In choosing dividend investing vs value investing, it’s important to recognize that both can lead to favourable returns
To decide between dividend investing vs value investing, investors must first distinguish between the two. The best dividend stocks respond to tough economic times by doing their best to maintain, or even increase their payouts.
Value stocks can test your patience by moving sluggishly for months, if not years. But the best value stocks can make up for it by rising sharply when investors discover their true value.
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But whether you choose dividend investing vs value investing, note that both can lead to favourable returns if you pick the right stocks.
Dividend investing vs value investing: Dividend-paying investments can be among your best holdings
We’ve always placed a high value on a record of dividends, mainly because it provides something of a pedigree for stocks we recommend. After all, you can’t fake a record of dividends. It takes a lot of success and high-quality management for a company to have the cash and the determination to declare and pay a dividend every year for five or 10 years. It’s not something you can create at the spur of the moment.
If you stick with top-quality high dividend paying stocks, the income you earn can supply a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.
At TSI Network we think Canadian dividend stocks are some of the best investments you can own.
Dividend investing vs value investing: The Canadian dividend tax credit offers more
Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends can be eligible for the dividend tax credit in Canada. This dividend tax credit—which is available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA—will cut your effective tax rate.
This means that dividend income will be taxed at a lower rate than the same amount of interest income.
Dividend investing vs value investing: Value stocks come with lower prices than other stocks
On the question of dividend investing vs value investing, one of the best ways to boost your portfolio returns is to buy high-quality “value stocks” (or stocks that are reasonably priced, if not cheap, in relation to their sales, earnings or assets), then hold on to them as investors recognize their value and push up their share prices.
Value stocks are typically stocks trading lower than their financial fundamentals suggest. They are perceived as undervalued, and have the potential to rise. Note that many new tech stocks, for instance, start out as growth stocks and transition into value stocks.
They have low price-to-earnings and price-to-book ratios—making them less expensive than other stocks. And at the same time, they may also pay dividends. Due to these fundamental distinctions, a value stock is often traded at a more affordable rate than other stocks.
Dividend investing vs value investing: Value investing can lead to “value traps”
You need an eye for value to succeed as an investor. But focusing on value measures alone can steer you into unsuccessful investments that are sometimes referred to as “value traps.”
Some of the measures that lead you into value traps are statistical. They include unusually high dividend yields, unusually low per-share price-to-earnings, or P/E, ratios, or a low ratio of stock price to book value or other measures of per-share value.
Any of these measures can make it seem like a stock is a bargain. But in fact, any of them can simply be due to a low stock price that is the result of selling by well-informed investors who recognize a dismal long-term future.
Another way to fall into a value trap is to put too much faith in the value of a brand name. A strong brand can sell a lot of strong product, or keep an over-the-hill product going long after competitors have faded. But even the strongest brand name can only do so much.
Final note on value investments: No investment can ever be so attractively undervalued or desirable that it overcomes a lack of integrity on the part of company insiders.
There’s no limit to the number of ways that unscrupulous insiders can cheat their investors. Key point: If you have any doubts about the integrity of insiders, sell immediately.
What’s a stock you’ve invested in that genuinely qualifies as a value stock?
This article was originally published in 2018 and is regularly updated.
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Don’t miss these three key steps to identifying TSX value stocks—those low in price relative to their high potential
Some investors only feel safe buying stocks after prices have risen, which means that they often overlook TSX value stocks. Yet this is the opposite of the way you make most purchases (cars, clothing, etc.) Ordinarily, it’s better to buy when prices go down, not up. When buying stocks, you’ll find this same logic applies.
TSX value stocks are companies that are undervalued on the Toronto Stock Exchange. Some examples we have suggested as noteworthy TSX value stocks in the past include Calian Group (Toronto symbol CGY; www.calian.com), Brookfield Renewable Partners L.P. (Toronto symbol BEP.UN; www.brookfieldrenewable.com) and Bank of Montreal (Toronto symbol BMO; www.bmo.com).
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Take these three steps to find profits in TSX value stocks
When investing in any stocks, not just TSX value stocks, you’ll rarely if ever sell near the top, or buy back near the bottom. If you could do that with any consistency, you’d “make all the money in the world,” as the saying goes. And no one ever does that.
