Dividends vs. Capital Appreciation, Part II
The One Thing NOT to Do with Our Advice
Best Canadian Dividend Stock #3
Those of you who have been reading Cabot Wealth Advisory for a while know that Cabot is a family business. The company was founded by my grandfather, Carlton Lutts, and I have the pleasure of working alongside my father, Timothy Lutts, who wrote yesterday’s Cabot Wealth Advisory on Dividends vs. Capital Appreciation. He brought up a subject near and dear to my heart (I’m our resident dividend expert, you could say), so today I’m offering up an “unauthorized sequel” to his missive.
In the course of addressing a subscriber question about investing systems, my dad mentioned that the three generations of our family to work at Cabot have all had different investing styles, which were not determined by our differing ages. You can read the whole story here if you missed it, but the relevant section included this:
“Contrary to the teachings of mutual fund marketers, your investing style need not be dependent on your age.
“I write frequently here about high-potential growth stocks that are changing the world because those are the stocks I’m most interested in. That reflects the personality of my life (evident in driving in Ireland without insurance among other things), and that guides my investing style. My very first investment, for example, was Mylan Labs, the first maker of generic drugs. Amazon was a big winner, as was Tesla Motors more recently. I’ve had losses, too, but I sell them quickly, and then forget them.
“But my father was an even more aggressive investor than me! He’d frequently have more than a third of a portfolio invested in one aggressive growth stock. And he could shake off a loss of 20% and jump right back into the market targeting another high-flier—even when he was much older than me.
“My daughter Chloe Lutts Jensen is still developing her style, but one thing is clear; she has a better understanding of the fine points of income investing than my father or I ever had—or wanted to! Before she joined Cabot, she wrote about debt instruments for two institutional publishers, and she’s the chief architect of IRIS (Individualized Retirement Income System), used in Cabot Dividend Investor.”
He’s right that my investing style is more diverse than either his or my grandfather’s ever was. Right now the two top performers in my personal portfolio are a value stock recommended by Cabot Benjamin Graham Value Investor and a growth stock from Cabot Market Letter. And while it’s possible I may settle comfortably into one method eventually, I think it’s also possible I’ll stay a dabbler for life.
You see, my grandfather started Cabot Market Letter because he was passionate about growth stocks, so his focus was a given. My father is most interested in big ideas, as he wrote yesterday, and that carries through to his investing. (He also likes to read books about very big, even unlikely, ideas, like the merger of the U.S. and Canada.)
I like big ideas too, and respect how powerful they can be as investment theses. And I like growth stocks, like my grandfather, and understand why companies with innovative new products or services make great investments. I’ve been reading Cabot Market Letter since I was a kid, so I know its system well.
But I’ve also been reading Cabot China and Emerging Markets Report since it was launched, and have seen how emerging markets can make open-minded investors rich.
I’ve been keeping up with Cabot Benjamin Graham Value Investor from the beginning too, and have seen Roy Ward make his followers steady money—and occasionally surprisingly big money—with little trading and even less stress.
And I’ve helped produce both Cabot Top Ten Trader and Cabot Small-Cap Confidential at different times, and been blown away by both how far Mike Cintolo’s momentum stocks can run, and by Tom Garrity’s ability to find the most profitable needle in the small-cap haystack.
I originally joined Cabot to reinvigorate Dick Davis Investment Digest and Dividend Digest, a job that included reading and hand-selecting investment ideas from over 200 contributing advisories—some of which made money, and some of which didn’t. And then last year, I developed a new income investing system, IRIS, from scratch for Cabot Dividend Investor (which is still new, but making money).
In short, I’ve seen firsthand that there is more than one way to make money in the stock market.
Knowing this, there are two good ways to go about your investing. The first, and the one we usually recommend to subscribers, is to figure out which system works best with your own personality, preferences, and strengths and weaknesses. The subscriber who my dad was responding to in yesterday’s Wealth Advisory, Rich S., was asking for help finding his perfect system. He felt, instinctually, like he should be investing in dividend-paying stocks, but admitted to being envious of the big capital gains delivered by blockbuster growth stocks like Apple and Amazon. My dad gave him some good advice to find the system that works best for him.
But, there is another way to invest, knowing that more than one system can make you money. It’s the way I’m investing right now, and from talking to our subscribers, I know it’s the way a lot of you follow our advice too. For example, about two weeks ago Cabot Dividend Investor subscriber Jonathan L. wrote to me:
“Hi Chloe. Just need to know how to handle NVO. You recommend buying NVO while [Cabot Top Ten Trader’s] Mike Cintolo recommends selling or holding a tight stop on NVO. Who do I listen to? Thanks, Jonathan.”
