As the Wise Man Sayeth, or ...

... Who is Tom Connelly and Why Do We Love Him?

We have been Tom Connolly fangirls for a really really long time!

Like, a really long time. No, really. Our crush on Tom has outlasted any girlish romantic feelings we had for Paul Newman (yep, we’re that old), Bruce Willis (not now Bruce Willis…the Die Hard Bruce! Yep, still old) or Zac Efron (we actually threw him in for our millennial readers – we have no idea who this is).

If Warren Buffet is the Oracle of Omaha, then our Tom is the Oracle of Ontario, or as we like to call him: The Diviner of Dividend Growth.

Some background on Tom – he has been a DGI investor and Analyst for 40 Years. He started his newsletter, The Connolly Report, way back in 1981 (yep, we were around back then although we were too busy with our teenage/early 20’s lives to notice) and morphed it into his online site www.dividendgrowth.ca. He writes about the state of the market and analyzes its impact on dividend growth investing.

From one of his latest posts, here is his perspective on the current state of the market maelstrom:

P/Es could continue falling for years. (Falling P/Es is not the same as falling prices). There will be a re-adjustment of valuation. Eventually, I expect, as happened in the last great bear market ending in 1981 (when Connolly Report began), most folks will not consider buying any equities at all. Your blogger lived through that experience. It happens every generation or so. Today’s young, whipper-snapper wealth managers don’t know this will happen. It’s called capitulation!

To recap what Tom says: the market correction we are experiencing is not unusual, nay, quite normal for the market. But those “young whippersnappers” who started their career in the last 10 years or so would have only experienced the full-on snorting meteoric Bull rise. It’s like assuming the weather in Canada is always glorious because you only ever visit in August! Canadians, we know better … winter is always coming.

Why not be ready for that winter or shall we say, retirement? A few words from Tom:

My retirement plan is very simple. When they are value priced, I buy common stocks of companies which have a good record of increasing dividend payments and hold them for the rising income.

The graph above illustrates Tom’s strategy at work. An initial investment in 1,000 Fortis (FTS) shares in 1995 for approximately $24,700 has weathered 3 major market downturns (2000, 2008-09, and now 2020).

It initially paid $1,680/year in income (1995) and as of end of 2019, it paid $7,640/year. The icing on this cake (not that we would ever eat the icing):

The original investment ($24,700) has been returned multi-fold by generating $91,500 in cold hard cash.
In the depths of the 2020 downturn, the stock is trading at $53/share for a total market value north of $200K (at time of writing).
So in addition to making $91K in cash, the stock itself is now worth 8x the initial investment.

Now back to Tom:

Can you think of a better retirement asset? Growing income. And no MER (management fees). And no maintenance or maturity date. Financial planners … sell most people mutual funds (or ETFs). Then, when retirement comes, they recommend withdrawals from the funds of 4%, 5% or 6% each year. Mutual funds (or ETFs) are not noted for providing income, so retirees can begin eating into capital right away. When the market collapses, as it did in 2000-2002 (and 2008-2009 and 2020!), retirees worry they will not have sufficient capital to fund retirement. I have no such worry. My strategy does not depend upon capital appreciation. It counts on dividends. The common stocks I own begin with higher yields and, with annual dividend increases, as the example above illustrates, the yields grow. When it comes to retirement, I live from the income. I don’t need to count on the capital gains.