Bringing Home the Canadian Bacon

The more things change, the more they stay the same – and the same might hold true for your portfolio. Many investors heed the "market wisdom" of the day and move from one trendy investment to the next. In the words of Bill Miller of Legg Mason (who, incidentally, has outperformed the S&P for 15 of the last 15 years): "People want to buy today what they should have bought five or six years ago; call it the five-year psychological cycle."

Indeed. But what, you may ask, will be the next great thing? No one really knows. However, we do know what has worked well over many years: buying good quality, larger companies with a consistently rising dividend yield. So is it time to get your portfolio cooking?

Let's look at where dividends come from: companies that have increasing, stable earnings usually have three choices as to what to do with their money. They can (i) invest in Net Present Value (NPV) positive value projects (namely, ones that will make them money after factoring in the time value of money); (ii) buy back stock from the market (buying their own shares in the market and canceling them – this leaves fewer shares outstanding); or (iii) pay dividends. Of course, they could also hold the money in the bank, but since that might not be 'NPV positive', many companies opt for one of the first three choices.

Canadian Dividend LEADERS™ Basket

NPV Positive Projects

A little vague in most cases, determining the NPV of projects involves estimating the cost of capital for the company (yes, this gets technical) which depends on the value and dividend rate of the stock, the interest rates on its bonds and the costs involved in selling new stock and bonds (investment bank fees are far from zero). Then companies have to forecast cashflows for proposed projects. Since there is only so much money to go around, managers have to ration capital, selecting those paths which offer the highest NPV. As you may have guessed, it's difficult to discern which way is best for the long term viability of the company, which is why the next two options are quite common.

Stock Buybacks

Buybacks are sometimes called 'signaling' events. That is, the company is telling the markets, "We believe that our stock is so good, we're buying it ourselves – it is the best investment for our money at this time." Now, the markets may have another opinion (stocks in buyback can fall) but the idea that insiders know more about the company is a strong sign for many investors. Stock buybacks also can have a good deal of flexibility inherent in them. They are announced every year or so with taglines such as: "at the sole discretion of the board" or "contingent on market conditions" or other such language. This means that if the stock goes up the company can curtail or terminate its buyback efforts – which is probably a good thing. It can also mean that the company can stop the program for whatever reason – but it still gets good publicity on the announcement date. The markets are sometimes wise to this, sometimes not.


Dividends are not contractual obligations with shareholders (as bond interest and principal payments are). They do, however, carry a powerful social/investor contract. Companies are loath to decrease (or, heaven forbid, omit) a dividend payment (at least in North America). Typically, once a dividend (dollar amount) is declared, it will be paid (and, many times, increased) from that time forward. Cutting or missing a dividend payment has an extremely powerful signaling effect - more so than the positive buzz from a buyback. It could indicate the company has (i) poor liquidity (no cash); (ii) vacillating management; (iii) a brutal profit future or; (iv) a combination of the above. The idea that a company might be holding back dividends for worthwhile projects is never entertained – it is the job of management to do their capital budgeting and then declare a dividend, the market seems to say. To reduce a dividend or miss one is anathema and, in many cases, leads to the company being a pariah on Wall Street.

What does all this have to do with investing in good companies? Everything, some say. As Mr. Miller said, many investors go all-in on what they should have bought a few years ago (Oh, if only I had bought a few extra barrels of oil 2 years ago!). But, if one has a longer view, think of the traits of those companies that might deliver profit and value to investors year after year (stock market gyrations notwithstanding). Would it be flash-in-the-pan opportunists who started a company based on the next new thing (The Internet, biotech, molybdenum mining) or those that are large, going concerns with decades/centuries of aggregate management prowess and solid market shares in profitable businesses?

The ONE Financial Solution

The ONE Financial Profit Lock-In & Cashflow Notes, Canadian Dividend LEADERS™ Class offers principal and growth protected exposure to 10 high dividend-yielding stocks on the S&P/TSX60, and 6 high-yielding Income Trusts trading on the Toronto Stock Exchange. The 10 stocks are: 6 bank stocks (Royal Bank of Canada, Bank of Nova Scotia, Toronto-Dominion Bank, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada), 1 telecom stock (BCE Inc.), 1 pipeline stock (TransCanada Corp.), 1 information stock (The Thompson Corp.), and 1 energy stock (TranAlta Corp.) The 6 Income Trusts consist of: Canadian Oil Sands Trust, ARC Energy Trust, Peyto Energy Trust, Canetic Resources, Shiningbank Energy Income Fund and Advantage Energy Income Fund.

The Canadian Dividend LEADERS™ Class Note offers investors a guaranteed minimum of 100% of both initial capital and any growth achieved (net of distributions, of course), automatic daily profit lock-in (which guarantees to return each Note's highest value), as well as quarterly return of capital distributions.


There's a lot be said for making money. There will always be a place for start-ups and their potential upside, but they tend to burn cash (on marketing, R&D) with uncertain pay-off. For investors who don't want that level of risk, large, established companies with proven track records and a history of dividend payments offer greater predictability and the promise of cash in hand. The Canadian Dividend LEADERS™ Class Note offers exposure to this attractive category, with 100% protection of initial principal and 100% protection of any profits – in other words, a better way to bring home the Canadian bacon.

MarketNotes is produced by ONE Financial Corporation and is written for informational purposes only. It represents ONE Financial's interpretation of market conditions at the time of publication.

†For the ONE Financial Profit Lock-In (& Cashflow) Notes, 100% of the amount by which the highest NAV of the portfolio the returns of the note are linked to (and for the Cashflow Notes, the highest NAV net of all dividends and other distributions paid by any of the Note's Underlying Investments, if any) during the term of the Notes exceeds the principal amount is locked-in and guaranteed to be paid by Maturity.

The portfolio may also include investments in notional bonds, and is subject to "Dynamic Asset Allocation" such that the performance of the Notes will not track the performance of the relevant Underlying Investment basket - see Master Information Statement (available on request). An investment in any of the Notes may not be suitable for all investors. Important details about each of the Notes are described in each product's Master Information Statement and the relevant Information Statement Supplement (the "Offering Documents"); investors should obtain and read carefully a copy of the relevant Offering Documents (available on request) prior to investing, paying particular attention to the risks associated with an investment in the relevant product. In the event of any discrepancy between the information described herein and the relevant Offering Documents, the terms of the relevant Offering Documents shall govern. This document has been prepared by ONE Financial based on information that ONE Financial believes to be fair but cannot be guaranteed as to its accuracy, and BNP Paribas shall bear no responsibility for the contents hereof. This document is for information purposes only, and does not constitute an offer to sell or a solicitation to purchase. 100% of investors' principal is guaranteed to be repaid only for Notes purchased at the Issue Price on the Issue Date and held until the Maturity Date, and there is no assurance that any additional returns will be generated. Returns on the Notes may not mimic, and may significantly underperform, returns in an otherwise identical portfolio consisting entirely of Underlying Investments invested according to the allocations described herein. No assurance can be given as to the tax treatment of investments in any of the Notes. Commissions, trailing commissions, management fees and expenses all may be associated with these investments. ONE Financial, the ONE Financial logo, "Profit Lock-In", "Profit Lock-In & Cashflow", "Guaranteed Linked Notes", "Upside Only", "We believe in better ideas" and "wealth through innovation" are trademarks of ONE Financial Corporation. BNP Paribas and the BNP Paribas logo are registered trademarks owned by BNP Paribas S.A. and used under license. ONE Financial Corporation ©2006 All rights reserved.