The Great Pension Experiment – 2019 Update

I parted ways with my previous employer in 2015, which was a significant financial hit because it had a “gold plated” defined benefit (DB) pension. If I had stayed with that employer until I retired, I was on track to receive a pension of $70,000 per year, significantly higher than the average employment income for a male in Canada (see appendix). However, when I did leave, the value of my DB pension only equated to $7,200 per year, about 90% less than what I should have received. Needless to say, this was a huge point of stress for me as it significantly impacted my retirement plans. Notwithstanding the drop, with such a long time horizon, I asked myself: “Is it worth it to take the $600/month salary in 25+ years, or can I do better?” From that question was borne The Great Pension Experiment.

To recap from previous posts, I felt confident that I could earn a better pension than $600 a month, if I started managing my DB pension myself. To “manage” the DB pension meant that I would have to take a lump-sum payout, and invest the money into securities I felt would give me a better rate of return. My strategy was to leverage a variation of the very popular couch potato portfolio to grow my assets, and when I reached the age at which I could withdraw the funds, convert those into an annuity.

For the annuity, I assumed that I would receive a 4% cashflow on the annuity. Reviewing the latest (as of August 2020) annuity rates from Life Annuities, the lowest available annuity provides $391.19 in monthly income per $100,000 invested, which equates to $4,694 per annum or a yield of 4.7%. With that in mind, a 4% payout ratio still seems like a reasonable metric. (If anything: targeting a 4% payout and receiving a higher payout puts us even further ahead). The original DB pension was paying $600 per month, or $7,200 per year. At a 4% payout, that means we need a lump sum of $180,000 to invest into an annuity to break even with the DB pension.

Company Age 60 Age 65 Age 70 Age 75 Age 80
BMO Insurance $440.35 $509.68 $605.15 $693.64 $886.69
Canada Life $418.10 $474.66 $557.80 $676.60 $859.51
Empire Life $407.36 $466.50 $546.67 $653.42 n/a
Great-West Life $418.10 $474.66 $557.80 $676.60 $859.51
RBC Insurance $408.09 $460.90 $539.87 $661.86 $860.85
Sun Life $391.19 $471.91 $565.45 $681.44 $862.72

The original payout of the DB pension was a little under $65,000, which means I need to triple my money over a 25-year timeframe. With that in mind, key measures of success are:

  1. Portfolio income. How much is it currently generating, and what is the probability that we will generate at least $600/month in the future?
  2. Portfolio performance. What is the net value of the portfolio relative to the present value of the pension I would have received, and how is the portfolio performing relative to the professionals?

With those metrics in mind, how are we faring for 2019?

Portfolio Income

The first metric for portfolio income is to review the actual income that the portfolio received. For the 12 months ending October 31, 2019, the portfolio generated $1860 in income, which equates to $155/month – that is 75% less than what my DB pension would provide. However, that $600 won’t be paid for another 21 years, so I have some time to catch up. To that end, when I review the yearly income numbers for my portfolio, the results look promising:

Year Ending Income Growth CAGR Income Growth
2016
2017 11.2% 11.2%
2018 4.8% 8.0%
2019 11.6% 6.4%

With 21 years left, $155/month income at the current CAGR will generate $608 in income. However, that number is based off of the assumption that CAGR will remain at or above 6.4% going forward.

The second metric is to check how much income I could receive from an annuity today if I were to cash out the entire portfolio. The portfolio did well in the year ending October 31, 2019, and if I were to cash it out into a 4% annuity it would generate $3,392 in annual income, or $283 in monthly income. Again, this is a far cry from the $600 I would receive from the DB pension, but it is as of this moment, and I expect the portfolio to grow in value over time; more on that in the performance section.

Those first two measures are summed up succinctly in this graph:

The red line represents the value of the DB pension (i.e. the $600/month) in today’s dollars. That $600 per month in the future is worth a lot less today, so for an accurate measure we should compare the discounted value to what the portfolio is currently generating. With that in mind, the point of success will be when one of the black lines crosses the red line: that means that the income the portfolio is generating (real income in the case of the solid line, or annuity income in the case of the dotted line), is exceeding that of the DB pension.

