a new use for dividends

Wow, the markets have been flying lately. The S&P 500 index is up 13% over the past 3 months. XDV (and ETF that tracks Canadian dividend paying stocks) is up 21% over the same period.

All this jubilation has caused me to begin to perform a behaviour that is out of character for me. It feels different from my normal long term, more savings = more investment = more dividends = more investment strategy but lately I've been letting the dividend tap run into my line of credit. That's right, I've been taking the money from dividends and interest that builds up in our investment account and using it to chip away at our investment line of credit.

Maybe it is the fact that stocks seem to go up everyday and therefore they get less attractive to me, or maybe it is because I like what it does to our net worth statement, but I'm going with my gut on this one for the time being. It's boring, it's conservative, but it feels good to reduce debt a little bit at a time.

fixing the moneygardener tech. problems

I've lost 125 subscribers and your old blogspot bookmarks won't work!

I'm not really sure what happened but the old themoneygardener.blogspot address is no longer redirecting to the new themoneygardener.com site. Also as of July 9 or so our feed was not updating regularly.

Please update your bookmarks to the new domain name and re-subscribe to the feed. The feed seems to be updating now. Hopefully this will resolve the problem.

Also bloggers and other linksters.....I would appreciate it if you would update your link to the moneygardener to the new .com address at http://themoneygardener.com.

Thank you for reading the moneygardener.

Shoppers Drug Mart should increase their dividend

Hey Shoppers Drug Mart (SC)!

You just reported an earnings increase of 7.5% amid one of most difficult Canadian retail operating environments in a long time. How about throwing shareholders a bone and giving them a little boost to the dividend?

The quickly growing Canadian drugstore chain's dividend has been the same 21.5 cents per share since the first quarter of 2008. The company is paying out a modest 33% of earnings and the stock yields 1.8%. Could Shoppers being hoarding cash for a take over of some kind? Either way, I would urge them to continue to raise the dividend on a regular basis, to not only reward current shareholders, but to build themselves a history of strength through dividend growth. A lot of investors, whether looking into the past or the future, like to see regular dividend increases and view the incremental hikes as a sign of stability.

Shoppers has raised their dividend regularly since 2005 and is now at risk of paying out an equivalent amount in 8 straight quarters. This would mean that if they don't raise in November despite recent growth in earnings, Shoppers would essentially pay out the same dividend in 2008 and 2009. What a shame, especially for a firm that I included as part of my future of Canadian dividend growth along with Rogers Communications (RCI.B) and Tim Hortons (THI).

market barometer

What an interesting time to be following the stock market, economic and business news, as well as corporate earnings this earnings season. This is my take on what is occurring broken down into smiles and frowns.

Smiles

• Recent results from companies like Caterpillar (CAT), CN Rail (CNI/CNR), and others showed positive signals of stabilization of the economy as well as a pick up in emerging economies.
• Many companies are really blowing away analyst earnings estimates including industrials and technology firms. Forward earnings guidance is also being raised.
• The S&P 500 index is up 42% from its March lows
• New economic estimates are indicating growth is right around the corner and the recession has ended.

Frowns

• Funny thing is that earnings coming in 'not as bad' is almost always attributed to cost cutting, which can't go on forever.
• Earnings are beating estimates, but have you noticed how low estimates are? For example Caterpillar's second quarter profit was down a whopping 66% from last year.
• Unemployment continues to ramp up in the US and Canada and some estimates are indicating that jobless rate could top 10% soon.
• The market is getting sick of 'not as bad' and 'stabilization' and is now searching for more in the form of growth, which may or may not come as quickly as Mr.Market wants.

Interesting stock moves lately:

• Caterpillar (CAT) up 24% in the last five days
• IBM (IBM) up 12% in the last five days
• CSX Corporation (CSX) up 11% in the last five days

vancouverites are richest canadians

An interesting article appeared on today's Globeinvestor.com: Vancouver Ousts Calgary as Canada's Highest Net Worth City

For Canadians as whole household net worth dropped 6.2% in 2008. Our net worth dropped by pretty much that exact percentage during calendar 2008; I guess that makes us average. We live in Brantford, Ontario. In Calgary, Alberta net worths actually dropped on average by 12.3% and in Vancouver wealth dropped by only 3.1%.

Vancouver real estate prices are holding up pretty well making them the richest Canadians with an average net worth of $575,826 per household versus Calgary's $569,926 and Ontario's $354,968. British Columbians are also piling back into the stock market faster than elsewhere while Quebecers and Ontarians are socking money away in safe places.

the pricing of stocks

It is time for another question from the Personal Finance Clinic mailbag. By the way, thank you to all who submitted questions for The Personal Finance Clinic. Please visit Canadian Capitalist and Triaging My Way to Financial Success to view the balance of the Q&A.

