high quality stocks

A stock with a high corporate profile may provide investors with a feeling of security, but it doesn’t pay them any dividends. Instead, owning a lot of in-the-limelight stocks can work against safe investing. Lots of smart people work in the public relations and the brokerage business. They do a highly effective job of publicizing and promoting their clients’ stocks. Many stocks in the broker/public relations limelight go up more-or-less steadily for years at a time. But when they come down, they can fall much further than you ever thought possible. That’s why it’s a mistake to stuff your portfolio full of them. On the other hand, at any given time, lots of prosperous, well-established companies are out of investor fashion. Some of the biggest profits you ever make will come from buying these stocks before they find their way into the limelight....

When we judge the investment quality of an individual company, we take nine key factors into account. These are: a record of profit; a record of dividends; an influential industry position; balance-sheet strength; geographical diversification; freedom from business cycles; freedom from excess regulation or insider abuse; ability to profit from lasting secular trends (such as global economic liberalization); and the ability to cash in on habitual customer behaviour. Mutual-fund ratings are more complex, since they are a step removed from these factors. Before we award our CWA Fund Ratings (Aggressive, Conservative or Income), we assess a fund’s strengths and weaknesses in several key areas. We start by looking at the quality of the fund’s holdings, based on our nine key factors. Then we look at the degree to which its holdings are spread out across the five main economic sectors: Manufacturing, Resources, Consumer, Finance and Utilities. Funds that focus on narrow segments are more risky or aggressive than those that diversify, even if they focus on a conservative area, such as Utilities....

IVY CANADIAN FUND $20.73 (CWA Rating: Conservative) (Mackenzie Financial Corp., 150 Bloor Street West, Toronto, Ontario M5S 3B5. 1-800-387-0780; Web site: www.mackenziefinancial.com. Load fund — available from brokers) is a good example of a Conservative fund. Ivy Canadian’s managers keep risk low by investing in well-established, high-quality stocks. The fund also invests in politically stable areas, with 47.3% of its portfolio in Canadian stocks, 27.8% in the U.S., 5.1% in Switzerland, 4.1% in the U.K. and 4% in France. Moreover, Ivy Canadian has $1.9 billion in assets, so it can easily meet redemption requests without having to sell parts of its holdings. Ivy Canadian Fund holds just 29 stocks. The top 10 are: Thomson Reuters, Shoppers Drug Mart, Imperial Oil, Tim Hortons, Becton Dickinson, McDonald’s Corp., Nestle SA, Colgate-Palmolive, Bank of Nova Scotia and Reckitt Benckiser. The fund is well-balanced among industry segments, with consumer staples making up the largest part of its portfolio, at 35.5%. Ivy Canadian holds 11% of its assets in cash. Ivy Canadian Fund is a Conservative buy.

As a general rule, it’s better to borrow to buy stocks after a drop, rather than when the market has steadily risen for several years. We think you’ll benefit most from this buying opportunity by sticking with the kind of stocks we recommend, as well as the mutual funds and ETFs we recommend in Canadian Wealth Advisor.

These include the iUnits Dividend Index Fund $15.50, symbol XDV on Toronto, (Shares outstanding: 21.4 million; Market cap: $332.5 million), which holds the 30 highest-yielding Canadian stocks. These stocks are included in the index based on their proportionate dividend-per-share weight. The weight of any one stock is limited to 10% of the fund’s assets. iUnits’ MER is 0.50%, and it has a dividend yield of 4.7%.

Dividend-paying stocks or funds that invest in high-quality, dividend-paying stocks will give you regular dividend income and cash flow to pay the interest on your investment loan. They’ll also benefit most from a stock market rebound.

Today, you can borrow for as little as 3.25% if you use your home as collateral. Over long periods, the total return on well-diversified, high-quality stocks and mutual funds runs between 10% and 11%. So, in addition to the tax advantages, you can expect to earn more than your borrowing cost.

But borrowing to invest is not without risks, including the risk of increasing your leverage. The amount you owe on your investment loan will stay the same, regardless of what the market does, but every dollar your portfolio gains or loses will come out of your equity. In addition, if you take out a variable rate loan, the interest rate you pay could eventually rise about the return on the fund.

