Mike, Author at MOOSE MARKETS

Unlock the Power of Dividend Reinvestment Plans (DRIPs)

If you’re looking for ways to maximize returns and build long-term wealth, consider dividend reinvestment plans (DRIPs). Reinvest your dividends in the underlying stock automatically, compounding your investment over time.

In this article, we’ll delve into what DRIPs are, how they work, how investors can participate, and the advantages and inconveniences associated with them.

What are DRIPs?

Dividend reinvestment plans (DRIPs) are an investment tool that allows shareholders to reinvest cash dividends received from a company’s stock into more shares or fractions of shares. Instead of receiving dividends in the form of cash payouts, investors automatically reinvest those dividends into the same stock. The result? Investors accumulate more shares over time, without any effort, and save themselves transaction costs along the way.

How Do DRIPs Work?

When a company pays dividends, instead of receiving a cash payment, shareholders who participate in a DRIP program receive shares equivalent to the value of the dividends. These shares are bought directly from the company without brokerage fees. Sometimes, DRIP participants get the stock at a discounted price.

For example, suppose you own 100 shares of Company X, and each share pays a quarterly dividend of $1. The stock price is $25 per share. If you take part in Company X’s DRIP program, instead of receiving $100 in cash dividends, you will receive 4 shares. Over time, this reinvestment can significantly increase your holdings in Company X.

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Enrollment and Participation

Participating in a DRIP program is relatively straightforward. Usually, investors must own at least one share of the company’s stock to enroll in the plan. They can do so directly through the company’s transfer agent or brokerage firm, depending on the availability of the DRIP program. Once enrolled, dividends are automatically reinvested without requiring any further action from the investor.

Many brokerage firms offer DRIP services to their clients, making it convenient for investors to enroll in multiple DRIP programs through a single platform. Investors can usually manage their DRIP participation online, track their dividend reinvestments, and monitor their growing investment portfolios.

Note that not all companies offer DRIPs. Consult the Investor Relations section of a company’s website to see whether they have a DRIP. Brokerage firms will also have a list of company DRIPs you can enroll in.

Advantages of DRIPs

Compounding Returns

One of the main benefits of DRIPs is the power of compounding returns. By reinvesting dividends back into the underlying stock, investors buy more shares, which in turn generate more dividends. Over time, this compounding effect can significantly enhance the total return on investment.

Dollar-Cost Averaging

DRIPs provide investors with the advantage of dollar-cost averaging. Since dividends are reinvested regularly, regardless of market conditions, investors buy more shares when prices are low and fewer shares when prices are high. This disciplined approach helps smooth out the impact of market volatility and can result in a lower average cost per share over time.

Convenience

DRIPs automate the process of reinvesting dividends, eliminating the need for investors to actively manage their dividend income. This automation makes it convenient for investors to grow their investment portfolios without requiring constant attention or manual intervention.

Potential Cost Savings

Many DRIP programs offer the option to buy additional shares at a discounted price or without incurring brokerage fees. This can lead to cost savings for investors, especially those who regularly reinvest dividends and accumulate shares over the long term.

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Drawbacks of DRIPs

While DRIPs offer several advantages, they can complicate tax reporting for investors. In non-registered accounts, reinvested dividends are still considered taxable income, even though they are not received in cash. Investors need to keep track of their reinvested dividends and report them accurately on their tax returns, which may require more record-keeping and tax preparation efforts.

Participating in a DRIP program means relinquishing control over dividend payments. While automatic reinvestment can be helpful for long-term investors, it may not suit those who prefer to receive cash dividends for other purposes, such as funding living expenses or investing in other stocks.

In some cases, companies issue new shares to fulfill the demand for DRIP participants, which dilutes existing shareholders’ ownership stakes. The effect of dilution might be minimal for large, established companies, but it could be more significant for smaller companies with fewer outstanding shares.

To DRIP or not to DRIP

Participating in a DRIP increases investors’ positions in some stocks automatically without them having to lift a finger. Over time, you could end up with overweight positions for these stocks if you don’t monitor your portfolio.

Also, if the stock price is on a major bull run and keeps rising, and your DRIP buys more for you with every dividend payment, your average cost per share rises as well. The point is that investors should watch their DRIP reinvestments, and the weight of the positions quarterly to avoid these issues. When a position reaches the maximum weighting wanted, it’s time to stop the DRIP to either cash in the dividends or invest them in other stocks.

Investors getting near retirement should also remember to review their DRIPs and stop some or all of them to help build up their cash reserve with the cash dividends ahead of the start of their retirement. Find out more about this in Retirement Cash Reserve: Surf the Market’s Waves.

