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Kyle Prevost, a distinguished Canadian blogger and author, has solidified his reputation as an authority in personal finance and DIY investing. An award-winning educator with over 15 years of experience writing on personal finance topics, Kyle is celebrated for his contributions to prestigious publications such as the Globe and Mail, CBC, Maclean’s, Moneysense, Million Dollar Journey and the National Post.
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Mike Heroux is a certified CPA and CFP who is also a passionate DIY investor who enjoys teaching others to build their own nest egg through his website Dividend Stocks Rock (DSR), which is the foundation of Million Dollar Journey’s dividend stocks list (one of Canada’s best read investing articles).
MIKE’S SESSION CANADIAN FINANCIAL SUMMIT 2023
Welcome back to the Canadian Financial Summit. I’m your host Kyle Prevost. And today we’re bringing on our dividend Ace picture to give his Insight on a current state of affairs on the markets in Canada. I’m talking of course about Mike Geto from dividend. Stocksrock.com. Mike’s been helping folks invest with conviction or many years now and he’s the man behind the idea of the dividend triangle analysis. Thanks for joining us Mike for I believe. It’s your sixth year now
Yeah, I mean I’m a veteran right is the the first Canadian Financial submit. So thank you for still having me. Yes the world of investment always changed
So there’s always something new to talk about and speaking of the changing environment this year. Obviously one of the names of the game is inflation and how to stay ahead of it. Obviously it’s not ideal for anyone but how do we protect or adjust as much as possible in terms of avoiding pain as investors? Um, I’d say the first thing is, you know, every year comes with its challenges a few years ago. We had actually an interview on how you can protect your portfolio against covid and and the lockdowns and this year we’re gonna talk about inflation and eventually potentially a higher interest rates as well. But the thing is investors should not try to protect your portfolio for the next six months for the the next big thing happening the bag big next threat, but they should have an investment plan that that really starts. I started to protect my portfolio against inflation 15 years ago, even though there was no inflation. No, I interest rates. The point is if you don’t have a solid investment plan, if you don’t know why you invest and how you invest and what what it works how it works in your portfolio and you’re just chasing one protection after the other then you get lost a lot of investors in during the summer time of 2020 started to talk about goal and now they bought massively gold or gold mining stocks and on and then I mean it didn’t happen the way they probably thought it would it would gold was around 2000 and ounces and and went back to 1800s if anything hundred and then it goes over there. So it’s not giving the protection they were expecting some other thought. Oh, let’s go into bit
Rain, Bitcoin went to 30,000 40,000 50,000 and it’s not the matter of saying. Oh, you should not invest in gold or you should not invest in Bitcoin, but you should not pick the shield of the moment because then what you do is you probably end up buying something at the very high price during the high peak. You’re not even sure if you want that in your portfolio, but everyone tells you to do that and this is how investors make mistakes basically So I’m going to go ahead and guess from that response then that you haven’t made big switches to your dividend Focus investing approach might
Not really. I mean the for me to secret is really to have a clear investment thesis a clear reason for each of my oldings. So whenever there’s a major change in the environment, it doesn’t mean that you just close your eyes and you keep focused. But then you look at your investment pieces and then you say okay. Is it still relevant considering the environment? So if I was taking a lot of guesses or speculation speculation Place, well obviously after covid around 2021 when the market was booming that was the time to just review your portfolio. So, you know what, I’m gonna cash a little bit of those speculative plays I’m gonna just go back and stay very focused on the main strategy. So most of my old things are the same and and most of the time when I sell a stock or I buy and you want it’s not really because of what’s happening right now, but rather it’s something that I really wanted
To do in the first place and I got a pretty good example at the end of 2021. I review my portfolio quarterly most of the time I just changes once a year because quarterly you’re just getting maybe the more to emotional about it. So look at my portfolio and then I realized that I’m now at 30 31% of all my investment into tech stocks
Which is a lot I think it’s a lot a lot of people would say comfortable but I’m thinking you know, what? Yes. They are my big Winners those were great years for for a technology sector, but at the same time I don’t want to be Overexposed in some single sector. So what I did is , okay. I’m apple and Microsoft were my biggest position together. They were 20% of my entire portfolio. So I just trim my position. I just five or six percent of them just to get back to a more balanced portfolio and at that time nobody talked about higher interest rates that much and and everybody was all in for text talk. So even I had a lot of members at dividend stocks Rock telling me well Mike, why do you do that? You know because I share all my trades and the reasoning and I told them well, it’s not that I don’t apple anymore. It’s just that it’s taking too much place. And if anything happened to the tech sector, I’m Overexposed. Well, it happened. I got lucky because I didn’t expect that text talks with that crash into you, but that’s that’s the reason that’s the The whole point here is to follow your strategy and you won’t have to protect your portfolio against the new threat. It will always be there and if you’re always going for what works for you during the good years, you’re gonna make a lot more money as well. So thinking that my portfolio should do 12 or 14% every single year. It’s a fantasy but it happened over the past five years. So I won’t point you just have to realize okay. So Mom, then I hit about a year. It’s gonna go down and just going to normalize My overall Total return which is normal
