The pushmi-pullu stock market

Do you recall Dr. Doolittle's pushmi-pullu (pronounced push me-pull you)? The stock market is a bit of a pushmi-pullu creation but a mix of a bull and a bear rather than than a couple of llamas. 

The bull end of our creation has been leading the way for the past few years. But the bull has finally run out of steam and the bear now has control.

Bear markets are not a surprise. Bear markets are simply part of our investing universe. Some call bear markets rare. I'd rather say they are not as common as bull markets but they do appear with a certain regularity.

Historically, bear markets do not last as long as bull markets but psychologically they seem to carry more clout. For this reason, many people are tempted to get out of the market during a serious downturn. This is usually a mistake locking in losses.

No one knows when market sentiment will flip from bear to bull. When it does flip, it is usually quick. If you are out of the market, you may miss some of the biggest gains as the recovery kicks in. 

I get through bear markets by focusing on the benefits of being invested during both bull and bear markets: dividends. Today Enbridge is yielding 6.7% and the yield promises to go even higher over the coming days and weeks (assuming the bear market continues to gain strength.)

The TD bank is yielding 4.1%, while the CIBC yielding 5.2%. If one likes REITs, the ETF RIF is yielding 4.9% today. Telus is yielding almost as much at 4.8%. Emera, a much loved utility, is at 4.6%. I may be getting greedy but I think this bear has some still untapped strength. Stay the course and one my well be rewarded with some truly generous dividends and then some solid capital gains as stocks slowly regain their former values. 

The Morningstar star system reflects how a stock's price today compares to its fair market value as calculated by Morningstar. The more stars the more attractive the price. With the market collapsing, more and more stocks followed by Morningstar are getting into four and even five star territory.

Stocks I'm watching today

There are a number of stocks and ETFs that I follow rather closely. If the price drops my interest grows. If it drops enough, usually something in excess of ten percent off it high of the past year, I buy a little. 

If it drops another ten percent I consider buying more but at this point I have some exposure and I don't feel the same pressure to buy. If it surprises everyone and stops dropping and starts climbing, I am already on for the ride. If I can muster the strength to resist, I try and put off a purchase until it has dropped 20% or more since my initial purchase. At this point, the pull to add to my holdings is almost impossible to resist.

BAM.A: Brookfield Asset Management-A LV (BAM.A is down about 23.73% from its high of the past year.)

BMO: Bank of Montreal (BMO is down about 17.45% from its high of the past year.)

CM: Canadian Imperial Bank of Commerce (CM is down about 19.61% from its high of the past year.)

RIF: CI Canadian REIT ETF (RIF is down about 17.45% from its high of the past year.)

MFC: Manulife Financial Corp (MFC is down about 18.87% from its high of the past year.)

QBR.B: Quebecor Inc CL-B SV (BMO is down about 19.11% from its high of the past year.)

QSR: Restaurant Brands International (QSR on TSX is down about 25.03% from its high of the past year.)

TD: Toronto Dominion Bank (TD is down about 16.01% from its high of the past year.)

XUS: iShares Core S&P 500 Index ETF (XUS is down about 18.92% from its high of the past year.)

ZRE: BMO Equal Weight REIT Index ETF (ZRE is down about 16.84% from its high of the past year.)

Except for BAM.A, all these stocks deliver a generous dividend. As a retiree, dividends, generous dividends, are very important to me. The large Canadian banks are wonderful stocks to have in a retirement portfolio as these banks, other than National Bank, have a history of never cutting or reducing their dividend. Bank dividends promise solid income. TD is yielding 4.93% at today's close.

The two REIT ETFs are also fine places to park retirement investment funds. I am betting that these ETFs will not cut their dividend payment by more than 15% no matter how poor the economy. I could be wrong, I'm human, I make errors, but in this case I feel quite confident that I am right.

Turning a sow's ear into a silk purse

One often reads how awful it is to lose money in the market. Well, it's true; it is awful. But, and it is a big but, the passing of time eases the pain—and I mean completely eases the pain. I bought some Manulife stock a few months back. Since then it has fallen on hard times. The stock has diminished in value to the point that it is living in bear territory and promising to put down roots there.

