Dale Ennis asked me to make suggestions for the coming year. Before I do that, I think it important to indicate my approach to DRIPping and to examine what I did last year.
DRIPping is a conservative approach to equity investing because of dollar-cost averaging and the ability to risk small investments at a time. There are many styles of DRIPping. If I had to characterize my style it is as an "aggressive-contrarian accumulator".
First, I don’t believe in blind dollar-cost averaging companies. Rather, dollar-cost average the money. That is, set aside money each month, quarter or year to invest. Then, on an individual basis, determine where the money has the best possibility for a successful return.
This leads to the second belief that it is possible to market time with DRIPs. Obviously one cannot time to the day. However, over any long period of time it is possible to focus on the troughs within a DRIP portfolio. The best Canadian DRIPs to do this with offer monthly investment dates. I have at least a 15-year accumulation time horizon.
Recognize that this style might not be suitable for your situation.
The Year Past
In Canada, the majority of my investments by far went to two stocks: Bank of Montreal (TSX:BMO) and TELUS (TSX:T.A). Every analyst I read on BMO was negative. As a contrarian, I bought it all year. BMO is at a 52-week high and I am ahead 18% on the year.
I began buying TELUS when BCTel was $55. Despite its debt situation I did not believe TELUS would go under and my view is long term. The year started with my TELUS holdings down 80%. I switched from quarterly to monthly investments and doubled up on a couple of them. Yes, there was doubt when TELUS went under $6 but the cheque went in regardless. As this is written the loss has been reduced to 22% and TELUS is once again my largest DRIP holding. Ever the optimist I view it as a 58% gain on the year. Thank the stars, I didn’t own Enron.
In the U.S. the analysts hated the Hewlett-Packard/Compaq (NYSE:HWQ) merger. As a Compaq shareholder, after the merger was completed I had doubled my holdings. Since then Hewlett has been the best-performing stock on the Dow. A 30% loss is now break-even.
Overall my ROI (return on investment) in my DRIP portfolio improved approximately 25% in Canada and 8% in the USA this past year.
The Year Ahead
Canadian DRIP companies tend to be more mature companies. This lends itself to focusing on the troughs within a DRIP portfolio. Steady performers, these companies, and the market tends to favour one, then another.
I own three Canadian DRIP banks: Bank of Montreal, Bank of Nova Scotia (TSX:BNS) and CIBC (TSX:CM). BMO is at a yearly high while BNS is off 14% and CIBC off 26%. CIBC would be my first choice but as it is in my RRSP, BNS will get the cheques for now.
TELUS has risen dramatically. BCE has done nothing. When Dale Ennis visited at the beginning of the summer he told me he wouldn’t hold BCE as they’ve forgotten what business they’re in. Now, I ask you, was there ever a more contrarian signal than that? BCE, the eventual (I hope) 500 pound break-out gorilla, gets the nod over TELUS, which returns to quarterly investments.
Not the sort of DRIP I’d own, Alcan (TSX: AL) earlier was almost 50% off its yearly high. Still off about 30%, a DRIPper willing to make a board lot purchase might still find value in this cyclical stock.
In the U.S. I intend to make a year-end top-up contribution to Intel to reduce the effects of their new high fees.
Looking in the USA
My first consideration when looking at the USA is to determine what situation can be DRIPped that is not readily available in Canada? With 1600 DRIP companies in the USA there is so much to choose. Secondly, in the USA there are small and mid-cap, as well as large-cap companies, that might present better growth opportunities. Finally, because of exchange rate charges of almost 2% when converting the dollar in both directions, the DRIP should be low or no fee. Here are four companies (I do not own) that fit the criteria:
Toro (NYSE:TTC) is a lawn care specialist and manufacturer of lawnmowers and golf course irrigation systems. Omnicare (NYSE:OCR) is the #1 independent provider of pharmacy and related services to the nursing home market and provides computerized medical record keeping and third-party billing for patients in its clients long-term care facilities. Kennametal (NYSE:KMT) manufactures and distributes a broad line of metalworking, mining, and highway construction tools and equipment. Philadelphia Suburban Corporation (NYSE:PSC) is one of the largest investor-owned water utilities serving nearly two million residents in Pennsylvania, Ohio, Illinois New Jersey and Maine. PSC can be purchased through a DSP (Direct Stock Purchase plan).
Robert Gibb, 401-2910 Cook Street, Victoria, BC, V8T 3S7 (250) 383-7075 firstname.lastname@example.org. Robert Gibb is a retired school teacher. He gives seminars on dividend reinvestment plans. Mr. Gibb is a frequent contributor to Internet DRIP boards under the nickname OperaBob.
© Canadian MoneySaver, PO Box 370, Bath, ON K0H 1G0 613-352-7448 - Published January 2003