I’m happy to welcome readers to the third Dividend Investor Interview on the new Triage Investing Blog.
In 2008 I featured two of my investing peers who shared their thoughts on dividends, successes, failures and investing approach in order to allow readers to gain different perspectives from investors.
Even though many investors concentrate on dividends, each of us has habits and practices that differ from others. Insight into the thoughts of other investors can provide valuable information, a new perspective, initiate a debate or simply reaffirm what good habits we already have.
Dividend Investor Interview III:
Roger (aka: Sensei)
Thanks for doing the interview Roger. Can you tell readers a bit about yourself as an investor (investor profile) with some background information?
Thank you for interviewing me. It is always gratifying to be recognized as someone worth interviewing. I’d have to say, though, that in the domain of stock investing, my knowledge is intermediate at best and I still have so much more to learn. Although my methodology borrows much from value investing, I’d describe myself mainly as a dividend investor.
I’m investing for retirement and I expect to remain in the accumulation phase for the next 8 to 12 years. After that I expect to live on the dividends or other income stream from my investments. You could also say that I’m a buy-and-hold investor in so far as my strategy has nothing in writing about selling the stock for a capital gain and capital gains are not what I intend to live on until absolutely necessary. I do sell on rare exceptions, which include selling on a dividend cut or the expectation of a dividend cut and very occasional selling but re-buying opportunistically.
As a non-resident Canadian (I live in Japan) with no formal plans to return to Canada I take an international, multi-currency approach. My investment plan is to buy undervalued dividend paying stocks in Canada, the US and the UK with overvalued yen. Thus, aside from the day-to-day business of finding suitable stocks to buy or add to, there is a constant interplay between various currencies and countries.
I’d add that I’m still an active mutual fund investor. I have significant mutual fund holdings outside of Canada representing 34% of my net worth at the time of writing (January 2012).
I’ll be 58 in March of this year. I was born in Winnipeg and lived there for 25 years. I moved to the West Coast and lived on ‘The Island’ for several years (mainly in Victoria). I also lived briefly in Vancouver before moving to Japan in 1992. I have lived in Japan for 19 years and Tokyo for the last 12 years. During this time I’ve been continuously employed as an English instructor, although I’ve done other work in the educational field such as writing textbooks and teacher training. I’m married with no dependent children.
Can you tell readers a little bit about when you first started investing?
I’ve always been a saver and I consider that to be a fundamental quality for successful investing. I started my first bank account at the Royal (RBC) when I was 12. Investing came much later and in three stages.
In the 1980s I was smitten with gold fever. I bought some gold certificates from CIBC, but became disillusioned when gold came back down to earth. I actually didn’t lose that much, but enough to turn me off speculating for some time. GICs (Guaranteed Investment Certificates) were paying very lucrative interest at the time, so I was able to build risk-free GIC ladders and create a supplementary monthly income. I also dabbled in real estate in a very small way. I owned half a duplex in Victoria and collected rent from roommates.
The 90s were pretty much a long hiatus from investment activities. I was deeply in debt when I arrived in Japan and spent four years digging myself out.
Did you have any special strategies to help get you out of your debt burden?
I’m afraid I wasn’t that savvy then. I was on more of a personal fulfillment track at the time; living and teaching in Japan and learning a new language. However, there were several circumstances that made it possible to pay down debt quickly. One was that
I didn’t have to pay rent. I was housed by the school that I worked at. Secondly, I was living alone. Thirdly, I lived in the countryside with no car. Besides that, I did what came naturally. I lived frugally (and still do). I paid off my debt in order of interest rates. I started with a charge card debt ($5,000) and paid that off quickly. I also settled accounts on a lease car that I had used in Canada (also $5,000). Finally, I paid off my students loans totalling some $15,000. By 1995 I was debt free and able to afford a car and attend graduate school at night in Tokyo. The latter was the best investment I ever made, come to think of it.
When did you start investing seriously?
Serious investing started in 1997. In that year I began to take a longer term view of my finances. By that time I had actually saved as much money as I had in my peak years of the 1980s. However, I realized that if I did nothing my prospects for retirement were pretty grim. I could not look forward to any significant pension from either Canada or Japan, and, as a contract worker, no juicy company pension either.
So in 1997, what was your style?