The third, and what I consider biggest, test to ascertain income in the future is in the use of a Monte Carlo simulation. With this method I run a number of simulations (250,000 simulations to be precise), and see how the value of the portfolio changes over time based on the randomness of expected returns. The reason I do this is that using a historical average is not necessarily the best way to estimate the future value of a portfolio: an average is just that, an average of high and low values. As an example, if the historical average return of a portfolio is 5%, that means that some years it could have lost 2%, but some years it could have gained 12% – the 5% is just that mid-point between the low and high return values. For that reason, we should take into account some variability in portfolio returns. While not the only way to consider this variability, the Monte Carlo simulation is straight forward to implement: we see how the portfolio performs over a given time period (in this case, from 2020 to 2040), make note of the results, do this a quarter of a million times, and then determine what the most likely outcome is based on those 250,000 simulations.

For this year, I used an annual average return of 8.15% and an annual standard deviation of 8.36%. The standard deviation is important because it gives me the effective range around which the annual average is focused. These values were calculated by taking the average returns of the benchmark portfolio from 2005 to 2019.

The results of the simulation are captured in this histogram:

The histogram illustrates the most likely monthly income based on converting the value of the portfolio to a 4% annuity. Reviewing this, the peak (i.e. most likely) scenario is monthly income between $1006 and $1256, based on cashing out the portfolio and purchasing an annuity with a 4% return (which implies a portfolio value between $301,000 and $377,000). If we poke at this a little further, this implies that the probability of generating at least $600 in income is 90%.

Portfolio Performance

The other metric is how well the portfolio is performing, especially against professional fund managers such as my previous employer.

Period Ending TTM Return Since Inception Return OPTrust Returns OPTrust since inception
2016-10-31 5.79% 5.79% 6.00% 6.00%
2017-10-31 12.05% 18.53% 9.50% 16.07%
2018-10-31 (0.91%) 17.45% 1.00% 17.23%
2019-10-31 11.54% 31.00% 11.20% 30.36%

Since I started this experiment, my total return has been 31.00%, vs. my former employer’s 30.36% return – so based on numbers alone I am exceeding what my investments would have made with my former employer.

Summary

Due to time commitments I was unable to do an update in 2018, so the results here are relative to my 2017 update. That said, overall, the experiment to date has been a resounding success:

  • Based on simulations of average returns, the portfolio has an 89% chance of exceeding the income I would have received from my employer
  • The total return of the portfolio is slightly better than what I would have received if I left my money with them
  • To date, the actual and projected income are inline with what I would expect, given the time horizon remaining

This emphasizes the fact that you don’t have to take what is given to you. If you have the patience and the stomach to weather the markets, you have a higher probability of coming out ahead than if you settle for what is given to you.

I am worried about the 2020 update; with COVID-19 the markets have just now started recovering from the massive drops at the beginning of the year, and the dividend income landscape is constantly shifting as companies revisit their dividend policies. However, that will be a discussion for later this year.

Onwards and upwards!

Appendix

Average Income for Males as of 2018

Source: Statistics Canada.

Data inputs:

  • Age group: 16 and over
  • Income source: Employment Income
  • Sex: Males

June 2020 Update

Investing takes patience, vision, and reflection.

Patience, because more often than not, there is no “quick money”. There isn’t a big score to find, so the best way is to invest frequently, steadily, and build up your capital over time.

Vision, because an investor has to have a goal, to know where they are going. My investment goals are not the same as your investment goals – I may have three kids, a dog, and a pool, and only need $2,000 a month to live because my spouse makes more than me and we live in a lost cost of living area. Conversely, I may have no kids, a spouse who makes less than me, prefer to drive high end automobiles, and live in a high cost of living area, so I need $6,000 a month to live. Everybody’s vision of where they need to be is different.