Conclusion

Dividend reinvestment plans (DRIPs) are a compelling tool for investors to grow their investment portfolios over the long term. By reinvesting dividends back into the underlying stock, investors can harness the power of compounding returns and dollar-cost averaging to maximize their wealth accumulation.

While DRIPs provide numerous advantages, including automation, cost savings, and compounding benefits, investors should also be mindful of the potential tax implications, lack of flexibility, and the risk of dilution associated with taking part in DRIP programs. Investors must also monitor the weight of positions for which they participate in a DRIP and stop the DRIP when the positions are large enough and when they want to build their retirement cash reserve.

Ultimately, the decision to enroll in a DRIP should align with investors’ long-term financial goals, risk tolerance, and investment preferences.

Buy List Stock for February 2024: Toromont Industries (TIH.TO)

My Canadian buy list stock for February 2024 is Toromont Industries (TIH.TO). It shows a very strong dividend triangle with double-digit 5-yr annualized growth for revenue, EPS, and dividends. Considering the massive infrastructure spending needs in Canada for the coming years, TIH should keep doing well.

We included Toromont in our Best Canadian Stocks to Buy in 2024, but it’s now a buy list stock because we feel it deserves a bit more attention and we wanted to provide more detail about it.

See our U.S. buy list stock pick for the month here.

Toromont Industries Business Model

Toromont Industries is a Canada-based company serving the specialized equipment and lifetime product support needs of thousands of customers in diverse industries from roadbuilding to mining, and telecommunications to food and beverage processing. It operates the Equipment Group and CIMCO segments.

Within the Equipment Group segment, TIH is the exclusive Caterpillar dealer for a contiguous geographical territory in Canada that covers Manitoba, Ontario, Quebec, Newfoundland, New Brunswick, Nova Scotia, Prince Edward Island, and most of Nunavut. Additionally, the Company is the MaK engine dealer for the Eastern Seaboard of the United States, from Maine to Virginia. The segment includes rental operations and a complementary material handling business. CIMCO segment is engaged in the design, engineering, fabrication, and installation of industrial and recreational refrigeration systems. Both segments offer comprehensive product support capabilities.

Want more stock ideas? Download out Top Stocks for 2024 booklet!

Investment Thesis for TIH.TO

TIH has over 50 years of history and has built a solid sales network with roughly 140 locations across Canada and the US. Combining this large distribution network with a well-known brand that is Caterpillar secures success that will last for decades. In addition to counting on the mining (20%) and construction (38%) sectors to grow organically, the company also buys smaller dealerships, such as Hewitt, acquired in 2017.

Considering the massive infrastructure spending needs in Canada in the coming years, Toromont is surely a player that could do well going forward. On top of this, the mining industry continues to bolster TIH’s order book given that commodity prices remain strong. It’s a shame that TIH exhibits such a low yield. The company has navigated the current uncertain economic conditions well by remaining committed to operating discipline. Now that governments want to invest in more infrastructure, TIH possesses a stronger dividend triangle showing robust growth.

TIH.TO Last Quarter and Recent Activities

Toromont Industries reported a total revenue increase of 9% for Q4’23 with Equipment Group revenue up 9% and CIMCO up +2%. EPS dropped 3.6% in the quarter as operating income fell due to property gain included in the prior year Q4 results. Excluding these gains, Toromont’s operating income grew 5% due to higher revenue but affected by lower gross margins. Bookings rose 49% compared to the same period in 2022. For the full year, revenue grew 12%, increasing in both groups and across all product and service categories compared to full year 2022 .EPS for 2023 increased 18% compared to 2022. The company also just announced an 11.6% dividend increase!

Potential Risks for Toromont Industries

When we think of the mining and construction sectors, there are two characteristics that come to mind: capital-intense and cyclical. While TIH enjoys a strong reputation and a steady source of income coming from its business model, the company still has to deal with economic cycles. The market expects TIH to showcase great performance in the coming years due to massive infrastructure investments from Canadian provinces. Let’s hope that the company doesn’t disappoint investors.

Revenue growth wasn’t impressive since the pandemic, but now it seems to be picking up in the latest quarters. TIH continues to face construction delays and inflationary pressure. What would happen if we entered a recession? We can see that backlog is now slowing down, signaling weaker results ahead. But so far, the dividend triangle stays incredibly strong.

Want more stock ideas? Download out Top Stocks for 2024 booklet!

