If you haven’t already, be sure to read Part -1 of my interview with Susan…
Susan P. Brunner has over 40 years investing experience. She started investing in the 1970’s, and by 1999 she was able to stop working and live mostly off her dividends. Susan is a dividend stock investor, and over the years she has tried many different investment approaches and strategies. When I asked her about this, Susan said that she tried them all, but dividend stock investing has been the strategy that has worked for her. As Susan points out in this interview, don’t fixate on the overall value of your stocks, but on the dividend income you are receiving.
Who can argue with 40 years investing experience?
Susan, welcome back!
Thank you for having me! One thing I wanted to add is that when I was laid off in 1999, I knew that I had reached my portfolio goal for stopping working . But I did not know if I could live off my income. The problem was that I was looking at Gross Income. I should have looked at Net Income. When I did, I realized that my Net Income was the same, although my Gross Income was not. The difference, of course, was income tax.
When I was working I was paying income tax on salary and dividend income. When I stopped working, I was paying taxes on my dividend income (which I was spending) and my RRSP withdrawal amount. My taxes went down a lot.
Susan, that leads into my question about RRSP’s. Back when you started the TFSA wasn’t available, so you put a lot of money into RRSPs. Since you have used your RRSP withdrawals for income, would you like to comment that?
I got into investing into RRSP’s as they were heavily being pushed by all sorts of financial advisors and financial reporters. Of course, putting money inside an RRSP also saves you ongoing taxes. You do not have to pay taxes on sale of stocks (capital gains) and on income earned within the RRSP.
They also said that you could expect to be in a lower tax bracket when you take money out then when you put money into these accounts. This did not happen for me, as I have ended up in a higher tax bracket, than when I put the majority of my money into my RRSP. Taxes on RRSP withdrawals can be a bit of a shocker. I must admit I did not expect the tax rate I paid.
That’s why in a previous post, I argued explicitly that investors should max out their TFSA first before their RRSP. Having actually withdrawn money from your RRSP, what do you think?
I would agree that you would probably be better off putting money first in a TFSA and RRSP second. It may be after tax money that goes into a TFSA, but you also save ongoing taxes (re capital gains and income).
So getting back to dividends, what do you think are the biggest challenges facing a dividend focused strategy?
I think you have to understand the risk that you are taking. There is a certain amount of risk no matter what you do. However, when investing in stocks you have to accept that the value of stocks will fluctuate. The value of my portfolio has flipped, flopped all over the place.
However, what is interesting about dividend paying stocks, is that my dividend income has gone up consistently each year. You cannot count on any consistent amount of dividend income increase, but you probably can count on some increase.
So, when the market goes into some sort of crazy, volatile state, I turn my focus on income a stock is producing rather than the value of the stock.
What do you think of Index Investing?
It seems like people are going to great lengths to decide on what ETF or index fund to invest in to avoid making a decision on what stock to invest in. You also have to wonder what effect all this passive investing will have on the market. Every once in a while you see someone expressing a concern on this subject.
I tried out indexed funds when they first came out. I am always willing to try anything. I never made any money from them. I just lost money to various degrees. So for me, it is really “been there, done that, did not work out.” So I moved on.
For example, I had TD’s NASDAQ index fund from January 2000 to February 2006. I lost 13.3% per year on this investment. Contrast this with Fortis, a Canadian Utility, that started off in Newfoundland. On this company, over the same time period I made a total return of 23.8% per year.
I had also tried out international funds. The story was that you could make good money investing in Asia. The only one I made any money on was Templeton’s Emerging Market fund. I had this from April 1996 to September 1999 and made a measly 3% per year total return. If you want to contrast this with Fortis, over the same time period I was making a total return of 9.7% per year.
How do you employ Asset Allocation, or do you?
My portfolio is composed of Consumer, Financial Services, Industrial, Real Estate and Utilities type stock. I also have a bit in resources, but not much. These types of stocks I keep an eye on, but never consider them a permanent part of my portfolio.
It may appear that I have excluded all but Canadian stocks, but that does not mean I have no international exposure. I have companies like SNC-Lavalin (TSX-SNC) which does business all over the world. I prefer to handle international exposure this way. I let sophisticated Canadian companies handle the international investment exposure for me. Since SNC deals with a wide variety of countries, if problems develop in one, they can weather the problem quite well. For example, this company has exposure to Libya and had to shelve a number of projects that they were doing there because of recent problems.
