Does a buy-and-hold investing strategy actually work? It depends on the stock in question. In the case of Canadian Tire (TSX:CTC.A) stock, it turned out alright even with the ups and downs in between. For example, $1,000 invested in 2004 would be worth approximately $4,556 today, equating to annual total returns of about 7.9%.
CTC.A Total Return Level data by YCharts
This return is actually slightly below the Canadian stock market (using the iShares S&P/TSX 60 Index ETF as a proxy) rate of return of 8.3% in the period. Today, Canadian Tire stock’s return is even better, as it compensates investors with a higher yield of 5% compared to a yield of about 1.4% in 2004 and the Canadian stock market yield of about 3.1% today.
Of course, today, we’re also in a higher interest rate environment. In other words, investors can get similar income of about 5% from a risk-free investment like a one-year guaranteed investment certificate (GIC). Traditional GICs are risk-free in that they protect your principal. When you invest in Canadian Tire stock, the stock will go up and down. So, there’s a chance of losing money if you sell at a loss. Additionally, if things get really bad, it could cut or eliminate its dividend any time.
Reliable dividend payer
That said, Canadian Tire stock has been shareholder-friendly. It started paying a dividend in 1945 and has maintained or increased its dividend for at least 20 years with a 3-, 5-, and 10-year dividend growth rate of 15%, 14%, and 17%, respectively. Its most recent dividend hike was only 1.4% in November. This suggests it’s going through some challenging times, but it is still committed to the dividend. Its payout ratio is estimated to be approximately 58% of adjusted earnings this year.
Investors should also note that Canadian Tire is a consumer cyclical business so recessions might result in an earnings decline for the business, while economic expansions might lead to higher growth in its earnings. In this sense, it could work in investors’ favour if they target to buy the stock after it sells off in bad economic times and hold for the subsequent economic recovery.
Stable earnings generator
For example, an investor with perfect timing would have witnessed the stock rising 156% from the 2020 pandemic market crash bottom to the peak in May 2021, which resulted in a total return of close to 166%. Of course, the pandemic was a black swan event that no one could have predicted. And at the time, there was high uncertainty amid economic shutdowns. Buyers of the stock needed to be super confident that the business would turn around and have the patience to hold the shares for a recovery. In case it’s not obvious, investors don’t need to time the market perfectly. Even if you didn’t buy at the very bottom and sold at the very top, you could still have made good money.
What actually happened during the pandemic was that the Canadian retailer’s earnings remained highly stable and it even experienced a massive jump in earnings in 2021. A combination of earnings rising and a price-to-earnings multiple (P/E) expansion after a huge market sell-off was what made the subsequent rally possible.
Earnings normalized after that. At $140 per share at writing, the dividend stock appears to be reasonably valued at a blended P/E of about 12.6. If it experiences stable earnings growth over the next few years as forecast, it could deliver total returns of more or less 13% per year in the period. In any case, its 5% dividend yield seems to be sustainable. So, in the worst-case scenario, I think investors get to pocket the dividend. Any price appreciation can be viewed as icing on the cake. In other words, it could be a better long-term investment than GICs for investors who are willing to take on greater risk.