I started with offshore portfolios of mutual funds. This is a relatively convenient, although expensive, option available to expatriates. Early on, I simply bought a portfolio of funds suggested by an advisor. However, I started to feel frustrated by just going at it blindly with no real knowledge of what I was doing. I started reading a lot on the subject. My favourite authors were Gordon Pape and Garth Turner at the time. Using strategies like dollar cost averaging, allocation formulas and rebalancing I built a second, then a third, offshore portfolio with different companies. These strategies worked, given time, so later I scraped together $25,000 in Canada and placed it with PHN (Phillips, Hager & North). I also built up significant fund exposure with TD. I would probably be doing the same thing today had it not been for the vagaries of the Canadian mutual fund industry. Around 2005 my mutual fund activities were stopped at TD and a year later at PHN. As I write, non-residents are not allowed to hold Canadian mutual funds.
On February 12, 2007, I bought my first stock, ADP (Automatic Data Processing), which also happened to be a dividend paying stock. From that point I rapidly moved towards dividend investing.
What would you consider to be your risk profile?
Speaking mainly as a dividend investor, my risk tolerance is low; especially after the subprime mortgage mess and because of my age. I’m not prepared to take big risks for big gains. I buy shares in mainly conservative companies if I believe they will continue to grow and/or payout a fair part of the profit to me as the shareholder. I don’t really consider capital gains to be an attractive goal for me.
To realize a capital gain, one has to make decisions on when to sell. These are decisions I don’t want to make; at least not in the pursuit of building retirement income. If I learned anything from the subprime mortgage mess about myself, it is that. On the other hand, dividends are relatively stable and predictable and therefore a low or lower risk way to build wealth in my opinion.
How would you define risk to a reader or investor on this site?
Traditional measures of unsystematic risk don’t directly apply to dividend investors. The typical stock buyer of the last 30 years, led by the financial media, has fixated on the idea of probability of gain or loss on the principal amount of his/her stock. The risk for a dividend investor is most often the probability of a dividend cut or a stagnant dividend rate (no dividend increases). These seem less risky when you consider that stock prices fluctuate almost by the minute whereas dividend rates change once or twice a year and that is on the whole to the upside. This is something that I noticed even during the subprime crash.
However, systematic risk keeps me awake at night. The chief risk for me (and millions of other boomers) is running out of money in retirement. Another related risk is inflation which in turn reduces the spending power of your investment income down the road.
So given that risk profile what would you consider to be risky investments?
Again this has to be considered on two levels. On a straight forward unsystematic risk basis, I consider any company that doesn’t pay a dividend to be an inherently riskier investment than one that does.
Companies with no apparent moat, while they might be successful for a time, are also high-risk investments.
In the broader systematic-risk context, investments that don’t keep up with inflation are very risky. Many fixed income investments certainly fall into that category at the time of writing.
So what are some of your tactics for minimizing risk(s)?
That’s an easy question to answer. Buying high quality companies that pay a sustainable and rising dividend is certainly my No. 1 risk minimization strategy.
Finding companies with an identifiable moat is another important risk reducer.
Portfolio management is also important. Although the dividend-paying stock universe is limited (and extremely limited in Canada), diversification across sectors makes sense. My US and Canadian portfolios cover 8-12 sectors although both are lumpy, and my Canadian portfolio extremely so. Neither the dollar value of my stocks or sectors is particularly even. Ideally, I’d like to have at least two stocks in each sector, although this has not always been possible because of lack of funds or opportunity.
I also have non-correlated investments within my mutual fund portfolios.
What’s your definition of quality when investing?
Not to sound like a broken record, but again dividend stocks have been shown to lead the market on many levels. These companies have reached a stage where they have sufficient earnings to pay some out to investors on a regular basis and also, perhaps, increase the payouts as the company continues to grow.
What specific criteria do you use to invest in dividend paying stocks?
That depends a lot on the company or sector. There are several metrics to look at, but to put it simply for a short interview like this, I consider these criteria and ask myself (or others) these questions before I buy a stock:
• Is the stock trading well below my or a published fair market value or target value? (In other words, is there a margin of safety?)
• Yield: Is it in a realistic yield range of 3%-7%?
• Dividend growth: Has it been consistent over a number of years?
• Earnings growth: Allowing for occasional bad years, is the company generally increasing earnings year after year?
• Dividend sustainability: Is the payout ratio consistent with the industry or objectives set out by the company?