TIH.TO Dividend Growth Perspective

Toromont has been a pioneer among the Canadian dividend growers with a dividend growth streak that has been around since 1989. It’s too bad that TIH exhibits such a low dividend yield even after management more than doubled its payouts over the past 5 years. Since TIH has a low payout ratio, shareholders can expect higher single digit increases over the long run. It followed up on a generous dividend increase of +11.4% in 2022 with another one of +10% in 2023 (from $0.39/share to $0.43/share), and yet another one, this time +11.6% in early 2024 (from $0.43/share to $0.48/share).

Final Thoughts on Toromont Industries

TIH’s yield of 1.5% won’t pay your bills, but it is growing by double-digit annually for one (+10.25%), three (+13.05%), and five years (15.45%).

Despite its very strong dividend triangle (5yr double-digit growth for revenue, EPS and dividends) and revenue growth improving of late, the stock price isn’t following the same growth trend. Last year, you had the chance to buy TIH at a PE of 20. Today, the forward PE is 18.80! Could be a good entry point if you want to add industrials stock to your portfolio.

Canadian Stocks Paying USD Dividend or Trading on US Market

Canadian stocks paying USD dividends or trading on an U.S. market (either the NYSE or NASDAQ), or both. Why? Canadian dividend stocks are fascinating. Many of them operate in small niches and pay handsome dividends.

Should you invest in a Canadian stock on the U.S. market? What is the advantage of having a dividend paid in USD by a Canadian company? Are there withholding taxes on USD dividends?

Let’s answer these questions. We’ll also cover Canadian companies paying a dividend in USD for my fellow Canadians who want to enjoy a sunny retirement down south without worrying about currency fluctuations.

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That darned exchange rate

One question that keeps coming up since the creation of Dividend Stocks Rock in 2013 is:

“As a Canadian, should I invest in the U.S. stock market?”

This is usually followed by…

“I’m asking because the currency rate isn’t good right now”

Is it really? Let’s look at the Canadian Dollar vs. the US dollar since the 70’s:

What we see is that we used to trade close to par in the 70’s (remember, it wasn’t a glorious decade for our southern neighbors). Then, it’s a rollercoaster ride between $0.65 to $1.05 depending on the decade. Now, let me work some magic with this graph and present another perspective:

Over the past 50 years, the dollar moved by 26%. In annualized return, we’re talking about the equivalent of an “expensive” ETF fee (0.456). The largest movement was from 2002 to 2007 (remember the oil boom with oil income trusts?) where our dollar surged by 71%. The difference between the bottom in 2002 and today is a 16% upside fluctuation.

Here’s the range of risk regarding CAD vs USD: over a short period of time, one investment in “bad” currency could make you lose a lot (71% between 2002 and 2007). However, if your investment horizon is over five years (seriously, if you’ll need your capital in 5 years or less, stop investing in equities right now), chances are the impact of currency fluctuations will be less than 1% per year.

Right now, we are not close to a historical high or a historical low. Therefore, your risk of losing massively in investing in USD for Canadians or in CAD for Americans isn’t that important all things considered.

Cross-border investing: is it worth it?

However, the risk of not investing in those unique opportunities for each country is great. Americans, you won’t find better banks, telcos, pipelines and utilities outside of Canada. Canadians, you won’t find better exposure to international markets, new technology and the world’s most popular brands outside of the U.S.

If you can combine both markets to your advantage, you’ll build the most powerful and stable dividend growth portfolio. You’ll be well on your way to achieving your retirement dreams.

I’ve discussed at length my interest in U.S. dividend growers. I’m pretty sure I’ve convinced most of my fellow Canadians to consider U.S. exposure in their portfolios. However, I haven’t fully covered the advantage for Americans to invest in Canadian Stocks.

Since we are talking about currencies, let’s look at these topics:

Canadian dividend stocks trading on U.S. markets for Americans to benefit from our best sectors.
Canadian dividend stocks paying dividends in USD for Canadians to retire in Florida or Arizona.

Learn about how Canadians can obtain a currency hedge and buy US stocks at a lower price, by reading Canadian Depositary Receipts (CDRs).

Create income for life. Download our guide!

Canadian Dividend Stocks trading on the NYSE

Good news, the list of Canadian dividend stocks trading on U.S. markets isn’t exhaustive. I’ve compiled a complete list to the best of my knowledge.

You can download the list here.

Fortunately for you, there are several great options on this short list.

Canadian banks

(RY, TD, BMO, CM, BNS): Canadian banks are highly regulated, but also highly protected. They are comfortably doing business in a small oligopoly. If you haven’t considered Canadian banks yet, now’s your chance. The big 5 are trading at 9.5-11.5 times their earnings. RY and TD are my favorite from this group (more on National Bank later). A special mention to Brookfield Assets Management (BAM) which is an asset manager, not a bank. Still, it’s a company you should consider. You can view our complete Canadian banks ranking.