I should expect six to seven percent per year not 12 to 14. So if I’m going back a little bit this year, I don’t really mind because I’ve made my money over the past 10 years instead
Yeah, that that point illustrates two things that I really bohem in stocks Rock Mike one is you mentioned how transparent you are in good times and in bad which I always appreciate and now over a substantial period of time that you’ve been making your track record public and the second is that’s an excellent example of sticking to your investment pieces where you had these two stocks and by the way, you may you may very well be buying back into those same two stocks again now that they’ve come down much or yeah, they come down us it’s National Mount and the companies are still great companies as I know you talk about on dividend stocks Rock, but you stuck your investment pieces and one of the first lessons, I know that you tell people is, you know, certain sectors or certain singular stocks should only be X percentage your portfolio. And once they get bigger than obviously you’re in some pretty risky territory and you practice what you preach which I I always enjoy for people that I’m trying to get actionable advice from Yeah, and it’s it’s always easy to tell people how great it is when you’re making a lot of money and beating the market and everybody’s happy. Right but it’s completely different when the market goes sideways that you just have to feel comfortable say, okay, I’m gonna stand right now. I mean, it sucks. Nobody likes that but it’s part of the market. I mean, I think we have get used to lose money for two months and then making money back right away, but it’s not exactly how the market works if people can go back in time and look at what happened in 2008
I mean it took a good four years to recover fully your money. And if you go back to the tech bubble it was even worse. It was five years for the S&P 500
So you have to be patient at one point and and focusing on your portfolio is the name of the game here
So Mike I know in past years we’ve talked about the dividend triangle and that you don’t just line these stocks up by dividend yield and select, you know, the the five highest yielding stocks and given growth obviously is a big part of what you do and and what you feel it reveals about a company. So our is dividend growth. Is that still a successful strategy in the face of inflation? Yeah, if you look at at studies and which is a bit hard because over the past few years. We haven’t been into a high inflation period and and going back in time. Then makes it a little bit riskier because The life into 70s or in the 80s were not exactly the same one as today. The industries are not the same the economy is not the same you have to be able to careful about that. But when you do your research you realize that Commodities are definitely the best Edge against inflation which gonna make sense because they’re at the center of inflation anyway, if we think about oil well now if World goes up Transportation goes up and if Transportation goes everything that you want to buy from Lumber to your for your house to groceries. Everything has to go up. So a good way to protect yourself is to go the words Commodities and energy the problem with them is they’re highly cyclical. So the thing is right. Now you’re gonna be making a lot of money, but if you look back in time, they’re just recovering what they lost in 2015 and they just recovering what they lost in 2008. So going in going out could be interesting. That’s not my game. I rather to have something a little bit more straight
Word and don’t have to move but that worked for some people. So the second type of Industry that is going to work against inflation are REITs and utilities. Why because most of them have long-term contract and Insider long term contract they do have escalation rate. So they know that for reads you have your tenants it’s gonna be there for the next 15 years and every single year. They’re gonna pay three percent more. So revenues are growing. Naturally, they don’t have to do anything and it’s going to match the inflation at one point right now. Obviously, we don’t know anybody that has a tenant increasing they’re seeing their rent being increased by eight nine 10% a year, but technically hopefully we’re not gonna live into a high inflation period but for the next 10 years, I don’t think it’s gonna happen. We’re gonna talk about that later on but For now, this is a good place to be for utilities
Pretty much the same thing. They have a monopoly over a specific state or Province and then they just they can just increase the rate accordingly. So it’s a good way a little bit more stable throughout time than going for Commodities after that. Obviously. A lot of people will tell you about gold gold was a fabulous investment in the 70s, but after that if you look at the other two higher period of inflation in the 80s and the 90s golden do much over a long long period of time over the next 50 or 100 years gold will pretty much match inflation not more not less. So unless we go back into stagflation mode probably that gold will not make its magic trick again and when you think about it, I mean If this pen is in gold and I put it on my desk and I wait for 20 years
