I’ve come to the conclusion that I hate work.
Well, let me rephrase that. I don’t hate work. I actually like work. I like the people I work with. The work is somewhat interesting, and occasionally challenging. But, I hate the idea of the structured daily grind, the rat race, the nine-to-five, whatever you want to call it. I also have a lot of side projects I’d like to work on, but with the newest edition to our family, I never have time for side projects. I work all day, come home, handle nightly duties (feeding, bathing, housework, paperwork, etc.), crash, repeat. On weekends I try my best to give my partner some time off from babysitting, and the rest of the weekend I spend time taking care of other errands and what not. In short: I spend so much time supporting life, I don’t have a life.
Now, don’t get me wrong.. This is all natural for me, at this stage in my life. A new family, a steady job, paying off car, house, condo, etc., all means that I have to make some sacrifices. Unfortunately, those sacrifices are things like pulling together a portfolio to participate in the annual Contact Festival, finish work on PART so that it is in a state that can be used by the public (truth be told I’ve used it for managing my investment portfolio for a few years now, and it works great), and some other side projects..
And for those reasons, I hate work.
So, what to do?
I’ve been crunching numbers, and mulling over what would be realistic goals, and pulling together my vision for my financial future. To that end:
- Retire from full-time work in 9 years, working at most 6 months out of the year
- Have an average before-tax salary of $100,000
There, one vision, two goals. As I said, I don’t mind work, but I want time to do my own things. And having six months of free time every year, will certainly afford me with the time to work on those things. The assumptions baked into the above:
- The $100,000 average before-tax salary will naturally adjust by inflation
- Any debt load I have in 9 years will be covered b the $100,000 salary, with enough to have a comfortable lifestyle
To accomplish those goals s going to take some fancy financial engineering. One of the biggest logistical challenges is that the bulk of my investments are tied up in either my LIRA or my RRSP; this means that any income and/or gains from those investments will not be available to satisfy goal #2. My non-RRSP/LIRA funds are relatively minimal at the moment: the past few years I have shifted many investments (primarily US companies) into my RRSP to take advantage of the zero withholding tax Canadians have when they hold US investments in registered accounts.
So, I am essentially starting from ground zero. If we do some quick back of the envelope math, to generate $100,000 in income at an average yield of 4% (a number I literally pulled out of the air, but it is fairly trivial to find reliable ETFs and/or individual companies to pay an average 4% yield) would require $2.5million in capital: $2,500,000 x 4% = $100,000.
Luckily the entire $100,000 does not have to come from investments. Up until recently I was a Project Management Consultant, and as such I still have my corporation. If I were to go back to project management consulting, it would be a fairly easy task to pick up at least one six month contract per year. If we do some more back of the envelope math, even at a very low hourly rate of $70/hour (which is the low-end of project management consulting rates in Toronto, in the finance sector), working six month yields:
|Days per Week||5|
|Weeks per Year||26|
|Hours per Day||7.5|
|Less CPP Contributions||$969.15|
A prudent decision would be to take out the $50,000 salary I need and leave the other $17,280.85 in the corporation “for a rainy day”; an added bonus!
So of our $100,000 target, there is now $50,000 remaining. Looking at the March results, I am currently generating approximately $1,000 net annual passive income that is not locked into a registered account; this leaves $49,000. Generating that much passive income is not an impossible task, but it is a daunting one: how to generate $49,000 in annualized income in 9 years? This is a classical risk-reward problem: the more risk you take on, the higher your potential reward.
If we use the benchmark Canadian Couch Potato Returns from the Couch Potato website, the balanced portfolio has a 10 year CAGR of 5.38%. $49,000 in passive income at 4% yield is $1,225,000 in capital required. At 5.38% CAGR, that means we need $765,000 today, so that it compounds at 5.38% over nine years to result in capital of $1,225,000. Regrettably, I do not have $765,000 lying around.
Some other considerations:
- I am gainfully employed at the moment at a major Canadian company; assuming I continue to be employed, my salary will go up each year (which I can redirect to investing), and I can continue to participate in the company’s employee share ownership plan.
- The plan gives me an instant 50% through the company’s match (i.e. for ever $1.00 the company kicks in $0.50), so I am making huge gains.
- Who knows where the housing market will be in 9 years? We may sell off our property and become renters: even after paying rent, $100,000 in pre-tax income will be more than enough, assuming that the relationship between $100,000 in pre-tax income and rents remains constant. I.e. if I were making $100,000 right now, I could still afford to rent. Assuming that the $100,000 inflation-adjusted in 9 years is enough to cover rent inflation-adjusted in 9 years, I would still be okay
So while I do not have the capital now, there are options available such that in 9 years I can fulfill my vision.
