Tahoe Market Pulse: Important lessons learned over the years
September 15, 2016
Over the life of this column I've covered many themes. Most recommendations have been spot-on; a few were not timely. There are important lessons from one of the latter.
Let's first talk about themes that worked. I've been correctly and steadfastly bullish and spotted the importance of TINA (There Is No Alternative) early on.
I've written extensively about preferred stocks and said they represent the best risk-to-reward opportunities. Indeed, they have outperformed the market with less volatility over the last several years.
Now one miss: In February 2014 I wrote a few articles on how "fracking" was a game-changer for an oil industry that was running out of oil. I didn't realize how big of a game-changer it was! This new extraction technique led to a glut of oil and gas; prices plunged.
An important lesson is found in our Spectra Energy (SE) recommendation. The price of oil was cut by two-thirds and Spectra Energy fell sharply as a result.
But they pay and raise their dividend every year and have an attractive 4-percent yield. As the stock fell, its yield rose. In a low interest rate environment, the yield couldn't be ignored and buyers emerged.
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Then last week Spectra Energy agreed to be acquired by Enbridge Inc. in an all-stock deal. The stock is up more than 100 percent from last year's low.
I first recommended Spectra in 2011 when it was 27. A quality company with a good yield and dividend growth. It rose, fell sharply with commodity prices, then rose again.
Through it all the dividends kept coming. The timing of my 2014 recommendation was unfortunate and caused anxiety for a while. Now it's working out well.
Compare that to technology stocks after the bubble burst in March 2000. Buyers didn't emerge and the prices fell further. The difference is the dividend. The lesson: buying dividend payers (and raisers) reduces drawdowns and improves the odds of a profitable outcome.
What should investors in Spectra Energy do now? If you are lucky enough to own it then you'll become a holder of Enbridge, which will become North America's largest energy infrastructure company.
Hold on to it. Management expects a 15-percent dividend boost in 2017 and 10-12 percent annual increases through 2024. Lesson number one: Dividends (and dividend growth) matter.
They reduce the downside risk and provide income while you wait for better days. Lesson number two: Quality matters. The Spectra recommendation shows why. When you buy quality stocks and your timing is bad, the next bull market (or a takeover) will make it right.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.