I’m gonna have the same pen. It’s not gonna generate anything. It’s not gonna produce anything and and I don’t buying assets that are just there and , you know sleeping on the couch
So this comes to going for dividend girl investing and it’s kind of very interesting because we don’t have much data inflation versus then go investing because when you go back to the biggest period of a high inflation, it was in the 70s and in the 70s, that was the creation of the dividend Kings. So those companies who successfully increase their dividend for more than 50 consecutive years back then we’re not that many today. We have a few dividend Kings left. So it’s really hard to see how it’s going to happen. But when you think about it a business that is able to increase its dividend every year
Must be to do something right you need a company that has a a good business model with driving revenues good market share pricing power iconic Brands plenty of ways to grow because if not management will not be able to increase their dividend payments. You have to think that for the shoulders is really nice because you get your paycheck, but from the company side, this is an expense. So management is looking okay, we’re paying this much for R&D. We’re paying this much in interest rates, and then we’re paying this much in dividend. So are we willing to increase that amount over time? All right, and can we afford it? So when you have a company that is able to do it. It’s a sign of strong confidence into their business and also obviously a robust business models that those type of companies even if we go into a recession, even if inflation persists for a few years. Those are the companies that are likely to survive and thrive moving forward
Yeah, that’s why I’ve been such a permeable as as the cnnbc folks say in regards to the Canadian Market specifically might just when you talk about that pricing power the ability to generate the free cash flow that you need to sustainably raise dividends for decades of the time
You know, the high inflation is not brand new despite what some people my age might think and and if we’ve had that pricing power in the past and we continue to have that same ability to raise alongside inflation. It protects the bottom line essentially
So on that mic specifically we’ll look at the Canadian and American markets first because I know every year a lot of folks right in and they say okay you guys talk about the general theories, but let’s get down to Brass tax. Give us some examples. What are what are you thinking here? And then of course, I tell them to go to give them stocks Rock, but you’re a sneak preview today and I asked you to come up with a few examples of your favorite Canadian dividend and then American dividend stocks. So let’s start off in a great white North what what community companies and see that you’re most confidence in right now
Yeah, actually if you permit I’m going to share my screen in moment just to show you how actually I apply the story in reality how to use a stock filter and then we’re gonna go with the stock picks. I’ve selected a few on the key inside and a few and the US side, but I think it’s important to understand the methodology before it Thanks won’t be long. There you go. I know that some stock stock picking folks on the internet just shake up their magic 8 ball I wasn’t sure if that’s how dividend stocks are did it? No, no III good the good it’ll used to on as you mentioned. I love using the dividend triangle. This is the first filter I’m using when I’m looking for stocks and it have been triangle is quite easy is basically I’m looking at the five-year trend for Revenue earnings and dividends. So the purpose is to find companies that are driving in terms of Revenue. So making more sales every single year, but also making profit and then sharing that which shareholders we’re gonna go here in the stock screener for DSR
And the thing that we can do is we can actually save or filter. So we’re gonna skip right away and go into the one that I called inflation and I’m gonna look at a few metrics that will help me do just the first screening because obviously now I have I pull out my screener. I have a bunch of stocks. I still need to refine my research but depending on the type of investor you are maybe you’re looking for a little bit more Dividend Group. Maybe you’re looking for a little bit more yield you can adjust and then you can select sectors as well. So in the filters what I’ve done I can’t Select Market for getting in your us if I want and I can select the sector. So as I told you before if you go for REITs and and utility and the energy sector you’re going to find the real inflation Fighters and then after that you can complete your portfolio with other what other stocks we have a preparatory rating here for dividend for the prorating in the dividend safety score. So I put a minimum of three out of five meaning At least a good start to old and a company that will increase its dividend for at least three four five percent a year after that. I put the dividend triangle in Magic. So the earnings the revenue I want at least one percent minimum to grow I usually put more than that, but in the middle of her past five years we have the pandemic some companies took a hit. You can’t really penalize a business because of a thing that happens every 100 years. So the business could be amazing, but they may have a rough couple of years. So having just one percent Revenue growth 1% earnings growth. It’s just saying, you know, what if you had a bad time you still had two years to recover now, you should still show a little bit more growth. This is what we’re looking for, but here for the dividend for the dividend growth. I’m asking for at least three percent which is above the target inflation
