August 2013 update

August 2013 Update

Market Performance

The headline in the Huffington Post says it all:

S&P 500 Ends Worst Month Since May 2012

The S&P ended the month down over 3% while the Dow Jones dropped 5%.  The one bright spot was the Canadian market that actually gained over 1%.

My portfolio dropped about 0.3% in Canadian dollars, helped along by my exposure to the Canadian market (see commentary on Canadian banks below) and some currency gains due to a weaker Canadian dollar.  Stated in US dollars, my portfolio lost 2.7 %, still much better than the market.

I’m still up over 10% on the year (Canadian dollars).

The silver lining for me is that after a summer of travel and heavy spending,  my net worth is still significantly ahead of where it was on June 30.

Revisiting the Strategy

By now everyone should have a reasonable understanding of the strategy I use in my investing.  Although I follow it very closely, you may have noticed a few deviations in my portfolio.  For one, I have considerable Canadian holdings that don’t show up in my screening.  I am adverse to moving money between currencies unless there is some compelling reason.  You lose every time you move money from one currency to another and I have Canadian cash, as I am paid in Canadian dollars, so wherever possible, I use that money for Canadian stocks.  I also have several stocks that fall below the 3% dividend yield that I tend to use in my screener, and I have some stocks that don’t meet the ValuLine A++ rating.  These stocks (eg, MO, PM) pre-date my rigid following of the current strategy and have served me well with high yields and significant capital appreciation.

The strategy calls for strong companies (ValueLIne A++) and a history of paying high and increasing dividends.   This is a fairly conservative strategy that will protect you in the bad times or in flat markets, as experienced in the last decade, while keeping pace in the bull markets such as we have experienced since 2010.  I have provided previous analysis to show how this strategy produced good annual returns in the “lost” decade.    So I thought I would do a similar analysis to show how this strategy performs in the good times.   The expectation is that in a bull market, this conservative strategy will somewhat underperform.

As a bench mark, the Dow Jones Industrial Average (DJIA) grew by 47.42% since January 1, 2010, while the S&P 500 rose 52.55%

I ran a screen on all stocks with a ValueLine rating of A++ or A+, a dividend yield of at least 2% and a 10 year record of dividend growth.  This group of stocks averaged a return of 46.2%, below the two benchmarks, as expected, but not much below.   However when you omit the A+ stocks and only look at the A++ stocks the return has been  47.53% plus dividends giving a total return of 50.57% – better than the DJIA and only slightly behind the S&P.  This validates continuing with only looking at the A++ rating as the A+ fell well below the two bench marks.

Of this group of A++ stocks, the best performers, exceeding the two benchmark indexes, were those with dividend yields of 2 to 3% while those stocks with yields above 3% performed much lower.   The higher yield stocks tend to be the more conservative stocks and thus don’t fair quite as well in a bull market compared to other stocks.  This would indicate that it is not a bad idea to have some lower yield A++ stocks in your portfolio.  I will begin including stocks between 2 and 3% in my regular reports so you can select from those as well.

To summarize, this conservative dividend strategy will protect you in flat or down markets, but may underperform in bull markets.  Your risk profile, which will include your age as a factor, will help you determine your mix of stocks.  For me, as I am near retirement, I am mainly concerned with capital preservation and income.  So I am prepared to accept lower growth in bull markets in exchange for security against bad times.

Canadian Banks

You will probably notice that I have several of the big Canadian banks in my portfolio.  The Canadian banking system is probably the strongest in the world, as evidenced during the crash of 2008-2009.  Canadian banks were the only ones that didn’t succumb to the crisis.  The reason for this is government policy during the 1990s.  The Canadian government refused to allow deregulation of the banking system when the rest of the world, especially the US banking system, was delving into risky ventures.  We all saw how that turned out.  As a result, I am a strong advocate of having exposure to the Canadian banks in a portfolio.  My bank stocks have been some of my best long term performers.  The following article is an example of how the Canadian banks are faring. This article from the Globe and Mail, refers to the CIBC, but the other big banks have a similar story.

