Just a short post on why we need to focus on our total return for a stock and not just the income generated from dividends.
We are in a real 'wall of worry' period in the world of stock market investing as on Wednesday the Dow hit an all time high. Up an astonishing 350% since the financial crisis of 2008. Have your returns been that much since then?
I have been my own worst enemy. I sold a lot of holdings (not all) at the lows. I didn't invest in many dividend paying stocks but rather more speculative junior resource stocks. Even some gurus of dividend investing sold and liquidated a lot of stocks like this guy.
Now all the talk is about another recession in the face of dizzying stock market returns so what can and should we do?
The first thing to remember is the stock market is just a giant marketplace where you go to buy a stock at a certain price. It is NOT meant to be your focus on a daily basis. You are buying businesses that will thrive long term because they are solid companies to invest in during any and all economic climates.
Try and focus on the historical growth record of the stock plus it's dividend yield. This is your total return. If you focus on that and not the day to day gyrations of your business you will be better prepared mentally to NOT sell out at the first sign of trouble.
YIELD + GROWTH = TOTAL RETURN
Bloomberg or Morningstar will allow you to plug in any screens you want for all stocks. A premium subscription will give you full access after the free trial is done. Focus on 5 and 10 year dividend growth records and a yield between 3-5% for safety.
A lot of our dividend growth stocks have 10 year DG records of at least 12 %. Would you take that type of long term return over investing in ETFs or Mutual Funds?
Let's look at the returns of some of Canada's blue chip dividend payers.
Royal Bank (RY) 3.6 + 6.7 = 10.3%
Canadian Utilities (CU) 4.6 + 8.6 = 13.2%
Bell (BCE) 5.4 + 7.1 = 12.5%
CNR 1.6 + 14.7 = 16.3%
That's just 4 stocks that fit with our TULF acronym. Telecom, Utility, Low Yield and a Financial. What is the verdict and Total Return average of just 4 stocks?
Total Return = 13%
That's a pretty good average when you consider the TSX average return over the same time frame has been 4.7%. The 5 year average is a littlebetter at 8.7%. Why do people index their portfolio with ETFs? You are losing a lot because they contain so many bad stocks. Invest in quality businesses and hold even during a recession. The best way to do that is STOP looking at prices every day.
Every year once a year is enough. When stocks go down in price when the panic sets in, that's a great time to buy. That same market is putting out the SALE sign for you.
So much fear out there right now but there will always be something out there to try and scare you out of your stocks. I don't fret and worry about my retirement money because of this philosophy. Focus on total return, that's where you see the real gains in your portfolio.
Dividends are your safety net over the tightrope. When you receive a dividend increase this boosts your initial yield. Eventually it will contribute to a rising stock price.
"Current Yield plus Dividend Growth indicates a stock's future total return prospects"- Josh Peters, The Ultimate Dividend Playbook.
No comments:
Post a Comment