What are your thoughts? Knowing you require $49,000 annual income in 9 years time, what would you do?
Earnings season is wrapping up, and as such companies are making the last of their dividend announcements alongside their quarterly results. At the Dividend Gangster blog we monitor a large selection of companies on the Canadian exchanges, which have a solid history of dividends. For the week ending June 2, 2017 there were five notable companies that announced dividends, where their dividend increased year over year from F2016. There was also one runner-up, whose dividend is in line with F2016, but over the past 10 years has increased their dividend; that said, they still have one more fiscal quarter to increase their dividend to keep up their streak.
Of the five companies (discussed below in alphabetical order) who increased year over year, the average year over year increase was 3.71%. Moreover, three of the five, and the runner up, are all from the Financial Sector. Here are some stocks for your consideration, if you are looking for new companies to add to your portfolio.
Since 1947, CAE Inc. (CAE.TO) has been providing training and simulation services and equipment to a number of industries, with a focus on the civil aviation, defence and security, and healthcare sectors. While they are a Canadian firm, they are a global organization, with branches and services offered in over 35 countries (either independently, or through joint ventures).
CAE’s most recent dividend pushes it to a $0.32 annualized dividend, which is 3.23% over its F2016 annual dividend of $0.31. At $0.32, its yield is 1.46% based on the June 2, 2017 closing price of $21.93.
Laurentian Bank of Canada
Laurentian Bank (LB.TO) is the smallest bank that announced this week, and being the eighth largest by market cap. In business for over 150 years, it is a mainstay—albeit a smaller one—in the Canadian market, with a focus on small and medium businesses, as well as retail clients. Like most fully integrated firms, it offers a broad suite of services for different customer markets:
- Retail banking
- Business banking
- Capital Markets
- Financial services (e.g. investment advisors)
Moreover, it has a wholly owned subsidiary—B2B Bank—which focuses on providing banking products to a wide network of financial advisors and brokers.
Laurentian’s most recent dividend of $0.62 pushes it to $2.46 annualized for F2017, which represents a 4.69% yield over the June 2, 2017 closing price of $52.40, and a 4.24% increase over the F2016 dividend of $2.36.
National Bank of Canada
National Bank (NA.TO) is the first bank after the Big Five, as measured by market capitalization. The bank has four key lines of business:
- Personal and Commercial Banking (e.g. retail, small business, etc.)
- Wealth management
- Financial markets
- US and International Speciality Finance
Like many of the key banks in Canada, it has a national presence, with branches in most provinces. However, one of its key areas of focus is in the Quebec market, where it works with many small and medium size businesses through the Commercial component of its Personal and Commercial Banking line of business.
With the recent dividend announcement of $0.62, its forward yield is 4.55% based on the June 2 closing price of$54.05, which represents an annual $2.30 annualized dividend. Its fiscal 2016 dividend was $2.20, and as such the $2.24 dividend is a 4.55% increase over the previous year.
In business for over 50 years, Saputo (SAP.TO) is a key player in the national and international dairy markets, and manufacturers and distributes a number of dairy based products, including cheese, milk, cream, and cultured products. It is in one of the top four firms engaged in the dairy market in each of Canada, Australia, and Argentina.
From a yield perspective, Saputo is the weakest of all companies reviewed in this article, with a yield of only 1.34%, based on the June 2, 2017, closing price of $44.64. However, its announced dividend of $0.15 for the quarter equates to $0.60 annualized, which is a 5.26% increase over its F2016 dividend of $0.57. That said, based on yield and growth alone, what you an investor loses in yield, potentially makes up for in year over year growth.
Scotiabank (aka The Bank of Nova Scotia)
Of the banks discussed in this article, Scotiabank (BNS.TO) is the only one that falls into the Big Five category of Canadian banks. Its lines of business are split between Domestic (i.e. Canadian) and International Markets:
- Retail and small business
- Commercial banking
- Wealth management
The bank also has a global banking and markets (GBM) line of business which works with corporate, government, and institutional clients. GBM offers commercial/institutional products and services such as trade and/or cash management, corporate lending, underwriting, research, commodity and foreign exchange trading, etc.
