Capital vs. Cash Flow
BMO Does It Again
A Story of StabilityThe Fry Investment Team’s motto, when it comes to our Cash Flow Portfolios, is that "capital may go up and down, but cash flow never changes”. What does that mean, and why is it so important when you’re looking for stable, reliable cash flow?
Let’s take a look at Bank of Montreal’s common stock (TSX:BMO).
April 18, 2007, BMO’s stock reached $72.75, a record high. The stock
had just paid its quarterly dividend of 65¢ per share in February, and
had announced that May’s dividend would be increased to 68¢ per share.
They would increase it again in November, to 70¢ per share, for a total
of $2.80 per year.
Between September and November of 2008, the
TSX lost more than 4500 points, a nearly 33% drop – the worst that had
been seen since the Great Depression of the 1930s. BMO’s share price had
been feeling the pressure since late 2007, and had been declining
steadily, ending November at $38 a share – just more than half of its
high a year and a half ago.
On November 27, 2008, BMO paid its quarterly dividend of 70¢ per share.
stock reached a bottom on February 24, 2009, in the very worst of the
recession, hitting a price of $24.05 – the lowest it had seen in almost
nine years, and a 67% drop from its peak in 2007. Other bank stocks, and
equities in general, didn’t fare much better.
On February 26, 2009, BMO paid its quarterly dividend of 70¢ per share.
stock, and the TSX as a whole, has been on the road to recovery since
March 2009. BMO’s stock price has regained a significant portion of its
value, and ended August 2012 at $57.62, more than double its value in
the worst of the financial crisis.
On August 28, 2012, BMO paid
its quarterly dividend of 70¢ per share – and announced that November’s
dividend would be increased to 72¢ per share, or $2.88 per year.
understand that the stock market is an emotional, volatile, and
unpredictable creature. This, of course, makes relying on capital growth
a very risky way to grow your money. Nobody knows when the next global
event will happen or how it will affect the markets.
on the other hand, are stable, regular, and do not change without
warning. This makes it a lot easier to build a portfolio based around
receiving a reliable, consistent cash flow – the very best thing that an
income can be.
"Capital may go up and down, but cash flow never changes.”
Now you know.