Part 2: U.S. Long Term Successes…and blemishes

Part 2: U.S. Long Term Successes…and blemishes

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In my first column on Long Term Successes, I shared examples from my Canadian portfolio. The Canadian market is just three percent of the world market and isn’t very well diversified, with financial and resource companies dominating. This makes international diversification a key success component.

My longest standing stock account is an RRSP. Thus I am pulling these illustrative examples from it. Many years ago RRSPs had foreign content restrictions, forcing investors into Canadian companies. It was originally 10%, increased to 20%, and was eliminated in 2005 allowing greater flexibility. The lifting of these restrictions coincided with a decade of currency parity creating a great opportunity for US investing, which came to represent about two-thirds of my portfolio.

The US is the largest and most diversified economy in the world, with its stock market representing 40% of world markets. It doesn’t tax dividends in retirement accounts, making it the market of choice for RRSP international diversification.

My longest US holding is Microsoft. I originally purchased Mr. Softie for $26.17 in 2002, less than half its peak price in 2000, at the height of the tech and dot.com bubble. In 2006 I added at $22.14. It started to pay a regular dividend in 2003 and paid a large special dividend of $3.00 in 2004. I have collected over $16.00 in dividends on the original shares. It has been a lesson in patience. Microsoft didn’t move for a decade, but since 2013 has been on a tear with shares now valued at $136.23, over five times my purchase price. It was becoming such a large part of my RRSP I regrettably sold a small portion about a year ago, yet it still represents seven percent.

My second longest US holding is JP Morgan Chase, currently the largest US bank. It wasn’t the largest when I purchased it at $20.46 in 2003. I added to my position in 2011, just as the financial crisis was clearing, for $37.80. Today at $113.99, it’s over five times my initial cost. I have collected about $23.00 of dividends on the original shares. Five times the original price sounds great, but is only about 10 percent annually. Adding the dividend, JPM has been returning about 13 percent annually, illustrating how modest returns compound over time.

JPMs dividend has not been a steady climb. In 2003 it was $1.36 per share annually, about 6.6%. It held steady for a few years, climbed to $1.52 in 2008. US banks took a massive hit during the financial crises with many drastically cutting their dividends. JPM cut theirs to 20 cents but has since raised them to the current level of $3.20 annually. The price of JPM went as low as $15.02 in 2009.

Do I always buy giant companies? My next example, Medical Property Trust, was a very small US Real Estate Investment Trust (REIT) that owns medical facilities. REITs pay out the bulk of their cash flow in dividends which is OK in an RRSP, without withholding taxes. I purchased at $12.28 in 2007, at $11.83 in 2008 and at $12.16 in 2013. It was paying dividends of $1.08 annually for a 9.1% yield. The dividend was cut to 80 cents in 2008 and has slowly grown back to $1.00, representing 5.6% yield at its current $17.92 price. Its share price declined to below $3.00 when “everybody” was panicking during the financial crises. As of today, I am up about 50% on the share price in a decade, all the while collecting 6-9% dividend on my original price. I’m OK with that!

What about the blemishes? My most notable is General Electric. I purchased GE in 2006 at $33.30 and in 2008 at $30.92. GE was a star in the 80s and 90s, but since hitting $57.00 in 2000 it has been a train wreck, currently valued at $9.98. Dividends made up some of the losses. How does one of the largest and most successful companies on the planet plummet to such depths? Size doesn’t prevent bad management, as periodically good companies go bad.

It is important to put poor outcomes in perspective, staying focused on overall portfolio performance. A good investment can return 10x in a decade or two, whereas a poor choice can only ever cost you 1x. The portfolio has compounded at an 11 percent annual rate despite the odd blemish like GE.

During a 35+ year career in agriculture, Herman VanGenderen became an active investor in stocks and real estate. He writes a monthly newsletter and his book “Stocks for Fun and Profit: Adventures of an Amateur Investor” is available at internet book sites. Visit his website at www.you1stenterprises.com, or email him at you1st.stocks@gmail.com.

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