The banks recently announced dividend of $0.76 equates to a $3.02 annualized dividend, representing a 4.86% increase over the F2016 dividend of $2.88. Based on the June 2, 2017 closing price, the dividend yields 3.94%, which is the lowest of the banks reviewed in this article which had a year over year increase. However, the low yield is compensated for in the year over year increase, which is the highest of the banks discussed, and second only behind Saputo.
Runner up: Canadian Western Bank
As illustrated previously, Canadian Western Bank (CWB.TO) is the seventh largest financial services firm in Canada, measured by market capitalization. The bank is unique in that it is the only Schedule 1 bank which specializes in mid-market commercial banking, and have a number of key lines of business, including:
- Speciality business banking services for small- and medium-sized companies
- Industrial equipment financing and leasing solutions for companies with requirements between $100,000 and $50 million
- Franchise Finance to help growth of franchisees and franchisors in the hospitality and restaurant industries
- Commercial equipment leasing with deals ranging $5,000 to $2 million
- Structured loans and customized leasing
- Wealth and investment management
The most recent dividend of $0.23 equates to $0.92 annualized, which is in line with its F2016 annual dividend. However, as CWB has increased their dividend every year for the past 10 years, it is highly likely that they will increase their dividend next quarter, to keep up their streak.
The following table summarizes the above discussion:
For income oriented investors who are looking for new companies to broaden their portfolio, any of the five companies mentioned above would be worthy additions. With consistent dividend growth over the past 10 years, except for our runner up stock (Canadian Western Bank), all four companies would be great hedges against inflation, whilst helping to provide a steady stream of income.
Notes & Disclosures
- All figures in Canadian dollars.
- Long BNS.TO, CAE.TO
One of the greatest challenges in investing in individual companies is in identifying which companies to invest in. There are literally thousands of stocks to choose from, and trying to find great value is like looking for a needle in a haystack at times.
One of the easiest things to do is to use a stock screener, of which there are several. A stock screener will let you filter through all of the stocks on a particular exchange, based on preset criteria. For example, you could do a screen on the common shares of stocks listed on the TSX, with a P/E ratio of less than 30, that pay a minimum annual dividend of $0.50/share:
Your screener would then output a list of companies that match that criteria.
Often, some screeners have pre-built screens, such as the one at Yahoo:
However, a stock screen is only the first step. The challenge with screens is that they typically only show the most recent year’s worth of data. For that reason, you often have to dig a little deeper. That said, pulling the past ten years of fundamental data to drop into a spreadsheet is not a trivial task: you often have to collect the data directly from a companies annual filings found on SEDAR or Edgar, which takes a considerable amount of time. However, often service providers such as BMO InvestorLine or The Globe and Mail have the most recent few years of data available.
To that end, I have created the CART model:
I’ve already covered a few companies using the CART model on Seeking Alpha:
The CART model provides me with a template for doing a high level analysis of a company by importing data from BMO InvestorLine. This high level analysis:
- Looks at the most recent 5 years of data (vs. a standard analysis of 10 years)
- Gives a quick view of underlying fundamental data such as:
- Balance sheet
- Earnings and Dividends
- Provides a quick view of how under or overvalued the stock is
The resulting template then lets me make a decision if I should go forward with a deeper analysis, which usually covers a wider timeframe (e.g. 10 years), and goes into more fundamental comparisons with competitors, a more detailed SWOT analysis, etc. All of this allows me to maximize my time in searching for value dividend payers, to help improve the returns on the overall portfolio.
Onwards and upwards!
The following is a brief summary of an analysis note that I posted to Seeking Alpha. The full article may be found at this link.
Richelieu Hardware Ltd. (RCH.TO) was brought to my attention by a colleague when he was searching for stocks that he found that met Peter Lynch’s stock selection criteria. Upon first hearing about Richelieu, it seemed to hit on some of the key levers I look for in a stock:
- Small/medium capitalization
- Dividend paying, with increasing payments
- Canadian based
- A boring industry
- Focused on a tangible product/service (e.g. they make/sell things that you can “hug and hold”)
Headquartered in Montreal, Quebec, Richelieu Hardware Ltd. is an importer, distributor, and manufacturer of specialty hardware and related products, focused on the North American Markets. Its primary customers are split amongst retail customers vis-à-vis the residential and commercial woodworking industry, home furnishing and office furniture manufacturers, and hardware and renovation superstores (e.g. Home Depot, Lowes). In performing a cursory analysis of the past five years of Richelieu’s fundamentals, the company has a strong balance sheet, great profitability, and a compelling dividend. However, it is presently overpriced.
