Previously, I shared examples from my Canadian portfolio that contributed to long-term investment success. The Canadian market is just three per cent of the world market and isn’t very well diversified, with financial and resource companies dominating. This makes international diversification a key success component.
My longest standing stock account is an RRSP. Many years ago, Canadian RRSPs had foreign content restrictions, forcing investors into Canadian companies. It was originally 10 per cent, increased to 20 per cent, and eliminated in 2005, allowing greater flexibility. The lifting of these restrictions coincided with a decade of currency parity, creating a great opportunity for U.S. investing, which came to represent about two-thirds of my portfolio.
The U.S. is the largest and most diversified economy in the world, with its stock market representing 40 per cent of world markets. It doesn’t tax dividends in retirement accounts, making it the market of choice for RRSP international diversification.
My longest U.S. holding is Microsoft. I originally purchased Mr. Softie for $26.17 in 2002, less than half its peak price in 2000, at the height of the tech and dot.com bubble. In 2006 I added at $22.14. It started to pay a regular dividend in 2003 and paid a large special dividend of $3 in 2004. I have collected over $16 in dividends on the original shares. It has been a lesson in patience. Microsoft didn’t move for a decade, but since 2013 has been on a tear with shares now valued at $120.95, about five times my purchase price. It was becoming such a large part of my RRSP I regrettably sold a small portion about a year ago, yet it still represents seven per cent.
My second longest U.S. holding is JP Morgan Chase, currently the largest U.S. bank. It wasn’t the largest when I purchased it at $20.46 in 2003. I added to my position in 2011, just as the financial crisis was clearing, for $37.80. Today at $111.21, it’s over five times my initial cost. I have collected about $23 of dividends on the original shares. Five times the original price sounds great, but is only about 10 per cent annually. Adding the dividend, JPM has been returning about 13 per cent annually, illustrating how modest returns compound over time.
Do I always buy giant companies? My next example, Medical Property Trust, was a very small U.S. Real Estate Investment Trust (REIT) that owns medical facilities. REITs pay out the bulk of their cashflow in dividends which is OK in an RRSP, without withholding taxes. I purchased at $12.28 in 2007, at $11.83 in 2008 and at $12.16 in 2013. It was paying dividends of $1.08 annually for a 9.1 per cent yield. The dividend was cut to $0.80 in 2008 and has slowly grown back to $1, representing 5.3 per cent yield at its current $18.76 price. Its share price declined to below $3 when “everybody” was panicking during the financial crises. As of today, I am up about 50 per cent on the share price in a decade, all the while collecting a six to nine per cent dividend on my original price. I’m OK with that!
It’s not all upside
What about the blemishes? My most notable is General Electric. I purchased GE in 2006 at $33.30 and in 2008 at $30.92. GE was a star in the 80s and 90s, but since hitting $57 in 2000 it has been a train wreck, currently valued at $9. Dividends made up some of the losses. How does one of the largest and most successful companies on the planet plummet to such depths? Size doesn’t prevent bad management, as periodically good companies go bad.
It is important to put poor outcomes in perspective, staying focused on overall portfolio performance. A good investment can return 10 times in a decade or two, whereas a poor choice can only ever cost you once.