Take 12 - Random Investing Notes
A collection of insightful investment pieces to broaden and elevate the investing mindset. Includes: Advantage of Dividend Stocks, Recessionary Dividend Performance, Railroad Stocks, and Reducing Risk
Benefits of Dividend Stocks
Dividend stocks are described as effective wealth-builders and protectors, especially during inflation and recessions, due to their ability to maintain payouts.
Dividend stocks are highlighted as defensive investments because:
Returns from dividends are always positive, even if the stock price drops.
Dividend-paying companies are generally stable and profitable.
Investors gravitate toward these stocks during market downturns.
This is no surprise as my very first published Substack (Take 1) under this series highlighted of dividend growers outshine all other dividend categories.
When inflation goes up, top-quality companies can increase their prices. This helps them maintain strong cash flow and keeps dividends coming. During recessions, dividend stocks stand out. Companies usually avoid cutting dividends because it shows weakness. They work hard to keep paying them. As a result, dividend stocks often drop less during tough times and bounce back faster afterward.
Dividend Strategies in Recessions
The primary known strategies of dividend hunters are as follows.
High-Yield Funds: Offer the largest dividends but come with higher risks.
Growth & Income Funds: Strike a balance between dividend quality and growth potential.
Dividend-Growth Funds: Focus on companies with consistent dividend increases; these funds are lower risk and better for long-term results.
The image illustrates the performance of these dividend strategies during past recessions. It clearly demonstrates that quality matters significantly more than yield in times of economic downturns.
I have explained the dividend growth strategy that I follow in a previous edition, Take 10.
Railroad Stocks
The investment potential of major railroad companies across North America is substantial. These companies benefit from significant competitive advantages, often referred to as 'moats’. The summary below highlights their strengths:
Why Railroads Are Reliable Investments:
Railroads have strong pricing power due to their monopoly over tracks.
They generate significant cash flow and offer growing dividends.
High barriers to entry make competition almost nonexistent.
They are resilient during economic downturns because they transport essential goods.
Three Key Railroad Stocks:
Canadian Pacific Kansas City: The only railroad spanning Canada, the U.S., and Mexico.
Canadian National: Operates in Canada, the U.S., and on three coasts (Pacific, Atlantic, Gulf of Mexico). It has strong connections with Asian import/export markets via Vancouver and Prince Rupert.
Union Pacific: Dominates the western U.S. with critical routes to major ports like Los Angeles and Long Beach.
Company Evaluation:
I recently delved into a head-to-head competition between Canadian Pacific and Canadian National. Read below to see who came out on top.
H2H Battle - Railways - Canadian National vs. Canadian Pacific
Railroads, among the oldest forms of mechanized transport, played a pivotal role in the rise of America's "big businesses" and remain a cornerstone of global transportation infrastructure. In North America, the rail industry primarily focuses on freight transport, moving bulk commodities, intermodal containers, automotive products, and other goods over …
Reducing Risk
Managing these four layers of risk can reduce external investment risks, such as macroeconomic or political events, and lead to better financial outcomes.
Diversification:
Holding too few stocks (e.g., 3-4) can lead to significant portfolio risk if one underperforms.
Owning too many stocks (e.g., 80-90) dilutes focus and mirrors the market.
The suggested balance is around 15-20 stocks across diverse industries for effective management and potential market outperformance, as previously discussed in Take Seven - Diversification.
Business Quality:
Invest in companies with steady profits, manageable debt, competitive advantages ("moats"), and long-term relevance.
Focus on high returns on capital, lower debt, durable moats, and sustainable business models.
Valuation:
Avoid overpaying for stocks, even if they belong to strong companies.
Use the concept of a "margin of safety" to ensure room for errors in optimistic forecasts.
Investor Behavior:
Emotional reactions, such as panic-selling or chasing trends, can lead to poor investment decisions.
Patience and consistency (e.g., holding stocks for years) are vital for compounding wealth.
You may not have control over the economy, but you do have control over your investments. You can decide how many stocks to choose, focus on picking high-quality ones, pay a fair price, and stay calm during market ups and downs.
Past Editions
Includes: 1) Investment Planning, 2) Returns After First-Rate Cut, 3) Investment Accounts in Canada, &
4) Hyperscalers.
Includes: 1) Dividend Growth Strategy, 2) Tariff Threats, 3) Importance of 10-Year Yield, & 4) Portfolio Building.
Includes: 1) China's Surplus, 2) Global Valuations, 3) Long-Term Investing, & 4) Trading vs. Investing
Includes: 1) 2024 US Market Review, 2) Concentration Risk, 3) Retail Sales Trajectory, & 4) Earnings vs. S&P500
Includes: 1) S&P 500 Valuation, 2) Canada’s Weak Economy, 3) Investment Vehicles in Canada, & 4) Diversification
Includes: 1) Yield Curve Inversion, 2) Tech Bubbles, 3) Gold vs. Treasuries, and 4) VIX.
Includes: 1) Trade Balances, 2) Deflation from China, 3) Global Reserve Currency, and 4) 2024 US Election Aftermath.
Includes: 1) S&P 500 Historical Growth, 2) Risk Terminology, 3) WFH Case, and 4) CRE Debt Crisis.
Includes: 1) Purchasing Power, 2) Global Liquidity, 3) Currency Debasement, 4) Hurdle Rate, and 5) Liquidity Cycles.
Includes: 1) Tough Industries to Invest In, 2) First Rule of Compounding, 3) CDN Focused Portfolios, and 4) Beta.
Includes: 1) MOATs, 2) Portfolio Recession Crashes, 3) Capital Allocation, and 4) CDN vs US Dividend Growers.
Consider joining DiviStock Chronicles’ Referral Program for more neat rewards!Please refer to the details of the referral program.
I really like your valuation and diversification notes. Well done. Check mine out please
Philippinelli.substack.com