In today’s post I would like to highlight the importance of four investing principles to make your money work for you. You must:
- Invest in good solid companies;
- Practice patience;
- Not panic when making investment decisions;
- Relish major market corrections as they provide opportunities in which to acquire shares at more reasonable valuations.
I will use The Royal Bank of Canada (TSX: RY) to show how staying the course regardless of economic conditions can be extremely rewarding.
Please refer to the two worksheets in the following Excel file.
On December 22, 2006 we acquired 1500 shares of RY at roughly $54.99/share (the day’s high) for a total outlay of $82,485 (excludes commission).
My rationale for investing in RY was that it was a financially sound bank. It had a lengthy track record of rewarding shareholders with a stream of dividends which increased annually.
Not long after this acquisition date, “The Financial Crisis” hit with full force. Some banks failed, many had to raise additional equity, and others required significant government intervention to avoid widespread catastrophic ramifications.
The Canadian banks were well capitalized and did not suffer to the extent of their counterparts in other countries. They, however, were not totally immune to the financial crisis and took precautionary steps to strengthen their balance sheets. One of the decisions was to freeze the quarterly dividend.
While the freezing of the dividend was certainly not something investors appreciated, it was a prudent course of action. At least this measure was not nearly as drastic as the reduction or the elimination of dividends undertaken by many foreign banks.
RY’s quarterly dividend during the November 23, 2007 – May 24, 2011 timeframe was frozen at the $0.50 level. This resulted in a plunge in RY’s stock price and thus a negative or a negligible positive Compound Annual Growth Rate for several years.
Several investors sold their equity investments during the market swoon because they could not stomach the erosion of their savings. My wife and I, however, were of the opinion that liquidating our investments would be a permanent impairment of capital.
We decided to acquire more shares and not sell RY since we looked at this bank from the perspective that it:
- had been business for a long time;
- was financially sound;
- was intricately woven into the Canadian economy.
In our opinion we felt we would have much worse things to fear if the Canadian Federal government and investors allowed RY to become insolvent.
We knew the world was not merely experiencing a financial blip on the radar screen but felt the financial crisis could not go on in perpetuity. Once things levelled off, we were reasonably confident that RY would still play an intricate part in the Canadian and global economies.
Our results would be as reflected in the No Dividends Reinvested worksheet had we opted to receive our $750 quarterly dividend payment in cash.
We, however, continued to automatically reinvest our quarterly dividends. Our actual results are as reflected in the Dividends Reinvested worksheet.
Look at the number of additional shares our RY dividends acquired when RY’s stock price was depressed. During the November 23, 2007 – May 24, 2011 period in which the quarterly dividend was frozen at the $0.50 level, we:
- Acquired an additional 246 shares solely from the RY dividends;
- Witnessed an increase in quarterly dividend income from $766.50 to $882.50.
Here we are in early 2017. The world did not come to an end, the markets have bounced back, RY is still in business, it reinstated dividend increases, and the stock price has recovered from the high $20s in February 2009 to $92.72 as at the market close on Friday, January 6, 2017.
What can we learn from our personal experience?
- Invest in solid companies;
- Practice patience;
- Do not panic;
- Relish major market corrections.