Life insurance companies

(MFC, SLF): Canadian Life Insurance companies could be interesting now that interest rates appear to be increasing. My favorite is Great-West Lifeco, but sadly it’s not part of this list. SLF would be my pick instead.

Telecoms

(BCE, TU, RCI, ): Like Canadian banks, telecoms operate in a small oligopoly where 90% of the wireless market is controlled by BCE, TU and RCI. BCE and TU are long-time dividend growers. The former will offer you a stable yield while the latter will offer you a great combination of growth and yield.

Utilities

(FTS, BEP, BIP, TA): If you look them up at DSR you will notice they all have strong ratings, but TA. BEP and BIP also pay their dividends in USD. Therefore, there is no reason to not consider those great dividend growers!

Energy

(ENB, CNQ, TRP, SU, IMO, PBA, CPG, ERF, OVV): While there is a wide range of choices in this category, I would cut the selection to only include dividend growers. ENB and TRP are probably the most reliable pipelines in North America while CNQ and IMO (which is partially owned by XOM) are two other great dividend growers. They have proven (especially in 2020), that they can weather any storms and keep their promises to shareholders.

Industrials

(TFII, CNI, CP, STN, WCN, TRI): This is clearly a widely diversified group, but all of them merit a look nonetheless. CNI and CP are among the strongest railroad companies in North America. WCN pays a small yield and is a very stable business. Thomson Reuters shows 28 years of consecutive dividend increases. TFI International is one of the fastest growing trucking companies in North America.

Materials

(FNV, NTR, GOLD, AEM, WPM, PAAS, MEOH, TECK, CCJ): You know I’m not a big fan of materials, but FNV is in another class. This is a rare gold-related company showing several years with dividend increases. NTR is also an interesting pick if the demand for potash remains strong.

Others

(MGA and OTEX): Magna International (MGA) is an amazing company. You can surf on the car industry along with the EV trend through Magna without having to take the risk of another automotive crash. The company is one of the largest auto parts sellers in the world. It’s a cash flow machine! As for Open Text, this is a SAAS business with over 100,000 customers around the world. However, I must admit that you have better choices on the US market if you are looking for a solid tech stock!

If you are American, I’d say that investing in Canadian banks, telecoms and utilities would add a lot of value to your portfolio. We have many choices in the energy & materials sectors as well, but I’m not a fan of those sectors.

What about pink sheets?

Pink sheets are listings for stocks that trade over the counter (OTC) rather than on a major U.S. stock exchange. They’re usually companies that can’t meet the requirements for listing on the major markets. They often have a “bad reputation” as many of them are penny stocks with limited liquidity. As a dividend investor, this isn’t exactly what you want to add to your portfolio.

However, you will also find amazing Canadian stocks are listed as pink sheets, such as National Bank (NTIOF), Emera (EMRAF), Power Corporation (PWCDF) and Alimentation Couche-Tard (ANCTF). Those are far from being penny stocks. Emera is the smallest company among this list with a market cap over $15B. While there is less volume for those companies, you can add them to your portfolio if you have a long-term horizon. If you’re a DSR member, I invite you to read our analyses of these stocks on the Canadian side if you have doubt about a pink sheet stock.

Create income for life. Download our guide!

Canadian Dividend Stocks Paying USD dividends

Some Canadian companies pay their dividend in USD. They choose to this usually after a business analysis shows most of the company’s revenues are made in the United States. By paying their dividend in the same currency as they generate their revenues, they reduce the risk of currency fluctuation. An example is TFI International (TFII) that changed its CAD dividend to USD after the integration of a massive acquisition in the U.S. (UPS freight was purchased for $800M in 2021).

Is there a tax implication?

In most cases, dividends paid in U.S. dollars by Canadian companies are eligible for the dividend tax credit (source). It’s always a good practice to verify this in the dividend section of the company’s investors’ website. The dividend may also be deposited in your account automatically in CAD. Again, it depends on the company. Those are questions you can ask your broker to ensure you receive the right dividend in the right currency!

Advantage of Canadian stocks paying USD dividends

In general, the advantage of Canadian stocks paying a USD dividend is more for the company, because it generates most of its revenues in USD as explained earlier. For investors, it could be a source of headaches or frustrations (you don’t want your broker making a sweet 2% conversion rate fee on your dividend, right?). However, if you plan a vacation or retirement in the U.S., having Canadian stocks paying their dividend in Uncle Sam’s dollar is a natural hedge against currency fluctuation. You can build a part of your portfolio with those Canadian stocks along with other US stocks and you’ll be set to never have to worry about converting your money “at a bad rate” in the future.