A cursory analysis shows that Richelieu appears to be a strong company based on the past five years of fundamentals. Richelieu’s fundamentals have some intriguing characteristics, but based on the most recent fiscal year it is overvalued. Based on this cursory analysis, I would rate this company a hold, pending further analysis into the fundamentals, over a larger window (e.g. 10 years vs. the 5 years used for my cursory analysis). That said, Richelieu certainly deserves a deeper analysis to establish if it is a company which should be placed on long term watch-lists, to purchase on dips.
Quite some time since I last posted, and the markets have been a bit of a roller coaster. The last of my statements have finally come in, and I’ve been able to compile the first quarter results for my portfolio.
The total fund T3M (trailing three month) return was 4.94%, dragged down primarily by my EPSP portfolio.. While this portfolio is a relatively small amount (less than 1% as of this quarter), it is a visual drag, as illustrated by the huge negative orange bars in the graph. The benchmark T3M was 4.06%, so I am still beating my benchmark, which is the ultimate goal (otherwise, why would I bother doing the work of picking my own investments?).
As I am an income oriented investor, the following graphs are somewhat more important, as they illustrate the going concerns for the portfolio (e.g. a stable, growing, cashflow).
Passive income for the quarter came in at 7.70% under the benchmark. How much of this is due to timing, and how much is due to selection, is a different story. The income power of the portfolio is something that I am watching more closely.. I liquidated a large percentage of the portfolio in May 2016 to purchase our new house, so by the next quarter, we will see what the one year run rate of passive income is. As you can see from the charts, passive income has been generally trending downward, and March was the first month that we did not break the $6M mark in over a year. This does concern me, especially since we broke the $7M mark in 2016 at this time.. But given the percentage of the portfolio that was liquidated, I am not surprised.
Presently the portfolio is in the accumulation phase, as I push as much spare cash as I can into my various accounts, to start building up a sufficient capital base to generate large amounts of passive income again. That said, this build-up will also provide me with an opportunity to revisit my allocations:
Equity exposure is still in the high seventies (~75%), which is surprising since I have been pushing virtually all spare cash into real estate ETFs (primarily VRE.TO) to increase my real estate exposure. The lack of relative growth in real estate is not due to real estate performing poorly, but it is a reflection of equities performing relatively stronger than the real estate sector.. While I have invested an additional 2% of capital in real estate, real estate itself went down by less than 1%…which means that even though I have put capital in, the equity growth is overshadowing the real estate growth! I am not going to look a gift horse in the mouth, but this does mean that I will continue to move more capital into real estate in the coming months, primarily through VRE.TO, HR-UN.TO, and REI-UN.TO.
Onwards and upwards!
..but I’m not worried.
I recently published an analysis of Magna International, and concluded that the stock was very undervalued, to the tune of 26%. Following my own advice, I picked up 100 shares in my Tax Free Savings Account on Thursday February 23, 2017. Following that, on Friday February 24, 2017 the TSX composite was down 1.57%, its biggest drop in 5 months. I had picked up Magna for an average cost per share of C$59.95 including commissions, and on Friday it had closed at C$56.43/share, a 5.87% drop in a single day; this equating to a C$352 cash loss in 24 hours.
At the same time, Magna announced its fiscal 2016 results, some highlights of which include:
- Record 2016 sales up 13%, well above 4% growth in global light vehicle production
- Record 2016 diluted earnings per share from operations increased 9%
- Record 2016 cash generated from operating activities of $3.4 billion, up 45%
- Returned $1.3 billion to shareholders in 2016
To sweeten the news, the dividend was hiked to U$0.275/share, up from U$0.25/share, a 10% increase.
To sum things up:
- The market dropped 1.57% in a single day
- My investment lost 5.87% in a single day
- Magna had a record year
- Magna increased its dividend 10%
Days like this only go to emphasise the importance of a long-term view. The market will always go up and down, and there is really no way to time things out (I’ll ignore the technicians in the audience). If I had a crystal ball, I would have waited 24 hours before pulling the trigger on my trade, and by now I would have been up 2.23% week-over-week, instead of down 1.54% week-over-week. Alas, I’m a Dividend Gangster, not a Dividend Clairvoyant. My original investment thesis stated that:
- Magna had a strong dividend history (26.97% CAGR over the past 6 years, when measured in USD Dollars. When measured in CAD dollars the dividend is a little wonkier (in the favour of Canadians) as it has to take into account currency fluctuations)
- Magna was undervalued to the tune of 26%
With the 10% increase, Magna is continuing to maintain the course of a strong dividend player. Even though the price dropped (like a rock!), it is still undervalued, and still has plenty of upside before reaching its Graham number.
