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Monday, November 3, 2014

Invest and retire before you die - Potash Corp. of Saskatchewan (POT)

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)

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 Potash Corp. of Saskatchewan
Symbols: POT.TO (Toronto Stock Exchange), POT (New York Stock Exchange)

Taken from Google Finance:
"Potash Corporation of Saskatchewan Inc. (PCS) is an integrated fertilizer and related industrial and feed products company. The Company operates in three segments: potash, phosphate and nitrogen. The Company owns and operates five potash mines in Saskatchewan and one in New Brunswick. Its phosphate operations include the manufacture and sale of solid and liquid phosphate fertilizers, phosphate feed and industrial acid, which is used in food products and industrial processes. The Company also has a phosphate mine and two mineral processing plant complexes in northern Florida and five phosphates feed plants in the United States"

Potash is the second largest producer of fertilizers in the world and with the growing demand for food in a planet projected to reach 9 to 10 billion humans by 2050, I think this company has a good chance of staying in business for a while. Hopefully my entire investing journey.

How would a $10,000 investment in POT 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 POT on August 1, 1995 with dividends reinvested in the stock would have been worth $98,073 on October 17, 2014. That is an Average Annual Return of 12.61% 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 10 times. You would now own 2723 shares, each one of them paying you $1.556 a year in dividends for a total passive income of $4,237 per year.

Comparison of an investment in POT 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 POT and reinvested all the dividends along the way, your investment would be worth around $398,013 and you would be the proud owner of around 11,055 shares of stock that would be paying you $17,201 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.

POT is a volatile stock with huge valuation swings. Notice that if you had started your investment in the summer of 2008, it would have been an awful time and you would be down money. That's why my strategy is about balancing, about periodically accumulating stocks instead of just at one point in time. It is true that in 2008 it would have been awful timing, but if you were disciplined in your approach then you would have picked up additional shares in 2009 extremely cheap, then some more in 2010 etc. Then you would be up money today in spite of the initial 2008 ill timed purchase. This way you are using the volatility of the stock to your advantage as it becomes undervalued more frequently than others.

A long term investment in POT could be a life changer. In full disclosure I own 85 shares of POT accumulated between 2013 and 2014. I plan to hold them for a long time and periodically accumulate some more whenever the stocks becomes cheap.

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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