August 29, 2013

CIBC quarterly profit jumps, beats expectations; unveils stock buyback

By TIM KILADZE

Bank posts solid third quarter as earnings hit $890-million

Canadian Imperial Bank of Commerce posted a solid third quarter profit of $890-million, marking strength across a number of its business lines.
The earnings amounted to $2.16 per share, slightly beating analyst expectations – making CIBC the fourth straight bank to do so this reporting season. The profit resulted in a 8-per-cent jump from the same period in 2012.
After stripping out one-time items, CIBC made $943-million, or $2.29 per share.
The bank kept its dividend unchanged, but announced plans to buy back up to eight million shares.
CIBC did not announce any progress in its talks with Toronto-Dominion Bank to divvy up its Aeroplan credit cards but said those discussions continue.
CIBC has revamped some of its key Canadian operations over the past year to retool for the future.
In June 2012 the bank announced that it would wind down its brokered mortgage business, FirstLine, after it failed to find a buyer for the brand.
Under the FirstLine model, CIBC paid brokers fees for finding new mortgage clients. By scrapping this business and bringing in new mortgages on its own, the bank expects to earn better margins. However, the change came with risk because brokers can be a reliable source of new business – something Bank of Montreal realized after it ended its own brokered mortgage business a few years ago.
CIBC is also in the midst of renegotiating the terms of a long-term arrangement the lender has had with Aimia Inc., the parent company of Aeroplan. The lender’s contract with Aimia, which designates CIBC as the primary issuer of Aeroplan credit cards, ends on Dec. 31. The two parties have held heated discussions for the past few months and the bank took the fight public in May by threatening to abandon the relationship during its last quarterly conference call. CIBC suggested it would launch a new credit card with $50-million it has earmarked to market the new offering.
Aimia raised the stakes in June when it signed a 10-year deal with Toronto-Dominion Bank to make TD its new primary card issuer. A few weeks later TD and CIBC said they were in talks to negotiate a three-way partnership with Aimia, which could result in both banks being able to issue Aeroplan-branded credit cards come 2014. Those discussions are ongoing.

Beware September

CNN also called August the worst month in a year for the stock market, but is there worse ahead?

The following article (see link below to connect to the original) provides a caution for September which has been a poor month for the markets.  This is why I usually do my buying late in October after all the regular market downturns have passed.

Historically, September Worst Month of Year $DIA $SPY $QQQ
By Jeffrey A. Hirsch & Christopher Mistal

Since 1950, September is the worst performing month of the year for DJIA, S&P 500, NASDAQ (since 1971) and Russell 1000. A 3.1% advance last September lifted Russell 2000 to second worst (since 1979). September was creamed four years straight from 1999-2002 after four solid years from 1995-1998 during the dot.com bubble madness. Although September’s overall rank improves modestly in post-election years going back to 1953 (third or fourth worst month depending on index), average losses widen to 0.9% for DJIA, SP 500 and NASDAQ and to 1.6% for Russell 2000. Although September 2001 does influence the average declines, the fact remains DJIA and S&P 500 have declined in 9 of the last 15 post-election year Septembers.

Although the month has opened strong 12 of the last 18 years (a fading trend as S&P 500 has been down four of the last five first trading day), as tans begin to fade and the new school year begins, fund managers tend to clean house as the end of the third quarter approaches, causing some nasty selloffs near month-end over the years. Recent substantial declines occurred following the terrorist attacks in 2001 (Dow: -11.1%) and the collapse of Lehman Brothers in 2008 (Dow: -6.0%). Solid September gains in 2010; DJIA’s 7.7%, S&P 500’s 8.8% were the best since 1939, but the month suffered nearly the same magnitude declines in 2011. September has been a rather volatile month

http://blog.stocktradersalmanac.com/post/Historically-September-Worst-Month-of-Year-DIA-SPY-QQQ?utm_medium=Newsletter&utm_source=Personal%20Finance%20Reader&utm_type=text&utm_content=PersonalFinanceReader&utm_campaign=107353769

 

Stock Screener for end of August 2013 (A++, 2% or greater yield, 10 year dividend growth)