Instead, the best way to identify the most undervalued stocks on the market—and make long-term investment profits—is to follow these basic steps and financial factors for finding the best TSX value stocks to invest in:
Step 1 for investing in TSX value stocks: The first step to finding TSX value stocks is to visit the websites of the companies you are interested in investing in. Get on their mailing lists, and read their quarterly and annual reports. Ask your broker for research reports. Read the business news every day. You’ll be less liable to get caught off guard by price fluctuations and over time you’ll begin to spot the most undervalued stocks in a lineup simply through observation.
Based on this data, look at these financial factors:
5 to 10 year history of profit. Companies that make money regularly are safer than chronic or even occasional money losers.
5 to 10 years of dividends. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying value stock picks, you’ll avoid most frauds.
Manageable debt. When bad times hit, debt-heavy companies go broke first.
Step 2 for investing in TSX value stocks: In addition to getting to know the companies you invest in, you should also get to know the industries that stocks operate in. Some industries are more volatile than others. Don’t invest in industries you’re not familiar with, and you’ll steer clear of many overvalued stocks.
Based on this data, identify these safety factors:
Industry prominence if not dominance. Major companies can influence legislation, industry trends and other business factors to suit themselves. Minor firms, on the other hand, don’t have that power.
Geographical diversification. Canada-wide is good. There’s extra risk in firms confined to one geographical area.
Freedom to serve (all) shareholders. High-quality value stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies.
Step 3 for investing in TSX value stocks: Consider earnings, dividends and other factors in making decisions. They matter far more than short-term stock-price trends. Stock prices rise and fall. But strong dividend stocks like to ratchet their dividends upward. Even during market downturns, the last thing a well-established company is likely to do is lower its dividend. When times are good, strong companies will raise their dividends.
Based on this data, identify these growth factors:
Freedom from business cycles. That’s why you need to diversify. Invest in utility, finance and consumer stocks, along with resources and manufacturers.
Ability to profit from secular trends: These trends outlast ordinary business booms and busts, because they reflect ongoing social change. Free trade and rising environmentalism are just two examples of secular trends.
Ownership of strong brand names and an impeccable reputation. Customers keep coming back to these businesses, and will try their new products.
Rely too much on simple value measures alone in stock analysis and you could fall into a costly value trap
You need an eye for value to be a Successful Investor. You can gain that eye by subscribing to our newsletter Canadian Wealth Advisor now. But focusing on value measures alone can steer you into unsuccessful investments that are sometimes referred to as “value traps.”
Another way to fall into a value trap is to put too much faith in the value of a brand name. A strong brand can sell a lot of a strong product, or keep an over-the-hill product going long after competitors have faded. But even the strongest brand name can only do so much.
4 tips for avoiding value traps:
Determine if the company has freedom from business cycles. Demand periodically dries up in “cyclical” businesses such as resources and manufacturing. You can hold some value stocks from those sectors, but look as well for companies, especially in manufacturing, that have broad product lines or products that are indispensable.
Review a company’s dividend record over the last 5 to 10 years. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying stocks, you’ll avoid most frauds.
Review a company’s finances going back 5 to 10 years. The types of investments we focus on have a history of profits going back for at least that long. Companies that make money regularly are safer than chronic or even occasional money losers.
Determine if the company has hidden assets in their relationship with loyal customers. After a series of satisfactory dealings, long-time customers develop a level of trust that makes them receptive to related offerings from the company. This customer loyalty can help businesses mitigate the value trap.
Bonus Tip: Consider investing at least some of your funds by practicing “dollar cost averaging.” Invest the same dollar amount on a regular basis. That way you’ll buy more shares when prices are low, and fewer when they’re high.
In fact, if you invest a fixed sum at regular intervals throughout your working years, perhaps increasing that sum from time to time as your income rises, you can largely forget about market trends. If you factor in dividend payments, dollar cost averaging could make a huge difference to your long-term profits.
Are you willing to wait for a value stock to reach its full potential, or will you look for stocks that rise faster?
Which value stock has been the biggest overachiever in your portfolio? The biggest loser?
This article was originally published in 2017 and is regularly updated.
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Estate planning is done in large part to minimize a variety of taxes, and is often a part of retirement planning.
It’s always good to have clear arrangements in place when estate planning in Canada. It’s also important to keep them up to date as your circumstances inevitably change.