So, am I going to sell, accept my loss and move on? No. Absolutely not. The price today is the price. Period. But, this new price comes with a few perks. A big perk is the yield: 5.88%. If I were to sell, where could I move my money and earn as much income?

Furthermore, at its new, and arguably improved price, Manulife has more room to grow in value. If it hits the target value envisioned by financial advisors, even taking as much as three years to get there, I will realize $3.96 in dividends for each share, plus I'll benefit from an increase of $4.78 in stock value. This is a total gain of $8.74 or 13% annually when calculated over three years.

If I insist on dwelling on the inflated price that I originally paid, then I clear $6010 over three years for an annual gain, dividends included, of 8%.

The trick to winning in the market is to buy decent firms paying good, solid dividends and then holding as planned. Play the long game. Do not fritter away your profits with too many trades. My Manulife is a sow's ear today but in three years I hope to see it replaced by a silk purse.

A truly cool calculator

 https://www.canadastockchannel.com/compound-returns-calculator/

 

Dropping IGM and putting RIT in my sights

Recently, I was eager to increase my holdings of IGM and I did. I more than doubled my holdings. 

Then within just days I sold all my IGM, getting out with all my money but just barely. Why? One, IGM was dropping farther and faster than I ever imagined it would. And two, while it was wilting, another and more attractive investment was on the horizon: RIT.

RIT is an ETF which gives one a managed mix of mostly Canadian REITs with about ten percent exposure to the U.S. REIT market. It just seemed like a wiser place to park my money. One cannot get locked in too tightly to one's plans. Stay alert.

I bought RIT after its price had corrected. I kept some powder dry to buy more should it enter bear market territory. As it is, I have a dividend income of 4.5% on this buy. I'm happy no matter what happens to the price in the coming days.

IGM is still a favoured Morningstar investment for Canadians seeking income and it is still featured in the Morningstar Canadian Core Portfolio. For this reason, IGM is still on my radar but it will have to get deep into bear market territory before I bite. IGM is now down almost 30% from its high of the past year.

The financial markets are in quite the turmoil today. These types of markets usually are around for days and weeks, sometimes even months. In today's financial climate, IGM could fall a lot further.

Link to Retirement Calulator

 Here is a link to a neat Retirement Calculator. I like that one can change the numbers in the yellow coloured fields. The result does not take inflation into consideration, at least not that I can tell, but it is a handy quick estimate of how long your savings will last.

Risk free comes at a price

If you want a risk free investment, buy a GIC. You may only make 3.5% on a four year term but at maturity all your investment will be returned. Oh, it may have lost buying power if inflation runs at more than 3.5% but you will get all your money back. Guaranteed.

 

If 3.5% is not enough yield, why not take on a little risk and put 2% of your portfolio in IGM stock. IGM is off its recent high by 21.2%. It is selling for $40.71. A price that puts it in bear territory. Buying today, you will enjoy a dividend income of 5.53% for the next four years. That much is pretty much guaranteed. IGM is not overly generous with its dividend. Its payout ratio is quite reasonable. The dividend should be secure.

Morningstar lists IGM on both its Canada Core Pick List and its Canada Income Pick List. Only eight stocks receive this buy recommendation in the recent monthly report. At the moment, Morningstar gives IGM four stars. This means Morningstar believes IGM will most likely reward investors with capital gain.

During the March 2020 bear market, IGM dropped in price to about $21. Clearly, the IGM price can fall a lot more. A paper loss is possible. On the bright side, it climbed out of the depths of the 2020 bear market in little more than a year. If you can afford to hold, its price should recover. (IGM was selling for $43.20 at market close Mar. 7th, 2023.)

My take

I ended up buying some REITs wrapped up in the ETF RIT. I the units were $17.95 with a yield of 4.5%. These units partially replaced the units of XRE that I sold at the beginning of the recent correction. I sold the XRE high and I bought the RIT at a much lower entry price point.

One thing you never get with a GIC is a profit surprise and with a yield of only 3.5% you are hardly being paid to be patient or otherwise.

Make a note to yourself and revisit this advice in four years. See if I was right when I pronounced RIT or even IGM a better investment than a GIC. With a GIC you have almost locked in a guaranteed loss. With RIT or IGM, but especially RIT, I like to think I am risking making a tidy capital gain and banking a generous dividend. That is a risk with which I can live.