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Tuesday, April 25, 2017

How to Get Burned on an Investment and Not Care

Posted by Tim Stobbs on August 19, 2010

Depending on how closely you follow investment news you might have heard that Manitoba Telecom Services (MBT) cut it’s dividend from $0.65 down to $0.425 per quarter (or 35% cut).  My wife owns that stock and as you might has guessed my initial reaction: S*%$!

At first I thought we only lost a little bit of income, until I realized I was looking only at a quarter not the year.  Overall we lost $180 in dividend income and of course the share priced tanked as well.  So you might think I’m still a little pissed off by this, but I’m not.  Why?

Well I did a little math to realize even with the cut back wasn’t really that bad given my wife picked it up at a decent price.  So even with the lower dividend her original investment is still yielding about 5%, which is acceptable to me.  Both our portfolios carry a few high yield, but risky stocks so I fully expect a couple of them to cut back over the years. We are indexed for the majority of our investments so when this happens we don’t panic as these stocks are the high risk part of the portfolio.

When we go shopping for a stock I typically have a range of yields that I try to stay within which is 4 to 9%.  Yes that is high, but this is the high risk part of the portfolio.  As we age I’m going to drop down the range and seek to reduce the risk in that section of the portfolio.  But for now we have over ten years horizon and I accept we might get burned once in a while.  As long as after the reduction we are still within that range I’m ok with the reduction.

To ensure diversity we try to arrange it so no one stock provides more than $500/year in dividends or distributions.  Thus limiting the damage a single stock can do to our investment income as MBT did.  In the long term we are going to try and hold more than one company in a given sector and try to keep to sectors that typically see monthly billing to their customers like: banking (your mortgage), utility (power bill),  or oil & gas (natural gas and gas for your car bills).

So that’s how we have setup some of our investments.  Is it perfect? No! But it does function rather well over all for us.  So have you been burned on a distribution or dividend cut? If so, did you keep it or sell it?

Comments

7 Responses to “How to Get Burned on an Investment and Not Care”
  1. deegee says:

    When I first retired in late 2008, I was able to buy about 25% more shares of the high-yield (not junk) bond fund because its NAV dropped sharply in the latter half of 2008. In early 2009, after a few months of its dividend holding pretty firm at 5 cents per share, the dividend dropped nearly 20% (or by one cent per share), shrinking my monthly dividend income by a few hundred dollars.

    I hung in there, optimistic that the dividend would recover as our US economy and the credit markets would unfreeze. They did, and the bond fund’s dividend increased back to its range it had before, albeit in the low end of that range. However, because I was able to buy so many more shares at the initial depressed NAV, I was still way ahead.

    By the end of 2009, the monthly dividend was just about back to its 5 cents per share so I am now way ahead again. :)

  2. George says:

    If you haven’t had at least one dividend blowup, then you’re not taking any risk or you’re not very diversified.

    I deftly avoided Washington Mutual’s collapse as it was obvious to me… never did understand why it wasn’t obvious to others.

    But I didn’t realize the full scope of the recession and rode Alliance-Bernstein into the ground all through 2008 & on into 2009 when they had a quarter or two of no distribution. Have learned my lesson… get out of financials when the R-word is a fact.

    In AB’s case, what I didn’t understand about the recession is that people suddenly had to pay for their debts, so they withdrew from their investments. Fund outflows plus dropping stock market will double the decline of AB. Even now, the outflows haven’t really stemmed, but they’ve been offset by people putting money into bond funds (which will blow up the day the Fed raises interest rates).

    In the end, the zero-distribution quarter(s) meant a 10% reduction in investment income. I still own AB, having picked up & traded some while the market is rebounding, but I’m also trying to wean myself away from it as it doesn’t fit my long-term investment plans (AB distributions are tied too directly to their income, so they vary too much… great when the market is going up, but a sideways market makes the distributions unpredictable and a down market is savage).

  3. Tiny Potato says:

    ManuLife Financial (MFC) is my blowup. For a long time this was such a highly regarded company. I bought in before the financial mess in 2008 and have been holding it ever since.

    The amount isn’t overly large so I figure I’ll just hold it and see what happens

  4. Echo says:

    Sometimes it’s not hard to see these things coming. In the case of MBT, the competition from Shaw and Telus have been eroding their market share for the past few years. Like, really crushing MBT.

    5% yield is still very respectable, but I just don’t see this as a great long term play. If your wife got in at an attractive purchase price, why not cut your losses now and find something with a little more upside?

  5. Canadian Dream says:

    @George,

    I love the first line of your comment. That covers it: no risk, no reward.

    @Echo,

    Well I’m considering a second company in similar sector, but I have yet to do the research on who I would like more: Shaw, Telus or do I go for something a little different like Rogers? I’m not in a rush to decide so I will wait and see.

    Tim

  6. Echo says:

    Hi Tim, I own both Shaw and Telus…good dividend paying companies, both with some upside. Although now they are doing battle with each other, with Telus entering the cable market with their Optik TV offering (which is doing really well), and Shaw about to enter the wireless market.

    Like you, I’m in no rush to pick a winner already…I’ll just keep collecting those rising dividend cheques!

  7. Adam says:

    MFC… ’nuff said…

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