All posts by Pat McKeough

Resource Stocks provide long-term gains and inflation hedging

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Including good stocks for long-term investment gains from the Resource section can be especially helpful in times of inflation. Learn more below.

For most investors, resource stocks should make up only a limited portion of their portfolios. That means that while we think you should maintain some exposure to resource stocks, you should still aim to balance your portfolio across most if not all of the five economic sectors.

If you want resource stocks in your diversified portfolio, then you need to know how to find good stocks in that sector for long-term investment gains.

Resource stocks, though volatile, tend to rise with inflation and can be good stocks for long-term investment gains

The resource sector is subject to wide and unpredictable swings in the prices it gets for its products. In the rising phase of the business cycle, when business is booming, resource demand expands faster than resource supply, so resource prices shoot up. This balloons profits at resource companies. When the economy slumps, resource prices fall, and this drags down resource profits and stock prices.

In addition to rising and falling with the business cycle, however, resource stocks have a history of rising along with long-term inflationary trends. This gives them a rare ability: they provide a hedge against inflation.

Back in the inflationary 1970s and 1980s, investors used to see this hedge-against-inflation ability as the main reason for buying resource stocks. But until recently, they rarely thought of it. That’s because inflation had waned for three decades.

Inflation peaked at a yearly rate around 13% in the early 1980s. It fell by two-thirds from that level by the middle of the decade. It went through a series of peaks and valleys, but had been working its way downward ever since.

However, after years of relative stability, inflation has come back to levels not seen in decades.

While the cost of just about everything has gone up, nobody can predict trends in inflation or interest rates with any consistency. And we disagree with investors who think we are on the verge of a huge outburst of never-ending price increases.

Even so, adding top Resource stocks to your portfolio lets prosper two ways: you can profit even without inflation — and these stocks will also provide an added boost in inflationary times.

It’s important to know your risk tolerance when investing in good stocks for long-term investment gains — including Resource stocks

There are several considerations that go into a successful growth investing strategy. Still, many investors overlook a number of important factors that can lower their risk.

In the end, there’s no such thing as risk-free investing. The tips below for lowering your growth investing strategy risk have long been part of the Successful Investor approach.

  • Balance your cyclical risk
  • Be skeptical of companies that mainly grow through acquisitions
  • Don’t overindulge in aggressive investments
  • Keep an eye out on a growth stock’s debt
  • Keep stock market trends in perspective
  • Look for growth stocks that have ownership of strong brand names and an impeccable reputation
  • The best long-term growth stocks should have the ability to profit from secular trends

Meantime, we continue to recommend that you cut your risk in the volatile resource sector by investing mainly in stocks of profitable, well-established mining companies with high-quality reserves. And as mentioned, resource stocks (and this includes oil and gas, of course) should make up only a limited portion of your portfolio. Continue Reading…

Investing in Crypto or Stocks: Which is safer for your Portfolio?

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Considering whether to buy crypto or stocks? Investing in top stocks makes a lot more sense than buying crypto and we explain why in this article.

Are you interested in investing in crypto or stocks? I still can’t think of anything that would make me optimistic on bitcoin or any cryptocurrency, even after the deep slump the whole sector has gone through recently. The best thing I can say about bitcoin is that it will probably remain volatile, rather than vaporizing like the worst crypto performers.

Please don’t misunderstand. I respect and agree with the many investors who have high expectations for the future of blockchain. (That’s the digital technique that serves as a foundation for bitcoin and other crypto creations.) Some investor/digital gurus think blockchain will change the world. They may be right. However, bitcoin is simply the earliest and most widely known blockchain user.

Bitcoin’s stature as a blockchain poster child has earned it plenty of media and public recognition. But bitcoin’s link with blockchain has no bearing on the future of bitcoin (or any other cryptocurrency) as a substitute for money.

This may surprise respondents to a recent survey about their plans for retirement financing. One quarter of those surveyed, and 30% of millennials, said they were planning to rely on “cryptocurrencies” to finance some of their golden years.

Should I invest in crypto or stocks? Understanding false narratives and how it relates to Bitcoin investment risk

The term “false narrative” has been around at least since the 1830s, but came into common use around the time of the 2016 U.S. Presidential Election. Each of the two main political parties accused the other of concocting and spreading an incomplete and/or biased story that falsely showed their candidate in a bad light.

However, it’s easy to concoct your own false narrative and let it guide your financial decisions. Widespread false narratives happen rarely enough that they find a way into history. Personal false narratives happen much more often. But each one is a little different from the next, and most people would prefer not to talk about them.

Here is a look at a false narrative involving Bitcoin investment risk: Continue Reading…

Best Canadian stocks are usually well-established Blue Chips with history of Stability & Dividend Payments

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Good Canadian stocks of blue chip companies can give investors an additional measure of safety in volatile markets. And the best ones offer an attractive combination of moderate p/e’s (the ratio of a stock’s price to its per-share earnings), steady or rising dividend yields (annual dividend divided by the share price) and promising growth prospects.

We feel most investors should hold the bulk of their investment portfolios in blue chip investments. And most of these stocks should offer good “value” — that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above average-growth prospects, compared to alternative investments.

Find a middle ground with p/e’s  

One of the biggest mistakes investors make is buying low p/e stocks, thinking that will ensure they’re getting a “bargain.” Sometimes that’s true, but sometimes a low p/e stock is a sign of danger.

