Market Buzz – Never Paint all Dividend Stocks with One Brush

Posted by Aaron Dunn: Keystone Financial

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keystonePlease Note: KeyStone’s Senior Income/Dividend Stock Analyst, Aaron Dunn will be speaking on Money Talks with Michael Campbell on Saturday June 29, 2013 at 9:00 a.m. (see below)

The Canadian dollar was lower Friday amid new figures that showed that the economy grew modestly during April.

The Loonie fell $0.39 to $0.9508 US as Statistics Canada reported that gross domestic product grew by 0.1%, in line with expectations.

Fed chairman Ben Bernanke rattled markets on June 19 when he indicated that the central bank could start tapering its bond purchases and the Canadian currency has been volatile ever since, sinking as low as $0.9475 US earlier this week, its lowest level since October 2011.

Chairman Bernake’s statement sent interest rate sensitive stocks (many dividend payers) lower. Higher bond yields have been the major culprit amid speculation the U.S. Federal Reserve could be close to starting to wind up one of its key stimulus measures, the purchase of US$85 billion of bonds every month.

While most commentaries expect Canadian economic growth to pick up in the second half of the year, year-over-year, the Canadian economy grew at an annualized rate of 1.4% — slightly below the Bank of Canada’s most recent estimate for the full year and well short of some private sector estimates for 2013 growth. This should hardly be a rate that instills fear of sharply rising interest rates.

It is true that some yield stocks had been pushed to unattractive levels near term, but to paint all dividend stocks with one brush is symptomatic of how myopic the market has become. Today it seems tech stocks are either good or bad, REITs are either good or bad, or in this case, dividend stocks are either good or bad. There is no middle ground, everything is an absolute. I thought “only the Sith (Star Wars reference) deal in absolutes” – you are either with me or against me – and how did that work out for them (not good for those not following).

This type of one size fits all investing is nonsense. It is entirely short sighted as well. Fortunately it provides us long-term buying opportunities.

It is true that in a desperate search for yield, some dividend stocks were likely pushed too high near term. But those who argue against dividend paying stocks as a general rule in this market sound ridiculous. Are we actually to believe that a stock that trades below its growth rate, generates strong cash, pays us between 3-10% annually and holds a strong business is somehow unattractive because interest rates will eventually move higher? That is absurd. This is precisely the type of investment any true investor should be looking at in ANY investment environment.

But don’t take our word for it. According to a Ned Davis Research firm, over a 35 year time horizon (1970-2005), dividend stocks on the S&P 500 generated a total return of 10.19% per year compared to the 4.39% generated from non-dividend stocks – nearly 6% annual outperformance! Similar research can be sighted back 60 years plus.

That fact is investing in high quality-cash producing dividend stock is no “Johnny-come-lately” strategy. It is simple tried & true and has been used by some of the world’s most successful investors for over a century.

It is one of your best chances at beating the market long term.

However, it can be hard to figure out which dividend stocks to invest in – after all, not all dividend stock are created equal. It is critical to remember that just because a stock has an attractive dividend or yield of say 5, 8, 10 or even 15% – there is by no means a guarantee that it is sustainable at that level or at all.

Dividend stocks are not bonds and if you invest in low quality dividend stocks and chase unsustainable yields, you can find yourself loosing 40%-50% or more of your principal value. The media is full of headlines like “The only 5 dividend stocks you need for a successful retirement” or “Retirement strategy: Buy any dips in dividend winning stocks.”

Do yourself a favour and avoid these short-term fixes and start using our simple proven strategy to uncover profitable dividend paying stocks through intense research.

We specialize in indentifying dividend stocks with;

– Strong sustainable cash flow.

– Reasonable payout ratios.

– Solid balance sheets.

– Strong management teams with strong ownership positions.

– Trading at attractive fundamental valuations.

– Growing businesses.

– A history of dividend growth.

– And in a diverse degree of industries.

Over the past 3-years, KeyStone’s Income Stock service’s average gain (Conservative. Moderate, & Growth portfolios) combined have posted gains of 55.1%, which is more than triple the 16.1% gains the TSX-Composite index posted over that same period. In fact, each year since inception our Income/Dividend Stock Research has substantially bested the TSX benchmark in up and down markets, consistently posting very strong gains.

Last year (2012), Keystone’s Dividend Stock “Hybrid Portfolio” (our favourite 10-12 income stocks) posted a 24.1% gain versus the TSX-Composite, which managed a 7.2% gain including dividends.


KeyStone’s Senior Income/Dividend Stock Analyst, Aaron Dunn will be speaking on Money Talks with Michael Campbell on Saturday June 29, 2013 at 9:00 a.m.

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