The list of Canadian stocks trading on the NYSE counts 75 companies and the Canadian stocks paying USD dividends is relatively small (35 companies), but you will find some common names.

You can download the list here.

Buy List Stock for January 2024: Stella-Jones (SJ.TO)

A new Canadian buy list stock on my list for January 2024 is Stella-Jones (SJ.TO), a special beast in the materials sector. While its business model revolves around lumber prices, most of its revenue comes from products essential to infrastructure projects: utility poles and railway ties. SJ.TO’s business is less affected by price fluctuations than if it was all about residential lumber. Find out more about why I bought shares of SJ.TO in December 2023.

See my U.S. buy list stock pick for this month here.

Stella-Jones Business Model

Stella-Jones Inc. is a Canada-based producer of pressure-treated wood products. It supplies various electrical utilities and telecommunication companies with wood utility poles and North America’s short line and commercial railroad operators with railway ties and timbers. SJ.TO also provides industrial products including wood for railway bridges and crossings, marine and foundation pilings, construction timbers, and coal tar-based products.

Additionally, the Company manufactures and distributes premium treated residential lumber and accessories to Canadian and American retailers for outdoor applications, with a significant portion of the business devoted to servicing Canadian customers through its national manufacturing and distribution network. The Company operates 45 wood treating plants and a coal tar distillery across Canada and the United States, complemented by a procurement and distribution network.

Discover other great picks in our 2024 Top Stocks booklet. Download it now.

Investment Thesis for SJ.TO

With utilities and railroads as its main customers, Stella-Jones will keep getting sizable orders and getting paid. SJ.TO’s revenue surged between 2017 and 2021 because demand for its products was strong from both sides of the border. Business has slowed since the second half of 2021, but SJ.TO continues to grow. In 2023, it reported impressive numbers as demand for infrastructure products is surging. With 15 facilities in Canada and 25 on U.S. soil, Stella-Jones can deliver its products promptly.

The company has proven to be a defensive pick during the pandemic. The “lumber COVID-hype” is over, but SJ.TO remains a solid business benefiting from multiple growth vectors. While residential construction may slow down due to higher interest rates, the need for more infrastructure and major projects continue to drive sales higher.

A portion of the company’s growth in recent quarters was fueled by recent acquisitions and margin expansion. Management mentioned it was seeking acquisition targets – we like that!

SJ.TO Last Quarter and Recent Activities

Recently, Stella-Jones impressed the market and analysts with a killer quarter; revenue up 13%, and EPS up 79%! Excluding the acquisition of utility pole manufacturer Texas Electric and the positive currency impact, sales were still up 7%. Despite understandable lower sales for residential lumber, the company saw an organic growth of 17% from its infrastructure-related businesses. Utility sales were up 32.3%, Railway ties +15.6%. Earnings jumped on expanding margins in SJ.TO infrastructure-related businesses, helped by businesses acquired in late 2022 and 2023.

Potential Risks for Stella-Jones

SJ.TO is highly dependent on macroeconomic factors. Although the company enjoys a stable replacement business for railway ties and utility poles, those segments do not always grow at a fast pace. The residential lumber division depends on the health of the housing market. Fueled by strong results, SJ.TO’s stock price skyrocketed in 2023. It’s always an additional risk to buy when a stock almost doubles in value.

Going forward, Stella-Jones will remain dependent on lumber pricing. If demand is strong, it will seem to be a robust business. Like any commodity producer, it experiences uptrends and downtrends. This seems to be a good deal with a forward PE ratio below 14.

Discover other great picks in our 2024 Top Stocks booklet. Download it now.

SJ.TO Dividend Growth Perspective

Another reason I chose SJ.TO as a buy list stock is that it’s dividend has almost doubled over the past 5 years, yet the company exhibits a very low payout ratio. Unfortunately, as is the case with many low-yielding stocks, the combination of a low payout ratio and low yield makes the DDM calculation inadequate. Going forward, shareholders can expect mid single-digit dividend growth. The latest dividend increases were more than generous (going from $0.15/share to $0.18/share in 2021 and then to $0.20/share in 2022, and now to $0.23/share in 2023), but for planning and valuation purposes, we would rather stick with a more conservative scenario.

Final Thoughts on Stella-Jones

In 2023, the company reported impressive numbers with demand for infrastructure products surging; despite a surging stock price in 2023, it still trades at an attractive forward PE of 14; infrastructure and major projects should continue to drive sales higher; the company is on the lookout for more acquisition targets. So, lots of growth vectors on its dashboard.

What’s not to like? Stella-Jones is fully deserving of a spot as a buy list stock for many dividend growth investors.