So right now we’re way above that but in general the Bank of Canada The FED they want to have the inflation between one and two percent. So at 3% you’re above the target inflation. And this is pretty much the way you can how you can protect your payment because a lot of people will tell me. Oh, yeah, but I this company’s paying 8% yield but if the eight percent yield doesn’t increase and you don’t reinvest that dividend, you’re just living off that 8% while you invest a hundred thousand dollar in that you get $8,000 on in 2022, but you’re also going to get $8,000 in 2032, which could be a problem. And in the meantime if the company is not able to increase the dividend
Well, then it could be a sign of the business is not doing that well and eventually could eventually cut their dividend which is even worse because then you lose Capital you losing them and you’re nowhere to be you know, where you want to be. So for that’s the third part of the dividend triangle and this is how I can get most of my thoughts at first just to have a good idea and then I’m going to refine Research with a little bit more metrics or the sectors and if we look at Apple for example, which is a classic one, but just to show you the what it looks in terms of dividend triangle
We have it here. So you see the price that goes up most of the time but it is driven by clear metrics
You can see that revenue is also following a growth Trend that is pretty steady earnings per share is pretty much the same and then the dividend is almost clockwork almost the same amount and then you have the numbers over to five years. So double digit for a new double digit for earnings and almost level digit for dividend. This is the type of business that will go through inflation that will go through a recession that will go through a financial crisis name it this business is solid and it’s going to work. So now let’s go back to as you said the great white North. I have a few companies that I love at first. We’re gonna talk about the I would call it the usual suspect. So what we call some people call it the turf telecoms utilities rates Financial in the Telecom world. I companies that Still growing and offer a some dividend growth. So I discarded Rogers I used to discarded show as well. So I really tell us and Bell the big difference between those two tell us is more growth oriented. They have decided to diversify their business model investing in artificial intelligence helping the agriculture industry farmers to manage their farm with new technology same thing with health care. So I kind of this tax side to something that is just a cash cow machine with their Wireless business
So they use that that cash and they spend it elsewhere. So a big fan of Dallas if you are looking for a little more yield obviously Bell is your go-to guy high yield stable business great presence in the media, of course, and you will still get a small dividend increase every single year. So again, very solid here for utilities, then you have plenty of choices, but if You don’t want to take any chances, I would go with for this for this 48 consecutive years with a dividend increase that tells you that it goes across anything and it keeps paying 99% of its business is regulated, which means that they have the Monopoly on an area they are present in both Canada and the states and a little bit also in the The Turquoise island in the Bahamas, but they have those Monopoly and they deal with Regulators to increase their rate. So they they are well comfortable there predictable cash flow very easy for them to forecast what’s gonna happen next even if interest rates increase and their death load will cost more they’ll just turn around to their regulators and say hey there’s inflation. There’s eye interest rate. I need to increase my my rate for my customers. It’s the way it goes. The other one that I really love is the Brookfield family. So you have Brookfield infrastructure if you want if you want to go Really with a complete portfolio into one company
This company has railroads ports. They have electric line pipelines data center. It’s all mixed into the same one. So it’s better in ETF actually and you have one business and it’s backed by one of the largest asset manager in Canada Brookfield Asset Management. So they’re sitting on billions. They have plenty of growth projects. I just love the way it is being managed. The other one is Brookfield Renewable. So if you want to have if you have your green side that is talking to you. Well Brookfield Renewable more than 50% of the revenue are from hydroelectricity. And then you have wind installer their prison across the world. So similar to Brookfield infrastructure, it’s pretty much adding an ETF or renewable energy over there. So those are very stable company speaking of stable we go with rates. I prefer apartment rates and Industrial rates in this sector not too kind on retail
Know I didn’t meet a lot of friends talking that I didn’t ryokan a few years ago. I still not convinced. They’re gonna turn around their business because they’re at over 90% in retail and I’m not convinced about retail at this point. But when you look at apartment while if you’re thinking that interest rates are is increasing all the time the access to property will become more difficult. So the need for those apartment will make a lot more sense for a lot of Canadians. So companies kill him apartment in to rent or Canadian apartment would be great picks
