Hello and welcome to the Download. I'm your host, Dave Richardson, and it is Stu's days. And Stu, for me, it's Stu's days from Sudbury, Ontario. What do you think of that? You've been to Sudbury, Stu?

You mean Studbury, Dave.

Oh, Studbury. That's right. In Stu's days language, that's the way it works. I've only been up here a couple of times. I was in Espanola last night and lots of people listened to the podcast there. So hello to everybody in Espanola. Thanks for listening in. And it's a great area of the country and we had a lovely event there. And we're doing some stuff in Sudbury tonight, so it's good to get out on the road. But you never go up this way, do you?

I have been up a few times. I've done the left turn. When you’re in Espanola, you turn left to go back down to Manitoulin island. I've done that. It's a beautiful country up there and great people.

I guess, over the years investing in Canadian stocks, you get up and do the mine tours and at least visit the companies.

Yeah, we've done everything up there. Now that I think about it, my very first presentation ever might have been in Sudbury, many years ago.

Really? And was it good?

Well, we're still going. Nobody threw anything. It must have worked out all right.

Yeah. Consistent employment is good feedback, even if you don't hear anything else. Stu, we talk about markets and what moves them and what's happening in the current economy and current markets. That focus is great; you want to understand how markets work. You want to learn over time. And that's the purpose of what we're doing here with the podcast. We want to talk about things that help people make good decisions around their portfolio. But oftentimes it's just stepping back and understanding the power of investing, and the power of investing over time. Sometimes we forget, trying to figure out what's going on in the short term, what can actually happen over the long term. And you had a discussion with your daughter. Your daughter is 18. I've got a 19- and 17-year-old. So these are discussions that we're having, and I'm sure other parents who listen are having as well. And you had an interesting conversation with her over the last couple of days about investing for the long term.

Yeah, it's like any kid, as they get older, they start to figure money out, and particularly, how do I get more of it? And we were out for dinner with one of our great advisors here. Our daughters both turned 18 the same week and we were having a party for them. And we got talking about starting TFSA and these building blocks to your future wealth and your portfolio. And the key is just to start. So when you turn 18, you can open a TFSA. And I showed my daughter the math: should you be able to make the full contribution from the ages of 18 to 65, say $7,000 a year — I know $7,000, especially at that stage of life, is not always the easiest to come by — but just the math of compounding $7,000 a year would be over $3 million at 8%. Your total contributions would be just over $300,000 across those 47 years. And you'd have ten times as much because of the compounding and the importance of starting early. Just stunning. So I showed her this math, and she was gob smacked. Just to put it in perspective. And so many of these things about where we contribute, how we take advantage of tax deduction, all sorts of things. These building blocks to portfolios pay off. As we think about the market, companies compounding their earnings over long periods of time, and if you can do it in the right types of accounts over time, you can do even better. These are just so important in the financial planning process. We tend to talk so much about the daily — what's going on, good, bad, this, that, and the other thing. And you think about the long term, the power of earnings growth, how that drives compounding, and then you do it in some of these accounts that are available. It's pretty stunning. I have money in all the portfolios that we manage, but one of the dividend ones, when we took it over, we made an investment in that fund, and I've just been going each month, and it's really something to watch 20 years later. In all honesty, I don't look at it that often and I never redeemed anything from it, I’ve never taken from it, but that power of time is just so amazing.

Yeah. And it's got to be nice for your daughter to be able to invest in the money her dad's managing. Does that earn you any points at home with a teenage daughter?

Well, I remember when my father-in-law made an investment in one of our portfolios, and I'd see him there cutting the turkey with his sharp knife, I'd go: ok, I got to go back upstairs to work. So the family member thing adds a little tension, which is always good. Nothing like having a family member saying, how's it going? So you always want to be at the top of your game.