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FIDELITY GROWTH AMERICA FUND $11.98 (CWA Rating: Conservative) (Fidelity Investments Canada, 483 Bay St., Suite 200, Toronto, Ont. M5G 2N7. 1-800-263-4077; Web site: www.fidelity.ca., load fund — available from brokers) uses a broad “bottom-up” approach to identify undervalued companies using fundamentals, such as earnings, dividend yield, book value, cash flow and debt level. The $160.2-million Fidelity Growth America Fund’s top holdings, among the 122 stocks it holds, include Exxon Mobil, Wal-Mart, Apple, Nuance Communications, Chevron Corp., Qualcomm, Bristol Myers Squibb, Coca-Cola, 3M and Phillip Morris International. Fidelity Growth America Fund is broken down by economic segment as follows: 13.9% in Information Technologies, 13.3% in Health Care, 11.9% in Energy, 10.3% in Consumer Staples, 9.1% in Financials, 8.7% in Industrials, 7% in Consumer Discretionary, 3.9% in Utilities, 3.5% in Telecommunication Services and 2.5% in Metals & Minerals....

A stop is an order to sell a stock if it falls to a specific price. If an investor owns an $18 stock, for example, they might tell their broker to sell it “on stop” if it hits $16. This may limit their losses if they paid more than $16; if they paid less, it may preserve some of their profits. However, the triggering of the $16 stop-loss order merely means the investor will automatically put in a sell-at-market order. There’s no guarantee that anyone will bid anywhere near $16 for the stock. As well, if other holders put in stops at $16, and multiple sell-at-market orders hit the market at the same time, everyone may wind up selling for far below $16. The funny thing about this stock trading strategy is that after all the stop-loss generated sell orders have been filled, the market may turn around and push the stock back up to $16 or higher....

At times like this, when deciding what to do with your portfolio, you should resist the urge to dump high-quality investments just because you think they may get dragged down by a further decline in the market. After all, when things look bleakest (as they do today), the market often turns around and begins rising. That’s especially true of high-quality stocks that offer lots of hidden value and high yields. Keep this in mind when contemplating the unsettling outlook for Canadian bank stocks. The banks are a mainstay of the Canadian economy. Their slide since mid-2007 provides a powerful buying opportunity. But fed-up investors may wind up dumping these stocks just when prices and risk are near a low....

The $50 billion Madoff affair no doubt qualifies as the swindle of the year for 2008, and rivals Enron in financial history. If so, let’s hope investors look closely to see where the money went. So far, media accounts reflect brokers’ views that Mr. Madoff’s stated investment strategy was sound, and that it only failed because he had too much money to manage. My view: only a broker could see it that way. The Madoff strategy involved buying high-quality stocks, while dabbling in stock options. In a rising market, this can cut volatility and produce steady returns for the client, while generating even steadier commission income for the broker. But the client’s returns will fall short of what you’d earn from simply buying stocks and staying out of options. The shortfall equals brokerage commissions, plus profits that options market-makers earn on each transaction....

FIDELITY GROWTH AMERICA FUND $18.32 (CWA Rating: Conservative) (Fidelity Investments Canada, 483 Bay St., Suite 200, Toronto, Ont. M5G 2N7. 1-800-263-4077; Web site: www.fidelity.ca. Load fund — available from brokers) uses a broad “bottom-up” approach to identify undervalued companies using fundamentals such as earnings, dividend yield, book value, cash flow and low debt. The $262.1-million Fidelity Growth America Fund’s top holdings include Exxon Mobil, Apple, Hewlett-Packard, Medco Health Solutions, Agco, National OilWell Varco, Travelers Companies, CF Industries Holdings, Lockheed Martin and ENSCO. Fidelity Growth America Fund is broken down by economic segment as follows: 15.7% in financials, 15.6% in information technologies, 13.4% in health care, 12.9% in energy, 11.9% in industrials, 10.1% in consumer staples, 9.5% in consumer discretionary, 3.9% in materials, 3.4% in utilities and 2.9% in telecommunication services. The fund’s one-year loss in Canadian dollars is 21.4%, compared to a loss of 14.4% for the S&P 500 in Canadian funds over the same period. The fund’s MER is 2.59%....

It’s generally a mistake to sell high-quality stocks just because their prices have dropped. Nor should you sell them just because they’ve gone out of investor favor. Well-established but out-of-favor stocks can provide great opportunities for patient investors. MCDONALD’S CORP. $62 (New York symbol MCD; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.1 billion; Market cap: $68.2 billion; WSSF Rating: Above average) provides an example: The stock fell over 23%, from around $64 in mid-December 2007 to $49 in January 2008, on fears that high gasoline prices and lower consumer confidence in the wake of the housing market slowdown would limit customer spending....