As for high-p/e stocks, we generally only recommend them as buys if we feel they have above-average investment appeal and deserve an above-average p/e.

Rather than focusing on low p/e stocks and avoiding high p/e stocks, you will generally make more money in the middle ground. That is, invest mainly in well-established stocks that have an appealing long-term growth record — and a moderate p/e. These are the stocks we favour in our Successful Investor approach. In our experience, they provide above-average returns in the long run. That’s because they provide nice gains in rising markets, and they also tend to hold up well when the market declines.

Buy shares in banks, which have a history of stability 

On the whole, the best Canadian banks to invest in trade at attractive share prices. Because they are growing, yet cheaper in many respects than other stocks, they give conservative Canadian investors a near-ideal combination of pluses: above-average dividend yields and track records; low to moderate per-share price-to-earnings ratios; and above-average long-term capital gains.

That’s why we’ve continually recommended buying Canada’s top five bank stocks since the 1970s. It’s also why that advice has paid off so nicely.

Canadian bank stocks have long been one of our top choices for growth and income, and we recommend that most Canadian investors own two or more of the Big-Five Canadian bank stocks — Bank of Nova Scotia, Bank of Montreal, CIBC, TD Bank and Royal Bank. That’s in large part because of their importance to Canada’s economy.

Canadian banks stocks have been some of the best income-producing securities.

  • Look for Canadian bank stocks with consistent dividends.
  • And remember bank stock dividends are a sign of investment quality.
  • They also can grow.

Look for value stocks with a history of success to add good Canadian stocks to your portfolio

At the core of the value investing approach is the ability to identify well-financed companies that are well-established in their businesses and have a history of earnings and dividends. Continue Reading…

A higher dividend yield isn’t always better: How to spot the good from the bad to avoid this costly mistake.

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is higher yield dividend better

Investors interested in dividends should only buy the highest-yielding Canadian dividend stocks if they meet these criteria — and don’t have these risk factors

Dividend yield is the percentage you get when you divide a company’s current yearly payment by its share price.

The best of the highest-yielding Canadian dividend stocks have a history of success

Follow our Successful Investor philosophy over long periods and we think you’ll likely achieve better-than-average investing results.

Our first rule tells you to buy high-quality, mostly dividend-paying stocks. These stocks have generally been succeeding in business for a decade or more, perhaps much longer. But in any case, they have shown that they have a durable business concept. They can wilt in economic and stock-market downturns, like any stock. But most thrive anew when the good times return, as they inevitably do.

Over long periods, you’ll probably find that a third of your stocks do about as well as you hoped, a third do better, and a third do worse. This is partly due to that random element in stock pricing that we’ve often mentioned. It also grows out of the proverbial “wisdom of the crowd.” The market makes pricing mistakes and continually reverses itself. But the collective opinion of all individuals buying and selling in the market eventually beats any single expert opinion.

Canadian dividend stocks and the dividend tax credit

Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends can be eligible for the dividend tax credit in Canada. This dividend tax credit — which is available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA — will cut your effective tax rate.

That means dividend income will be taxed at a lower rate than the same amount of interest income. Investors in the highest tax bracket pay tax of around 29% on dividends, compared to 50% on interest income. At the same time, investors in the highest tax bracket pay tax on capital gains at a rate of about 25%.

The Canadian dividend tax credit is actually split between two tax credits. One is a provincial dividend tax credit and the other is a federal dividend tax credit. The provincial tax credit varies depending on where you live in Canada.

A couple of decades ago, you could assume that dividends would supply up to about one-third of the stock market’s total return. Dividend yields are generally lower today than they were a few years ago, but it’s still safe to assume that dividends will continue to supply perhaps a third of the market’s total return over the next few decades. Continue Reading…

Avoid new issues but high-quality stocks likely to gain in value over next year

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The IPO or “Initial Public Offerings” market — more commonly known as the new issues market — has gone through an extraordinarily bad time this year. It’s been bad for all three of the groups that take part in this market. They are as follows:

Investors who put their money in new issues have lost substantial sums in the past year. On average, new stock issues tend to do worse than the rest of the market in their first few years of public trading. This past year, they performed much worse than ever.

Financial institutions that bring new issues to market for sale to investors have suffered, too, because demand for new issues has dried up. At this time of year in 2021, the new issues market had raised around $100 billion. So far this year, it has raised just $5 billion. In the past quarter century, the new issues market raised an average of $33 billion at this point in the year.

Companies that raise capital for themselves through the new issues market are suffering as well. When the new issues market began drying up as a source of corporate funding, many would-be issuers of new stocks found it was harder and more expensive than ever to find alternate sources of financing.

This will be worst year for IPOs since 2009

This will be the worst year for raising money in the new issues market since 2009, when the economy was struggling to pull out of the 2008/2009 recession.

As long-time readers know, we generally advise staying out of new stock issues. After all, there’s a random element in the success or failure of every business, especially when it’s just starting out. But new issues expose you to a special risk that you avoid with stocks that have been trading publicly for some time. That is, you can only invest in new issues when they come to market.

This is just one more example of a conflict of interest, which we’ve often referred to as the worst source of risk you face as an investor.

Companies only come to the new issue market to sell their stock when it’s a good time for the company and/or its insiders to sell. The insiders can’t predict the future, of course. However, they do know much more than outsiders do about their company. Continue Reading…