Now, a novice investor might have panicked on the Friday when the market dropped, and sold off on the Monday. Let’s take a look at the stock performance over the past few days, and see where we’ve landed:
|Date||Price (CAD$)||Gain (Loss) for the Day||Gain (Loss) Since February 23|
If a novice had sold immediately after the drop on Feb 24 (i.e. they sold on Monday Feb 27), they would have lost 3.41%, or $2.02. If they had held until today (Mar 3), they would only be down 1.93% or $1.14. How would they know when to sell? How would they know why to sell? The short answer is: they wouldn’t! And that is what differentiates an investor from a trader. The former does not panic at the drop in price in the short term. Guess what happened between February 23, 2017, and February 24, 2017?
- The price dropped 4.68%
- EPS rose 12.02%
- Book value rose 7.19%
- The dividend rose 10.00%
- The dividend payout ratio increased from 17.23% to 17.82%
So except for the dividend payout ratio, some of the key per share metrics improved, and the price dropped. If the EPS went up, and the dividend went up, and the book value went up, and the share price went down, that screams “buying opportunity”! However, the general trend of the market on that one day pushed most stock prices down, including Magna. If anything, I wish I had some additional capital kicking around: I would have doubled down on my position in a heartbeat.
As investors, more importantly, as dividend investors, we have to keep our eye on our 3-year, 5-year, 10-year, and 20-year goals… A minor blip in stock price shouldn’t shake us, it should drive us to invest more of our capital. The classic quote from Baron Rothschild is to “[b]uy when there’s blood on the streets, even if the blood is your own.” Now, I didn’t have blood of my own that day (because I was investing in my TFSA, if I had leveraged my line of credit, the interest to purchase the stocks would not be tax-deductible)… But nonetheless, while a market downturn is bloody, but it is also an opportunity.
Onwards and Upwards!
- Fundamental figures are in US currency
- Share prices are in Canadian currency
- My ACB was C$59.95, which was based on an intra-day price; the values listed in the historic pricing table are the CAD close price
A copy of this article originally appeared on Seeking Alpha.
With respectable profitability over the past 10 years, and an incredibly strong dividend history, SNC-Lavalin (SNC.TO) would be a worthwhile addition to any dividend growth portfolio. However, its current valuation measured against its price-to-book, and price-to-earnings ratios, as well as when compared to its peers, demonstrates that even with strong dividend performance it is still overvalued. Investors would be better off putting this stock on their watch list, and adding when the price drops below C$40.00.
SNC-Lavalin is a Canadian based engineering firm, which derives its income from six key streams, outlined below.
Collectively, the Mining & Metallurgy, Oil & Gas, Power, Infrastructure & Construction, and Operations & Maintenance, are referred to as the Engineering & Construction segment. Running parallel to this is the Capital Investments segment, which enters long term agreements which use either fixed cost or equity method accounting to record revenue.
Profitability and Stability
Beginning in F2013, SNC started reporting its revenue broken down between engineering revenue and capital investment Revenue. Except for F2009 and F2013, year over year (YoY) revenue growth has been positive, with the most recent year’s revenue coming in at +16% at over $9billion.
The share price has generally trended upwards over the past 10 years, with minor dips in F2008, F2012, and F2014:
The F2008 dip may be attributed to the Kerala Hyderoelectirc Dam Scandal, and the F2012 and F2014 dips may be attributed to the Libya business probe. Of course, this is speculation, but given the negative press it is a plausible explanation, especially since the underlying fundamentals relating to revenue remained consistently strong during that period.
One other financial stability figure to review is the current ratio. Typically, one would hope to see a current ratio of at least 1.50 (i.e. current assets more than covers current liabilities). As of the most recent fiscal year, the current ratio is 1.02 when comparing net current assets to net current liabilities. However, this number quickly climbs to 1.54 once you consider the ratio of short term assets to short term debt (i.e. vs. aggregate short-term liabilities). This is illustrated in the below chart, which breaks down short-term liabilities into its components of debt vs. de-facto liabilities.
Dividends are an interesting metric when compared to share price. Provided the dividend payout ratio (i.e. the portion earnings paid to dividends) remains low, and the dividend remains consistent or increasing, a drop in a company’s share price often represents a buying opportunity. It is for this reason that I feel dividends can be observed separately from share price: whereas share price represents capital appreciation, dividends represent (immediate) realized gains to shareholders. That said, over the past 10 years, SNC’s dividend has risen from $0.23 in F2005 to $1.01 in F2015, representing a 14.40% compounded annual growth rate of dividends.