Estate planning in Canada: Ensure you have money to leave
Estate planning tips only help if you first have assets to leave to your heirs. Of course, your initial goals should be saving for retirement. Let’s take a moment to review retirement saving goals.
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Let’s say you’re 50 and you want to retire at 65. You have $200,000 in your RRSP, and you expect to add $15,000 in each of the next 15 years. To determine if this is enough to retire on, you need to make assumptions about investment returns and income needs.
What you can expect: Long-term studies show that the stock market as a whole generally produces total pre-tax annual returns of 8% to 10%, or around 6% after inflation. For purposes of this retirement plan, we’ll assume a 6% yearly return, and disregard inflation. Your $200,000 grows to $479,312*, and your yearly $15,000 RRSP contributions add up to $370,088, for total retirement savings of $849,400.
You can run the calculation yourself using one of the many compound-return calculators available online.
Estate planning in Canada: Invest based on your heirs’ timelines
If you have substantially more money than you’ll need for the rest of your life, and you plan to leave the excess to your heirs as part of your retirement planning, it makes sense to invest at least part of your legacy on their behalf. That is, invest based on their time horizon, not yours.
For instance, if your heirs are in their 40s, your retirement planning should involve holding at least part of your portfolio in a selection of investments that would suit investors in their 40s. Of course, you’d still want to invest conservatively. But you’d want to take advantage of the many years that 40-somethings have till they reach retirement age.
If your retirement planning involves holding your money in T-bills for the last few years of your life, it will generate a minimal return after taxes—you may actually lose money after accounting for taxes and inflation.
After your death, it may take months or longer to settle your estate. After that, your 40-something heirs may need time to put your legacy to work, especially if they are inexperienced as investors. They may have passed 50 by the time they get around to investing in an age-appropriate fashion. Missing out on, say, three years of even moderate returns can take a big bite out of the funds they’ll have a couple of decades later, in retirement.
Estate planning in Canada: What prepaid funerals can teach you about long term investing
The topic of prepaid funerals brings up the age old investing topic of having a healthy dose of skepticism when you encounter new investment products. Most seasoned investors will talk about the value of everyday qualities like patience, consistency and a healthy sense of skepticism—in short, the kind of qualities that bring success in all aspects of life, not just investing.
This investing mindset is the perfect way to deal with the idea of prepaid funerals. Being able to think critically about an investment product and knowing how money is being made on both sides is crucial to making an informed investment decision.
These qualities also help you apply our three-part formula for investment success: invest mainly in well-established, high-quality companies; spread your money out across most if not all of the five main economic sectors; downplay or stay out of companies that are in the broker/media limelight.
Patience plays a crucial role. All too often, investors buy a promising stock just as it enters a period of price stagnation. The idea of prepaid funerals may be a relatively new idea and may make sense for future investors, but for now it has too many downsides when you could be investing the money more profitably in the stock market.
Are you planning to leave your heirs some dollars or live down to your last dollar?
Why decriminalization of marijuana and investment by big Canadian names doesn’t change our opinion of Canadian Marijuana stocks
Interest in Canadian marijuana stocks stems from Fall 2018’s legalization of recreational cannabis. Today, investors continue to search for ways to tap in to those sales and profit from future growth. The federal government’s legislation has already spurred marijuana production and caught the investment interest of large companies such as Molson Coors and Constellation Brands. While we believe there is potential there for aggressive investors, determining which of today’s producers will become tomorrow’s leaders remains challenging. Regardless, investors need to remain wary of overvalued Canadian marijuana stocks and potential stock promotions.
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The federal government introduced its bill to legalize recreational marijuana use in April 2017. That new law came into force on Oct. 17, 2018, and provincial governments have, in turn, laid out their own laws for the distribution and sale of the drug. A year later, in October 2019, the federal government broadened legalization to include edibles, cannabis oils and vape products.
Increasingly, Canadian marijuana stocks have been marked by a high level of volatility. U.S. states, such as Colorado, have already decriminalized or legalized marijuana use and authorize legal production and sale of the plant. Other U.S. jurisdictions, such as California, have only just joined them, having started January 1, 2018.