Yeah. A couple of other points that come to mind as you talk about that example of the TFSA in Canada, around $7,000 a year, and you maximize it until you’re 65 — and did you put about an 8% rate of return on that? So a dividend stock, long term rate of return on it, and you get to 3 million. That’s the first point around starting early. The old classic wealthy barber story, if any of you remember that book. What was great about that book is it did exactly what we're talking about today, which is just very simple math, and simple math that a lot of people up till that point, really hadn't done a lot of. It wasn't out in the public discourse, and it probably isn't there every day either, particularly for 18-year-olds. But one of the concepts was that if you start investing at 18, you invest for eight years, so from 18 to 26. So say you put in $1,000 and stop, and then your sibling starts investing at 26 and contributes $1,000 all the way until he is 65, you end up at the same spot in terms of investing, and that's the power of compounding and the power of starting early. So that one's really important. The other one, though, is you're having conversations with your kids. Hopefully, we've got a lot of young people who are listening to the podcast and learning some of these concepts and ideas around investing. But for parents and grandparents who are working with their kids and grandchildren, one of the things you might say right away — and there's a greater awareness of it right now — is inflation. Inflation for a long period of time. An 18-year-old, for the most part, through their life, inflation was quite benign. It was not something we thought a whole lot. It was low and stable, and interest rates were low and stable. And then boom, all of a sudden, inflation pops up. And you can see how inflation, year after year, erodes your purchasing power. So that $3 million — big number right now — is not going to buy what $3 million buys today. But the point is that doing that and having that growth over time is going to allow you to build purchasing power, which is why we invest in the first place. It's one of the ways you fight against it. That's one piece. There are other things you're going to do, too. But you need to continue to grow your money beyond just earning it, invest it, save, grow, so that, as prices rise over time — and even with low inflation, prices rise over time — you're in a position to live the life you want to live down the road. It's also important not just for an 18-year-old, but for a 68-year-old, too. This event we did last night. When we go out and do events, we often have a lot of people who are 65 or 70 years old. We start to talk about long-term investing, and you can see them look at you and go: long term for me? I'm 70. But no, wait a minute. You look at Canada, you look at where we are right now, and somebody who's 70 years old and healthy is probably going to live into their 90s. They've got a long term to invest, which creates an opportunity and a challenge. The challenge is you need your money to last. And the opportunity then is to make sure that you do have enough growth in your portfolio so that you can maintain that standard of living all the way through. And sorry, this is Stu's days. This is supposed to be all about Stu. I just talked too long.

Well, Dave, no, you're bang on, and you should keep going. You take a collection of stocks that have dividends and if those dividends grow by 4% over time, or whatever it is, that's going to be probably twice inflation. So while the stock prices are a little volatile sometimes, they will grow with their dividends and they'll pay you the dividends. And that purchasing power, that dividend stream, will rise as fast or faster than inflation. And that's why they become a really important part of a portfolio where you're trying to grow the capital. But even when you're using some of it, it is nice to have that offset to inflation. So when you think about trying to earn a 7 or 8% return over time, if inflation is 2 or 3%, then the difference is what you call your real rate of return, and that's the pace that your purchasing power is rising at.

That's right. And so you've got to have that positive real rate of return in your portfolio over time or you're losing ground. Which is not why you invest in the first place. Which is why when we look back, people try to make short term calls. So say we go back to a year ago today. We're just coming out of 2022. A brutal year for bonds — the worst year in the bond market that anyone alive has seen. And not a great year for stocks either. At different points in time, stocks are down 30% during 2022, and people tend to have that recency bias. They look towards 2023 and think 2023 is not going to be that great. Well, it turns out that 2023 ends up being a pretty good year from an investment perspective. And instead of people thinking long term and getting invested, or at least starting dollar cost averaging — which we always like —, they sit on the sidelines and end up looking back at a year in 2023 that was pretty good. Generally, the best thing you can do is start investing today in some form or another.

Well, one thing that's interesting as well, when you own a portfolio of stocks, and you go look at those stocks. Being up where you are, you probably would see both rail lines. You'd see the Canadian Pacific and Canadian National rail lines. And you think about watching the share price in the newspaper or on a screen, and then you see the rail line and you're thinking, that's irreplaceable. If I own those companies, I own small shares of those rail lines. You think about how rates have changed over time, you think about the efficiencies that scale has brought, all sorts of things that have come to those businesses over time, and you're like, that's going to produce growth down the road, notwithstanding daily volatility. And I have a chunk of that in my portfolio. And when you distill it away from share prices and movement to what I actually own, and the management teams that are doing everything they can to grow those businesses, it becomes a little bit easier on the angst that you often feel around investing.

Now, Stu, I think we talked about it a couple of times before, but as we were just having our little conversation before we start recording, you were talking about the idea that all dividend stocks are not made the same, and you're seeing that play out in the market in some ways right now. Could you talk a little bit about what you were pointing out in that conversation?

