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Long-term horizon, dividend investing, dividend growth investing, contrarian
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Summary

  • Strategies to come out winning on a stock that went nowhere.
  • A real life example of investment in ERF over the last four-plus years.
  • There are some risks associated with this strategy.

As investors, we all make mistakes from time to time. As a matter of fact, that is the only way I know how most folks come to be better investors. However, it is important to learn from your past mistakes as well as those others have made. In today's topic, I want to demonstrate that even when I made the mistake of buying a stock at the wrong time with false premise, I was able to recover from the losses and still end up with a decent return, roughly 50% (9.5% on an annualized basis). As a matter of fact, if the timing of deployment of funds is taken into consideration, the return would be in excess of 16% annualized. The purpose of this example is not to brag, but to highlight the different steps we can take when we realize that we have made a wrong investment decision.

Let me provide a real life example of my investments in Enerplus Corp. (NYSE:ERF), from December 2009 to 2014. I will follow by highlighting the various options. Enerplus is a Canada-based Energy producer with a portfolio of oil and gas assets, with its production evenly split between the U.S. and Canada. Enerplus and its peers, such as Pengrowth Energy (NYSE:PGH) and Penn West Petroleum (NYSE:PWE), are generally favored by the income seeking investors because of their high dividends.

Investment History Over Four Years

I opened my first position in Enerplus on Dec. 14, 2009, buying 44 shares at $22.51 per share (including commission). My reasons for investment were twofold: I liked the fact that company was in Energy business, and I liked that it was paying a high monthly dividend.

ERF chart - Courtesy Morningstar.com

In hindsight, it is clear that prior to buying, I did not do due diligence and make sure that the dividends were safe enough. Since 2009 was generally a good time to buy stocks, ERF continued its bull run until mid-2011, when the shares reached a high of $32.68 a share. However, soon after that it started a downtrend. Reports started appearing that Enerplus was facing tough times due to lower natural gas prices and there was a possibility of a large dividend cut. Before I took notice and contemplated any action, my investment was substantially down, and the share price had hit a bottom of $12.87 on June 29, 2012, on expectations of a large dividend cut. Soon enough, on July 12, 2012, Enerplus announced that it would cut its monthly dividend in half. I was faced with the following options:

1) Do nothing and "hope" that the stock price will rebound. Obviously not a very good option.

2) Sell the stock immediately and cut down my losses. As of July 2012, my holding was down 31% even after including dividends. But, taking substantial losses would have been painful. I tried to remind myself about Warren Buffet's First Rule of Investing: "Never lose money." So I decided perhaps I needed to explore other options.

3) Hold and possibly double down: research and think hard. Was the company going through some short-term difficulties, and did it have a high probability of a rebound in the long term? Making sure that there is almost no chance of the company going into bankruptcy. Also consider if the company still pays a significant enough dividend (after the dividend cut) to justify the wait.

After doing some research I reached the conclusion. You guessed right: I chose Option 3. I also decided to put in additional money once I saw prices stabilizing to take advantage of lower prices and bring down my cost basis. Again, I want to emphasize that I would do this only when I am almost 100% sure the company would not go bankrupt. At the time of my second purchase, the stock price was $14.39 and it was still paying a monthly dividend of $0.089 per share on monthly basis (roughly 8.25% dividend yield based on those lower prices). I then made a third installment of investment at $16.04 per share in 2013 when it was clear the company had come out of the worst. At this point, my total cost was $2770.96. Thereafter, I left the stock alone and let the dividends accumulate and do their compounding magic.

The following table that I created provides the details of purchases and the dividend accumulation over the last four and half years:

Table 1

Date of
Purchase

Shares
bought

Price
bought

Cost of purchase

5/20/2013

50

$16.04

$802.00

8/9/2012

68

$14.39

$978.52

12/14/2009

44

$22.51

$990.44

Sub total

162

$2770.96

Dividends Shares collected since first purchase

28.457

0

TOTAL

190.457

$2770.96

Fast Forward to April 2014

During this time, the company's prospects have improved, their share price has rebounded and hovers around $22, roughly the same price when I first purchased the stock and the dividend has remained largely intact since after a 50% cut in 2011 (however, dividends in U.S. dollars can fluctuate due to currency rates between the Canadian dollar and U.S. dollar). Table 2 (that I created) provides a snapshot of cost-basis (after including dividends), current share holding, total cost and current total value. Table 3 (that I created) provides details on current monthly dividend and dividend yield on cost.

Table 2

Shares

Cost of

Purchase

Current value as

of 04/15/2014

(share price $21.89)

Profit

Profit %

Bought

162

$2770.96

$3546.18

$775.22

27.98%

From Dividend reinvestment

28.457

0

$622.92

$622.92

NA

Total

190.457

$2770.96

$4169.10

$1398.14

50.46%

Table-3

Current Monthly Dividend per share (in U.S. dollars)

$ .082 (9 Canadian cents)

Closing price as of April 17, 2014

$21.89

Current yield per share (annual basis)

$0.984 (4.5%)

Cost basis per share

$14.55

Yield on cost

6.75%

The above example demonstrates that even when a stock performs poorly, one can still win by taking a contrarian view -- provided that the company has a long-term future, with no probable chance of going bankrupt, and pays a reasonable dividend which would overtime bring down your cost of ownership.

Risks Associated With This Strategy

The above strategy is not without risks, and many will find it questionable. Some folks firmly believe in cutting their losses early on, so it is not for them. In my opinion, this strategy works when it meets all of the following and sometimes more:

1) The company has only short-term difficulties and long term it still has the promise when you first bought it.

2) There is almost no chance of bankruptcy.

3) The company still pays significant dividends at current market prices.

4) And lastly, the investor is suited for higher risk-profile and is prepared to take a wild ride. Better still, he/she has the stomach to double down at a much lower price. As they say, if you try to catch a falling knife it will hurt you, but I believe it may be OK to pick it up once it is firmly on the ground.

Going Forward/Conclusion

On current prices, ERF is paying roughly 4.5% dividend yield, and probability of any dividend cut is remote . My yield on cost is over 6.75%. So, after a few years of patience, my current view on this investment can be summarized in three ways:

1) Even if the share price falls 6%-7% every year (which is possible but unlikely in my opinion), I will still not lose any money.

2) If the price stays flat, my original investment still grows by 6.70% a year (by way of dividends), which is not spectacular, but still acceptable.

3) If the price goes up moderately, say, by 3%-4% a year or the dividend payout goes up, my investment could grow in excess of 10% to 12% a year.

Source: How I Was Still Winning While My Stock Went Nowhere