You’ll notice if you do your research they increase your distribution year after year. So again, the team is still around all the time. The other one that I love Granite they are specialized in high tech facilities and warehouses. So a lot for e-commerce their biggest their biggest clients are magnet International in Amazon. So I really how this business has been able to increase over the past few years again same The same team here you have a growth perspective. You have some dividend as well. So don’t go for those super generous high yielder in REITs if the pale ratios aside the yield is I and there’s no increase that’s creams for a dividend cut. You have to be careful in the financial World. Well Canadian Banks do I really love them? I mean, honestly, we may have our our favorite but between you and me if you buy anything among the big six, you’re not gonna be wrong. So that’s the first thing and the second thing I would say about them is, you know, too many banks is not better. So pick your favorite too and deal with them because having five or six banks in your portfolio, it’s just they were Suffocation because they’re gonna be affected by the same environment. So just pick your first two and move on in the energy sector. I am a lot of fan. I’ve said it before and then a lot of people will tell yeah. Well you miss a great opportunity. It’s true. I also missed
Lot of bust and a lot of stocks going down and a lot of dividend cut in the past. So I don’t really mind my portfolio is doing well anyway, but there are a few exceptions companies Canadian national Railways. Sorry, can you national resources cnq, they increase their dividend at the same time as Suncor announced a dividend cut the company shows 25 years of Pennsylvania did an increase they are sitting on oil Sanders and or send Reserve there’s no tomorrow great business. It has gone down a little bit after the hype. So maybe it’s a good time yield is over four percent a lot of things that we can love about this one and obviously pipelines and Bridge and DC energy because they’re not as Dependable of the community Bryce they work with long-term contract and those are take or pay the customer has to pay Enbridge regardless if they’re using the pipeline to move the oil or not. So there’s always a minimum fee going in it’s really passive income for And and as we have seen in the past two years the need for those pipelines are crucial for economy right now the world needs them. So they’re not about to shut down the pipes and I think it’s going to be a good way to find a little bit higher yield here. Yeah, and they’re not building any more of them. They’re not building, you know, those pipelines even if Germany you have to use them, you know, it’s a toll roads. I mean, there’s one road to go to Toronto. Well, there you go. You have to take it no matter how much it costs
Yeah, that’s that’s a good way of describing it
Even of Germany really really wants more toll roads. Sorry Germany. Obviously, I’m I’m joking a little bit sound but but yeah, obviously the demand will be there for for those nice little six percent dividend pairs in the Canadian Midstream sector. Okay. So those are our sort of Canadian dividend growth picks going forward that you feel most comfortable recommending most confident in you mentioned Apple before Mike, which I know you’ve been on for many years. I remember I had a few weeks ago. There was an article talking about how Apple just their their earpods. We’re that 28 billion dollar Company by themselves in terms of Revenue and I was man, that’s crazy. That would be one of the biggest companies in Canada just from Africa. Never mind
The fascinating thing about Apple is they don’t even have to be first for the product in their in their Market. What they do is that they’re sitting on the pilot cache and because they did they did that with the Apple watch they’re doing that now with the air Buds and actually those are bows but I do run with my airpods Pro. It’s just that I cannot make myself work on the Mac, but that’s just amazing. They just wait they look at the competition they look at what they do and then they start doing their R&D and they improve them. They make the product almost perfect and then they go in the market and now they’re creating all those little businesses. I mean the it’s kind of funny because the the part that I love the most about Apple is not their iPhone and it’s not they’re they’re MacBook, but I look at the other services and wearable where all the magic happens right now. They build many different small businesses. It’s just impression impressive where in all kind of direction as well. So they’re just using their Cash Cow a little bit I was talking about Dallas with wireless
Using their iPhone they generate it on the profit with that but instead of just reinvesting in their iPhones, they’re looking at other products that could work with it. And then they just become a company offering many Diversified things and that’s probably one of the sector right now technical information technology in the US that you should go mostly because it got hurt and we don’t have that in Canada. I mean, we cannot really compare Shopify and I know it’s not not fun to to say how this this talk when how very high up and then crash but you cannot really compare a company Shopify to the Microsoft or the apple of this world if you’re interested into semiconductors because we keep talking about the fact that we are in short and supply and they’re gonna be high demand and it’s gonna move towards Texas Instruments. They’re making analog chips mostly for the industrial and the automotive industry and we all know how much technology we put in those. So I think there’s a To be a lot of growth vectors coming up for Texas Instruments as well the key here when I look at the overall US market for selecting on top of the dividend triangle is I’m going to look at companies that are Diversified worldwide and they have iconic brand. Why because when you have an iconic brand you have a lot more pricing power, which means that even if you’re increase your price customers will still be willing to pay for it. So you can think of in the consumer description area. You can think of companies my key or Starbucks and they took a big beating that could be very interesting moving forward and what I found very interesting about Starbucks over the past few quarters is while they suffered from lack of growth in China because they still have a lockdowns over there. So and this was their main growth vectors for several years now, but they were able to increase their price in the US and still make more money. So people are just not