Overall, the dividend payout ratio has been consistently below 50% since F2010, and prior to that, it was consistently below 40%. Overall this indicates that there is still plenty of room for SNC to continue to raise dividends, even in the face of revenue headwinds.
SNC’s current valuation is where it falls short in my view, based on the following:
- Trailing-twelve-months (“TTM”) EPS of 2.03/share
- Book value of $25.03 based on the most recent fiscal quarter results
- Current share price of $56.52 (as of February 3, 2017)
Given these numbers, the stock has a price-to-earnings of 27.8, and a price-to-book of 2.2, yielding a Graham number (i.e. P/E × P/BV) of 60.8. SNC’s meaningful peers (Aecon (ARE.TO), Bird Construction (BDT.TO)) have an average P/E × P/BV of 25.0 for the most recent fiscal year, illustrating that SNC’s Graham number is more than twice that of its peers.
What this translates to, is that SNC is trading at much more than it should be at this time, when compared to EPS and/or book value. At the current TTM trailing EPS and book value, I would expect to see a price of no more than $33.81, if we have an upper limit of 22.5 for our Graham number. This puts SNC’s current price at roughly 1.7× what it should be, based on TTM EPS and book value based on the most recent quarterly results. This isn’t quite as bad as the Graham number multiple compared to peers (SNC’s 60.8 is 2.4× that of the peer average at 25.0), but it is still considerable.
Fundamentally, I like SNC. Its historical performance, even amidst two scandals, is stellar, and its dividend growth is spectacular. However, the valuation concerns me; as much as I don’t mind paying an “okay price for a good company”, at the current valuation it is no longer “okay”, just “bad”. I would consider buying on dips, and will re-review after the F2016 results are out to see where the valuation sits vis-a-vis its updated fundamentals.
All figures are reported in Canadian dollars.
Overall, I have been pretty happy with the January performance when observing paper (i.e. non-realized) gains, but passive income fell short when compared to the benchmark.
Total fund returns were 1.26%, vs. the benchmark of 0.52%, which represents a more than 2× gain over the benchmark! This is also evident when we look at the trailing twelve month performance:
Here, you can see that on a trailing twelve month basis, total fund is up 15.79% vs. the benchmark 9.99%, which represents a 58% differential!
In absolute terms, the biggest gainers were Brookfield, Philip Morris, and BMO, which accounted for 54% of the overall gains in the period. On a percentage gain basis, Sun Life, Bank of Nova Scotia, and Telus, topped the list in gaining 45.42%, 23.49%, and 17.30% respectively.
However, while the non-realized gains were impressive, as I mentioned above, passive income was lacking.
Overall, the benchmark passive income was $1,811.80, and my own passive income was less than half of that; in fact, my passive income came in at 60.50% under the benchmark. But, this was to be expected. Recall from my December 2016 update:
That said, I expect to see a huge spike in January 2017 in the benchmark, mainly due to timing. You’ll notice that December had a very low benchmark income number, and generally speaking, March, June, September, and December, should be roughly equal in benchmark passive income. Because my benchmark is composed of ETFs, those ETFs did not pay anything in December 2016, and instead paid many of their distributions in January 2017 — so any missed income from December should catch up to us in 2017.
So, the spike in January 2017 was to be expected, but I did not expect the spike to be so drastic. This huge upset also affected the TTM passive income numbers:
Not quite as bad as the monthly results, but on a trailing twelve month basis, we are still running at 1.97% less than the benchmark. As I have become more aggressive in investing idle cash in ETFs, I expect this trend to reverse in the coming months.
Finally, starting with this post I will be monitoring my asset mix compared to my target asset mix. As to be expected, I am very heavily weighted in pure equities. You’ll also notice that the majority of my funds are tied up in my RRSP and LIRA. As part of my 2017 goals I mentioned increasing TFSA contributions on the order of $20,000, and I’ll also use these contributions to pair down equity exposure, systematically increasing my fixed income and real estate exposure through ETFs.