Ellen asked;
Does it matter whether the value of my stock investments increases because of earnings or increase in value? If so, is there a rough and ready way for me to tell how much of the increase is due to earnings and how much due to price increase?

The simple answers to these two questions are 'No' and 'No'. Let me explain...

First off, you must understand that there is no value without earnings. Any increase in stock value that one might think is unrelated to earnings is a misnomer because it always comes back to earnings and earnings growth. Stock prices will always reflect investor sentiment about the future over the short term. Over the long term a stock's value should come back to reflect the true measure of a company's success, which is earnings per share (EPS). Broken down to it's bare bones, the only thing that really matters to a stock's value is earnings per share, however obviously several other factors will dramatically influence the price. If a food manufacturer just earned a great EPS number for the year but lost two major contracts due to a deadly contaminant in their product, the high EPS will matter very little as the stock is sold off hard.

For example, let's say Gusher Oil & Gas earned $4.00 per share in 2009. You might think the stock should trade for at least $32 per share or so (8x earnings), if the firm was in decent shape and was expected to grow earnings at a moderate pace. In reality Gusher could trade at $16 per share if oil prices are expected to plummet and Gusher had taken on too much high interest debt. On the flip side, Gusher could trade at $80 per share if they just discovered a new oil deposit and oil was expected to rise dramatically in the short term.

A good way to understand why stocks are priced the way they are, and why they move the way they do is to understand the sum of investor's thoughts about the company's future earnings growth potential. This is a complicated mish mash of predictions, anticipated industry trends, past performance, and expectations. At the end of the day every stock price is a guess at future earnings growth.

net worth update, july 2009

It's time to report my bimonthly net worth. I report my net worth on the moneygardener or around the 15th of May, July, September, November, January, and March.

Net worth results for the 2 Months Ended July 14, 2009:

• Debt/Asset ratio dropped to 0.50 from 0.51 (back to $1.00 for every $0.50 of debt - a record low)
• Net Worth gained 1.7% (to a record high)
• Total Assets rose 0.6% (to a record high)
• Total Liabilities shrunk by 0.4%
• House Value/Total Assets fell to 66.0% (a record low)
• Non-Registered Portfolio grew 7.4%
• Net Worth Calendar Year to Date Gain/Loss: +12.5%

Steady as she goes, as our net worth continues to grow to record highs. The S&P 500 index was up about 2.5% during the period and our net worth grew by 1.7%. Our savings rate has slowed lately as we had some lingering planned household expenses. I expect our savings rate to pick up over the next few months and the money will go toward debt reduction unless I see an irresistibly priced stock to add to. It is very encouraging to see our debt/asset ratio back down to meet the record low we achieved back in September of 2008.

Walgreen nearly doubles dividend since 2006

the moneygardener darling, US drugstore chain Walgreen Co. (WAG) has increased it's quarterly dividend by 22%. This is the 35th consecutive year that Walgreen has raised it's dividend. Walgreen has been growing it's dividend at a torrid pace over the past few years. In fact, since 2006 WAG has roughly doubled it's dividend.

The stock is now yielding only 1.8%, however a purchase during the depths of March, 2009 would have yielded 2.6% on cost. It is interesting that the company is choosing to increase the dividend at such a high rate given the current slowdown in earnings growth. Walgreen's last quarterly earning report was actually down 9% from 2008. The pay out ratio is rising and the company's traditional objective of rewarding shareholders with growth, may be shifting to include paying out cash in the form of dividends.

The company is currently largely focusing on cutting costs and driving productivity. 2009 earnings look like they will come in lower than 2008 after much expense due to cost-cutting restructuring. I remain very bullish on the company long term due to their strong brand, their market position, and US demographic trends. WAG currently makes up about 6% of my portfolio.

Last year in July, Walgreen increased their dividend by about 18%.

added caterpillar

I bought some shares of Caterpillar (CAT) today for my wife's RRSP. The basic thesis for this purchase is that for a long term hold, Caterpillar offers exposure to a leader in building out the infrastructure of the world. The short term may look very gloomy for this company, which presents a buying opportunity as the shares are down 65% from their all time high.

Caterpillar's CEO is actually predicting a return to 2008 sales levels within five years. This may or may not occur, but it is interesting to note that CAT was trading at $63-$85 during 2008 before the crisis hit.

Incidentally the stock actually yields a surprising 5.5% and is maintaining the dividend for now in the face of the downturn.

market update

So how have the markets been?

Well, they were rising steadily for a few months, but since June 12 sentiment has shifted and stocks have been falling. Could this be the start of a long series of tests of previous levels? Maybe. Could this be the start of a test of the March 9 lows as some pundits are predicting? I seriously doubt it.

We will not be revisiting the levels we saw in early March. If we do, I will be buying.

Stocks I am currently watching include Caterpillar (CAT) for my wife's RRSP and Canadian Pacific Railway (CP) for our non-registered portfolio.