So inside of a dividend portfolio, there are companies that pay high dividends without much growth, there are companies that pay moderate dividends that try and grow the dividend, and there are companies with low dividends where dividend growth is the real focus for the business. And at different stages of the cycle, different companies tend to do better. When interest rates are falling and economic growth is slow, the companies with the high dividends tend to get the benefit of the high level of current cash flow. We do own some of those businesses, but we tend to prefer the first two buckets, because from a long-term standpoint, they're the ones that do the heavy lifting in the portfolio. Their dividends grow, they do pay out modest levels of cash flow, but they really drive that inflation protection, that portfolio growth over time. In this environment, those stocks have done better and are doing better. The ones that have less growth and have bigger balance sheets — and by which, I mean they borrow money to create the capital that they have invested — they're still feeling a bit of a pinch, because although interest rates have come down, they're still higher than what many of these businesses would have embedded in their current borrowing. 4% is better than 5%, but when they're having to go refinance, they used to be paying 3%. So then they have to chip up. So these businesses may not grow at more than 2 to 4%, and a quarter of that growth might be eaten up by having to pay higher interest rates, interest costs, even though interest rates are coming down. Meanwhile, the businesses that are in those first two camps, the more dividend growth, lower payout, they tend not to use a lot of debt in the grand scheme of things, so they don't have that same encumbrance. And even though we haven't gone into official recession — Canada has been slower — but as the economy has slowed and begins to do better, their dividend growth prospects look pretty good in that grand scheme of things. One of the big tools that we like to use in the portfolios is called time arbitrage. And it's the same thing you're doing as an investor, saying, I'm going to own these things for 25 or 30 years in my portfolio. As an investor, you're always asking what will that business look like in a couple of years, and how might it be valued in a couple of years? So a company is making an investment that will begin to bear fruit. They're finding a new product; they're bringing on new forms of revenue. Always looking out 18 months to two years from now and saying, how will those cash flows grow? And then how will they be valued once they grow? That's a key tenant. And those businesses that are really focused on dividend growth, they tend to be very good stocks in that environment.

Yeah. And not only that, as we go through the experience from 2022, which as I mentioned before was a period of very high volatility in the market. And the other thing that focus on those types of stocks does is there's not as much volatility in that type of an investment. So, go back to that 70-year-olds who still need some growth in his portfolio, well, they don't need a technology stock that could lose 90%. They need a stock that is going to provide some income and provide some good solid growth, to continue to stay ahead of inflation as they live out for a long, long time, and not have the same level of volatility. And again, that's what a good portfolio of dividend stocks does for you.

Yeah, for sure. And the businesses tend to be reasonably stable, and they also usually are quite manageable and malleable. As an example, say you owned a share in a business that had grocery and drugstore. In those drugstores, a number of years ago, you would have gone in and you'd see a photo booth. They used to make a lot of money with people printing photos, this, that and the other thing. And then phones came along, and that business really died. So all of a sudden you've got a spot in the store that isn't as profitable as it used to be. As an investor, you can sit there and focus on, well, it's not as profitable, or you can go and ask management, what are you going to do with that spot in the store? And they come back to you, they say, well, we're going to start putting some fresh food in there. That will drive more traffic. People will come in to buy some perishables, and that will drive traffic. Or we're going to expand and we're going to put in small healthcare centers. And you're going to start doing things with the pharmacist that you might have done at the doctor, with whom it’s harder to get an appointment. All of a sudden, this capital was making money. Then it paused and then it reaccelerated. And that's just all par for the course on how a good management team will grow a business over time. And the cash flows over the fullness of time might grow mid- to high-single digits, even though there's periods when it's a little bit slower and other periods where it accelerates as things catch up.

Yeah. And again, these are tangible examples. The example of the pharmacy. I'm sure most of the people listening would have seen and see that evolution as they walk into the grocery store, the chain pharmacy that they go to, that evolution as those businesses try to maximize every square foot of space that they've got. Well, that was a very interesting discussion. I'm going to say to my daughters, I hope you enjoyed that, and I hope you pay attention. I've been telling you that. I know you listen to Stu more closely, so now you've heard it straight from Stu. So let's get investing, girls.

Sounds good, Dave. Safe travels. Enjoy the day in Sudbury and Espanola, and we'll talk to you soon.

Super. Thanks, Stu.