What to Expect for 2024

It’s hard for investors to know what to expect for 2024. Recession or a soft landing? Interest rates cut? What about bonds? And politics and wars? Here’s some insight.

Currently, a contrast exists between the resilient U.S. economy, driven by enthusiastic consumers, and a Canadian economy showing fatigue due to the strain of continuous spending. Long fixed-rate mortgage contracts in the U.S. versus the 5-year contracts in Canada contribute to this contrast.

Despite the S&P 500’s impressive double-digit growth in 2023, this surge was primarily propelled by a select few mega-cap stocks, known as the “magnificent 7,” contributing two-thirds of it.

See part of our best dividend stocks selection for 2024, download our Top Stocks booklet now!

Recession – Are We There Yet?

Predictions of a 2023 recession, including mine, were wrong. However, we saw the first signs of a slowdown in Canada in late 2023. Not calling it a recession…yet. I’m still convinced the economy will suffer from the combination of high inflation and high interest rates.

Graphs showing GDP is flattening in Canada while it is still growing in the U.S. — Flattening in Canada; still growing in the U.S.

Although a slowdown might loom in 2024, robust job markets in the U.S. and Canada, coupled with demographics where more people retire than join the workforce, might help the soft landing wished for by central banks.

Graph showing unemployment rates that have been quite low in Canada and the U.S. since early in 2022, but inching up a bit in Canada in late 2023 — Low unemployment rates in Canada and the U.S., but inching up a bit in Canada late in 2023.

Recession or not, current interest rates will significantly affect 2024.

Lower earnings

Expect weaker corporate earnings, especially in the industrials, automotive, and consumer discretionary sectors, affected by restrained consumer spending. Canadian Tire (CTC.A.TO) sold fewer discretionary items as consumers focus on essential purchases; U.S. Home Depot (HD) consumers take on smaller projects; car sales will barely go up; and so on.

Holdings in such cyclical companies are in for a few poor quarters. Should you jump ship? Short answer: no.

Zombie companies, interest rates

The number of Zombie companies, unprofitable businesses that survive by taking on new debt, went from roughly 500 to over 700 in 5 years.

Despite possible rate cuts for 2024, we won’t be going back to a cheap money era. Interest rates will stay relatively high as companies renew their debt. We’ll see zombie companies die and interest charges rise for capital-intensive businesses, including telcos, utilities, and REITs. This lagging effect will last the year and beyond. Brace for impact.

See part of our best dividend stocks selection for 2024, download our booklet now!

Market liquidity

This paints a pretty bleak future for your investments. However, there’s $6 trillion sitting in cash on the sidelines, the highest level ever seen in U.S. money market funds. If the Fed announces rate cuts, that money won’t go into bonds or in declining high-interest savings accounts; it’ll likely return to the market. Another reason to stay invested in holdings you’re confident about.

Bond rally?

The current inverted bond yield curve shows short-term bonds offering higher yields than long-term bonds, a sure sign that the market thinks interest rates will decline.

I’m not a fan of jumping from one strategy or asset allocation to another, and I’m not recommending that you do so. However, income-seeking investors might want to look to bonds. Short-term bonds tied interest rates should do well in 2024 as opposed to long-term bonds.

AI for Cost Savings?

Suffering from the slowdown, higher interest charges, inflation, what will companies do? Lower their costs to improve their margins. Using artificial intelligence (AI) is a way to enhance productivity.

A sound strategy for investors is finding companies that will profit from the AI wave, no matter what; there are even dividend payers among them!

Chip markers: Nvidia and AMD are obvious winners. Other semiconductors companies (TSM, Broadcom or Intel) could also benefit from the quantity of chips AI needs. Semiconductor equipment providers (Lam Research or ASML) could see their backlog grow.
Software enterprises: Companies could use AI to improve their software products; others, like Accenture, to boost their consulting and strategy services.
Healthcare: Healthcare companies like Abbott Laboratories, Medtronic, and McKesson already invest in AI to improve productivity.

See part of our best dividend stocks selection for 2024, download our booklet now!

Renewables & Infrastructure Investment

Relying heavily on debt to fund projects and government investment, renewable utilities have been on a rollercoaster for two years, with the wind energy industry the most affected.

Setting up wind farms is complex and costly, as is connecting them to the grid. Vast quantities of raw materials are needed, and inflation made construction costs explode. Wind energy a less performant energy solution for now when compared with the ease of installing solar panels on rooftops!

Solar energy is a cheap way to generate electricity. Like wind, it’s an intermittent energy source but more predictable.