Company Ticker

Financial Strength

 Dividend Yield

 Dividend Growth 10-Year

 Current PE Ratio

Verizon Communic. VZ

A++

           4.38

            2.50

           16.10

AT&T Inc. T

A++

           5.38

            5.00

           13.32

Cardinal Health CAH

A++

           2.41

          25.00

           14.10

Deere & Co. DE

A++

           2.45

          13.00

              9.86

Gen’l Dynamics GD

A++

           2.65

          13.00

           11.80

Int’l Business Mach. IBM

A++

           2.08

          18.00

           12.06

Johnson & Johnson JNJ

A++

           2.99

          12.50

           16.02

Lockheed Martin LMT

A++

           3.88

          22.50

           13.29

Northrop Grumman NOC

A++

           2.60

            9.50

           12.93

Total ADR TOT

A++

           5.59

          15.50

              8.22

Baxter Int’l Inc. BAX

A++

           2.74

            8.50

           15.04

Becton, Dickinson BDX

A++

           2.00

          15.50

           16.45

Du Pont DD

A++

           3.16

            1.50

           15.11

Exxon Mobil Corp. XOM

A++

           2.90

            8.00

           10.77

Home Depot HD

A++

           2.11

          19.50

           19.53

Honeywell Int’l HON

A++

           2.03

            6.00

           16.15

Intel Corp. INTC

A++

           4.04

          26.00

           11.97

Kimberly-Clark KMB

A++

           3.39

            9.50

           19.16

McDonald’s Corp. MCD

A++

           3.23

          27.00

           16.72

Medtronic, Inc. MDT

A++

           2.14

          16.00

           13.68

Occidental Petroleum OXY

A++

           3.18

          14.50

           11.81

PepsiCo, Inc. PEP

A++

           2.88

          13.50

           17.23

Pfizer, Inc. PFE

A++

           3.41

            6.00

           17.94

Procter & Gamble PG

A++

           3.02

          11.00

           19.08

Raytheon Co. RTN

A++

           2.87

            8.00

           14.01

Royal Dutch Shell ‘A’ RDS/A

A++

           5.65

            8.50

              7.56

Smucker (J.M.) SJM

A++

           2.16

          10.50

           18.69

Texas Instruments TXN

A++

           2.89

          21.50

           22.31

Travelers Cos. TRV

A++

           2.48

            4.00

           10.34

United Technologies UTX

A++

           2.08

          15.50

           16.19

Wal-Mart Stores WMT

A++

           2.56

          18.00

           13.45

3M Company MMM

A++

           2.22

            6.50

           16.72

Automatic Data Proc. ADP

A++

           2.49

          14.00

           23.22

Chevron Corp. CVX

A++

           3.38

            9.00

              8.81

Coca-Cola KO

A++

           3.08

          10.00

           17.99

Colgate-Palmolive CL

A++

           2.38

          12.50

           21.89

Emerson Electric EMR

A++

           2.64

            6.50

           16.28

Illinois Tool Works ITW

A++

           2.31

          13.00

           16.68

Merck & Co. MRK

A++

           3.60

            1.50

           13.66

Novartis AG ADR NVS

A++

           3.31

          16.00

           17.26

Unilever PLC ADR UL

A++

           3.55

            9.50

           18.34

Bristol-Myers Squibb BMY

A++

           3.36

            2.00

           24.08

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About borgford

Feel free to contact me with questions: brianborgford@hotmail.com
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One Response to August 2013 update

  1. Joyce Zomer says:

    Hi, Brian

    I thoroughly enjoy receiving your monthly Investing news! It’s keeping me on my toes, that’s for sure!

    Are you and Rochelle back in Qatar now? I had three weeks in Canada with my family. Mom continues to decline and we never thought we would see her in this depressing and awful situation. The only good thing is that she is totally unaware of it.

    For the rest, we’re doing great, although Herman’s got a nasty cold right now and has lost his voice. That does have its advantages!!

    I do like your new layout. I think it is crisp and clean and completely different, having the white text on the black background.

    Hugs to you and Rochelle

    Joyce   “And in the end, it’s not the years in your life that count. It’s the life in your years.” Abraham Lincoln

    >________________________________ > From: Brian Borgford – Investing >To: joycehct@yahoo.com >Sent: Saturday, August 31, 2013 5:11:10 PM >Subject: [New post] 48 > > > > WordPress.com >borgford posted: “August 2013 Update Market PerformanceThe headline in the Huffington Post says it all:S&P 500 Ends Worst Month Since May 2012The S&P ended the month down over 3% while the Dow Jones dropped 5%.  The one bright spot was the Canadian market that actu” >

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