Thursday, June 14, 2007

My favorite stocks


My two favorite stocks that I own right now are AAV and GE.


AAV is a Canadian Royalty Trust, which is a special type of company that doesn't have to pay taxes. They are required, though, to distribute their profits to shareholders (or unit holders as they're called). This results in a nice, large monthly dividend.

Well, in October of last year, a Canadian politician proposed that these Canadian Royalty Trusts should be taxed like normal corporations. The share prices plummeted. I read about this in March or so of this year and thought, hey this looks like a good investment. I thought that the price drop was too extreme for the situation -- the trusts keep their current tax status until 2011 -- and the dividends were really nice. In addition, it's *possible* that Canada will reverse this new law, since it might have severely negative effects on their energy industry. Picture dozens of large companies leaving Canada to become American MLPs (another tax-advantaged type of company, but in the US). If that happens, these Canadian Royalty Trusts could return to pre-October prices.

So why did I choose AAV in particular? I looked at many of the largest Canadian Royalty Trusts and honestly I liked all of them. AAV had just made some significant cuts in their monthly distribution, which made its price go down even further. The general sentiment seemed to be that other trusts would have to cut their distributions too, but hadn't yet. This article made me think that AAV had made the right choice in cutting their distributions and now I had a great opportunity to get in while (sadly) the current investors were overreacting and cutting their losses.

Sure enough, it's gone up nearly 30% since I bought it at around $10.30/share. On top of that, I've had a few monthly distributions of about 14¢ per share, which is a bit over 1.3% / month. Not a bad return.

The stock has pretty heavy resistance at around $13, I guess because the newbies who got in are taking profits. I don't blame them, but at the same time, I really don't mind if it stays in the $12 - $13 range, as long as I'm getting that dividend! In the past week, it's broken through $13, perhaps because more people have gotten in at $12 - $13. I bought more shares for my IRA on one of its dip to the middle of that range.

In the future I expect AAV to continue increasing, as long as there isn't another dividend cut. They cut it so much already, though, that I would be really surprised. In fact, there is some sentiment that they will be increasing their dividend, due to higher natural gas prices. (Oh, I neglected to mention that their business is more than half natural gas; the rest is oil.) Natural gas demand is increasing a lot because it is used not only for heating and such, but also in alternative fuel production. Natural gas is used as a source of nitrogen in fertlizers, so increased corn growth (or other crops used for fuels) will result in higher natural gas demand.

In the short term, if there are hurricanes this summer, there's a chance natural gas will spike since imports will be disrupted. It'll take some discipline to sell my AAV in this event, even though NOW I think it would be the right decision. It will probably fall when imports are restored.


Everybody knows GE, of course. As a company, it is pretty well respected around the world as a maker of high tech items like jet engines, as well as "every day" tech like washers and dryers. Of course they do a LOT of other stuff, too. For instance, I learned that GE owns NBC.

Honestly, that is the main reason I want to invest in GE. I like it as a company so I want to be part of it, if only a very small part! The other reason is that looking at GE's stock chart, I think the past few years have not been very kind to it and it's probably time for a change. Looking at the 10 year chart, you can see that, like so many stocks, it started falling in 2000 and started recovering in 2003 (what a great year 2003 would have been to have start investing! ah well). Unlike a lot of respected blue-chip companies, though, GE hasn't even come close to recovering to its 2000 and pre-2000 level.

I've learned that one reason for this is that GE is so BIG that investors find it "confusing." What that means is that if one part of it, like NBC, does extremely well, it has little impact on the stock price because it's still just a small part of the overall company.

I think 7 years is probably long enough that something is going to get done. Sure enough, recently GE sold its plastics division to a Saudi Arabian company for a hefty bit above the value of that division to the company as a whole. Also recently, some stock analyst (I forget which one) stated that if GE were to be split up entirely, the resulting companies together would be worth about $45 per current GE share (which at the time was trading for $35). That's right in line with what I think -- that the "street" has treated GE a bit unfairly and not let the stock price keep up with the strengthening of the company. So I think in the next 5 years or so, GE will have pretty good share price growth as it takes some actions to show shareholders what it's really worth.

Another reason I like GE is the steady dividend growth. I like the idea of long term investing with dividend growth. For instance, if the current dividend (28¢ or so per quarter) increases by 10% or so per year, then in 30 years it will be about $4.80 per quarter! Now of course the stock will have split a few times by then, so it will in actuality probably still be around 30¢ per share, but I'll have more shares. That means that for *today's* investment, I'll be earning about 40% return per year JUST IN DIVIDENDS.

I hear that a lot on websites that talk about the benefits of long term investing in dividend paying stocks, but in my heart of hearts I think it's a big fallacy. After all, the return in 30 years compared to today's investment doesn't matter. In 30 years if I could sell my shares and buy something else that returns 10% a year, it would be better than something that returns 4% a year, right? So in that sense the dividend growth doesn't matter. What matters is the rate of return in terms of the future dollars, because those future dollars tied up in the stock is my opportunity cost for the dividend.

Still, dividends are important. A 4% dividend doesn't sound like a whole lot, but it makes a big difference. If you have a stock that grows at 15% a year, versus one that grows at 19%, does it make a whole lot of difference? Yes: in 30 years, the first investment will have grown 6600%, and the second will have grown 18400%.

Exponents are great because addition of exponents results in multiplication of the results. No matter what your return, if you add 4%, then in 30 years you'll have 1.04^30, or about 3 times as much (hence 18000% vs. 6000%).

Well, this post is getting WAY TOO LONG so I'll stop. Next time I'll write about some of the stocks I hate.


JonathanRaleigh said...
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JonathanRaleigh said...

Many people don't think about the future dividend growth and how it affects your return on your original investment. For example using AAV's #'s you're making about 1.36% per month or 16.31% per year on your investment at the current dividend rate of $.14 (us dollars, its $.15 in canadian dollars. I got the numbers by dividing $.14 into $10.30)

OK lets say they make their way up to doing their dividends like they used to and pay about $.26! (once again us dollars, $.28 in canadian) That would be a return of 2.52% per month or 30.29% per year!!! Even though yahoo may say the dividend yield is only 13% you would base it on the purchase price of $10.30 instead of the current price. I love seeing those % returns.

Same thing with any dividend company... GE, WM, SO, or BAC as long as its a company that continues to increase their dividends yearly.

Whew.... I pretty much wrote another blog, I may have to copy and post on my site, LOL

I look foward to checking your site out more often and reading about your stocks :D