We all get emails like this fairly frequently when two or more of our advisories are recommending the same stock. (It happens more often than you might think—a good stock is a good stock!) My picks most frequently overlap with Roy Ward’s, but sometimes, as in the case of Novo Nordisk (NVO), the stock Jonathan was asking about, something Roy or I recommend for dividends or value also has strong enough momentum to get into Top Ten.
I always reply to these emails with a similar question. Here’s what I wrote back to Jonathan:
“Two main points here:
“1) We bought NVO on February 3 and are sitting on a 7.7% total return, including the dividend. Mike recommended buying on March 10 around 45, so he had a small loss when he recommended selling last week.
“2) We are using very different investing strategies. I recommended NVO for long-term price appreciation and dividends, based on its IRIS scores. Mike recommended it for price appreciation, based on its momentum.
“So the answer to your question depends on WHEN and WHY you bought NVO. I know it can be nice to see the same stock recommended by more than one of us, and I have no problem with subscribers using that as another reason to buy. But when you buy, you need to have a plan in place. So when and why did you buy NVO?”
That was all Jonathan needed, and he responded succinctly:
“Thanks, you’re been very helpful. I bought NVO for the long term and for the dividends.”
The point I’m getting at should be clear by now: mixing investment systems can actually work quite well, but not on the same investment. When I buy a recommendation of Roy Ward’s, I write down that it’s his recommendation I’m following, and note his minimum sell price in the “notes” section provided by my portfolio tracker. If it’s later recommended by Mike or Paul or my dad, that’s nice to see, but I don’t change my plan. All my other investments have a similar note next to them, so I know what system I was following when I purchased the investment. Then, I just follow the same system the whole time I hold it.
One big advantage of this system is that it automatically adjusts my portfolio to current market conditions. When growth stocks are weak, as most have been for the past two months, I’ll sell my weakest Cabot Market Letter performers, as Mike Cintolo recommends, and my portfolio automatically becomes more weighted toward better-performing investments, which could be Roy’s value stocks, Paul’s emerging markets stocks or my own dividend-paying stocks. When the market starts to get overvalued and Roy warns that buyers should back off a little, I can turn to Cabot Top Ten Trader to take advantage of the latest fast-moving momentum stock that’s soaring to some sky-high valuation. Then I sell when Mike tells me to.
Like any investing system, it takes discipline to make this mixing and matching work. And if you’re instinctually drawn to investing one way above all others, like my dad and my grandfather, it usually works out best to put all your energy into following that dream. But if you invest a little more intellectually, rather than instinctively, I think you can effectively follow more than one system at a time. In fact, I know a lot of you are already trying to do it.
(I’d love it if you’d drop me a line and let me know if you’ve tried mixing and matching our investing systems, and how it works for you. Just reply to this email.)
Before I go, I want to share the third idea in my series featuring the strongest Canadian dividend paying stocks. Today’s buy idea is a Canadian energy company that earns a Dividend Safety Rating of 9.7 and a Dividend Growth Rating of 7.5 from IRIS, my Individualized Retirement Income System (click here to learn more about IRIS).
Suncor Energy (SU) is a diversified energy company that produces, refines, transports and markets a variety of energy products. In addition to its core oil sands operations in Canada, the company also has exploration and production operations in the U.S., Northern Europe, Libya and Syria (currently suspended due to the war there).
Suncor has paid dividends sine 1994, and has never cut its dividend. Last year, the company boosted its dividend by a whopping 54%, from $0.52 per year to $0.80. Another increase followed this year, to the current rate of $0.92 per year, for a current yield of 2.2%. (All dollar amounts in Canadian dollars.)
Suncor’s dividends are well supported by growing earnings. In the latest quarter, Suncor reported record earnings of $1.8 billion, 31% increase from $1.4 billion a year earlier. Cash flow increased a similar amount, approximately 31%, to $1.96 from $1.50 in the prior year period. Higher prices for oil sands bitumen and natural gas both helped increase Suncor’s margins.
Suncor’s payout ratio of 28% is solid and leaves room for the dividend to grow.
Technically, the stock looks like it may be ready to begin a new uptrend after five years of sideways action. A breakout through the 40 level, where SU broke down in 2011, would indicate that buying power is back. The next resistance level would probably come just under 50, the 2011 high. Short-term, SU is completing a normal pullback after an 11% run-up in April.
Suncor (SU), which is traded on both the TSX and NYSE, looks buyable here or on a strong move above 40.
Chloe Lutts Jensen
Chief Analyst of Cabot Dividend Investor