News

Tom Connolly

Author, The Connolly Report financial newsletter

My Best Investment

My best investments have been in dividend growth stocks, and while the story is much the same on all of them, Fortis is a terrific example.

It's a broadly based utility in Newfoundland - it used to be an electrical utility, but now it has gas and a number of other assets in other provinces and other countries, so in a way, it's a kind of conglomerate.

It was 1995 when I first invested in Fortis. I bought it again in 1996, and I ended up with 500 shares each time.

Fortis is a dividend growth stock, and I had been following it for 10 years before that, anyway. The general philosophy was that its dividend growth record was pretty good, and that's the kind of stock I buy.

What I usually use to buy stocks is the yield. The price isn't so much important as the yield. If the yield is higher than average, then I'm interested.

The Return

The yield on that investment now - on my original price - is 16.9 per cent. My purchase price on the first batch of stock was $24.62, and the second batch was about the same. Each of those batches, which we paid $12,000-something for, are now worth $50,000. Not too bad for what most people would call a dull, old utility.

And then, the nice thing about it is, last year, with all the [market] turmoil and prices going down, since my cost is $6.16 and the low for Fortis was $20.70 last October, it's nowhere near my buy price, even with all that excitement.

So I'm still feeling pretty good about Fortis. It's down from its high, but it certainly didn't get anywhere near my purchase price.

And that's it. I measure performance by the income my assets provide. The current price isn't relevant, so I don't have to sell when the market is down.

The takeaway

It all started with a letter to the Financial Times (of Canada) in August, 1984 - that's what got me thinking about dividend growth investing. The guy who wrote the letter, his income, when he retired in 1966, was $4,800. And by the time he wrote the letter to the Times, in 1984, his income was up to $31,000.That piqued my interest, so I started investigating dividend growth stocks, and buying them.

With dividend growth investing, you have to convince yourself that it works. It's fairly easy to do. There's not too many companies to worry about. There might be 20 good dividend growth stocks in Canada - a small group of Canadian stocks that have really good dividend growth, good cash flow and products that you need. It's just a matter of picking a utility, or a bank, or a food retailer or a couple of industrials, perhaps. And building a portfolio that way.

What I do is look back at dividend growth over a period of, say, at least 10 years, and I figure if the dividend is growing, then that's real cash, so the earnings must be growing, and the company must be doing things right.

So that's my main signal: that they have a good dividend growth record. And when I get right down to it, I look at the yield; yield is my trigger.

What it boils down to is, you need to know what's going on with dividend growth investing, and from there believe that it's going to work. You have to have the patience to sit and wait for that dividend to grow and grow and grow - and finally it gets up to yields that are terrific.

This article first appeared in Globe Investor Magazine. Read the rest at http://tgam.ca/Cgz