Cannabis stocks are attracting investor interest as legalization continues. However, these companies sell into a limited and highly regulated market. As well, there are very low barriers to entry for new medical marijuana producers. If the market grows large and profitable enough, more big producers, including tobacco companies, will enter the market and take sales away from small growers.
Longer term, the continued expansion of the marijuana industry in Canada threatens established licensed producers. They benefit from a heavily regulated market where barriers to entry are high.
While most producer shares have suffered dramatic decreases since their highs in late 2018, most stocks still have high “market caps” (the value of all shares outstanding), in relation to their current sales. That means they need substantial revenue growth to justify their current stock prices, let alone move higher. They also have unwarranted speculative appeal, and if revenues merely hold steady, their stock prices will be vulnerable.
Share prices of many Canadian marijuana producers remain up significantly from mid-2016 levels. Their speculative appeal continues to attract investors looking for a ground-floor opportunity. However, the pioneers in an industry are not always the ones who survive. Investors need to ongoing research on these stocks, the industry and markets both here in Canada as well as the U.S. and globally. That kind of ongoing, deep analysis is the focus of our TSI Cannabis Bulletinsadvisory.
Investor bonus: Above all avoid “pot-of-gold” pennies if you invest in marijuana stocks
While the marijuana industry now has a number of established producers, in the early days of de-criminalization we continue to see highly speculative “pot-of-gold” penny stock promotions, especially in the U.S. These typically arise in new industries.
We advise staying out of stock promotions of Canadian marijuana stocks businesses or anything else. They attract the wrong kind of people. Stock promotion is a take-the-money-and-run type of business. Most successful entrepreneurs value their reputations, and want to build a profitable, sustainable business that can pay off for investors. So, they generally go in to some other line of work, and stay out of stock promotion, which is a good thing in the stock market.
For a recent Canadian Business article seeking our views on marijuana stocks, click here.
For a CBC article in which Pat McKeough was interviewed on marijuana stocks, click here
How much interest do you now have in marijuana stocks now that Canada is on the verge of legalizing recreational use?
This article was originally published in 2016 and is regularly updated.
The highest dividend stocks can harbour hidden dangers, but you’ll enhance your portfolio with the safest dividend-paying stocks
No one can predict which stocks will be average performers, which will be losers, and which ones will turn into the superstocks that wind up rising five-fold, 10-fold or more. But overall, we find dividend stocks to be less volatile, and the safest investments.
Even though the best dividend stocks in your portfolio can turn out to be your most profitable investments, dividends rarely get the respect they deserve, especially from beginning investors. We’ve always placed a high value on dividend stock investing, mainly because it provides something of a pedigree for stocks we recommend. After all, you can’t fake a record of dividends.
However, we do recommend looking beyond dividend yield when making investment decisions because an unusually high dividend yield among the highest dividend stocks can be a sign of hidden risks.
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High yield can sometimes be a danger sign rather than a bargain
A dividend paying stock’s yield could be high simply because its share price has dropped sharply (because you use a company’s share price to calculate yield) in anticipation of a dividend cut. We recommend that you look for companies that have established a sound business and a history of building revenue and cash flow.
The highest dividend stocks need to have a history of paying a dividend to be reliable
One of the best ways of picking a quality dividend stock is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings, issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce. A history of dividend payments is one thing that all the best dividend stocks have in common.
Highest dividend stocks are a sign of investment quality
Some good companies reinvest profit instead of paying dividends. But fraudulent and failing companies hardly ever pay dividends. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks. For a true measure of stability, focus on companies that have maintained or raised their dividends during economic and stock market downturns. These firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth.
More factors for finding the best highest dividend stocks
Management’s public commitment to a dividend. A company’s commitment to the dividend is reinforced if management stands behind it publicly. Executives don’t like to be called out by the media or shareholders for failing to keep their word.
A recent dividend increase. There are good reasons companies trumpet their dividend hikes. They are more than a reward to shareholders, they’re a statement of self-confidence by the company. We trace increases over 5 years and more, to get a timely reading on the company’s commitment to dividend increases.
A record of earnings and cash flow. A consistently strong balance sheet can only be maintained with a regular stream of revenue and earnings to generate steady cash flow.
Highest dividend stocks can be a big part of long-term investment gains
If you stick with top quality high dividend yield stocks, the income you earn can supply a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.