Oh I’m gonna pay eight bucks for my coffee was five bucks before I’m gonna Eight, and and I know it’s maybe it sounds crazy for some people but it works. I mean, I’m not I’m not judging the choice of people but I’m just seeing the numbers and the numbers are telling me that people are willing to pay eight bucks for a coffee. So go for them in the customer Staples, which is a safe haven for inflation as well because we need those products
In Canada, we had groceries I could have talked about little laws Mitch row and an Empire which are the big three, but if you want to go somewhere where you have more exposure to Geographic diversification, I classic companies boring companies Colgate family Clorox Proctor and Gamble Coca Cola, you know, you’re not Reinventing the wheel here, but if you’re purpose is to protect your portfolio against our recession or interest rate or inflation. Those are the names that will come around that we need. It’s just natural to buy those products. We cannot do any other way
So we go with those long term giving Growers one segment that I find very interesting right now is the industrial sector why because they are also getting beaten up they suffer from change Supply disruption. They have problems with raw material price increase their Are not really good but moving forward. It could be super interesting to hack them company AO Smith
It’s a dividend Aristocrat more than 25 years of conservative dividend increase and they are offering water treatment and water tank either
So here dominant place in North America. They’re growing in India and in China and the rest of Asia as well because the need for treating water boiling water is super important and this is exactly what they do. So over the long run could be very interesting to have them Global businesses Honeywell ABB for robotics could be interesting and speculative plays now 3M dividend King with more than 60 years of dividend increases but a lot of lawsuits around them a lot of bad news. So maybe you want to think of bet on this one. They have come around several times. I don’t know if you’re gonna they’re gonna be able to do the trick Johnson Johnson did in the healthcare department where Able to manage their lawsuit successfully and then move on hopefully they will but that could be also an interesting take here
Great. Well, you get a wide variety of of avenues to look for specially complementing sort of a traditional strengths in Canada. There might getting back to the big picture here for just a second. What are some things we should look out for maybe some? Secondary filters if you will in regards this High inflation environment, what what’s specifically should we look at when we’re looking at a company or it’s on our watch list. We know that inflation isn’t transitory or at least not transitory in the short term it ironically now, it looks it may actually be you need more time possibly. So everyone. But anyway, what what sort of secondary photos are you using to say, you know, what watch over this
This is gonna be impacted by inflation
Well, the thing is when you think about high inflation the second thing that will happen and that’s gonna hurt even more is higher interest rates. So in your filters, what you want to look at is the death level of the companies you’re looking at most of the time I would look at that level and also the their margin and more looking at graph which we have not necessarily put filters here
But first thing you have a company you found a company in the sector you won they have a strong dividend triangle you it. Well, then it starts. It’s important to start looking at Trends
So looking at that how it was dead graded rating as well. If it keeps going up. Yes
It’s fun that revenues going up but A company that is racking up more debts year after year. Eventually they have to pay it back and right now thinking that interest rates keeps increasing and at the time a recording it was just a week after the FED announced that they’re gonna continue to increase this fall. So hopefully listeners when you’re watching this interest rates are definitely hired and they are during the the summertime and in they’re gonna central banks either to fed and send a Bank of Canada. They made it clear that inflation is their number one enemy and they’re gonna do whatever it takes to take care of it which means that they’re gonna increase the interest rate until we use the r word and it’s kind of funny. I’m really I’m currently reading Harry Potter with my youngest kid and you know when they refer to Voldemort and they never say his name and it’s , yeah, the the guy we never say in the name. Well now even the US they’re just no. No, it’s not a recession. It’s not the word with the are we’re water. Yes soft Landing or yeah those things and then No, it’s gonna happen. I mean it for sure it’s going to happen. So you need companies with healthy margins. So if those margins are going down or if you’re looking at an industry that our razor thin margin, I would probably discard those because they’re gonna hit another bump in the road. And and yeah, that’s margin could be interesting cash flow from operation because earnings they’re based on accounting principles
