Canadian Dividend Investors
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Minimum Financial Risk
Successful investing is about managing risk, not avoiding it.
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Ben Graham
Every investment carries some level of financial risk. For example when a Treasury Bill matures, the purchasing power of the principal amount you receive may be lower than when you bought it, because the rate of interest paid by the Bill was less than the rate of inflation.
Financial risks cannot be eliminated, but they can certainly be managed. The adjacent table presents some guidelines for reducing the financial risks associated with owning the common shares of financially stable public companies, based on information presented in Value Line Investment Survey (VLIS) reports.
In general, I suggest that you only consider owning companies that have a market value (the current share price times the number of outstanding common shares) of more than 1 billion dollars. This criteria will ensure that the shares can be readily bought and sold on the stock market. Smaller companies may be listed on the markets, however their shares may be thinly traded, which can cause share prices to fluctuate significantly from day to day. In particular, if the shares are in high demand, it may be difficult to acquire them at a reasonable price, or if large numbers of shares being are offered for sale, it may be difficult or impossible to find a buyer at a reasonable price.
I suggest that you only own companies that have been financially stable and have earned a profit every year for the most recent 10 years or more. It is acceptable, if earnings fall or turn negative in one or two years over the course of several decades, provided there is a consistent upwards earnings trend and the company's financial success is expected to continue.
The annual earnings for Sun Life Financial have been highlighted on this portion of the VLIS report for Sun Life Financial. As indicated, the company's annual earnings have grown consistently and steadily from 2012 to 2023, and the growth is expected to continue for at least the next few years.
VLIS assigns a Safety Rank to all of the 1700 companies in their coverage universe. As indicated by the red arrow on the image above, in the upper left corner of the VLIS Report, the Safety Rank for Sun Life Financial has been assigned a value of 2. The VLIS ranking system ranges from 1 (the highest safety rank) to 5 (the lowest safety rank) relative to the other 1700 companies in the VLIS universe. The number of companies included in each safety rank are not necessarily the same. The Safety rank is derived from each company's Financial Strength Rating and the stock price stability.
VLIS assigns a Financial Strength Rating to each company in its coverage universe, in 9 steps, ranging from A++ (highest) to C (lowest). The financial strength rating is a qualitive assessment of each company's financial condition, relative to the other 1700 companies in the VLIS universe. The financial strength rating appears in the lower right corner of the VLIS report, as indicated by the red arrow on the following image. In this example, VLIS has assigned Sun Life a financial strength rating of B++ .
1. Attributed to Benjamin Graham. Source unknown.