In September 2017, I received slightly over $100K as a result of the commuted value of my pension plan. I decided to invest 100% of this money into dividend growth stocks. Each month, I publish my results. I don’t do this to brag. I do this to show you it is possible to build a portfolio during an all-time high market… and stay confident during a hectic one! In the meantime, I enjoy cashing some juicy and consistent dividends!
Will we see the March 23rd bottom again?
Interesting enough, I’m writing this introduction early on May 1st while the market has gone through an impressive rebound in April. However, market futures are way down this morning. Is it a new chapter of this bear market? It’s obviously too soon to tell. We should expect volatility for several months. But, do you think we will hit the March 23rd bottom again? There are a few reasons why I think we will not see the market sink to that low again. There are many things we can learn when we look back at the 2008-2009 financial crisis.
The Markets collapse was bolstered by leverage
Back in 2008, the market suffered from strong volatility, and experienced the most unique and violent market crash we have seen over the past 50 years. One factor that contributed to this massive and rapid market drop was margin calls.
Imagine that you are a hedge fund manager and borrow $100M to invest in the market. Your banker deposits the money in your trading account but tells you that he will monitor your portfolio value. If it decreases below $85M, you must add capital and maintain that level. If you don’t, the bank will use its margin call rights and sell your holdings to pay the bank back. Now, during a market panic, your portfolio value decreases while clients withdraw their money. You quickly go under $85M and the banker sells everything. As the market is flooded by stocks, everything drops even faster. This phenomenon played a great role in 2008, and it also happened in 2020. Some funds even put the breaks on withdrawals to avoid margin calls.
Fortunately for investors that stayed the course, we can think that many hedge funds have been called in March (down about 35% from peak value) and will not likely have to proceed with another massive sell later.
Stimuli came in very fast this time
One of the reasons why the market bounced back so quickly is how fast and strong central banks and governments around the world reacted. Back in 2008, the market posted about 12 months of market decreases (from October 2007 to October 2008) before the U.S. government announced the first $700B bailout bill. This time, it took a few weeks before all major economies announced rapid and massive support to their economies.
While some small businesses and consumers won’t avoid the inevitable bankruptcies, many will be saved as they secure government support. Banks are much better capitalized than they were back in 2008 (since their capitalization was at the centre of the crisis). They are likely going to cruise through this recession without falling apart.
Since all the major economies are “printing money”, we won’t likely see hyperinflation as the balance of the money supply may not tip in any country’s favor. Remember, to see your dollar value drop, it must do it versus another currency. The market is currently banking that governments will take the bulk of the covid-19 economic impact on their shoulders. Some businesses will just enjoy the piles of cash and free loans available.
There are significant amounts of money waiting on the sidelines
I can’t stress enough the importance of having so much money waiting on the sidelines.
Source: Yahoo Finance, Bloomberg
During 2007, before the market collapsed, many investors started to build cash as they no doubt found the market to be “overvalued”. As you can see, investors started the same strategy between 2017 and 2020. Those who had missed March 23rd are now avidly watching the market to catch the next correction. Strangely enough, it’s their enthusiasm that will likely diminish the impact of the next market drop.
As expected, the March sell-off led to a huge build in cash reserves. Do you wonder how the S&P 500 and the TSX 60 went up (total return) by 26% and 31% respectively in 2009? A good part of the answer can be explained by the transfer of billions from money-market funds to equities as shown on this graph. We can expect a similar phenomenon to happen once the economies of the world reopen, and the covid-19 becomes a historical issue.
Some businesses die, and some thrive
Assuming most airlines, hotels and cruises will receive help or bailout money, we are left with the “less essential” businesses that will bite the dust. Among those, we will count numerous energy companies that were already struggling from the previous oil bust in 2015-2016. We will also count some classic brick-and-mortar retailers that previously failed to adapt to the new economy (e.g. e-commerce). I have warned investors about those sectors several times through my newsletter over the past few months.
