Thursday, October 25, 2018

Getting Even by Owning Big Business Stocks

Common advice to make up for high bank fees is to buy bank stocks to get your money back in dividends. We could extend this to the big telecommunications companies as well. I decided to look at how I stand in collecting dividends from these companies vs. getting it back in dividends.

On the dividend side, it’s not a good idea for your portfolio to be too concentrated. I own Canadian stocks through Vanguard’s Canada All Cap Index ETF (ticker: VCN). The part of VCN’s dividends that come from the six big banks plus Bell, Rogers, Telus, and Shaw amount to about 34 cents per share each year.

So, suppose you add up what you pay to these businesses and it comes to $1000 per year. As I write this, you’d have to own $90,800 worth of VCN to collect $1000 per year in dividends. Of course, these businesses don’t pay all of their earnings out in dividends, so you could own a little less VCN than this to have the total profits cover your costs.

You could also argue that these businesses do provide some value, and we shouldn’t say the entire $1000 is lost to insufficient competition. Prices might be only triple what they would be with meaningful competition. In the end, you might decide that $50,000 worth of VCN is enough to cover your costs deriving from our uncompetitive markets.

On the other hand, most of us will find that we give more than $1000 per year to these businesses. For the telecommunications companies, we should include mobile phone plans, home phones, cable, and internet access.

Assessing bank costs is trickier. If you haven’t figured out that there are free chequing accounts, these fees are easy enough to add up. Bank deposits are typically paid about 2% less interest than current short-term bond yields. Credit cards make almost everything more expensive whether you pay by credit card or not. Net of credit card rebates, I’m guessing I pay an extra 1% on almost everything I buy. Then there’s the cost of unreasonably high interest rates on all forms of debt.

In the end, I was surprised at how much I pay to Canada’s big, bloated, government-protected businesses. Fortunately, what I get back in dividends from these companies is a little higher. That’s good for me, but the vast majority of Canadians end up on the wrong side of this comparison.

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