They’re easier to look at in terms of graph and getting those information because they’re let they’re more stable than cash flow. But after that second thoughts you look at the cash flow from operation to make sure that it’s growing because if it’s if they’re getting squeezed on cash, you can be sure that the company’s not doing that. Well, they will have to cut here and there and the among the places that they can cut there’s a dividend you have to be careful with that too. So those are the thing that I’m a little bit concern right now. So this is what I look for when I look at my businesses and when I review my investment thesis if I have Japanese for example that has a grow-by-quisition strategy
I make sure that they don’t go overboard because I won’t point you can grow too big for your own good recently. I’ve seen TFI International which is a trucking company in Canada and they have that road bike position have been acquiring many businesses lately in 2021. They spend more than 800 billion on 800 million. Sorry on on UPS right to boost their their business and I was kind of happy that throughout summer time. They announced that they’re gonna sell a part of their business which was the lowest profitable segment they had and they say, you know, what we’re gonna get rid of that for 500 million dollars. It’s going to resplendish or balance sheet and we’re gonna be ready to make more acquisition in segment that we Thrive and where we make more money you want Business that focuses on those high margin activities and not taking the risk of getting hit by another curveball because you know The Well of investing is always full of curveballs. We don’t know what’s gonna happen next in December or January of 2023
So you might as well make sure that those businesses are fully shielded and they’re well under control with their balance sheet and the rest of their business model
Yeah, you mentioned sort of unanticipated or semi-anticipated our words there Mike, I’m actually I’m actually not that concerned about maybe two consecutive quarters of minus two or maybe even minus three to five percent GDP obviously I’m not looking forward to it but if it happens I know that there’s been some precedent there in the past what I’m actually worried about is is the s word oh no thanksglation and it’s and it’s funny because it’s such a A dumb person’s idea of what a smart person would say in regards the finance. I just it’s in all the headline sanctions thankfully should know and it is kind of unique I guess but what role do you see if and stay inflation playing in in the markets? You’re over the next year? So it’s definitely shouldn’t big buzz word right now. And I think there’s a big difference between what we could have as short term stiflation where the economy is going down. Which this is what we’re seeing right now and inflation remains very high
So you have a place where because usually inflation goes higher when the Kami economy is booming. Everybody’s working. They’re making more money. They’re buying more stuff and the fact that they’re buying more stuff raise inflation, they ask for a higher salary and on and then you can see that spiral of inflation going on. So when you have a high inflation technically you’re economy should be booming but the stagflation which is very hard to manage is when the economy is going the other way around right now
This is what we have but I think it’s as you said, I mean if we have a GDP going down by minus one percent, it’s not a severe recession and if we can go towards that smooth Landing that could be nice and then we can go Go back up and it’s going to be fine what people fear and that that the problem that a lot of people I don’t know. They’re just waiting for that to happen. But I’m not convinced gonna happen is what we saw in the 70s where stagflation lasted for a full decade and for investors. That means that you’ve been losing money on your portfolio for 10 years inflation adjusted
It was terrible. So you’re retired today thinking that you need $50,000 a year to retire comfortably and then you realize that your portfolio is not growing and your dividend is not increasing more maybe it’s going to 50 to 51 next year. But really what you needed is going from 50 to 55. So every year you’re losing a couple of friends of buying power and and five years later you’re not able to afford to go the restaurant anymore or to go to that trip in the Bahamas that you love with your wife anymore. That’s not happening because of Legislation and and this is where the fear comes but you have to understand that stackflation first happened once a real big period of stiflation. It happens once 50 years ago in the 70s. So now yes, I’m not saying it’s not it cannot happen again, but you have to compare also the context there were no tactic Technology stock back in the 70s. They were no dividend Growers as I mentioned earlier the we were living in industrial era where people goes to manufacturers together pay job together paycheck. And today we are living in an area of services which is complete different industry. The demographic is highly different. We had a baby boom
And right now it’s pretty much the opposite. We have a retirement boom, everybody’s going to retire and then I mean my my daughter at 14 she could get a job this. I remember that at that age. I was just dreaming of having a job and that was thinking I need to wait until I’m 16 and then at 16, I’ll have to ask for 10 jobs or whatever. So again completely different and central banks. They have they’re really fast on acting right now. They want to hack art. So at first they were just saying, oh, it’s just a story We’re not gonna do anything It were a bit slow for the first 12 months. But since then they’re increasing their rate very fast. They have more tools to play with they can they can use quantitative easing or reduce it in this case to to stimulate consumption of an economic slowdown. So there’s a lot of things that are not happening that happen in the 70s and the most important one is the oil crisis
