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Friday, November 7, 2014

Invest and retire before you die - TransCanada Corporation (TRP)

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)

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 TransCanada Corporation
Symbol: TRP.TO (Toronto Stock Exchange), TRP (New York Stock Exchange)

Taken from Google Finance:
"TransCanada Corporation (TransCanada) is a North American energy infrastructure company focused on natural gas pipelines, oil pipelines and energy. The Company’s segments include natural gas pipelines, oil pipelines and energy."

As a pipeline TransCanada can also be considered a pretty defensive stock. It only corrected 14.63% in 2008 when most market indexes were losing 30% - 40% of their value.


How would a $10,000 investment in TRP 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 TRP on August 1, 1995 with dividends reinvested in the stockwould have been worth $54,878 on October 17, 2014. That is an Average Annual Return of 9.26% 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 5.5 times. You would now own 1041 shares, each one of them paying you $1.92 a year in dividends for a total passive income of $1,999 per year.

Comparison of an investment in TRP 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 TRP and reinvested all the dividends along the way, your investment would now be worth around $269,631 and you would be the proud owner of around 5,115 shares of stock that would be paying you $9,821 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.

Although not as spectacular as other companies previously analyzed in the series, TRP would have been a solid investment in the past, that beat the S&P500 index and would be spitting out a nice dividend income today.

In full disclosure, as of this writing I am long 33 shares of TransCanada which I purchased back on October 10, 2013.

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. Now that you are moving to US are you going to update this for stocks that are trading in the US vs. just Canada?

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    1. The beauty of this series based on Canadian companies was its simplicity. Only 9 gems.
      Now, with the American markets it will probably have to be like 30 companies or at least 25. Definitely a much larger selection of solid names.

      I'll see what I can do Rick. Been thinking about it too.
      LT

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