I received the following e-mail from a member last week: "I feel very sorry for people who invest money in the stock market these days. Who knows what is to come with Greece announcing a referendum. I believe the stock market is the same as playing the race track, casino, and the lottery. Who makes the profit? It is the government, the brokers and the banks? No financial advisor wants to admit the truth. What is your take on this?"
To begin with, my first reaction is to empathize. The stock market does seem to resemble a casino during times of high volatility. Fortunes are made or lost on any given day based on the latest news bulletins and the mood of investors. For example, on Nov. 1 the Dow lost 297 points and the TSX fell almost 140 points while European markets crash-dived on news that Greece would hold a referendum. The next day, Toronto and New York posted triple-digit rebounds although the outlook for Europe was every bit as confused. Then Greece abandons the referendum idea amidst G20 turmoil. Who knows what happens next in this wild drama!
Through all this turmoil, however, it is worth noting that many solid dividend-paying companies have held their value and continue to reward investors with regular cash payments. Several of our Super Stocks fall into this category. For example, BCE Inc. (TSX, NYSE: BCE) has gained about $4 a share since the start of the year and continues to yield 5.2% on an annual dividend of $2.07. Fortis (TSX: FTS) is about the same price it was at the beginning of January, compared to a loss to date of 7.7% for the S&P/TSX Composite Index. Fortis closed on Friday at $33.68 and yields 3.4% on an annual dividend of $1.16. Enbridge (TSX, NYSE: ENB) is up about $6 a share since January and yields 2.8% on an annual dividend of $0.98.
These aren't isolated cases. Here are some more, all of which are on our Recommended List.
CN Rail (TSX: CNR, NYSE: CNI). This is also one of the Super Stocks. It has gained about $10 this year and pays a dividend of $1.30 to yield 1.6% on a price of C$79.75, US$78.59.
Dollarama (TSX: DOL). Another big gainer, it is ahead about $10 year-to-date and recently instituted a modest dividend of $0.36 a year.
Canadian Utilities (TSX: CU). The stock is up about $8 since January. The annual dividend is $1.61 a share for a yield of 2.6% based on Friday's closing price of $62.88.
Telus (TSX: T.A, NYSE: TU). Like BCE, Telus is on a roll. The shares have gained about $6 since January and the $2.20 annual dividend continues to be attractive with a yield of 4.3% based on Friday's closing price of C$50.95, US$50.33.
Tim Hortons (TSX: NYSE: THI). This iconic brand keeps rolling along. The stock has jumped about $6 this year and the dividend is now $0.68 a share.
TransCanada (TSX, NYSE: TRP). Despite the uncertainty over the Keystone pipeline and a recent pull-back, the stock is up about $5 this year. The dividend of $1.68 works out to a yield of 4% based on Friday's closing price of C$42.37, US$41.73. (See update elsewhere in this issue.)
There are many more. The point is that it is possible to obtain returns that are much higher than those available from GICs even in turbulent markets such as this. The key is to focus on stable companies that offer good cash flow and to underweight or avoid sectors that are extremely volatile, such as commodities.
Our reader then asks who makes profits when markets slide. The answer is nobody except short sellers. Governments don't want to see market crashes because they lose tax revenue when capital gains dry up and are replaced with deductible capital losses. Brokers hate a prolonged market slide. It is easy to argue that they make money on commissions anyway but ask any broker and he or she will tell you that their income drops dramatically because people simply stop trading.
As for banks, they profit to the extent that more money may flow to the perceived safety of their GICs. But they lose in other aspects of their business as loan demand falls and their investment portfolios decline in value. Life insurance companies are even more vulnerable to portfolio losses, which is why we have seen such weakness in their stocks.
The plain fact is that a vibrant and positive stock market is the underpinning of our economic health. That's one of the main reasons why world leaders are scrambling to try to avoid another crash of the 2008-09 magnitude. We should all hope they succeed.