A Strategy for Market Uncertainty

Posted by Ryan Irvine: Keystocks

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Market Buzz – Market Uncertainty Makes a Case for Dividend Investing

While the close of market on Friday, June 24th ended a three week spree of consecutive declines in the TSX Composite Index, the picture is not as rosy as one might be inclined to think. The TSX closed the week at 12,909 points, up modestly from 12,769 at the start of the week, but down fairly significantly from the mid-week high of 13,159.

Crude oil remains a hot topic on the market’s collective mind, with the commodity continuing to decline from its year-to-date high of almost $115 per barrel to $91.16 at the end of the market on Friday. Arguments over what causes specific commodities to rise and fall are often highly polarizing with some camps pointing to fundamental supply and demand and others to speculation. The only things known with certainty are firstly that the true answer always lies in between the rationales provided by the opposing camps and secondly, regardless of the real drivers, commodity price movements are impossible to predict. The decline in crude oil price has caused similar declines in Canada’s universe of energy stocks, which is undoubtedly a key contributor to the declines we have been seeing in the TSX, an index whose weighting towards energy is estimated at over 30 per cent. Looking to current events in the oil market, the February shutdown of 1.5 million barrels per day of production from Libya has caused the U.S. government to recently announce the release of 60 million barrels of oil held as strategic reserves. It seems plausible that this temporary increase in supply is at least partly to blame for the recent declines in crude oil prices, as this was undoubtedly the intended outcome of the action. Global economic uncertainty aside, if indeed the release of strategic reserves is a significant contributor to lower prices, then we should see crude oil start to appreciate again after the next 30 days or so. For context, global oil consumption sits roughly between 80 and 85 million barrels per day.

Whether it is concerns over declining commodity prices, lower growth rates in Asia, or the unprecedented debt loads in Europe and the United States, one argument is for indisputable, that is that we are playing in uncharted and uncertain markets. In a market where uncertainty appears to be the rule, many investors have found safe (or safer) heavens in the wonderful world of dividend investing. Throughout history, dividends have been the core source of return for equity investors. Recent studies have indicated that as much as 70% of total equity returns were attributable to dividends between 2000 and 2010. Considering numbers such as these, it is no wonder that we have seen dividend investing come back since the 2008 market meltdown. For conservative investors, utilities, banking, and telecom continue to be the preferred sectors. Leaders in these areas have generated spectacular capital appreciation over the past two years and many tend to increase their dividends on an annual basis. While yields have been compressed during this period, investors are still able to find long-term opportunities to buy companies that pay yields of 3% to 5% and are able to grow their distributions at 5% per year or more. Moving into the higher risk categories of dividend stocks, we have seen opportunities in number industries such as agriculture, healthcare, real estate, financial, and special situations, where companies are continuing to provide investors with a solid mix of income yield and capital appreciation. In these markets, investors are gravitating to yield as income may be the only source of investment return in a flat or down trending market.

For investors interested in learning more about how KeyStone Financial can help add dividend growth stocks to a portfolio, go to our Income Stock Report website (www.incomestockreport.com) or email us at subscriptions@keystocks.com.

Looniversity – Corporate Bling!

A simple question — If a company reports earnings of one million dollars, does their bank account swell by the same amount? Not necessarily. Why not, you ask? Well, in the wild and wacky world of public companies, financial statements are based on accrual accounting, which, in an effort to best reflect the financial health of a company, takes into account non-cash items such as depreciation. Sometimes, however, it can be valuable to strip off all the “accounting noise” and look at how much “actual cash” a company is generating. The statement of cash flow provides us with this information.

What is Cash Flow?
Cash flow is the constant flow of money in and out of a company. The outflow of cash is the money paid every month to pay salaries, suppliers, and creditors. The inflow is the money received from customers, lenders, and investors. All companies provide the cash flow statements as part of their financial statements, but cash flow can also be calculated as net income plus depreciation and other non-cash items.

Why is a look at the cash flow statement important? A company not generating the same amount of cash as competitors is bound to lose out when times get rough (can anyone say now?). Even a profitable company (by accounting standards) can go under if there isn’t enough cash on hand to pay bills. Unlike reported earnings, a company can do little to manipulate their cash situation. Unless tainted by outright fraud (which is apparently a consideration), this statement tells the whole story: either the company has the cash or it doesn’t.

Put it to Us?

Q. I am fairly novice in the investment realm and wanted to ask how much it will cost to get set up to casually invest with a broker?

– Jessy Rudd; Calgary, Alberta

A.  Understanding the costs associated with becoming a casual investor is important if you want to be successful. It is important to realize that there are tangible costs, such as commission and funding for an account. Also, don’t forget about the hidden costs, such as the time and effort. Fortunately, it will cost you nothing to set up your account with either a full-service or discount brokerage in Canada. For most beginners however, the first major obstacle is the amount it takes to fund a trading account. There is no magic amount that is needed and this will vary depending on your personal situation.

Commission is the second cost and can vary widely based on which type of brokerage service you require. A full-service broker offers clients access to their research and are often willing to give clients advice based on their risk profiles. With this high-level of service comes a higher commission fee. On the other hand, a discount brokerage offers clients the ability to buy and sell various securities, with a considerably lower cost. Most discount brokers do offer access to their research, but you will have to navigate the information yourself.

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