I do not invest in companies that are Airlines, Pharmaceutical, or are into mining and resources, except on an individual basis. I do not believe that I can make money in these sorts of companies over the long term.
What types of stocks do you like to invest in? (Blue chips, high yield etc.)
Mostly I have dividend paying stocks from the of Consumer, Financial Services, Industrial, Real Estate and Utilities sectors. I have ones with low-dividends and high-dividend growth, ones with high-dividends and low-dividend growth, and ones in between.
For example, Canadian Tire (TSX-CTC.A) has a 1.1% 5 year median dividend yield and a 5 year growth of 16% per year. REITs like Canadian Real Estate (TSX-REF) have high dividends and low growth with a 5 year median dividend yield of 5% and 5 year growth of 1.9% per year. (Currently that is just above the inflation rate for the last 5 years.)
I also used to have some Income Trust companies with high dividend yields, but these have all converted to corporations. I expect that their dividend yields will end up in the 4% to 5% range via stock price increases and dividend decreases, or a combination of these.
I also like tech stocks, and in the past have made money investing on stocks on a short term basis. For example, I made a lot of money for my Lock-in Pension funds by investing in RIM for a short period of time.
I have also made money by investing in Computer Modelling Group Ltd (TSX-CMG) a rather small cap tech company that has a 5 year median dividend yield of 3.9% and 5 year dividend growth of 49% per year. I have had this company since 2008 and have made a 51% per year total return on it. I still have this company’s stock.
I have had loser, of course, but you can only lose what you invest. If a company takes off, the sky is the limit on what you can make.
Lately I have been investing in small cap stocks that pay dividends. For example, I had Pareto Corp from 2009 to 2011 and made a total return of 134% per year. I had to sell because it was bought out. This is the second small cap dividend paying stock I had to sell for this reason.
I recently bought TECSYS (TSX-TCS) and McCoy Corp (TSX-MCB) to try out. I haven’t made any money on either so far, but they are recent purchases. So it will be fun to see what happens. The market has been wobbling around recently, but it is May, so what else can you expect?
What dividend screening tools do you like to use, and think are the most effective? (i.e. dividend payout ratio, dividend growth etc.)
For each stock that I have, and the ones I track, I do a spreadsheet. This spreadsheet shows changes over time for revenue, earnings, dividends, Graham price, stock prices, shares, cash flow, and book value. I look at various ratios, such as Price/Sales, Dividend Payout (re earnings and cash flow), Price/Earnings, Price/Cash Flow and Price/Book Value. I also look at various debt ratios of Liquidity, Asset/Liability, Leverage and Debt/Equity Ratios.
I look at stocks to see if I would like to own it. I like companies that can make money for their shareholders over the long term. If I would like to own a stock, I will look at the current price and see if it is a reasonable price to pay. It is always nice to pick up a stock you like cheaply, but the more realistic price is a reasonable one. I will look at the stocks ratios and compare it to past ratios. You also have to be aware of value of these ratios on similar stocks and for the market as a whole.
What do you think is most important for tracking your progress and returns?
I use Quicken to track my stocks. No matter what anyone says about stocks, I like ones that show a decent return over the long term. Quicken will show total return per year for any stock I have. (They call this Internal Rate of Return or IRR).
If you are not making money, why be invested in a stock?
Care to give the readers your favorite stock picks?
Where I have made money is in banks and utilities. I have had Fortis (TSX-FTS) since 1987, and I have made a total return of 13.4% per year. I have also had the Bank of Montreal since 1987, and I have made a total return of 16.3% per year.
You need to diversify, but retail stocks do not do as well as banks and utilities. For example, I have had Thomson Corp (now Thomson Reuters – TSX-TRI) since 1985 and I bought more in 1989. I have made a total return of 8.4% per year on this stock.
Not only do you have to pick great stocks, you have to buy them at a reasonable price.
Susan thanks so much for taking the time for my questions! It’s been a real pleasure, and I hope an inspiration to all investors, and those starting out on their divided investing strategy. Thanks again for sharing your 40 years of investment wisdom and knowledge with everyone!
Thanks for having me.
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If you haven’t already, be sure to read Part -1 of my interview with Susan…
You can learn more about Susan P Brunner from her website and follow her on twitter. See how Susan invests, and view the spreadsheets she uses to track Canadian Stocks:
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