Thursday, August 27, 2015
The Rewards of Patience in the Buy and Hold Strategy
Take for example our shares of Exchange Income Fund (EIF-T), which we bought for around $25.3 back in January 2012. It was paying an annual dividend of $1.68 for a yield of over 6.6% and seemed like a good buy at the time. For the next few months, the stock price continued to rise, closing as high as $28.84 in March 2013. Then an adverse acquisition caused the stock to plummet, and for the next two years, the price stayed depressed.
It was tough watching the market value of this holding continue to fall and the red loss numbers under $ Change and % Change continue to rise. At its lowest, the stock closed at $15.49 in October 2014. We had to keep reminding ourselves that it was just a "paper loss" as long as we didn't sell, and more importantly, the dividend payout never wavered, although it also did not rise over this down period. Rather than dump the stock, we took advantage of the lower price to buy more shares, using EIF's Dividend Reinvestment Program (DRIP), which offers a 3% discount on the market price for DRIP purchases.
After hitting that lowest point, the EIF stock started to rally at the end of 2014 and has continued to do so through 2015. After two years of waiting out the dip, EIF has finally rebounded and is now trading for more than our purchase price. It has a consensus "Buy" rating from the financial analysts and a target price of over $29. But best of all, rather than lowering its dividend, EIF has now raised its dividend twice since November 2014. So throughout this period of waiting for EIF's share price to rally, we were actually rewarded by being paid more and more dividend income and were able to grow our number of shares by DRIP-ing while the price was low.
Our Sunlife Financial (SLF.T) stock provided another example where patience was required. We bought our shares in September and October of 2010 for an average cost of $25.32 per share. SLF was paying $1.44 in annual dividends for a yield of over 5%. It had a good run through most of 2011, hovering between $29-31, once closing as high as $33.91. Then Sunlife specifically and insurance companies in general ran into a rough patch caused by the poor economy. There were fears by financial analysts that Sunlife would not have sufficient cash flow to maintain its dividend payout. It was bad enough that the price dropped to the $19 range at the end of 2011, falling as low as $18.07 on one closing. But the threat of the dividend cut was much more concerning to us, since we rely on this dividend for our retirement income. Yet we did not want to realize a loss on our SLF holding on the mere possibility of a dividend cut.
Here is where patience, faith and a bit of luck paid off for us. Given that Sunlife is a good solid large-cap company, we decided to stand pat and hope for the best. As it turns out, SLF never cut their dividend and by the end of 2012, the share price had rebounded and continued to rise to its current average today of over $40. In 2015, for the first time in 7 years, SLF finally raised their dividend to $1.52. At the current significantly higher share price, the yield on this stock is 3.6%. But since we held onto our stock, which we bought at a much lower price, our effective yield is around 6%. Buying and holding onto this stock has really paid off for us.
We recognize that we will not always make the right call by holding onto a company that may be temporarily in trouble. It was pure guesswork that led us to hold Sunlife as opposed to Manulife, who did cut its dividend in 2009, causing its stock price to dive even further. It seems though that in general, large blue-chip companies will do whatever they can to avoid reducing their dividend payouts, since doing so signals weakness and failure and is a self-fulfilling prophecy. On average and in the long run, we think our "dividend-stock buy and hold" strategy will succeed more times than it fails. We can also absorb the rare dividend cut since we get dividends from so many different stocks that the net impact of a single cut will not deplete our income. Our patience is currently being tested by one of our REIT stocks which has lost 37% of its book value and shows no sign of rebounding in the new future. But the consistent effective dividend yield of over 6% that we receive eases the pain.
Through the past several brutal days this week, when stock prices were ravaged by news of China's flailing economy, our total portfolio fell by almost 10%. We gritted our teeth, confirmed our dividends were solid and looked away. By the end of the week, we have recouped more than half of the paper losses. Better yet, we learned that three more of our stocks (CIBC, RBC and BNS) announced upcoming dividend raises. We continue to firmly believe that good things come to those who wait.