scott Phillips discuss bubbles in Chapter 6. In early 1999 Lauren Templeton visited her great-uncle Sir John Templeton (Uncle John) in the Bahamas, she wrote:

 “Not quite sure what to say, I blurted out a largely spontaneous and regrettable question: ‘Uncle John, have you been buying any technology stocks?’ He calmly glanced over at me, gently set his Coke down onto the table, and with the slightest smile said, ‘Let me tell you a story.’

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Do You Have Mediocre or Lousy Investments?

investingchartDo you have poor performing investments (stocks, mutual funds, index funds, ETFs)? If so, now might be the time to get rid of them.

Recently the Dow broke through 17,000 for the first time. The stock market reached an all time high.

When the markets are high, that is usually a good time to get rid of your loser investments. Loser investments are investments that:

•    Have been performing poorly over the years
•    Have reduced or eliminated their dividends over the last few years
•    Mutual funds with high fees

When the market is high, generally speaking most stocks and mutual funds will also be high. The investments might be trading at prices much higher than what you paid for them. I hate to lose money, so if I can sell a loser investment for more than what I paid for it then it’s a great time to sell that investment.

When the market is high, use that opportunity to sell your loser investments.

Be cautious of buying any new investments right now, remember you want to buy quality stocks when their prices are low (undervalued). There is no harm in waiting for quality stocks to become undervalued. Remain patient, educate yourself on how to invest, and you’ll be ready when the opportunity presents itself.

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Are You Trying to Beat the Market?

Are you trying to beat the market? Do you think if you spent large amounts of time researching stocks that you can can achieve extraordinary returns? Very few people can consistently outperform the stock market. The chances are extremely slim that you can compete with experts who have the latest data and research at their finger tips.

The goal here is to build yourself a portfolio of safe quality dividend-paying stocks. Over time your portfolio will start generating increasing passive income for you. Here’s what Lowell Miller has to say about  investing:

“Remember, we’re not trying to ‘beat the market’ here, nor are we even seeking what others might call the ‘best’ stocks. We’re trying to create a compounding machine that will be robust and durable for at least an entire investing life, one that will provide equity-market returns with some measure of reliability and predictability over time, one whose income will rise. And because its income rises, the investment will also rise in market value.

It is the easy path and the sure path in the stock market, one that requires time and patience more than it requires cleverness and heroics. So don’t be too clever, or too much of a hero.”*

Focus on building your own portfolio of safe quality dividend-paying stocks, and you will do very well for yourself.

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* page 166, “The Single Best Investment” by Lowell Miller

Building a Portfolio is a Marathon not a Sprint

Building a portfolio is a marathon not a sprint. I know many of you are eager to invest right away and invest everything, so that you can achieve maximum returns. But remember you must buy quality stocks  when they are undervalued. Buy low and sell high, not the other way around.

I’m a big fan of Investment Quality Trends (IQT), and I’d like to share with you the latest nugget of wisdom from IQT:

“As long as the Federal Reserve maintains a zero interest rate policy there is no alternative for investors except to invest in stocks. Subsequently, since there are no decent yields to be found in fixed-income, and traditional “growth” companies pay little to no dividends, investors have been flocking to dividend paying stocks in droves.

Of course we are big proponents of dividends; they are after all the straw that stirs our drink. The fact is though that simply because a company pays a dividend, it doesn’t mean that the company represents good value. Cash flow is nice, and the dividend is the most fundamental measure of return on investment, but in terms of the risk/reward equation, even dividend paying stocks have downside risk if they aren’t acquired when they offer good value. This is the sole reason to establish Undervalued and Overvalued boundaries, which lowers your downside risk and increases your upside potential.

There are also those that fall into the activity dictates results camp, which feeds right into Wall Street’s wheelhouse. Our contention is that portfolio construction is a marathon and not a sprint. This is to say that it is the rare occurrence where you can construct a well-diversified portfolio of 25 to 30 high-quality companies that offer historically great values in one fell swoop.

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When Harry met Sally he lost $94,378

Re-investing dividends will grow your savings much faster than if you spent your dividends. But how much faster will your savings grow?

John Heinzl wrote an article recently at GlobeAdvisor.com looking at a fictional portfolio for Harry and Sally.

“Consider two investors, whom we’ll call Harry and Sally (my age is showing, I know).

On Dec. 31, 1993, each invests $10,000 in shares of Royal Bank of Canada. They hold their shares for the next 20 years, the only difference being that Harry spends his dividends while Sally reinvests the quarterly payments in additional shares of Royal Bank.

Now, it’s obvious that Sally will come out ahead. After all, she’s not spending her dividends like Harry is. But the magnitude of the difference may surprise you.

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