Note, though, that when it comes to investment safety, a long history of steady dividends is more important than a current high dividend yield.
Good dividend stocks are a valuable component of any sound investment portfolio.
Some of the best dividend paying stocks are Utilities and Canadian Finance shares
We continue to recommend that you spread your investments out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities). However, the proportion of your holdings you devote to each sector depends on your temperament and financial goals.
For example, if you’re an income investor, you may wish to place more emphasis on Utilities and Canadian banks. That’s because these stocks generally pay high, secure dividends, and have long histories of raising their payments, even during downturns. However, you’ll still want to make sure your portfolio is well-diversified across the sectors.
By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.
You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.
Have you ever been misled by a high dividend yield?
How much to save for retirement depends on the type of lifestyle you’re aiming for
How much to save for retirement varies for each investor. A fulfilling retirement is not simply a matter of accumulating sufficient wealth to give you peace of mind. It is equally a matter of knowing what you will do—in effect, ensuring that you will be as active and productive with your time as you were during your working days.
These days, more investors suffer from what you might call “pre-retirement financial stress syndrome.” That’s the malady that strikes when it dawns on you that you don’t have enough money saved to be able to earn the retirement income stream you were banking on.
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Begin determining how much to save for retirement by asking these questions
To alleviate this worry, we recommend that you base your retirement planning on a sound financial plan. Here are the four key variables that your plan should address to ensure you have sufficient retirement income:
How much you expect to save prior to retirement;
The return you expect on your savings;
How much of that return you’ll have left after taxes;
How much retirement income you’ll need once you’ve left the workforce.
Remember to take taxes into account when determining how much to save for retirement
As for the tax structure, it keeps changing. But it’s safe to assume that you’ll pay a lower rate of tax on dividends and capital gains than on interest, and that you’ll generally pay taxes on capital gains only when you sell.
As for the return you expect, it’s best to aim low. If you invest in bonds, assume you will earn the current yield; don’t assume you can make money trading in bonds. For stocks, the market returned 10% or so yearly on average over the past 80 or so years. Aim lower — 8% a year, say — to allow for unforeseeable problems and setbacks.
Having a good financial plan is important but the happiest retirees are those who stay busy. You can do that with travel, golf or sailing. But volunteering, or working part-time at something you enjoy, can work just as well.
Stick with conservative estimates to account for unforeseen setbacks in determining how much to save for retirement
As for the return you expect from investing for retirement, it’s best to aim low. If you invest in bonds, assume you will earn the current yield; don’t assume you can make money trading in bonds.
Over long periods, the total return on a well-diversified portfolio of high-quality stocks runs to as much as 10%, or around 7.5% after inflation. Aim lower in your overall return—5% a year, say —to allow for unforeseeable problems and setbacks.
One thing we encourage all investors to do is perform a detailed study of how you spend your money now. Then, you analyze your findings to see what personal expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits. You may be surprised at how much you’re spending and how much more you could be saving for retirement.
A Registered Retirement Savings Plan (RRSP) is a great option
RRSPs are a great way for investors to cut their current tax bills and make more money from their retirement investing.
RRSPs are a form of tax-deferred savings plan. RRSP contributions are tax deductible, and the investments grow tax-free. (Note that you can currently contribute up to 18% of your earned income from the previous year. March 1 is the last day you can contribute to an RRSP and deduct your contribution from your previous year’s income.)
When you later begin withdrawing the funds from your RRSP, they are taxed as ordinary income.
Retirement income planning doesn’t have to be about moving money around. Sometimes it’s easier to live frugally. People who come from humble circumstances often develop a degree of both frugality and industriousness early in life.
Finding part-time work while in school, and making every penny count, becomes a game for them.
It’s easy to let frugality evaporate in mid-life, when money becomes more plentiful. But some find that if they return to frugality later in life, it’s more fun than ever. It’s a little like taking pleasure from a game that you haven’t played since you were young.
Your enjoyment of, or distaste for, frugality is partly a matter of attitude. But that’s under your control. Don’t think of it as penny-pinching. Think of it as taking charge of a part of your life, so that more of your money goes to things you choose.
Do you know how much to save for retirement for your own life? Do you often worry about your retirement and if you’re saving enough money for it? Or do you feel comfortable with your retirement investing so far? Share your retirement investing experience with us in the comments.
