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Daniel Fry
Chris Fry
Bryndon Fry
Connie Taccone

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Capital vs. Cash Flow

BMO Does It Again 

A Story of Stability

The 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).

On 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.

The 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.

The 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.

We 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.

Dividends, 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.