The Rewards of Patience in the Buy and Hold Strategy

In these tumultuous times where stock prices have been sinking like stones across the board in every sector, it takes patience and nerves of steel to not panic and to hang tough with the game plan to "buy and hold".  The strategy of choosing quality stocks that pay a good dividend and hanging onto them as long as there are no dividend cuts has served us in good stead over the years.

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.

Handling Unexpected Expenses After Retirement

After three financially uneventful years of retirement, it has finally happened–we have been hit with a huge, unplanned expense that could not be anticipated.  We knew that big ticket items like a replacement for our 2005 Toyota Matrix or our aging appliances are upcoming within the next 3-5 years and have plans in place to incrementally save for those.  But earlier this year, out of the blue, we were informed that our condo building is one of the many buildings and houses across North America that installed plastic Kitec pipes for its plumbing system between 1997 and 2005.  It has been determined that there is a defect in the fittings or connectors between the Kitec pipes that could cause them corrode prematurely and possibly burst, leading to significant flooding.  The longer the pipes have been in place, the higher the risk of failure.  Given that our building was erected in 2003, time is of the essence to have these pipes replaced and the cost will be borne by each owner, since it does not fall under the jurisdiction of the reserve fund.  A class action suit has been launched against Kitec, but the settlement date is so far away and there are so many complainants that not much money will be awarded and definitely not enough or in time to pay for the pipe replacements.

The Kitec pipes can be identified by the colours of their tubing, which are bright orange for hot water lines and bright blue for the cold water lines.   They could be running behind our showers, bathtubs, toilets and washer/dryer units, and underneath bathroom and kitchen sinks.  Getting to these pipes could involve cutting holes through drywall, and even worse, through marble tiles.  The estimated cost of replacing the pipes comes in around $10,000.  The cost of repairing the damage done to our condo, which includes replacing marble and drywall, and repainting, will not be known until a contractor determines how many access holes need to be created and where.  At this point, we're guessing we need an additional $5000-$8000, since we have marble tiles in both of our bathrooms and specialty paint with a textured finish in our main bathroom that will be difficult to replicate.

Suddenly, we need to come up with an extra $15,000 - $18,000 within the next 6 months or so.  This is where the "contingency" part of our retirement strategy kicks in.  Since we do have a bit of time to save some of the money, our first approach will be to cut back on discretionary spending.  While going out less often for restaurant meals and watching fewer live theatre shows will help a bit, where we will get the biggest bang for our buck will be to cut back on vacation spending.  Since we enjoy traveling abroad, when preparing our post-retirement budget, we set aside a healthy amount of money to spend on this each year.  In the past two years, we've taken advantage of this by embarking on 6-7 week trips to Europe.  Next year, we will cut right back and just take a short 1-2 week trip within Canada or even within USA, which won't cost much despite the poor exchange rate on the Canadian dollar since we have saved up US currency from our US dividend stock.  If we feel that even this short trip is stretching our income, then we can consider a Toronto staycation.  Depending on how soon we need the money, we can temporarily borrow  from our emergency cash float, where we aim to always keep sufficient funds to pay up to 3 months of regular expenses.  Adhering to our game plan to slowly reduce the value of our RRIF accounts while our taxes are still relatively low, we could make one-time taxable withdrawals of any excess dividends accumulated in our RRIFs, making sure we leave enough to still meet our yearly minimum withdrawal criteria.  Finally as a last resort, we can consider taking money out of our TFSAs tax-free, with the goal of reinvesting that amount once we save it up again in a future year.

So we have many options and strategies at our disposal for addressing large expenses that arise suddenly.  While we did not anticipate this specific expense, we knew that we had to be prepared in general for unexpected spendings that could arise.  Accordingly, we are not as panicked about the situation as others might be, since we put careful thought in advance as to how we would respond to just such an occurrence.  It is now simply a matter of methodically putting our contingency plans into action.