Fundamental Knockout

In early 2012 I had this stock market thing all figured out and I knew that I wanted to invest in dividend paying common shares.  It saved me from having to do the intense due diligence that Brent performed when assessing a preferred share, but still gave me a decent dividend yield.  I did some searches on the internet for good dividend paying stocks and found several pages which included lists of the "best" dividend paying stocks... "best" meaning that they had a good track record for paying dividends.

This was great!  All I had to do was pick from the lists of dividend "aristocrats" and I was golden.  I picked the ones with the highest returns (yield) and bought a bunch, including Atlantic Power Corporation (ATP), AGF Management (AGF.B) and Bonavista Energy (BNP).

After purchasing my shares in said aristocrats, I sat back to watch my money grow, and instead, watched the value of each of the stocks drift down... and down... and down.  The problem was, I hadn't considered the "fundamental" advice for picking dividend stocks, which is oh-so-clearly plastered all over the internet, as well as in all of the stock market "Dummies" books I've subsequently read.  The main caution being that one must consider the financial fundamentals of the company before investing - often a high yield is a sign that a company is in SOME KIND OF TROUBLE and one should be wary of investing in it.

I had bought ATP stocks on February 6th at a price of $14.92, AGF.B on February 10th at a price of $16.00 and BNP on March 16th at a price of $19.96.  The prices have drifted steadily down until today they are sitting at $10.86, $9.50 and $14.56, respectively.  That is a loss of $275 (27%), $400 (40%), and $275 (27%) per $1000 invested, respectively.  It would take an awful lot of dividend payments to make THAT back.  I could have held onto the stocks and waited and hoped that someday the price would come back up, but because these companies were in some kind of trouble, fundamentally speaking, holding onto them would likely have compounded my error.  The prices could take a very long time to return to the level where I bought them... or they may NEVER recover to that level.  I bailed out of each of them long before they drifted down to their current levels.

But how did I go SO wrong on that?  Of course I realized (after the fact) that there was more to the decision than just blindly picking the highest yield stocks and expecting everything to be golden.  How could I be so foolish and naive?

I dug into learning about the "fundamentals".  What characteristics should a company have in order to be considered a solid investment? How do I find out if a company exhibits those characteristics?

I read some Dummies books.  I pored over companies' financial statements as posted on TMX, becoming very familiar with the kinds of information that one can glean from the Balance Sheet, the Income Statement and the Cash Flow Statement.  I learned about certain ratios that one can calculate using the numbers from the financial statements to help sniff out potential issues that may not be immediately apparent from studying the financial statements.  Wow, this was some dry stuff, but I guess this is around the time that a spark of genuine interest was born in my brain because I kept at it... quite obsessively.  I created spreadsheets.  I gleaned and calculated.  I chose better companies to invest in based on all that gleaning and calculating.

Then I discovered that Morningstar.ca lets you set up custom portfolio views which will give you the fundamental analysis without really having to do all that gleaning and calculating manually.  Woo-hoo!  I was really on fire then... with my knowledge of the fundamentals and Morningstar's handy views, I could easily distinguish between healthy companies and sickly ones.

I also discovered the lovely REIT thingies which were a vehicle to invest in real estate without buying the real estate... and enjoy a healthy yield while you're at it.  I discovered that some of the fundamental criteria used for assessing an REIT are different from the criteria used in assessing companies, and I made sure to find out how to assess the fundamentals of an REIT.

I found some healthy, dividend-paying companies and some REITs.  I chose the ones with the higher (relatively speaking) yields and bought a bunch.  Now all I had to do was sit back and watch my money grow!

Unfortunately (and slightly more surprisingly), that is truly NOT what happened next.  Re-cue the ominous cliff-hanger music....