Weekend Reading – Debt ceilings and dividends

Weekend Reading – Debt ceilings and dividends

Hey Readers!

Here we are with a new Weekend Reading edition, all about debt ceilings and dividends. 

A few thoughts on both of those subjects in a bit…

Some recent posts and reminders first:

Inflation continues to run warm, so I shared some of our tips and tricks to manage food inflation.

Here is a great reminder about the tyranny of compounding costs – fees to avoid that kill portfolios. 

And just this week, I highlighted some excellent, low-risk, low-cost cash-alternative ETFs to own that yield more than 4%. Are these ETFs right for you?

Are Cash-Alternative ETFs Right for You?

Weekend Reading – Debt ceilings and dividends

What on earth will the U.S. do?

We know the answer, probably, right???

Created by Congress in 1917, the debt limit, or debt ceiling, sets the maximum amount of outstanding federal debt the U.S. government can incur. Based on an article I read, as of January 2023, the total national debt and the debt ceiling both stood at $31.4 trillion.

In fact, the U.S. government has run a whopping deficit averaging nearly $1 trillion every year since 2001, meaning it spends that much more money than it receives in taxes and other revenue. To make up the difference, it has to borrow money to continue to finance payments that Congress has already authorized.

(Be mindful of why this is so political…any U.S. action to raise the debt ceiling does not increase the nation’s financial commitments, as decisions to spend money are legislated separately. Any change to the debt ceiling requires majority approval by both chambers of Congress.)

We know the answer to the debt-ceiling debate if history is any guide. 

Since 1960, Congress has increased the ceiling seventy-eight times, most recently in 2021. Forty-nine of these increases were implemented under Republican presidents, and twenty-nine were under Democratic presidents…just in case you were thinking Republicans this time had a bias 😉

You can read more here:

https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit

With U.S. political polarization at an all-time high, only to likely deepen/worsen over time given U.S. politics cannot focus on basic, fundamental issues like adequate healthcare and education for hundreds of millions citizens, in that order, votes to raise the debt ceiling have remained contentious and will continue to occur. When the debt ceiling was set to expire in 2013, debate over the limit forced the government into a shutdown, and in 2021, the issue again came down to the wire. As U.S. policymakers once more deliberate an increase to the debt ceiling in 2023, I read that President Biden has said he will settle for nothing less than a no-strings-attached increase.

Of course, forever kicking-the-can down the line is not the right answer. 

The debt ceiling was created by Congress during World War I, as a way to simplify government borrowing without the need for lawmakers to approve each individual bond issue. Congress could eliminate the debt ceiling altogether, or declare that necessary borrowing is automatically authorized whenever federal spending is approved. Options abound to streamline most government activities (here in Canada too) but that costs government jobs so that too is unlikely to be resolved near-term as well IMO.

When the U.S. will actually be unable to pay its bills is difficult to figure out from my point of view but it is clear that if the U.S. Congress doesn’t make a deal, soon, next week, then calamity would occur: payments to any federal workers would be suspended, U.S. pension payments would get stalled, and interest payments on valuable Treasuries would be delayed. The U.S. would default on its payment obligations…

Based on what I am aware of, over half of the world’s foreign currency reserves are held in U.S. dollars, so a sudden decrease (based on U.S. default) in the U.S. currency’s value could send major, major shockwaves throughout the world economy. 

Thanks to this Visual Capitalist graphic and narrative, some economists argue that the U.S. debt ceiling helps “keep the U.S. government more fiscally responsible.“ I would like to talk to those economists and understand that point of view. 🙂

I’m from the perspective that the U.S. government, financially speaking, is in very dire straits and has been a mess for the better part of my life – so keeping this tool and politicising it is just augmenting an already flawed system of governance. Keeping this debt-ceiling in place, like more personal line of credit increases and sustained personal borrowing, is not addressing the problem. By maintaining the status quo, keeping something that can be easily raised and perpetuate ongoing fiscal ignorance is never helpful. Just my thoughts!