And finally, investing requires reflection. One must always be reviewing the portfolio—but not obsessively—to ensure that they are still on the path they started out on. More important: they must ensure that the path they started out on is still the right path to be on. Life changes, and as such, your vision should change. It is only with reflection—on your investment results, and your investment needs—that you can determine how well, or poorly, you are doing as an investor.

The first two items I have been doing fairly well at. While I have not published a portfolio update in nine months (the last being in my September 2019 update), I have been patiently investing my cash, and my vision has not changed. But what I have failed to do is monitor and reflect on my portfolio. This is even more important now, given the current state of the world, and the economy. But part of publishing a portfolio update is that it forces me to reflect on how the portfolio is doing, and the results of my investment decisions. And that brings us to today…how have things been going?

As to be expected, the first half of 2020 has been abysmal:

Monthly Performance Summary as of June 2020

The COVID-19 issues in February and March sent the markets into a tailspin, and it has taken me four months to get the total portfolio returns back to a point where I am exceeding my benchmark: June 2020 had a 2.2% return vs. the benchmark 1.5% return. Things look even worse when reviewing the trailing twelve month returns:

TTM Performance Summary as of June 2020

The benchmark has been beating me handily, with total fund hovering around a 5.0% loss for the 12 months ending June 2020, vs. the benchmark yielding a 3.0% gain during the same period. The biggest laggard is my tax free account, with the biggest drag being High Liner Foods which is sitting at -47%. High Liner has been having a hard time recovering since they cut their dividend earlier this year.

However, total fund income is only one dimension of measuring performance. First and foremost, I am a dividend investor—nay, a dividend gangster! My focus is on passive income, so regardless of how well I am doing from an overall returns perspective against the benchmark, what I really care about is how well my passive income is doing against the benchmark. Put another way: have my investment decisions for the total fund beat, or been beaten by, the passive returns if I had only invested in the benchmark?

Income TTM Variance Percentage as of June 2020

Looking at the trailing twelve months, I have beaten the benchmark, and that is the true measure of success. So for every $100 I would have made in the benchmark, my own portfolio made $117 (+17%), over the past twelve months. Reviewing the past year, every month I have beaten the benchmark on a trailing twelve month basis.

The only other item of reflection is my asset mix:

Total Fund Mix as of June 2020

As of mid-year, I am still overweight in equities, and all other asset classes are well below target. With that in mind, over the next few months my focus will be on investing in Vanguard’s VRE.TO REIT to increase my exposure to that asset class.

In summary:

  • Total fund performance has lagged the benchmark on a trailing twelve month measure
  • Over the same period, total fund passive income has exceeded the benchmark by 17%
  • The total fund is still underweight in the fixed income and real estate asset classes

Even with the sub-optimal allocation and the current state of the economy, given that passive income is still exceeding the benchmark—even with the dividend cut of High Liner Foods and CAE Inc. (discussed here)—I’d consider the past nine months a success.

Onwards and upwards!


How I Made $100 in 1 Hour (…or, how to make the best use of your emergency fund)

With the COVID-19 crisis, the need for an emergency fund has become increasingly evident. Unemployment has hit some spectacularly high numbers, with as many 2mm jobs lost in April in Canada (source), and as many as as 1.5mm individuals in the US filing for unemployment benefits (source). Employment Insurance—in Canada at least—is not meant to replace your entire income, but merely to supplement it. And to complicate matters some folks only get the Canada Emergency Response Benefit which amounts to $500/week ($2,000/month). Recent indicators show that in some cities that $2,000 barely covers rent, and in Toronto it doesn’t even cover it based on numbers from rentals.ca, which peg the average rent at $2,103 in Toronto for June 2020 (see chart at end of article)

An emergency fund is one of the foundational blocks of a good financial plan. Our good friends at reddit tag it as the second thing you should do, after budgeting, and financial gurus such as Dave Ramsey set it as the first thing you should do (truthfully, Ramsey has it as the first and third things, the third being a bigger emergency fund). By now we’ve all heard the news of people being underwater, businesses suffering, and general anxiety of not knowing where your next paycheque is coming from. But if you have six months of expenses saved away, you can live virtually stress free for at least a few weeks while things settle down. Personally I follow the six month approach to an emergency fund, which is roughly 13 of my net paycheques, since I get paid bi-weekly (26 times per year). This means that if I am out of work, notwithstanding unemployment insurance, I have at least half a year of savings to draw down from.