Discover how to read stocks for long-term investing success through these tools
How to read stocks? It’s a simple enough question, and one all Successful investors must confront. Generally, they all try to arrange their portfolios so they profit more or less automatically over long periods. Investors who learn how to read stocks can do this by tapping into long-term growth that inevitably comes to well-established companies when they operate in relatively free economies during relatively prosperous years and decades.
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Use technical analysis to support—not determine—your view of a company. A far better approach is to look at chart reading as one tool among many. But focus on how to read stocks and charts as a way to predict what’s going to happen. Look to see if the pattern on the chart seems to support your view of the stock, based on its finances and other fundamentals. But remember that the stock market follows a multitude of factors to varying extents, and the most important or influential factors continually change.
It’s encouraging if your analysis and the chart seem to match. But sometimes they don’t. If a company looks promising, but its chart shows a lengthy falling trend, insiders may know something you don’t. That’s when you know you have to dig deeper, and perhaps wait until the situation clarifies itself.
How to read stocks: Using a break even analysis
A break-even analysis is basic arithmetics, but has significant value in analyzing potential gains—and losses—on stocks. For example, if you lose X% in the stock market, you’ll need X% to recover, or break even. An understanding of this relationship can help you stay out of poor-quality stocks where the risk of a big decline is high. For example:
If you lose 10%, you need an 11% gain to break even.
If you lose 20%, you need to make 25% to break even.
If you lose 40%, you need to make 66.6% to take you back to where you started.
If you lose 50%, you need a 100% gain to break even.
An 11% gain is relatively common; in fact, the market has gained nearly that much annually, on average, over the past 75 years or so. A 25% gain is a little harder to achieve. You need an above-average year to make that kind of return. Gains of 66.6% to 100% or more can take years. Even if you make enough money to regain your losses, however, that only brings you back to where you started.
How to read stocks: Using a debt to equity ratio analysis
Experienced investors will often undertake a debt to equity ratio analysis. This ratio comes in several variations, but the basic idea is that you measure a company’s financial leverage by comparing its debt with its shareholders’ equity. In essence, you assume an attractive company can earn a higher return on its total capital than the interest rate it pays on the debt portion of its capital.
In that case, excess profits accrue to shareholders, and that in turn raises shareholders’ equity on the balance sheet. But leverage works both ways. If the total return falls short of interest payments, the difference comes out of shareholders’ equity.
A high ratio of debt to equity increases the risk that the company won’t survive a business slump.
However, a debt to equity ratio analysis can mislead, because it compares a hard number with a soft one.
Debt is usually a hard number. Bonds and other loans generally come with fixed interest rates, fixed terms of repayment and so on. Equity numbers are not as precise. They mostly reflect asset values as they appear on the balance sheet—minus debt, of course.
But figures on a balance sheet may be misleading. They may be too high, if the company’s assets have depreciated since it acquired them (that is, depreciated more than the company’s accounting shows). In that case, the company will eventually have to correct the balance-sheet figures by trimming them back or “taking a writedown.”
Or, the equity value may be too low if the company’s assets have gained value since the company acquired them. This can happen with real estate and other investments.
How to read stocks to find the best ones for your portfolio
No one can predict which stocks will be average performers, which will be losers, and which ones will turn into the superstocks that wind up rising five-fold, 10-fold or more. You may avoid some temporary losses if you sell every stock you own that goes up faster than you guessed. But do that, and you will also sell any superstocks you stumble upon, often when they are just getting started. That could mean that your stock investing strategy never pays off.
Note that our Successful Investor approach, automatically limits your involvement in notoriously trouble-prone areas like new issues, start-up companies and illiquid investments.
Of course, you also need to stay out of companies when you have doubts of any sort about the integrity of insiders. You need to recognize the special risks of investing in fashionable or excessively popular minefields, such as Internet stocks in the late 1990s, or income trusts in the previous decade, or green energy in the current decade, and be profitable by using our three-part Successful Investor philosophy:
No matter how you invest for retirement, you should take care to spread your money out across the five main economic sectors: Finance, Utilities, Consumer, Resources & Commodities, and Manufacturing & Industry.
By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.
You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.