My reference to Visual Capitalist:

Charting the Rise of America’s Debt Ceiling

Source: https://www.visualcapitalist.com/rise-of-americas-debt-ceiling/

More Weekend Reading – Debt ceilings and dividends

On dividends, on a slightly brighter note, Canadian big bank earnings were reported this week and here is a recap of various dividend hikes from this sector including our portfolio raises:

• Bank of Montreal declared a $1.47/share quarterly dividend; 2.8% increase from prior dividend of $1.43.
• Bank of Nova Scotia declared a $1.06/share quarterly dividend; 2.9% increase from prior dividend of $1.03.
• Royal Bank of Canada declared a $1.35/share quarterly dividend; 2.3% increase from prior dividend of $1.32.
• Canadian Imperial Bank declared a $0.87/share quarterly dividend; 2.4% increase from prior dividend of $0.85.

I was also fortunate to receive other dividend increases recently in May so I will keep those handy when I share our higher, May 2023, dividend income update. Here was my/our report for April below.

When investing, stay boring friends including investing in any indexed funds as you wish!

April 2023 Dividend Income Update

Thanks to Jon Chevreau for highlighting my thoughts on semi-retirement and any retirement timing here – as I start to work through things in my head 🙂 . Lots to consider…

How would you invest a lump sum of money today? Dividend Growth Investor offers some ideas.

Stock picking and market timing can be very hard – even for the most talented investors. Ask Cathie Wood.

From the article:

“Cathie Wood’s flagship exchange-traded fund closed out its Nvidia Corp. stake in early January. Then, came the artificial intelligence frenzy that sent the stock and its big tech peers on a tear. The chipmaker has added around $560 billion in market capitalization since Wood dumped her shares — with the last $200 billion of that surge coming overnight after the company handily beat earnings.”

“In February, when Nvidia traded for $234 a share, roughly 50 times forward earnings, Wood said the valuation was “very high.””

Ouch. 

Rob Carrick wants to know how common it might be for adult kids to help parents out, financially? (subscription). Take his survey in that link to share your story for his future post.

Without too much speculation on this one, Baskin Wealth cites Brookfield (and its associated companies and affiliates) as a growth story for years to come.

From the article:

“BAM today manages $834 billion, up over 3 times in just the last 5 years, with leading positions in global infrastructure, real estate, renewable power, and credit. These are attractive industries that will require substantial capital investments going into the future, and BAM’s creativity in creating new funds and raising capital should lead to ongoing AUM growth and corresponding growth in the value of BN’s stake in BAM.”

I enjoyed this list of personal finance myths that could cost you lots of money from Jason Heath, in the Financial Post (subscription). Here are the highlights: 

1. Dividends (while good) are not magic money. “It is important to understand the way a dividend works. When a company earns a profit, the board of directors can declare a dividend and pay some of that profit to investors. Many companies pay consistent dividends each quarter because they have stable businesses that are profitable but may have limited growth potential. Limited growth potential means they can only reinvest so much in their business so they might as well pay out some of their profit to investors as dividends.” 

2. Stocks are too risky. “An undiversified portfolio can be very risky. If you own 20 or more stocks from different industries or geographies, either directly or through an exchange traded fund or mutual fund, your risk drops dramatically.”

3. CPP will not be there when you retire. “The CPP is managed by the Canada Pension Plan Investment Board, a Crown corporation that holds CPP funds from contributors for paying pensions. The Chief Actuary of Canada does an independent triennial report on the CPP and most recently said it should be sustainable for the next 75 years.”

4. Always max out your RRSP. This one bothers me too, Jason! “If your income is below $50,000, you should probably not contribute to a registered retirement savings plan (RRSP). That is, unless you have an employer matching contributions. The higher your income is above $50,000, the more beneficial an RRSP contribution becomes.”

Final food for thought:

“The grim irony of investing, then, is that we investors as a group not only don’t get what we pay for, we get precisely what we don’t pay for. So if we pay for nothing, we get everything.” – John C. Bogle, The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

Enjoy your weekend!

Mark