But, just because you can’t touch the money, doesn’t mean you shouldn’t have it work for you.

Conventionally folks would stick the emergency fund in a High Interest Savings Account. Current rates (as of June 2020) have HISA rates between 1.69% and 2.00% according to our friends at ratehub.ca:

Bank Rate
EQ Bank 2.00%
ScotiaBank 2.70% (tiered)
Alterna 1.69%
Oaken 1.65%
Tangerine 2.80% (for first 165 days)

The challenge is that if rates crumble, it won’t be long before HISA rates fall as well.

I’d like to lock in my interest rate, but at the same time, keep my emergency fund liquid. To accomplish this I reframed my emergency fund not as a 13-week buffer (~180 days), but as two 90-day buffers:

  • Take half of my effective emergency fund (90 days worth of expenses), and invest it in a 90-day GIC.
  • If something were to happen, I would have the remaining 90 days worth of emergency funds to leverage, and by the time those 90 days were up, the 90-day GIC would have matured.

This method allows me to lock in rates, not worry about rates falling, and most importantly: guaranty liquidity of my emergency funds.

I opted to open a 90-day GIC with EQ Bank because at the time it had the best 90 day rates available. The entire process took me about an hour (opening an account, transferring funds, and then purchasing a GIC). But that one hour of work netted me a little over $100 in interest from the GIC, which in my mind was worth the time and effort.

Onwards and upwards!

 

rentals.ca June 2020 Rent Report

rentals.ca June 2020 Rent Report


The World is in the Tank

I’ve held off on keeping up with much financial news lately, or reading any blog entries, because the pace of change is ridiculously fast right now. A few weeks ago, the markets were in a yo-yo formation, swinging from positive to negative territory, practically on a daily basis. If we use VCN.TO (Vanguard FTSE Canada All Cap Index ETF) as a proxy, we can see what I mean:

Daily Close Price and Day-over-Day Percent Change for VCN.TO (Canadian Index proxy)

When the market first tanked, I jumped on the opportunity. Luckily I had a fair amount of excess capital saved away, and I was able to splurge on some fun stocks where I wasn’t too sure where things would go (namely SPCE.N, Virgin Galactic), pick up some stocks I had my eyes on (e.g. CTC-A.TO, Canadian Tire), and double down on some other investments (e.g. WEN.N, Wendy’s). All things considered, given a 20+ year timeframe all of these investments should yield some great results over time. I was able to pick up SPCE.N near my target of U$20/share (even though it has dropped to the mid-teens since then; it was in line with my willingness-to-pay), cut my ACB for WEN.N in more than half, and finally picked up a strong Canadian dividend player on the cheap. But I made all of those purchases near the beginning of the chaos that snagged the markets, and as things got worse and worse, I pulled myself over to the sidelines until things calmed down a bit.

The COVID-19 epidemic has been going on for a few weeks now, and for the most part I feel that the economy, while it is still in horrible condition, has adapted to what is happening. Businesses that would be forced to close have done so. Businesses that have been deemed essential, have been told so (and have remained open). Society is slowly adjusting to the new (temporary) norm of staying indoors and avoiding all social contact whenever possible to help curb the spread of the virus. So, now that things are settling down, it makes sense to take stock—no pun intended—of our investments and see where things sit.

As a dividend investor with a short-term plan to FIRE by 2026, I break my investments down into two broad categories: tax free in my TFSA) and taxable in my regular margin account. With the dust settling I finally had time to sit down and take a hard look at where things sit as of today (April 12, 2020). The results aren’t as bad as I thought they would be.

