Hey friends!

One of my greatest supporters, my wife Mj, read last week's Journal and gave me some feedback.

“Eddie, the part on the Debt Crisis is too complicated—you lost me.”

I said, “dang, ok, well given the wide variety of readers—from brand new investors and young students to seasoned stock market enthusiasts, CFAs, MBAs, and investment bankers—it’s hard to thread the needle each week with content that will land well with everyone.”

She followed up by saying, “it’s ok, and maybe this is a lesson for me as well. Just because I don’t understand, doesn’t mean it’s not valuable. Actually, you should tell people that we must be willing to read things that might seem complex, to go through the zone of discomfort, for the only way to achieve any sort of progress or true learning is to experience such a feeling first.”

And so, ladies and gentleman, I present these wise words from Mj in this introduction.

Just because something feels strange or complex, doesn’t mean you should disregard and move on forever. Because nothing truly worth doing is easy. It requires effort and time. The same is true of love, languages, and indeed, the world of money.

Anyway, thank you everyone for being here—I really appreciate all the feedback and ideas.

Personal Finance

Our friends Mike and Lindsey had us over for brunch the other day.

They had a belated gift for Julia’s 1st birthday: a nice, crisp, $50 bill.

They said - to be invested in the RESP! (Education fund)

So instead of a $50 Barbie Doll that Julia disregards in about 3 minutes, in favour of tooling around in the garbage can on a daily basis, I went on and deposited the $50 bucks into her RESP and invested it in the stock market.

$50 bucks compounded at 10% for 20 years = $336, or 6.7x!

So instead of 336 doll-hairs, Julia will be the prime beneficiary of Three Hundred and Thirty Six dollars, otherwise known as that sweet chedda, when she goes to University.

Instead of buying material gifts for the next baby shower you go to, why not give money to invest?

Thank you, Mike, Lindsay, and Jude.

Stock Markets

I see a lot of financial influencers chasing passive “dividend investing”, finding these “Great High Yield” stock plays to invest in because the cash flow is amazing.

Not all bad, but there’s a few problems with the investing only for dividends thesis.

Let’s say you have a company trading at $100 per share, and it pays a $5 dividend.

That means the dividend yield is 5%.

Let’s say the stock price sinks on weak growth prospects, it falls to $50 per share.

Now the same $5 dividend equals a whopping dividend yield of 10%! Whoa, that’s great cash flow, must be time to buy!

This is literally what an alarming amount of investors—and terrible investment advisors— will say.

The problem is that you might buy the stock and get one year (or one month) of a 10% yield, but since the company’s prospects are now in question, (revenues might be falling/expenses increasing), so it’s less likely there’s any cash left over for the company to pay that dividend, not to mention their creditors (equity is last priority in the capital stack).

So you just made an investment decision based on a simple “high yield” strategy that is now facing the question of whether the business will even survive. Perhaps the company get’s back on the straight and narrow and the stock price recovers and you get that 10% yield along the way. But I see more companies fail to recover in these situations than succeed. Ergo, it’s a “high risk” play for sure.

Now, I don’t want to completely dump on dividends, nor the companies that pay them. For mature, stable companies that are playing in a saturated market, if there’s excess cash to pay back to investors, sure thing.

Just remember this:

• Dividends ≠ Total Return. If a stock pays you a 10% dividend but declines in value 50%, you are down 40%

• When a company pays a dividend, the value of the company immediately drops by the dividend amount

• It also means there are no meaningful 'growth’ opportunities for the company to invest in → this limits price appreciation in the stock

• Dividends trigger taxable events for shareholders

• Creates reinvestment risk → cash must be reinvested wisely to beat inflation

In sum, focusing only on dividends is a mistake, because it ignores Total Return.

Total Return = Growth + Cash Flow

And I’ll never forget what my former boss always told me:

High Yield = High Risk.

Real Estate

I'm excited to share with my Real Estate and Investor network that at Narland we have successfully acquired 156th Street Business Park in Canada's fastest growing major city, Edmonton, Alberta.

In a time of challenging global economics and political uncertainty, we are proud to have secured this asset for our investors (and happy to welcome a few new investors from this Journal).

The investment is a strategically located small-bay industrial property in Edmonton’s Northwest Industrial submarket. It is comprised of four buildings with a total NRA of 243,109 SF, located on a 11.44 acre site.

The property offers stable cash flow with contracted rental rate growth in Edmonton’s diversifying and strengthening industrial market, with added economic tailwinds due to cost of living and provincial in-migration.

Special thanks to Curtis Palmer and David Young of CBRE Limited, Craig Pratt of ATB Financial, and Clara Tsang of Edwards, Kenny & Bray LLP.

For those interested to discuss, send me a note or give me a call.

1 Quote

A Question

What is your kid’s favorite activity?

Julia likes putting things in the garbage can. We suspect Mj’s wallet is in the landfill actually. True Story.

_____________

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Thank you

Eddie Gudewill, CFA

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