quarterly review - td

TD Wealth

QUARTERLYREVIEW 4th Quarter

Wells on Wealth [email protected] us online: http://www.johnwells.ca

Wells on Wealth Group – John H. Wells – Fourth Quarter Commentary December 2018 | 2

n Turn Down the Volumn – There’s too Much Noise in Here

n Dividend Growth =

n Know Your Financial History

In this Issue

TD Wealth


in HereIt’s important to realize that stock prices are acting with extreme volatility as I pen this

commentary. It has very little to do with the fundamentals of the companies or their long-term prospects. As we enter 2019 we find ourselves managing investments within

an environment riddled with extreme noise relative to price movements. Most of these extreme movements do not reflect investors making buy or sell decisions; they result from computerized algorithms, index funds, and high frequency trading, which when combined, exacerbates very volatile up and down price movements. This volatility is challenging, but to me it is also normal.

An analogy comes to mind. Imagine for a moment going out to dinner with friends to a restaurant where you expect some noise, overhearing other party’s conversations, hearing some mild kitchen clatter, and listening to muted background music. Now imagine being seated in a dead silent restaurant. Strange and off putting indeed. Now visualise sitting with your guests in the middle of a restaurant surrounded by loud, obnoxious patrons, in which the music is blaring so much so as to inhibit conversation. Not too far away is a table with a couple of arguing very loudly. Odds are you will have a very distracted, disconcerting, poor dining and visiting experience, even if the food is excellent.

When there is a lot of noise investors get distracted. They leave the market (restaurant) vowing never to return.

TD Wealth

Turn Down the Volumn –There’s too Much Noise

Let’s review some of the noise in this big buffet we call the stock market.

n We hear constant noise about Britain trying to leave the European Common Market with as little damage as possible;

n We hear constant noise about President Trump’s presidential style and his emergi problems;

n We hear constant noise about the China – US trade disputes;n We hear constant noise about the possible repercussions of Canada’s arrest of the

CFO of Huawei;n We hear constant noise about the Trans Mountain Pipeline tug-of-war, andn We hear constant noise about rising interest rates, amongst other things.

The list is by no means complete, but begs the question: “How do you deal with these distractions?” Well, you go back to the basics, long term investing in great companies that continue to adhere to the reasons they were purchased to begin with. Above all else it is essential to remember a portfolio is a long-time endeavour. Time will prove you a winner. Understand that the loud debilitating noise usually doesn’t last forever, and great companies adjust. We have entered a correction phase and the current noise can outweigh the fundamentals, if you let it. While today the lure of self-investing is strong, it’s usually your nervous stomach that takes over in times of noise and stress. Our skills and experience will be the tonic for what ails you.

First, let us review some background information…

Stocks that have grown their dividends consistently over time have always made me happy.

TD Wealth


Dividend Growth = Our current Canadian equity portfolio reflects this belief. Senior Canadian stocks

are very much focused on returning their cash flow back to their investors. I view Canadian equity investments firstly for income and then for growth, for the most

part. The following table shows the history of dividends paid by the companies currently comprising our Canadian portfolio. It is a sea of green (rising dividends) going back to 2010.

I often use the example of a renter, someone who keeps his space clean and tidy and never causes you (the landlord) any concern (like a very well-run company). To top it off he/she wants to and has paid you more rent every year (increasing dividends).

Now, instead of one renter think of a 17 suite apartment building (we currently have 17 stocks in our Canadian portfolio) within which all renters feel and act the same way (tidy and more rent).

TD Wealth

16/01/2019

Name Yearly Yearly Yearly Yearly Yearly Yearly Yearly Yearly Yearly2010 2011 2012 2013 2014 2015 2016 2017 2018