There are a variety of techniques used on how to read stocks. How do you figure out which stocks you want to buy? Have your investing methods evolved over the years? Have you used investing methods that did not work and you recommend avoiding? Share your thoughts with us in the comments.
This article was originally published in 2017 and is regularly updated.
This Canadian manufacturer has established an international market for its niche products such as bicycles, strollers and car seats. And its Home division is benefitting from higher sales (and lower costs) thanks to expanded business with online retailers.
While revenue was down in the latest quarter, earnings were up more than 20%. The stock continues to trade at a modest level to projected earnings and the dividend yields 4.8%.
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DOREL INDUSTRIES (Toronto symbol DII.B; www.dorel.com) makes a range of items: ready-to-assemble home and office furniture; juvenile products such as car seats, strollers, high chairs, toddler beds and cribs; and bicycles and other sporting goods.
In the quarter ended June 30, 2017, sales fell 4.1%, to $611.3 million from $637.3 million a year earlier (all figures except share price in U.S. dollars).
However, Dorel’s earnings, excluding one-time items, climbed 22.1%, to $12.4 million, or $0.38 a share, from $10.2 million, or $0.31.
The gains came from improved profit margins and revenue for Dorel Home. Sales to online retailers, such as Amazon.com, now represent more than 50% of the business’s revenue; for the first time, they’ve surpassed sales to bricks-and-mortar retailers. The shift lets Dorel sell an expanded line of products for lower costs and higher prices. Strong sales at Dorel Home offset slower sales of bikes due to prolonged bad weather in North America.
Value Stocks: Brazil offers rewards and risks for Dorel
The company’s Juvenile business has performed well in Brazil and Australia, where Dorel is now a market leader. Still, the company’s operations in Brazil carry above-average currency and political risk. That includes Dorel’s 70% stake in Caloi, one of Brazil’s biggest bicycle makers. In addition, the company gets a high 30% of its overall revenue from Wal-Mart. That also carries risk.
However, Dorel continues to reduce its excess inventory. It also continues to drop unprofitable products and to cut jobs. Earlier this year, the company made costly adjustments in response to “manufacturing issues” in China, and for the most recent quarter it reported that production has increased significantly in that country.
Dorel trades at a modest 14.5 times the company’s forecast 2017 earnings of $2.14 U.S. a share. Those shares yield a high 4.8%.
A Member of his Inner Circle recently asked Pat McKeough about a company that is aiming to succeed with a “revolutionary” system for producing cleaner energy through natural gas. This new process would not release emissions into the atmosphere and would eliminate the costly and often wasteful use of steam-based technology.
While Chicago Bridge & Iron is developing a plant to put this NET Power venture into practice, Pat notes that the company has suffered several major setbacks in its engineering and construction business, and had to suspend its dividend to help meet growing debt obligations.
Q: I would be grateful for your opinion on Chicago Bridge & Iron. The company’s stock is way down but I have been told that it has a new and inexpensive revolutionary (and clean) method of producing energy from natural gas and is in the process of building power stations to use it. Many thanks for your advice, as usual. Joining the Successful Investor was the smartest move in the whole of my investing career.
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A: CHICAGO BRIDGE & IRON N.V. (symbol CBI on New York; www.cbi.com) is a U.S.-based engineering, procurement and construction company. It specializes in projects for oil and gas firms.
The company recently plunged to an eight-year low after reporting poor results in the latest quarter and suspending its dividend.
In the three months ended June 30, 2017, Chicago Bridge’s revenue fell 40.6%, to $1.28 billion from $2.16 billion a year earlier. The company lost $301.7 million, or $3.02 a share, compared to its profit of $123.9 million, or $1.10 a share.
The engineering and construction business was particularly weak, with revenue falling 53.2%, to $702.2 million from $1.5 billion. The drop was primarily due to the wind-down of a large liquefied natural gas (LNG) project in the Asia-Pacific region as well as lower revenue from two U.S.-based LNG projects. The company has been unable to replace these contracts with new ones. The big loss came from the lower revenue as well as big cost overruns at some of its major projects.
Chicago Bridge’s long-term debt of $1.8 billion debt is a high 129% of its market cap. To satisfy its creditors, the company had been forced to eliminate its dividend.