The solution for reducing carbon emissions is a combination of hydro electricity, wind & solar energy, natural gas, and potentially nuclear energy. Governments will spend billions in renewable projects, leading to major infrastructure spending. My favorites are Brookfield (Renewable and Infrastructure), NextEra Energy (the parent company) and Xcel (regulated/green energy mix). But utilities aren’t the only ones to benefit from this wave of money…

Alternative asset managers

Infrastructure projects don’t generate cash flow immediately, far from it. To invest and manage them, you need specialists called alternative asset managers.

Investing in alternative asset managers is a great way to diversify your portfolio. Usually, their returns aren’t determined by what’s happening on the market, and they can be about 5-7% above inflation over long periods. My favorites? Brookfield (BN or BAM) and Blackstone (BX).

Short-Term vs. Long-Term

The short-term view of the market might be cloudy, but long-term looks much brighter:

Staying on the sidelines after the tech bubble crash, 9/11, the financial crisis, the European debt crisis, Brexit, or COVID-19 would have meant missing 20 magical years on the market! Conclusions:

Staying invested is the best solution, always.
The market might not give you much for several years. Be patient and focus on your growing dividends.

2024 Playbook

Don’t overhaul your investing strategy and start over. Adjust your portfolio to ensure you are well-invested and poised for what’s coming. A potential long bear market affects investors who are invested and those with cash on the side. Here’s the playbook.

Invested investors

Review your portfolio; ensure it’s well-diversified across several sectors
Identify weaker looking stocks; re-examine if you still want to hold them
Trim overweight positions
Optimize your holdings with better stocks (strong metrics, growth potential)
Build a cash reserve if you’re retired and depend on your portfolio to generate income

Cash on the side investors

You could wait for years and never get today’s price again. Instead:

Build a list of stocks to buy now
Invest 33% of your money now
Wait for a quarter, review earnings, invest another 33%.
Rinse & repeat for another quarter to fully invest your money.

The goal is to make sure your portfolio thrives no matter what happens on the market:

You invest 33% just days before a crash starts. Major market crashes are intense, but the down trend doesn’t last very long. Therefore, three and six months down the line, you’ll have bought during the dip, averaging down with cheaper prices.
Alternatively, you invest 33% just the market begins a 5-year bull run. You’ll slowly build a profit cushion with an average price below the market.

Wars & political tensions

Ongoing geopolitical tensions and conflicts make headlines, scare the market, and cause tragedies, but their long-term impact on investments is limited. Think about how fast natural gas prices returned to pre-war levels while the Russia-Ukraine war still rages. Companies carry on and adapt quickly to new circumstances.

Quality income investments

Don’t just go exclusively for yield. It’s okay to have higher yield-stocks, but find companies that won’t let you down and that keep increasing their generous dividends. To safeguard your portfolio, focus on dividend safety.

Reduce your exposure to stocks you’re not 100% convinced about to prevent a huge hole in your portfolio if they crash.

Final Thoughts

As always, navigating the uncertainties of 2024 requires that you remain loyal to a straightforward strategy, echoed by Peter Lynch: know what you own and why you own it.

Common Investing Mistakes: Waiting for Market Pullback & More

Among common investing mistakes is waiting for market pullback hoping to buy stocks at a cheap price. Another is holding on to loser stocks hoping their price goes back up. These mistakes put your retirement at risk and keep you from sleeping well at night. Learn what you can do about it.

Learn about the other three frequent mistakes investors make here.

Download our Recession-Proof Portfolio Workbook to learn more about building a resilient portfolio.

Waiting for a Pullback

Buy low, sell high, basic and sound investing advice for anyone starting their investing journey. So, what do you do when the stock market keeps climbing higher? You’re not going to buy high, are you? When the market’s trading close to an all-time high, it’s very tempting to wait for the next crash before investing

Why you do this

History is full of investing horror stories. Over the last 25 years alone, we’ve seen the tech bubble, the Twin Towers terrorist attack, the 2008 financial crisis, the oil bust in 2015, the 2018 quick bear market, and the 2020 pandemic crash. Inexplicably, many investors think of the events of went up 145% while the U.S. market tripled!

Hoarding cash until the next crash seemingly makes sense; you’ll buy shares at an incredibly low price and enjoy strong returns when they go back up. Why buy now if you can get it cheaper later? And, while you wait, you won’t lose any money on the chunk you hold in cash. A win-win situation; earn interest on your cash now and bargains in the market later. Wrong!

How it hurts your portfolio

It’s true that investors who invested in 2009 show impressive results today. If the events of 2009 occurred every 5 or even every 10 years, waiting for a major pullback would be a defendable strategy. The opportunity to invest after a major stock market correction is quite rare. Since 1970, there have only been three pullbacks that would’ve been worth the wait (1973-74, 2000-01-02 and 2008-09).