The coronavirus is only accelerating what many expected to happen down the road anyway. Back in the mid 1300’s, Europe saw a third of its population decimated by the plague. This also contributed to the end of the feudal regime as lords lost much of their power over the population. The plague accelerated the end of the regime, but it was not the cause of its death. The feudal regime was already showing signs of weakness. Today, there is a shift toward renewable energy and another one toward online business. The pandemic just pushed the needle.
On the other side, we see numerous businesses doing well in this unreal situation. The technology and healthcare sectors (along with the eternal consumer defensive sector) are doing well during the pandemic. You can expect many of those companies to thrive longer as debt will remain cheap for a while. Companies that have a robust balance sheet and a known appetite for acquisitions can also add businesses at cheap prices. Ironically, money spread during the economic lockdown may very well create the next bubble to come.
Unfortunately, we could crush March 23rd bottom again
All right, now that I’ve created a big hype and you are about to buy everything on the market, I’ll end this note by bringing you back down to earth. There is a scenario that could lead to another major market correction. As many countries are attempting to reopen their economies, a second wave of the virus could cause severe damage.
If we must go back to another economic lockdown this fall, you can expect a moment of panic where “permabears” are going to dance like kids at a party. At this point, if the virus strikes again, we will get caught in a very weak position. Governments and central banks would have already deployed most of their monetary arsenal, and more money injected into the economies would not be as effective.
Now, let’s look at how the best month in the stock market since 1987 boosted my portfolio.
Here’s my CDN portfolio now. Numbers are as of May 1st, 2020 (before the bell):
Canadian Portfolio (CAD)
My account shows a variation of +$7,494 (+18%) since the last income report on April 6th.
As hope is at its highest, severely punished holdings like CAE (CAE) have gone through a major rebound. Sylogist (SYV.Z) is also up for a strong rebound after announcing another juicy 10% dividend increase in the last week of April. While I took a hard hit in March, my Canadian portfolio had a stronger rebound than the TSX 60.
Here’s my US portfolio now. Numbers are as of May 1st, 2020 (before the bell):
U.S. Portfolio (USD)
|United Parcel Services
The US total value account shows a variation of +$10,254.50 (+17%) since the last income report on April 6th.
Results from Apple (AAPL), Microsoft (MSFT) and Visa (V) were strong enough to encourage the market too. DIS suspended their dividend, but it had no effect on the stock. I’ll keep my shares. Here’s why.
My entire portfolio updated for 1st Quarter!
Each quarter, we run an exclusive report for Dividend Stocks Rock (DSR) members who subscribe to our very special additional service called DSR PRO. The PRO report includes a summary of each company’s earnings report for the period. We have been doing this for an entire year now and I wanted to share my own DSR PRO report for this portfolio. You can download the full PDF giving all the information about all my holdings. Results have been updated as of April 2020.
Download my portfolio Q1 2020 report.
Dividend Income: $73.62 CAD (+7.8%)
I really need to buy stocks paying dividends in April. I only receive three dividend payment this month which explains the small number of dividends received. However, they all show higher payouts vs last year! Here is the dividend growth detail. The growth is compared to April 2019 (not necessarily a recent dividend increase).
- Alimentation Couche-Tard: +12%
- Andrew Peller: +4.9%
- Gentex: +4.3%
Canadian Holdings payouts: $34.37 CAD
- Alimentation Couche-Tard: $12.04
- Andrew Peller: $22.33
U.S. Holding payouts: $28.20 USD
- Gentex: $28.20
Total payouts: $73.62 CAD
*I used a USD/CAD conversion rate of 1.392
Since I started this portfolio in September 2017, I have received a total of $8,126.15 CAD in dividends. Keep in mind that this is a “pure dividend growth portfolio” as no capital can be added into this account besides its dividend. Therefore, all dividend growth is coming from the stocks and not from any additional capital.
Last month, I ended this income report with the following thought:
“Trust the plan you developed at one point; it must be good!”
I think that, once again, following your investment plan throughout a market storm will pay… dividends!
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