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.

KeyStone’s Latest Reports Section

• IP Company’s 2011 EPS Meets Expectations, Hold Strong Cash Position, & Yields 3.6% – Short-Term Cost Increase Leads to Long-Term Opportunity – Maintain Rating (Flash Update)
• China-based Fertilizer Stock Posts Q4 2011 Slightly Below Expected, Growth Expected into 2012, Fear Creates Buying Opportunity (Flash Update)
• Profitable, Low Cost, Junior Gold Producer Operating in South East Asia – New Focus Buy (New Buy Report)
• Cash Rich Communications Software Company Posts Strong Q2, Strategic Acquisition Sets Table for Long-Term Growth – Maintain Rating (Focus BUY) (Flash Update)
• China-based Athletic Apparel Manufacturer Posts Solid Q3 2011 Results, EPS on Upswing Again, Strong Cash Position (Close to Half its Market Cap), No Debt – Reiterate BUY (Focus BUY) (Flash Update)

Another ‘All One Market’ liquidation event could be in the making

Click here to read more…

ETF’s are showing early technical signs of recovering from oversold levels.

Click here to read more…

Considering the only soundbite that was relevant from Ben Bernanke’s 45 minute 2:15pm oratory was that “we don’t have a precise read on why this slower pace of growth is persisting” America, and the entire civilized world, could have done just as well without it.

Instead, we should have listened to Jim Grant, who once again correctly identifies all the things that the Fed chairman should have said (Bernanke certainly focused on the other side): “What we are not going to get is a concession that QE2 has achieved its unintended consequences, namely a lower dollar exchange rate, a higher gold price meaning weaker confidence in the dollar, slower economic growth and a higher measured rate of inflation. Those are some of the things that have come out of this experiment and let us call it by its name money printing…How do we know that this 30% gain in the Russell and 20% gain in Dow since the Chairman spoke in August, how are we to know these are real values. The prices are up, but are people who are buying these stocks on the back of the Fed, are they doing something wise from an investment point of view, and if the market is too high because the Fed has put it there, what does the Fed do when the market comes down, which opens the fate for QE3.”

And on a far more important topic which we will soon hear much more of, namely extensive US money market exposure in Europe, which will be completely locked up if, pardon, when there is a major liquidity run in Europe snagging American money market liquidity: “The money market mutual funds have nothing to do in this country cause rates are zero, go to Europe. So money market mutual funds investors are taking quite ponderable risks for about a 0% return, these funds are yielding a few basis points only. But to get those few basis point, these funds are crossing the Atlantic right smack dab in the middle of the European banking crisis. This is a prime example of the unintended consequences of this massive intervention by our central bank.” Indeed, this is just one simple example of the massive clusterfuck, which certainly does not need Greece’s $5 billion notional in CDS, to make the Lehman liquidity freeze seems like a little melting ice cube. And since everyone now agrees that Greece will default, and it is only a matter of time, all the trillions in dollars in the shadow and open banking systems that we have been exposing for years now, will suddenly be locked up in the forms of 1 and 0 in computers belonging to institutions that are no longer operational. And most unfortunately, the man in charge of it all, has a quivering lip problem.

Much more in the entire must watch interview with Bloomberg’s Margaret Brennan:

…go HERE for the Bloomberg video (scroll down a bit)