Tax Type Ticker YoY Change % Weight for Tax Type Weight for Total
Tax Free ACO-X.TO 7.51% 15.53% 11.99%
Tax Free ARE.TO 263.12% 11.42% 8.81%
Tax Free BMO.TO 4.70% 9.46% 7.30%
Tax Free CNR.TO 113.95% 10.26% 7.92%
Tax Free HLF.TO (32.20%) 3.57% 2.75%
Tax Free LGT-B.TO 206.79% 5.51% 4.25%
Tax Free MG.TO 11.40% 9.64% 7.44%
Tax Free XTC.TO 322.22% 6.78% 5.23%
Tax Free VRE.TO 19.39% 26.05% 20.10%
Tax Free XBB.TO (0.01%) 1.78% 1.38%
Taxable HYG.N 34.95% 26.81% 6.12%
Taxable BCE.TO 7109.24% 8.59% 1.96%
Taxable BNS.TO 7.54% 9.79% 2.23%
Taxable CAE.TO (100.00%)
Taxable EMA.TO 6.18% 18.16% 4.15%
Taxable ENB.TO 9.71% 3.40% 0.78%
Taxable FTS.TO 6.87% 7.14% 1.63%
Taxable MFC.TO 15.00% 2.79% 0.64%
Taxable NA.TO 6687.50% 6.96% 1.59%
Taxable T.TO 8.42% 8.85% 2.02%
Taxable HR-UN.TO 299.42% 3.94% 0.90%
Taxable REI-UN.TO 299.99% 3.58% 0.82%

Table – Weights of Dividend Income

(Side note: CTC-A.TO excluded since positions are as of February 29, 2020).

My tax-free account is composed of regular equity positions, with VRE.TO and XBB.TO thrown in to give me some real estate and fixed income exposure. My taxable income is primarily DRIPs at various brokerage houses. At first blush some of the numbers are rather…staggering.

  • NA.TO, HR-UN.TO, REI-UN.TO, all have YoY changes in excess of 200%. This is mainly a reporting issue, since the reporting for those positions was not captured accurately in 2019; but the 2020 income is accurate.
  • BCE.TO and NA.TO show 4-digit percent increases; this is due to my buying some shares directly through the brokerage at the tale end of 2019, which increased my holdings by large amounts, resulting in a huge increase in dividend income.

With the outliers out of the way, that leaves the other two drops:

  • High Liner Foods (HLF.TO) cut their dividend last year by more than 50%, so the reduction in income was expected.
  • CAE Inc. (CAE.TO) announced measures to protect its financial position, and one of those measures was to cut its dividend indefinitely.

The above changes aren’t too concerning: HLF.TO was expected (in fact, when the price dropped I picked up more shares in High Liner; I am confident in the company’s overall operations, and see this as a buying opportunity), and CAE.TO accounted for less than 1% of overall dividend income (and less than 3% of taxable income).

All things considered, I got off lucky. Because HLF.TO and CAE.TO accounted for small parts of my portfolio, natural dividend gains for other companies made up the difference. But in retrospect my portfolio is very concentrated in a few positions; except for XBB.TO and HLF.TO, all of my positions in the tax-free account exceed 5% of the total income. Put another way: it takes as little as two companies to cut or reduce their dividend for my income to potentially be cut by at least 10%. In fact, if real estate tanks (I am not clear if that will be the case or not), I may be in some serious trouble since Vanguard’s FTSE Canadian Capped REIT Index ETF (VRE.TO) accounts for more than a quarter of my dividend income.

The takeaway here is that I have to take a better look at diversification in my portfolio. One tactic I am contemplating is restricting dividend income to 5% for any one position. However, that implies expanding my holdings to at least 20 different companies/ETFs. There are several great dividend companies out there, so I am not concerned about finding good investments. The broader complication is that I have already maxed out my TFSA contributions for the year, so the only way to re-balance would be to sell existing positions. However, I’m unwilling to sell right now because (a) the market is still low; and (b) other than the relative weighting of income, there is nothing wrong with the companies I currently hold (i.e. no need to sell).

