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Tuesday, November 11, 2014

Invest and retire before you die - Suncor Energy (SU)

Have you ever wondered how an investment in a boring, blue chip company that pays dividends to share holders and periodically grows those dividends performs over long periods of time?

Welcome to the Invest and retire before you die series, where I explore the merits of long term investments in Canadian blue chip companies that pay and grow their dividends every year. I have seen these studies for American companies in the past and figured it would be nice for people to find something equivalent for Canadian ones. Notice that many Canadian blue chips companies are also listed in American exchanges and are therefore easily available to US investors.

If you are interested in other companies already discussed as part of this series, you can check out:
Invest and retire before you die - The Bank of Nova Scotia (BNS)
Invest and retire before you die - Emera Inc (EMA)
Invest and retire before you die - RioCan Real Estate (REI.UN)
Invest and retire before you die - Potash Corp. of Saskatchewan (POT)
Invest and retire before you die - Enbridge (ENB)
Invest and retire before you die - TransCanada Corporation (TRP) 

Why dividend payers and growers?
Revenue that is distributed to share holders is the hard proof that money is flowing in the business. It is hard to argue with cash that is periodically paid out to shareholders. In addition to that, dividends that are increased every year show the confidence that the management of a company has in the future operations of the business to sustain the new pay outs. Management knows how negatively, future dividend cuts are perceived by investors. That's why, when dividends are increased, they better make sure they can sustain them, which shows confidence. Increasing a dividend shows that the business is not only functional but that there is potential for sales and revenues to keep growing going forward. 

Dividends are not only for old retirees but for anyone willing to make money as a long term investor. From 1930 to 2013 dividends were responsible for about 42% of Stock Markets returns.


An Investment in Suncor Energy Inc
Symbols: SU.TO (Toronto Stock Exchange), SU (New York Stock Exchange)

Taken from Google Finance:
"Suncor Energy Inc. (Suncor) is an integrated energy company. The Company is focused on developing petroleum resource basins-Canada's Athabasca oil sands. In addition, the Company explores, acquires, develops, produces and markets crude oil in Canada and internationally, and the Company transports and refines crude oil, and market petroleum and petrochemical products primarily in Canada. The Company operates under three segments: Oil Sands, Exploration and Production, and Refining and Marketing."

How would a $10,000 investment in SU have fared in the last two decades?
Data from August 1, 1995 to October 17, 2014. That is 19.22 years. Numbers reflected in Canadian Dollars.

A $10,000 investment in SU on August 1, 1995 with dividends reinvested in the stock would have been worth $189,652 on October 17, 2014. That is an Average Annual Return of 16.54% in a period that includes the 2000 dot com bubble burst, 9-11 terrorist attacks, Wars, the 2008 market correction (second worst in history), the 2011 debt ceiling issues in the US, the European debt debacle. Your initial investment would have been multiplied almost 19 times. You would own 5024 shares at the end of the period, each one of them paying you $1.12 a year in dividends for a total passive income of $5,628 per year.

Comparison of an investment in SU vs an investment in the S&P500 index
But what if instead of buying once and forgetting you decided to contribute with additional purchases every year? What if instead of purchasing $10,000 worth of stock once, you decided to invest $5,000 every year?

Had you invested $5,000 every year in SU and reinvested all the dividends along the way, your investment would now be worth around $637,436 and you would be the proud owner of around 16,894 shares of stock that would be paying you $18,921 every year in the form of dividends. Dividends that are favorably taxed in respect with normal income a.k.a salary. Dividends that provide you with cash flow without selling your shares, without giving away your ownership on the company.

Had you started a position in early 2008, you would have suffered a lot of pain if you didn't plan to add to your investment over time. In fact you would be down money today. However, with a strategy of accumulating shares little by little every year, yes you would have suffered a draw-down in 2008 but then in 2009 you would have purchased additional shares at extremely cheap prices. Had you done that every year you would be doing just fine today.

A long term investment in SU was a life changer for someone who invested two decades ago. It could very well be a life changer going forward. In full disclosure, I own 77 shares of Suncor as of this writing which I purchased this year and intend to hold long term.

Related Articles:
Chapter 1 - Invest and retire before you die - The Bank of Nova Scotia (BNS)
Chapter 2 - Invest and retire before you die - Emera Inc (EMA)
Chapter 3 - Invest and retire before you die - RioCan Real Estate (REI.UN)
Chapter 4 - Invest and retire before you die - Potash Corp. of Saskatchewan (POT)
Chapter 5 - Invest and retire before you die - Enbridge (ENB)
Chapter 6 - Invest and retire before you die - TransCanada Corporation (TRP)
Chapter 7 - Invest and retire before you die - Suncor Energy (SU)
Chapter 8 - Invest and retire before you die - Toronto-Dominion Bank (TD)
Chapter 9 - Invest and retire before you die - Telus Corporation (T)
Chapter 10 - A basic Dividend Growth oriented Canadian Investment Portfolio


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2 comments:

  1. Hi, are you going to increase your positions on energy (SU, GPG...) after this big drop?

    ReplyDelete
    Replies
    1. Hey Thomas,
      No, I'm not going to add to energy anymore. Would have been great to enter at these prices but I just can't put so much weight on Energy in the overall portfolio.

      Regards,
      LT

      Delete