Finally, in a previous entry I mentioned that I was running severely over budget for 2017, when comparing my projected spend to my actual income. In fact, I was projecting a deficit of $14,000. To that end, I have been rigorously monitoring my spending habits, and I’m happy to say that in January I came in at 3.51% under budget. This is not a significant amount, but anything under budget is a gain in my view.
|Month||Actual Spend to Budget Variance (lower is better)|
A big chunk of this decrease was due to not having to buy gas in January (hooray for public transit!), and cutting down on entertainment expenses (e.g. music, movies, and books). However, February is looking a little bleak, as some expenses that I avoided in January will definitely come up in the next month (e.g. I will need to buy gas in February!).
And there you have it: the first update for 2017. How did everyone else do?
Onwards and upwards!
My discount brokerage, BMO InvestorLine, only released statements to its clients on January 23; so the update for December 2016 has been incredibly delayed. But was the delay worth it? Given the data we have at hand, I would say yes! Key highlights:
- Passive income of $620, 350% over our benchmark
- Total passive income for 2016 of $6,627, 29% over our benchmark
- Total fund returns for December 2016 of 2.7% vs. benchmark of 1.2%
- Total fund returns for 2016 of 11.0% vs the benchmark 7.8%
Some stellar numbers! Let’s see how this looks on the graphs.
First up, you’ll notice that there is a new portfolio added, that of EPSP. I recently became a full-time employee of a major FI again, mainly to maintain stability of income, and now have access to their Stock Ownership program. This gives me a great way to receive commission free trades on a regular basis, directly debited from my pay, which results in regular, periodic investments into my tax deferred account. The EPSP portfolio is also responsible for the huge retroactive spike in November 2016. Overall, 4 out of 6 of my portfolios beat the benchmark, with only my LIRA and EPSP lagging behind. Overall however, the entire portfolio for December brought in a 2.7% return, whereas the benchmark returned only 1.2%: I effectively doubled the benchmark, and then some.
On a trailing twelve month perspective (i.e. all of 2016), I am generally happy with the results. Because I am heavily weighted in Canadian stocks, I did not experience as much of an updraft as some US investors since Trump won the election in November 2016, but overall my portfolio has been on a positive uptrend all year, ending the year at +11.0%, whereas the benchmark is only up 7.8% for the year; my portfolio beat the benchmark by over 40% in 2016. One point of pride: each and every one of my portfolios beat my benchmark; since each portfolio has a slightly different mandate, this is a great feat, which I hope to continue in 2017.
Of course, I am a dividend investor, so passive income is one of my key measures of success. What follows are the passive income returns for December 2016, as well as for the year.
These graphs look different from previous ones, but I believe they provide a simpler comparison of actual vs. benchmark income. For December we brought in over $600 in income, vs. the benchmark of $138. For all of 2016, we brought in $6,267, whereas the benchmark only brought in $4,859; a whopping 29.0% increase for the year.
That said, I expect to see a huge spike in January 2017 in the benchmark, mainly due to timing. You’ll notice that December had a very low benchmark income number, and generally speaking, March, June, September, and December, should be roughly equal in benchmark passive income. Because my benchmark is composed of ETFs, those ETFs did not pay anything in December 2016, and instead paid many of their distributions in January 2017 — so any missed income from December should catch up to us in 2017. A similar event happened in October 2016, where the benchmark returned zero passive income, but there was much higher passive income in November, when compared to July and August.
With the year at an end, I have also been able to calculate my forward income. In 2017, based on current holdings and current rates, I expect to generate $6,800 in dividend income, roughly 8.50% higher than all of 2016. As I mentioned in my investment goals post, I wish to increase my total income by 5.00%, which means I have to generate another $340 in passive income to make that goal. I feel this should be a realistic goal given the current environment, assuming I do not have to liquidate any holdings in the near term.
So there you have it: F2016 in a nutshell!
Onwards and upwards!
I need $14,000. There I said it. But how did I get here? What the hell happened? Did I go crazy at the tables at Casinorama? Did I pull a not-so-friendly Community Chest card in the real-life version of Monopoly? Did I go long the Mexican Peso when Trump was inaugurated? None of those I’m afraid…
One goal I did not mention in my previous post, was to have a well-defined budget. Truth be told, I had a budget planned out in 2016, and for the most part I stuck to it. Budgeting suddenly became very important when I became an independent consultant: as a contractor, you need to know exactly how much money you need, because this ultimately drives the lowest per hour cost that you can live with. If you charge too low, then you will not make enough to cover your regular expenses; so anything you charge over your minimum per hour rate is butter on your bread. Example: if I know that I need to charge at least $50/hour to cover all of my expenses (this includes my personal expenses, as well as corporate expenses), if I can find a contract which pays me $60/hour, assuming a 7.5 hour work-week and two weeks vacation, this means I suddenly have $18,750 more I can play with. But, if a contract paid me less than $50/hour, say, $40/hour, I would be short $18,750. But, I will save the per hour calculations for another post; today, we are here to speak about budgeting!