What does all of this mean in the context of the broader COVID-19 crisis?

So far, nothing. The crisis and its impact on the overall economy has forced me to take a closer look at my portfolio as a whole and rethink my capital allocation and risk mitigation strategies, but insofar as individual companies are concerned, I am not too concerned, yet. However, as it stands the social distancing strategy may go on until the summer according to reports from Global TV and The National Post, so it is really anybody’s guess which direction this will go. I have observed that slowly people are becoming used to the new norm, e.g. take-out only, grocery delivery, not leaving home unless necessary, etc. Efforts by the government to help out individuals in financial need, and businesses in financial need, are kicking off. With assisting the economy, hopefully consumer spending will start to level out to a new norm (although I doubt that we will reach pre-COVID-19 norms anytime soon). Businesses that I myself frequent, such as Home Depot, Best Buy, Canadian Tire, Swiss Chalet, Wendy’s, etc. are all doing curb-side pick-up and take-out, and adjusting to the new method of servicing customers.

In the meantime, I will be monitoring the news more closely and looking for other investment opportunities as they arise.

Onwards and upwards (well, at least onwards!).


What to do with a $1,000 SolarShare Bond

Occasionally one is faced with a windfall of money and they have to determine what to do with it. A few years ago, I purchased a SolarShare bond (https://www.solarbonds.ca/) as a way to add some diversification to my portfolio. When I purchased it, the bond was yielding 5%, and it matures this month on January 31, 2020. SolarShare reached out to me and provided me with the option of either cashing out, or rolling the bond into a new issuing which would yield 4% (versus the current 5%). Before pulling the trigger on how to invest I wanted to see what would be best in the long term.

Option 1: Purchase a new bond

This is the easiest option: a click of the mouse and my $1,000 5% bond would be rolled into a $1,000 4% bond. Doing so would guarantee me $40/year in income for 5 years, with my principal repaid in 2025. Doing so would present the following cash flows:

Year Cash out Cash in Net
Year 2020 $1,000 $40 ($960)
Year 2021 $40 $40
Year 2022 $40 $40
Year 2023 $40 $40
Year 2024 $1,040 $1,040
Totals $1,000 $1,200 $200

This would net me $200 cash at the end of the day, which makes sense since it would be 4% a year for 5 years. A $200 return on $1,000 would be 20%, which seems pretty good at face value. However, you have to take into consideration that that is 20% over 5 years, which is actually 3.71% compounded annually. E.g. if you took $1,000 and found a vehicle that would re-invest the interest at 3.71%, you would end up with the same end value:

Start of Year Interest End of Year
Year 1 $1,000 $37 $1,037
Year 2 $1,037 $39 $1,076
Year 3 $1,076 $40 $1,116
Year 4 $1,116 $41 $1,157
Year 5 $1,157 $43 $1,200

When you look at the return on a compounded basis, it is not as attractive as the 4% coupon of the bond, but 3.71% guaranteed return is still pretty decent.

Option 2: Savings Accounts

The challenge with this is that you need to find an investment vehicle (e.g. a savings account or something similar). Popping over to ratehub.ca, as of January 22, 2020 the top high interest savings accounts (HISAs) are only yielding 2.45% at their best:

In addition, there is no guarantee on the HISA will maintain its “high interest” for the foreseeable future, so are now exposed to interest rate risk.

Another option would be a Guaranteed Investment Certificate (GIC), but looking at ratehub.ca again, the highest GIC rates are below what we need to meet or exceed SolarShare:

Moreover, we’d have to ensure that the GIC could re-invest the interest, otherwise the interest would only be applied on the original investment.

Option 3: Equity Investing

The most obvious alternative option would be to find a decent company with an attractive yield and invest the money outright. I wrote previously about investment friction (link). Ignoring tax friction, in a normal trading situation—even with a discount brokerage—you would still be victim to commission friction and rounding friction, the reason being that it would be very hard to purchase stocks that totalled exactly $1,000 (less commissions).