Alimentation Couche Tard 0.08 0.10 0.10 0.13 0.18 0.27 0.36 0.36 0.40Brookfield Asset Management 0.52 US 0.52 US 0.56 US 0.60 US 0.68 US 0.48 US 0.52 US 0.56 US 0.60 UCanadian National Railway 0.55 0.65 0.75 0.86 1.00 1.25 1.50 1.65 1.82Canadian Imperial Bk Commerce 3.48 3.54 3.68 3.82 4.01 4.42 4.84 5.14 5.44Canadian Natural Resources 0.30 0.36 0.42 0.50 0.90 0.92 0.92 1.10 1.34Canadian Tire Corp Cl.A 0.84 1.10 1.20 1.40 2.00 2.10 2.30 2.60 4.15Enbridge 0.85 0.98 1.13 1.26 1.86 2.12 2.12 2.44 2.95Fortis Inc. 1.12 1.16 1.20 1.24 1.28 1.40 1.53 1.63 1.80Gildan Corp 0.26 US 0.26 US 0.31 US 0.37 US 0.45 UIntact Financial Corp 1.36 1.48 1.60 1.76 1.92 2.12 2.32 2.56 2.80Manulife Financial Corp 0.52 0.52 0.52 0.52 0.62 0.68 0.74 0.82 1.00Nutrien 0.20 US 0.40 US 0.45 US 0.45 US 1.40 US 1.57 US 1.57 US 1.57 US 1.72 URoyal Bank of Canada 2.00 2.16 2.40 2.68 3.00 3.16 3.32 3.64 3.92Suncor Energy Inc 0.40 0.44 0.52 0.80 1.12 1.16 1.16 1.28 1.44Sunlife Financial 1.44 1.44 1.44 1.44 1.52 1.68 1.82 2.00Telus Corp 1.05 1.16 1.28 1.44 1.60 1.76 1.92 1.97 2.18Toronto Dominion Bank 1.23 1.36 1.54 1.70 1.88 2.04 2.20 2.40 2.68

* 3 for 2 stock split Apr 8 2015

Benefits of a rising dividend policy

Disciple in the maintenance and use of corporate cash flow

Increasing confidence in the future and the sustainability of the business

The ability to manage the balance sheet properly

Shareholder friendly directors who voluntarily choose to payout more to the shareholders

Discounted future cash flows from the business is a proven valuation method, rising dividends make for higher valuations

RIOCAN REIT 1.38 1.38 1.38 1.41 1.41 1.41 1.41 1.41 1.44

TD Wealth

Examine the table below – wouldn’t you like to own this apartment building?

Source: Thomson Reuters

* 3 for 2 stock split April 8 2015

** 2.23 shares of Nutrien for each Agrium share held

A rising dividend policy reflects:

1) Discipline in the maintenance and use of corporate cash flows,2) Increasing confidence in the future and the sustainability of the business,3) The ability to manage the balance sheet properly,4) Shareholder friendly directors who voluntarily choose to pay more to shareholders, and5) Discounted future cash flows of a business is a proven valuation method: rising

dividends make for higher valuations.

TD Wealth

Know Your Financial History

TD Wealth

Internal

A rising dividend policy reflects;

1) Discipline in the maintenance and use of corporate cash flows, 2) Increasing confidence in the future and the sustainability of the business, 3) The ability to manage the balance sheet properly, 4) Shareholder friendly directors who voluntarily choose to pay more to shareholders, and 5) Discounted future cash flows of a business is a proven valuation method: rising

dividends make for higher valuations.

Know your Financial History

I have always found that knowledge and experience overrides panic and confusion. During the last quarter of 2018 stock markets around the world sustained a significant correction. Since we only invest in the North American Markets, here is a review of their performance since September 30th, 2018:

TORONTO STOCK EXCHANGE Sept 30 thru Dec 31 Down (-11%)

DOW JONES INDUSTRIALS Sept 30 thru Dec 31 Down (-12%)

S&P 500 INDEX Sept 30 thru Dec 31 Down (-14%)

Source: Thomson Rueters

It was a solid correction. Will it persist? Will the same decline occur during the next 3 months? Will the indexes show a positive return at all during 2019? All good questions which cannot be answered with any certainty. As I review and make investment decisions, I must always keep things in perspective. History shows us that the S&P 500 falls 10% every 11 months on average. It falls 20% every four (4) years on average and 30% every decade on average.