Bar chart showing yearly market variation since the 1928. Only three major market crashes since 1970. — A long wait – Only three major market crashes since 1970

Most often, you’d wait nine years for the next major crash. Who can afford to wait a decade to invest? An insidious effect of waiting is that it makes you doubt your investing plan. Case in point: on December 26^th, 2018, both markets had just decreased double-digit from their peak levels. Did you invest all your available money then? This was a major pullback. You probably didn’t invest more money in December 2018 because you were thinking about the possibility of another 2008 or 2000-2002. None of us knew it was the start of yet another bullish segment. Nobody waives a flag to tell us it’s time to buy.

Fixing it

In 2013-2014, most financial analysts and the media said the market was overvalued, be it Forbes, Goldman Sachs, or Motley fool. Everybody agreed the market was way overvalued again in 2017, and again in 2022.

Stock Buying Process: child following instructions to assemble Legos — Build according to plan

In 2017, I didn’t care where the market was from a valuation standpoint. Selecting from the finest dividend growers at that time, I built my portfolio. Even if a pullback happened 3 months after I invested, I knew my dividend payments would continue to increase during the correction. Sooner or later, share values would go back up… because this is what happens, repeatedly.

Despite 2018, a terrible year, I was better off fully invested during that time than if I had kept 30% to 50% of my portfolio in cash to invest on boxing day. The capital appreciation from early fall 2017 to summer of 2018 combined with the dividends paid exceeded temporary losses incurred during the rest of 2018. None of the calculations I made showed that waiting would have been better.

So, when you think you shouldn’t invest money, focus on your dividend growth plan instead of the stock value. To add in some protection, you can plan to invest at intervals over a 6- to 9- month period. See How to invest a lump sum.

Investing with confidence prevents waiting for a pullback. Our DSR portfolio returns show that even during the market correction of 2018, the focus on dividend growing stocks minimized losses. The best protection against a market crash is a solid portfolio, holding robust dividend growth.

Download our Recession-Proof Portfolio Workbook to learn more about building a resilient portfolio.

Thinking it’ll Bounce Back

Many people invest in the wrong companies. Making poor investment decisions happens to all of us. My positions in Lassonde (LAS.A.TO) and Andrew Peller (ADW.A.TO) were in the red, about 30 months after I bought them. For a while, I waited, but eventually sold my shares of both as they didn’t fit my investment thesis.

Why you do this

None of us want to buy high and sell low. We’ll justify the first 10-20% loss as a temporary setback, the market doesn’t get it, or investors will realize it’s a good company. It’s hard to admit mistakes. It hurts our ego, and our brain does all it can to protect that ego. So, we patiently wait for our losers to come back on track and prove us right.

We also tell ourselves that selling at a loss is acting on fear, and we don’t let our emotions drive our transactions. It’s good reflex to have, but we must analyze our losers to decide to keep or sell them.

How it hurts your portfolio

Investors keep their losers because they focus on the money lost. After making a bad investment that’s trading 40% lower than what you paid, not much else can go wrong. How can you possibly lose more? So, you keep your shares thinking one day it’ll bounce back, and you could recover your money.

In doing so, you leave a lot on the table; there’s an opportunity cost when keeping your money invested in a bad place. What if you cut your losses and bought shares of a strong dividend grower instead? Worried you’ll make another mistake? It could happen, but since you already made one, you learned from it and will make better choices.

Some years ago, I held shares of Black Diamond Group (BDI.TO). The company faced challenges after the oil bust of 2014-2016 and cut its dividend. Sticking with my investing principles, I sold my shares right away and took the loss. I wasn’t happy to lose money and felt a bit dumb for having bought it in the first place. I was wrong with my investment thesis, and I wasn’t fast enough to see the dividend cut coming. Instead of whining about my bad investment, I moved on. With the proceeds, I bought shares of Canadian National Railway (CNR.TO / CNI). The rest is history:

Had I waited for better days with Black Diamond, I’d have suffered a second dividend cut and lost even more money. Meanwhile, my new shares of CNR appreciated in value substantially and the dividend kept increasing.

Fixing it

Investigate why your loser stocks are losers; perhaps they suffered a one-time event or temporary setback? Or perhaps metrics over 5 years show more serious problems with the company, like lack of growth, absence of dividend increase, a dividend cut, ballooning debt, etc. To avoid future mistakes, find where you went wrong; were you blinded by the company narrative, seduced by a high yield, in denial about the risks the company faced? See 7 Reasons we end up With Loser Stocks, What to do About it.

Build a list of replacement stocks; those you’ve researched and would like to own. The best way to get over selling a loser at a loss is to get a shiny new thing!