Money Matters The Montrealer April 3, 2006 4804 Let’s get back to Margaret. Last month, she was enjoying a two-week holiday in Vienna. Before leaving, she was gloating (yes, let’s use that term) over how well her dividend-paying and dividend-investing strategy had paid off. As you will recall, Margaret in her late 70s, had paid for her trip, and for much of her current lifestyle, by adopting an investment strategy that counted on rising dividends. Precisely put: invest in companies that pay dividends. Moreover, favour those companies that increase their dividends consistently and predictably. Over time, one’s rate of return compared with the initial investment, may move substantially higher. Indeed, Margaret had seen the banks and insurance companies of Canada increase their dividends by 10% to 25% since the year 2000. Since she held their stocks, her dividends (read income) rose by that same amount every year. Imagine that, getting an income (read pay) increase every year without having to lift a finger! Was there anything else to worry about? After all, living through retirement with an average 10% increase in income would be a dream come true for many people. Back to Margaret. Perhaps everything isn’t quite as rosy as it appears as she appears slightly agitated. Loblaws, for example, has been paying her a dividend that increased by an average of 22% every year over the past 5 years. Lately, however, the company seems to have encountered some competition (read Walmart). The supermarket chain’s earnings (read profit) fell last month for the first time in 13 years. Let’s be clear here: Margaret prides herself on ignoring the stock price. Nevertheless, when she checks her net worth on her monthly statement, she notices that a drop in Loblaws has dented that while she was sipping her café and biting into her Sacher Torte in Vienna. The stock has moved from $76 to $57. Ouch! Her money manager gives her the information she needs: “Net income fell 23% in 2005 as Loblaw had problems integrating new warehouses into its supply network, leaving some stores without merchandise.” That’s the official line. Even though Chairman Galen Weston and President John Lederer declined to accept bonuses for the year, Margaret would be more comfortable with how things were going before. “Well,” her money manager explains, “the point is that you never know what’s going to happen in business nor to stock prices. That’s life. It’s best to diversify over a number of dividend-paying companies and furthermore, to spread your money across various areas or sectors in which the companies operate.” Margaret doesn’t really want a lesson, but gets it nonetheless, because after all, it is her money and she has to be informed. She retains a few points: Loblaws hasn’t announced a change to their dividend policy. Whew! It’s still 84 cents a share, however, she’s not sure about next year’s raise. Further scrutiny show her how well her portfolio is diversified: that she has many other companies outside of the “consumer goods” sector which are paying her very well. Another whew! And finally, she learns that dividend-increasing investing depends on the ability of the company to grow its profits, its market share, its cash flow, and maintain a tight rein on its debt load. It sounds like dry common sense to Margaret, and she appreciates having discovered more. She knows she’s found an excellent money manager whose interest in her well-being comes first, and that she has to rely on and trust her counsel. Next month we’ll learn how this same manager has established a key discipline that saves Margaret a fortune! Meanwhile, if you’re interested in a copy of the top 10 dividend-paying stocks, send us an e-mail or call Pina Tria at 514-394-3771 and mention this article in The Montrealer and we’ll be happy to forward it to you. The Adena Franz Group has over 15 years’ experience of successful portfolio management and is with the independent firm MacDougall, MacDougall and MacTier Inc. 1010 de la Gauchetière West, Suite 2000 Montreal, Qc H3B 4J1 Phone: 514-394-3771 Email: [email protected] The information contained in this article is for general information purposes only. It does not account for specific investment objectives or the financial situation of any person reading it. Opinions expressed are those of the author and do not necessarily represent the opinions of MacDougall, MacDougall & MacTier Inc. Investors should seek professional advice regarding the appropriateness of investing in any securities discussed or recommended here and should recognize that statements regarding future prospects may not be realized.