But we can poke at this a little more. I also wrote previously about DRIP investing (link), of which I am a huge proponent. If I were to invest in one of my DRIPs:

  • I would not pay commissions
  • The full $1,000 would be invested (i.e. I would be able to purchase fractional shares)
  • When the DRIP triggered, I would get full reinvestment, i.e. true compounding

So, DRIP investing sounds like a good option. At present I own shares (or units) in the following companies that offer a DRIP:

  • National Bank
  • CAE Inc.
  • Fortis
  • Telus
  • Bank of Nova Scotia (Scotiabank)
  • BCE Inc.
  • Emera
  • Manulife

The $1,000 question is: would one of these companies be a better choice for capital allocation, than the SolarShare bond?

A cursory look at the latest data (as of January 22, 2020) for each of the companies yields this, sorted by ascending yield:

Price Quarterly Dividend Yield P/E P/BV P/E × P/BV
CAE.TO $38.25 $0.1100 1.15% 27.5 4.5 123.0
FTS.TO $57.54 $0.4775 3.32% 1.7 14.8 25.0
MFC.TO $27.25 $0.2500 3.67% 11.3 1.2 13.1
NA.TO $73.40 $0.7100 3.87% 11.3 2.0 22.5
EMA.TO $59.71 $0.6125 4.10% 18.2 2.0 35.7
T.TO $51.98 $0.5825 4.48% 17.4 2.9 50.6
BNS.TO $73.35 $0.9000 4.91% 1.4 10.9 15.3
BCE.TO $62.20 $0.7925 5.10% 18.0 3.3 59.8

Recall that the minimum yield we need (if fully re-investing) is 3.71%. Intuitively that would remove CAE Inc., Fortis, and Manulife immediately. However, one reason these companies are in my portfolio is because they consistently increase their dividend. Because of that, we must look at both the current yield and the forecasted yield based on how much we feel the dividend will grow over the five years I would hold the shares. If we look at the 5-year CAGR for the dividend, and assume that same rate of growth, the total investment for each becomes:

Price Quarterly Dividend Yield P/E × P/BV 5-year dividend CAGR Total Income
CAE.TO $38.25 $0.1100 1.15% 123.0 9.70% $1,071.78
FTS.TO $57.54 $0.4775 3.32% 25.0 6.89% $1,205.51
MFC.TO $27.25 $0.2500 3.67% 13.1 10.53% $1,247.76
NA.TO $73.40 $0.7100 3.87% 22.5 6.94% $1,242.83
EMA.TO $59.71 $0.6125 4.10% 35.7 9.37% $1,272.97
T.TO $51.98 $0.5825 4.48% 50.6 7.61% $1,289.52
BNS.TO $73.35 $0.9000 4.91% 15.3 6.43% $1,311.92
BCE.TO $62.20 $0.7925 5.10% 59.8 5.08% $1,315.69

The only real change was that Manulife, which had a lower yield, ends up with a slightly higher return than National Bank. The difference can be attributed to the higher compounded growth of the dividend.

The question then becomes which company would be good to purchase. Not surprisingly, when valuing each company by it’s Graham Multiple, the higher multiples corelate to a lower yield, which intuitively makes sense: a high Graham Multiple indicates that the stock is overvalued (i.e. too expensive), which would be reflected in a lower dividend yield. Ignoring the most expensive companies (CAE Inc., BCE Inc., Telus, and Emera) leaves us with:

  • Fortis, 3.32%, $205 forecasted income
  • Manulife, 3.67%, $248 forecasted income
  • National Bank, 3.87%, $243 forecasted income
  • Bank of Nova Scotia (Scotiabank), 4.91%, $311.92 forecasted income

The forecasted income should be taken with a grain of salt since that assumes the CAGR remains constant. All things being equal, Bank of Nova Scotia is the clear choice: highest yield of the four, undervalued with a Graham Multiple of 15.3, and a 6%+ 5-year CAGR. Even if there were no dividend growth, at 4.91% yield it would still exceed the SolarShare bond.