So, in 2016 I got into the habit of planning out my personal and corporate budgets to the penny. Budgeting is not easy task. You have to ask yourself hard questions, and you have to keep yourself to your budget. If you only budget $100/month for eating out, then you have to be damn well sure that you spend no more than $100/month on eating out! While this sounds easy in principal, it rarely is: easy access to credit, and convenience payment methods such as credit cards, tap-and-pay, paying with your phone, etc., make it all too easy to lose track of your spending.
The hard questions really revolve around what you need vs. what you want. Sure, I want to go out to a fancy restaurant every week, but is that something I need to do? Moreover, when you actually plan stuff out, you realize how much friction discretionary expenses cost you. Case in point: if you go to see a movie every other week, you can spend easily $390 on tickets alone (26 weeks @ $15/ticket). Factor in dinner that you will likely eat when you go out with your friends, the concession stand, gas/transit, etc., and you can easily get up to over $1,000 per year just on going to the movie! Now, consider what other frivolous items you spend your money on!
Our family is growing this year, with a wee one on the way, which will drive a slew of new expenses (diapers! building a nursery! strollers! diapers! baby food! diapers! did I mention diapers???). We also moved, I am 17 months away from paying off our family vehicle, and 53 months from paying off my rental property. When you take into account all of the negative cashflows (e.g. regular expenses, discretionary expenses, paying off liabilities such as mortgage and car, savings, investing), my net income is $14,000 short of my aggregate cash outflows; e.g. if my net outflows are $50,000, I am only making $36,000, $14,000 short.
What does this mean, practically speaking?
Well, when you are budgeting there are really two types of cash outflows:
- Fixed / required costs
- Discretionary costs
Examples of costs which I cannot avoid–no matter how much I would like to!–include:
- My mortgage, and the interest on my mortgage
- Car payments
- Utilities (gas+water+hydro) and property taxes
- Pet care (food, vet)
Costs which are discretionary–I can simply not spend this money if I don’t need to–include:
- Eating out
- Buying books/movies/music
- Donations (e.g. to the Toronto Humane Society, United Way, Kids Help Phone, etc.)
So, while I am “short” $14,000, this is purely from a budgeting perspective. Simply because I have $600 budgeted towards going to the movies/buying new music/buying new books, does not mean that I will have to spend $600. That said, I believe 2017 will be a year of frugality: instead of buying books, borrowing from the library. Instead of buying CDs, *cough* borrowing *cough* them from friends (or the library!). Driving less, etc. Ultimately, I would like to make a complete reversal, and instead of finding $14,000 in new funds to fund my shortfall, increasing my overall savings by some amount. These guys are hella inspiring in that regard! I would relish the opportunity to save 60% of my regular income, alas, that’s not going to happen anytime soon.
With that in mind, one more metric that I will be tracking on monthly basis is my personal budget, and how well I am tracking to it. My goal is to tighten my belt enough that I can avoid dipping into long-term savings to cover the $14,000 shortfall. One thing that I have gotten into the habit of doing is using cash instead of credit. In fact, the only things I use my credit card for at the moment are gas, and online purchases. But, if I am driving less, that implies I will be purchasing less gas, which means I will be using my card less. If I cut down on buying things online (e.g. books on amazon.ca), then I’ll be able to cut down on that avenue as well. Previously I was drawn to the siren song of bonus dollars and cash-back cards (such as the Tangerine Cash-back card, which gives 2% cash-back on three categories; if you are going to sign up for one, please use my referral ID, 16176076S1). However, the problem with cash-back cards is that you really have no idea what you’ve spent until the bill comes in the (e-)mail; on a regular basis I was getting hit with $1,000 bills without faintest idea as to where my money had gone. That said, my frugality principles for 2017:
- Cash, not credit
- Drive less, transit more; even easier since I have a TTC Metropass
- Borrow, not buy, in the case of books
- If I have to buy, buy used, through craigslist, Kijiji, or eBay (although eBay offers less and less in terms of bargains nowadays!)
- Learn to say no: if a bunch of friends wish to go out, if I don’t have physical cash in my wallet, don’t do it
- Look for cost cutting measures around the house
I’d be curious to hear what methods you are all using to cut costs, and generally have more savings on hand!
Onwards and upwards!