• Debt: Is it low or non-existent or is it consistent with other companies within that industry?
• Easy to understand business: Can I explain what the business does?
• Moat: Can I explain what the moat is?
• Sensible acquisition policy: Do acquisitions add shareholder value and support the dividend?
• Share buybacks: Do share buybacks support the dividend?
• Management: Has it been a well-managed company over a number of years?
My investment objectives remain the same. I need to support myself and my wife in retirement. We have no great expectation of income from either the Canadian or Japanese governments.
Any significant influences over the years you’ve invested? (media, mentors, family, experiences, etc)
While I could name various people that I respect and listen to, many from Financial Web Ring (Brad911 included), experience has been the best and toughest teacher.
What was it about dividend investing that caught your interest?
There are so many cliché expressions that apply here, but certainly the title of Geraldine Weiss’ book, Dividends Don’t Lie, comes to mind. Also, in a historical framework, dividends make so much more sense (to me) than the buy-and-sell hubbub promulgated by the media of the last 30 years or so.
Do you have a dividend threshold or minimum yield for your portfolio?
In order to get to where I want to be in 10-12 years, I look for yields in the 3%-7% range. As a qualification, I’d be looking for a total return of 10% based on a simplified interpretation of the Gordon Growth model. Dividend yield + average dividend growth (5 years) = 10%. Therefore a stock with a lower initial yield should be growing the dividend faster.
As investors we’ve all made mistakes; biggest regret?
My biggest regret is not starting early enough. As things are now, it is a race to the finish line and I may have to make some hard decisions if health becomes an issue.
Your biggest mistake?
Not necessarily a mistake, but I’m still working through the psychology of when to sell. I’ve made some huge mistakes by not selling when it was clear the dividend was all but eliminated.
Your biggest success?
With the help of Morningstar and various other resources, I have had great success at building dividends in the US and I’m proud of my US stock portfolio as it stands today.
Besides the fact mentioned above that it is clear where they come from, I also like the way they are paid. There are no direct decisions to be made by me. A dividend portfolio is also cheap. My MER for 2011 was 0.2% and it will be significantly less in 2012. That includes a subscription to Morningstar’s Dividend Newsletter.
Where do you see yourself in the medium to long-term? (10-20 years)
10 years from now I hope to be still working although less than now. Geographically, I’ll still be in Tokyo. I wouldn’t want to live anywhere else, although I’d like to spend more time with relatives in Canada.
15 years from now I’d still like to be working, but full retirement is the most likely scenario.
What advice would you give to a novice investor struggling with the markets?
Start early and be consistent in the long term no matter what your investing strategy is.
Would you be interested in giving five of your favourite stocks and a few reasons why?
Sure (these are not recommendations to buy)
BCE Inc. (TSE: BCE)
• Best of the telcos in Canada
• Great dividend
• Growing the business
A&W Royalties Income Fund (TSE: AW.UN)
• I like the business model of collecting royalties
• Not directly related to the success of the restaurants
• Sentimental value; A&W is as old as I am
• Very wide moat brand business in my opinion
• Very well managed
Realty Income (NYSE: O)
• Wonderful US REIT that pays monthly income
• Excellently managed, almost like the crash never happened
• They live to pay distributions to people like me
• Solid business model
• Intelligent acquisitions
Intel (NASDAQ: INTC)
• I admire Andy Grove and identify with him as an immigrant.
• The company has a huge competitive advantage in that their products are in more than half of all personal computers worldwide.
• Intel has had the guts to introduce a dividend in a highly competitive business.
• Intel, despite fierce competition, continues to stay ahead of the research curve.
Keyera Corp (TSE: KEY)
• My best performing stock of all time, pays a good dividend and has tripled in value
• Has made a successful transition to a corporation and maintained the same dividend
• It is in one of my favourites spaces: midstream energy. These are wide moat businesses. Difficult to replicate the facilities.
Among four offshore portfolios, I still make regular monthly contributions to one. The others, I’ve held for 10 years or more. These are tax-sheltered investments with no taxable event until the proceeds are brought back into Japan (or Canada if I am there). I use these to cover geographic areas where I have no specific competence and/or no desire to invest directly in the stock market. That would include emerging markets; Asia (ex Japan), Latin America and Europe. From a sector point of view, international small caps figure in these portfolios as well as various bond funds.
Thanks for doing the interview Roger.