While there are many schools of thoughts when it comes to investing, a common one is "Invest in what you know". The rationale behind this is that if you use products or services from a company regularly or see them doing business in your neighborhood, you can understand how the business works. While this should not be the only approach for investing, as I have discussed earlier in the importance of diversification, investors should also invest keeping geographical allocation in mind. Staying invested in companies only local will cause you to take on risk that could otherwise be mitigated. However, this does not rationalize investing in companies that you do not understand. Whenever I'm asked for investment my advise, I always have the following to say: Every investment should be well understood. If you do not understand how a company generates revenue and don't understand its business model, then you shouldn't be investing in it.
With that established, lets look at how investing in companies that you are intimately familiar with. What better way to understand a company's business model but the ones you are a customer of, and contributing to its revenue regularly. When you are a customer of a company, you have probably done your research on the products or services offered and compared with their direct competitors. For whatever reason you chose the company for your business, every other customer goes through the same process. This can be a powerful thought process when it comes to investing.
I am not dropping any revolutionary new knowledge or viewpoint here. There have been various other bloggers and investing professionals that have explored this idea. What I like to explore here is how you can use the investment in a company as a hedge those very bills.
Always do your research before investing in companies. You may be a customer simply because they have the best rates in the market, but it could well be that the business isn't being run well.
In my case, I am a customer at BCE Inc (NYSE:BCE) and Bank of Nova Scotia (NYSE:BNS), both very strong dividend growing companies with a spectacular track record. As a customer, I chose them because they provide good service (albeit at a premium) and think the prices charged are fair and on par with market value. As an investor, I have researched enough to come to a conclusion that they are reliable businesses and have a bright future and great long term prospects. These companies are the type of companies that people may grumble about, day-in-day-out, but are great companies to invest in. People may hate them, but cannot live without them and the competition space is limited. Customers are provided with good service, but they are also charged a hefty sum of money unless well negotiated.
Bell Canada, as it is commonly known, is the lifeline of millions of Canadians. The company owns a major stake in supported land lines across the country. In addition to cell phone service, Bell is also our internet service provider (NYSE:ISP). Not only do we fork over $100 per month in cellphone and ISP bills, but Bell also charges us something called a dry-loop rate for our internet connection which is a very convenient $10 a month. The dry-loop is simply Bell activating our phone line port at home without a real phone line and charges customers for it. This is the kind of move that I hate Bell as a customer, but love it as an investor. Customers can grumble and whine about it all they want, but will eventually simply pay up - as it is non-negotiable.
BCE Inc is the largest Canadian telecom service provider including landlines, wireless services, and internet services. BCE is a dividend challenger, having raised dividends consecutively for 5 years and has a 5-yr DGR of 25.6%. In 2008, BCE suspended its dividend growth in 2008 when it was a target of a leveraged buyout offer. That deal fell through and BCE and continued raising its dividends aggressively since.
Bank of Nova Scotia
Scotiabank, as it is commonly known, is one of the Big Five banks. In addition to our bank accounts, we ended up with our mortgage at Scotiabank as well, simply because they had a great product that fit our needs. We used a mortgage broker while purchasing our home and we ended up picking Scotiabank which had the best product offering. I have had a couple of friends who work for some of the other big banks in Canada but end up getting mortgages at Scotiabank simply because they offer the best products (even after getting an employee pricing discount on their own bank products). Stories such as these can be incidental, but cements my faith in Scotiabank as being very competitive.
The Bank of Nova Scotia is the third largest of the Canadian banks by deposits and market cap. BNS is also the most international of the Canadian banks with exposure in 55 countries outside Canada. BNS has been paying dividends since 1832 - the second longest streak of paying dividends in Canada (first place goes to BMO which started in 1829). BNS saw a pause in its dividend growth during the financial crisis. However, BNS has started raising dividends after the crisis with a 5-yr DGR of 5.15%.
Full Disclosure: Long BCE, BNS. My full list of holdings are available here.