It also plans to sell its technology business, and use the proceeds to pay down its debt. The technology business offers licensed technologies to the hydrocarbon industries and equipment for use in petrochemical facilities, oil refineries and gas processing plants. It’s also the most profitable of Chicago Bridge’s operations and the one with the best growth prospects.
One of the business’s smaller ventures right now is NET Power, a partnership between 8 Rivers Capital, Chicago Bridge and Exelon. It is developing a small 50 megawatt thermal power plant to make use of a new natural gas power system. It produces zero atmospheric emissions, including carbon dioxide.
Growth stocks: Smaller power plants another potential benefit
NET Power believes the system, based on a technology called the Allam Cycle, is cost competitive. Its lead inventor is Rodney Allam.
Unlike other fossil-fuel power-generation technologies that release emissions to the atmosphere or use expensive, add-on carbon capture systems, the primary by-product of NET Power is pipeline-quality, high-pressure carbon dioxide (CO2). That gas is not released into the atmosphere.
Generally speaking, when natural gas is processed to create electricity, it must generate steam to turn turbines. However, as part of this procedure, the steam must eventually be condensed back into water. When this takes place, NET Power estimates between 30% and 40% of the energy created can be lost.
Another major negatives tied to traditional steam-based technology is plants must invest heavily in equipment that reduces carbon dioxide emissions to legal levels. That is often cost prohibitive.
The Allam Cycle will use carbon dioxide in place of steam. The benefit of this approach is that it lets the firm keep recycling that carbon dioxide through its combustor and eventually turns it into a “working fluid” that is mostly high-pressured carbon dioxide. This, in turn, is believed to be “pipeline-ready” and can be sold to and used by oil firms that then inject it into old oil wells to “flush out” any remaining oil.
Another benefit to NET Power technology is that lets the average power plant be far smaller than they are now. That’s due to the elimination of steam.
NET Power began construction of a demonstration plant last year at La Porte, Texas, and hopes to have it in operation by the end of this year. But the technology is still a long way from commercialization—if it works on a large scale.
Inner Circle recommendation: We don’t recommend Chicago Bridge & Iron N.V.
The shares of Russel Metals have risen over 30% in the past year with the help of higher steel prices. Revenue also rose 30% in the last quarter. Now the company is about to add an acquisition ready to contribute to its profits immediately.
The company could add to those gains if the Trump administration’s trade policies come to fruition. However, its 5.5% dividend yield doesn’t depend on it.
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RUSSEL METALS INC. (Toronto symbol RUS; , is one of North America’s largest metal distributors, serving 28,000 clients at 51 locations in Canada and 12 others in the U.S.
Russel has just acquired Color Steels Inc. for an undisclosed amount. Color Steels is a service-centre operation that processes and distributes pre-painted metals from its facilities in Thornhill, Ontario, and Laval, Quebec.
Revenues for Color Steel over the last year were about $45 million. That’s small in comparison to Russel’s annual sales of over $2.6 billion. But those sales will add immediately to profits and lets Russel expand into the Canadian market for processed pre-painted flat-rolled products.
In the three months ended June 30, 2017, the company’s revenue rose 30.9%, to $816.5 million from $623.1 million a year earlier. The increase came from higher shipments and selling prices. As well, sales for Russel’s energy-products business rose 68%. That operation supplies pipes for oil and gas drillers.
Growth stocks: Earnings jump with higher steel prices
Overall earnings in the second quarter were $32.5 million, or $0.52 a share. That’s a 98.2% increase from the $16.4 million, or $0.27 a share, a year earlier. The company benefitted from rising steel prices; they sharply increased the value of Russel’s inventory and its profit margins.
The company holds cash of $164.3 million, or $2.65 a share; its $296.1 million of long-term debt is a low 18% of its market cap.
Oil and gas clients supply about 35% of the company’s revenue. That adds to its cyclical risk.
The stock is up 33% in the past year. The election of U.S. President Donald Trump has contributed in part to that rise, thanks to his stated intention to restrict low-cost steel imports, particularly from China. He has also promised to boost infrastructure spending. Those measures could lift both steel prices and demand in the U.S.
The company pays a quarterly dividend of $0.38 a share for an annual rate of $1.52; the stock yields a high 5.5%. The company’s dividend has grown an average of 1.7% annually over the last 5 years.
Recommendation in TSI Dividend Advisor: Russel Metals is a buy.
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