It’s not taking five hours to fuel your yeah your car right now. You don’t have to make lines for killinators and wait, you just go you feel probably that you swear a little bit when you see the bill, but you still able to do it on on time. So all of those things happen to 70s, they’re not happening right now jumping to on guns and to the words of conclusion right away. I think it’s a bit premature. Yeah. I look at the strong labor markets and I look at the earnings Trends in a lot of the companies you just talked about my specifically and you know, obviously there’s reason for concern it’s not hey, we’re in this great growth environment
Um, but at the same time, I don’t see reasons to panic. I think if you understand the metrics and you look at the loose connection between GDP and the stock market you look at these companies that have pricing power. I think I’d be actually a little more worried about some of the smaller companies some of the the mom and popsite Shops and and the 50 million and I’m very tight companies. I’d be a little more worried about some of those actually that aren’t able to pass along incomes fast, but something’s big companies. I just don’t see the evidence that that their earnings are gonna take a big hit they might they might stabilize for a year to , and not go up as much as we’re used to but man they would have to really really Jack interest rates High to hurt some guys, I think Yeah, and and I would I would just end on that because I think it’s super important a lot of people right now because there’s a times of confusion and a lot of fear, they rather wait and not invest right away and they they mention oh, I’m gonna wait and see until the numbers are getting better
And I would you I would to invite you to go back in 2008 2009 to see what happens with the the most recent big crisis and look at all the economic indicators
Look at unemployment rate consumer sentiment the GDP growth all numbers were very bad in 2009. Very very bad. Like they were all telling you. We’re in the Deep recession and there’s no way out of it right now. Well, if you start invest in 2009 you are smiling today and in 2018 as well, but if you were waiting for those numbers to good be good. Well, then you probably lost an upside of 30 40 percent and you lost the easy money because the market is always thinking ahead. They’re taking bets They’re Taking Chances but in 2009 enough investors, we’re saying, you know what I think that we’re pretty much towards the bottom of the recession and it’s gonna get better from there. So they started investing right away the stock market exploded while all the economic metrics for bad. So if you’re waiting To have a sign say hey Kyle right now is the time to invest because everything is go back to normal. Well, yes, it’s going to happen. But all the good money has been gone at that point
Yeah, thanks for giving some context to all this Mike and sort of putting inflation in the bigger picture and how it interacts with some of these big companies that have had, you know, sustainable records of dividend increases. What else have you got going on there did in stocksrock.com and and what can we look forward to we go over there to check it out? Well, actually it’s the the big season for us obviously with the earnings and on. So what we do at dividend stocks rock is we offer to our Pro members they can build their portfolio on our platform and we track over 1,000 stocks with our analysts and we will make those review of earnings. So we’re gonna tell you which one are doing. Well which not owing not well where you should drag your attention according to our metrics. We’re gonna rate everything we’re gonna make suggestions. So you say oh, you know what maybe having tons of text talks with not be a good thing. You should move and on we have those kind of things. You can find me at dividend stocks Rock Comm, obviously, why do you private webinars where I answer all questions to my members monthly. So it’s a lot of fun. You can see have a good set up here. I just love to do that that just open the mic and then people are asking questions. They’re experience investors
So we learn a lot as a community together, that’s great. And I mean if you just want to hit me up and and ask me some easy question, Phone find me on Twitter at dividend guy pretty much the easiest way can listen to the podcast as well that didn’t guide podcast you can you can see the team around here. So this is where you can find me
and I’ve actually been a big fan Mike’s been even more active on YouTube over the last year and I appreciate that you’re getting pretty slick at your editing there might I’ve been check out Mike’s videos that he does fairly often these days they might Yeah, every Thursday there’s a new video on the YouTube channel. So I’m having a lot of fun actually doing those and and yes, I have changed my setup
I spent tons of money in lighting. It’s kind of crazy. Like they makes a difference. It’s crazy. But yeah, I think a lot of fun doing that. I mean, you know, my goal is really to Shared that passion with investors. And and what I realized over time is if you are confident in your investing strategy those big words and and big catastrophe coming up. I mean, there’s just no noise and you can just continue your life and be happy in your portfolio is not gonna move but you need to gain that trust in your process that confidence and this basically what we’re doing at the Sr
All right. Well, thanks for shedding. Some very expensive light on video stocks during this inflationary environment might It’s been my pleasure Cal it’s always fun to chat with you