The fine art of buying dividend stocks gradually
Don’t try and time the market, says a Canadian advisory that urges investors to buy dividend stocks gradually, like one earth-moving stock.
Legend has it that Mr. Bernard Baruch would sit on a bench in Central Park and discuss the stock market and politics with all comers.
He was a highly successful investor and adviser to presidents. He also summed up in one concise phrase the idea of buying at the bottom of the market and selling at the top.
“This can’t be done — except by liars.”
In other words, one does not make a fortune by trying to time the market (and Mr. Baruch made his fortune before he was thirty).
That is why one of Canada’s oldest investment advisories cites Mr. Baruch in support of its philosophy.
“You’re better off gradually buying high-quality, dividend-paying stocks,” says The Investment Reporter.
This advisory looks ahead and sees a future that so shrouded in doubt that it would seem more dangerous than ever to time the market.
But before we look into that crystal ball, let’s examine one of those dividend stocks that will reward investors who buy gradually.
Riding shotgun
Some stocks ride shotgun on the economy, as it were. They provide the tools that dig up the materials that get the wheels of industry churning.
Finning International (TSX-FTT) is one of them. It is the world’s largest Caterpillar equipment dealer. It has the exclusive rights to its loaders, graders, excavators, etc. in Alberta, B.C., Yukon and the Northwest Territories. This means it serves the oil patch, and the oil sands.
It is also has a sizeable footprint in South America, in Chile, Argentina, Bolivia and Uruguay. Among other things, this means it supplies the heavy equipment for the copper and gold mines of Chile.
Obviously, the slowdown in the global economy was not to Finning’s benefit. Its earnings fell off in 2009.
In response, Finning cut back selling, general and administrative costs by $120 million. And it intends to save another $200 million this year. It has done much of this by cutting out overlap and waste, or, in business-speak, “improving efficiencies across divisions.”
At the same time, Finning is raising its free cash flow, easier to do because it does not have high capital requirements in its business. Some of the cash goes to pay down debt. Some of it is going into new projects, like a truck stop in Fort McKay, Alberta.
Committed to dividends
One of the secrets of Finning’s success is its after-sales support. By 2012, the company expects to generate $2.3 billion in supplying parts and service for the equipment it has sold. This produces what analysts call “high barriers to entry.” What competitor could match this service?
In its own words, Finning is “committed to dividends.” It has raised the dividend in each of the past eight years. It currently stands at $0.44 and yields 2.6 per cent. “We expect Finning to at least maintain the dividend,” says The Investment Reporter.
This is a good company that depends on others — miners and oil and gas producers — to reach its peak in revenues. So it’s a stock that wears best over time, and will keep the dividends coming while you follow its progress. This advisory makes it a buy for long-term gains and dividends that rise most years. It is trading at $17.24.
Prescription for disappointment
Dividends are essential to any sound investment portfolio, in this advisory’s philosophy, and all the more important in uncertain times.
And uncertainty is the order (or disorder) of the day, the advisory insists. It cites two pessimists.
One is veteran Wall Street strategist Mr. Raymond DeVoe, Jr. (whose own report we have featured here a number of times). He points out that the mortgage problem is not over in the U.S. Unless unemployment drops sharply and home values rise substantially, he says, foreclosures will simply keep on rising.
Nor is there any reason for U.S. banks to lend to consumers when they can borrow from the central bank for nothing and get higher rates from risk-free government securities.
He is also among those who believe the 10-month rally has driven stocks up too far, too fast.
The other pessimist is the oft-quoted Canadian analyst Mr. David Rosenberg, formerly of Wall Street and now at Gluskin Sheff in Toronto. “He thinks forecasted company earnings are too high and likely to disappoint investors,” says the advisory.
The U.S. economy is projected to grow by four per cent in 2010. By most historical calculations, Mr. Rosenberg points out, that would work out to company profits of around 10 per cent.
Yet strategists are predicting that company profits will grow by 36 per cent! A prescription for disappointment if ever there was one.
The Investment Reporter makes one more important point. “Much of last year’s earnings growth came from cost cutting.” You can only cut so many costs before you start hurting yourself. This year, revenues will need to grow to keep those earnings up.
This advisory is not really painting a picture of doom and gloom. It is simply saying that no matter where the market is heading, steady and patient investing will ultimately win the race.
And were Mr. Baruch still haunting that park bench, he would surely say, “Yes, that can be done.”
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