We have been here before. Just as a reminder, from January 29th, 2018 through the trading day low of February 9th, 2018 the S&P 500 fell 11.6%. Guess what? That was 11 months ago. Corrections are as common as the weather. You know it will rain, just not precisely when. Averages are just that, averages. They seldom work as predicted but you have a pretty good idea that they will happen. The longer an event delays happening, the more certain you are that it will occur. As part of my tool box of indicators I like to use a 2% market correction during a trading day as a notation of market sentiment. This, along with the Chicago Board of Exchange Volatility Index (VIX), gives me further insight and assists in my decision making. I have talked about the VIX in previous newsletters and now I would like to show you the history of 2% market corrections on a daily basis within a year:

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

0 0 0 11 41 28 10 21 3 2 4 6 5 0 17


Ihave always found that knowledge and experience can help override panic and confusion. During the last quarter of 2018 stock markets around the world sustained a significant correction. Since we only invest in the North American Markets, here is a review of their

performance since September 30th, 2018:

Source: Thomson Rueters

It was a solid correction. Will it persist? Will the same decline occur during the next 3 months? Will the indexes show a positive return at all during 2019? All good questions which cannot be answered with any certainty. As I review and make investment decisions, I must always keep things in perspective. History shows us that the S&P 500 falls 10% every 11 months on average. It falls 20% every four (4) years on average and 30% every decade on average.We have been here before. Just as a reminder, from January 29th, 2018 through the trading day low of February 9th, 2018 the S&P 500 fell 11.6%. Guess what? That was 11 months ago. Corrections are as common as the weather. You know it will rain, just not precisely when. Averages are just that, averages. They seldom work as predicted, but you have a pretty good idea that they will happen. The longer an event delays happening, the more certain you are that it will occur. As part of my tool box of indicators I like to use a 2% market correction during a trading day as a notation of market sentiment. This, along with the Chicago Board of Exchange Volatility Index (VIX), gives me further insight and assists in my decision making. I have talked about the VIX in previous newsletters and now I would like to show you the history of 2% market corrections on a daily basis within a year:

Source: Thomson Reuters

Except for the years surrounding the financial crisis we haven’t seen this many 2% daily corrections in quite a long time. You are quite normal in being a little rattled. From my experience this is what I plan to do to navigate the situation:

1) Add to our stock positions – but do it slowly. Buy the companies we know and are comfortable with. They come on sale from time to time and buying slowly helps alleviate the fear of market timing and instills an investment discipline.

2) Stick to quality stocks but always keep an eye on the big MO (momentum). Momentum in the stock market can be very strong and it is what the majority of trading algorithms are based on. In the short-term, momentum is powerful. Don’t fear it, understand it. Corrections don’t last that long; however, we are at the mercy of averages with all their implied variances.

TORONTO STOCK EXCHANGE Sept 30 thru Dec 31 Down (-11%)DOW JONES INDUSTRIALS Sept 30 thru Dec 31 Down (-12%)S&P 500 INDEX Sept 30 thru Dec 31 Down (-14%)

If you have any questions about anything in this Quarterly Review or you would like some further information, please contact one of the Wealth Group using the details below:

Wells on Wealth [email protected] us online: http://www.johnwells.ca

The information contained herein has been provided by John H. Wells, Vice President, Portfolio Manager and Investment Advisor and is for information purposes only. The information has been drawn from sources believed to be reliable. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.

Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.

Index returns are shown for comparative purposes only. Indexes are unmanaged and their returns do not include any sales charges or fees as such costs would lower performance. It is not possible to invest directly in an index.

Bloomberg and Bloomberg.com are trademarks and service marks of Bloomberg Finance L.P., a Delaware limited partnership, or its subsidiaries. All rights reserved.

Wells on Wealth Group is a part of TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc. which is a subsidiary of The Toronto-Dominion Bank.

All trademarks are the property of their respective owners.

® The TD logo and other trade-marks are the property of The Toronto-Dominion Bank.

TD Wealth

The Wells on Wealth Group is dedicated to BUILDING FAMILY WEALTH, not “making some money”. It is like saying climate change is the same as weather. Climate change is long term and evolves slowly while the weather comes and goes with the seasons and is very hard to predict: ask any farmer.

Sincerely,

John H. WellsMBA, CIM®, FSCI®Vice President, Portfolio Manager and Investment Advisor TD Wealth Private Investment AdviceWells on Wealth Group

quarterly review - td

Documents