The Final Choice

Looking at the options, there are risks and benefits to each:

Benefit(s) Risk(s) / Downside(s)
SolarShare Higher guarantee of at least receiving your principal back
  • Non compounding interest
  • At maturity, new issuing interest rate may be lower than 4%
Savings Account Guarantee to protect your capital Interest rates may drop
Equity Investment
  • Preferred tax treatment (form dividend tax credit)
  • Fully reinvested (i.e. “compounding” the returns)
  • Potential for capital growth
  • Potential for capital loss, principal declining below initial $1,000 investment
  • Dividend could be cut or reduced

The catch however, is that I am using the investment as a cash flow mechanism: meaning that I am likely to not sell the investment in five years. Given that, the risk/downside of capital loss is really not an issue, and the real risk is that the dividend could be cut or reduced. However, given the track record of these companies, I feel that that risk is minimal.

I’ve elected to purchase equity investment because I believe that the long-term gains are better. If I were considering cashing out the investment in five years, I would lean more towards the bond to guarantee my capital; if I went with an equity investment and needed at least my capital back, I may need to wait if the stock market is soft.

Onwards and upwards!


Passive Income Update for September 2019: Broke $1,000!

Coming back from vacation I’ve been swamped catching up at my day job. On top of that, things at work are really ramping up with another person leaving our team (on to bigger and better things within the same company, but different group), and the typical ramp-up of client work coming in for the fourth quarter. It’s times like this that I am appreciative of the “set it and forget it” mentality for investing. That said, in September we broke the $1,000 threshold – which was somewhat expected since this was a quarterly period: typically four-times-a-year companies pay out in March, June, September, and December. But even though we broke $1,000, year over year we were down 3.0% compared to this period last year. On the flip side, we were up 8.2% on a TTM perspective compared to this time last year.

Ticker Company Previous Year Return Current Year Return Variance Variance % Comments
ACO-X.TO ATCO Ltd. $75.32 $80.96 $5.64 7.5%
BAM.N Brookfield Class A (US) $90.87 $99.16 $8.29 9.1%
BBU.N Brookfield Business Partners LP $0.72 $0.74 $0.02 2.3%
CAE.TO CAE Inc. $5.01 $5.58 $0.57 11.4%
CIG50221.TO Sentry Small/Md Cap Income Fund A $39.07 $40.11 $1.04 2.7%
ENB.TO Enbridge Gas $4.60 $5.14 $0.54 11.7% Now receiving cash; last year was DRIP
FTS.TO Fortis Inc. $9.96 $10.96 $1.00 10.0%
HLF.TO High Liner Foods Inc. $152.25 $52.50 ($99.75) (65.5%) Dividend cut
HYG.N iShares iBoxx $ High Yield Corporate Bond Fund $11.14 $11.13 ($0.01) (0.1%) FX
INTC.N Intel $20.96 $22.28 $1.32 6.3%
MCD.N McDonalds $26.24 $30.76 $4.51 17.2%
MFC.TO Manulife $3.41 $4.05 $0.64 18.8%
MGA.N Magna International $43.01 $48.09 $5.08 11.8%
R.N Ryder $13.95 $14.87 $0.92 6.6%
SLF.TO Sun Life Financial $76.09 $138.48 $62.39 82.0%
T.TO Telus $0.53 $0.00 ($0.53) (100.0%) Timing; last year was in September, this year in October
VAB.TO Vanguard Canadian Aggregate Bond Index $62.70 $60.49 ($2.21) (3.5%)
VNQ.N Vanguard MSCI REIT ETF $373.00 $246.43 ($126.56) (33.9%)
VRE.TO Vanguard MSCI REIT $40.69 $57.82 $17.13 42.1%
XBB.TO iShares DEX Universe Bond Fund $3.33 $3.33 $0.00 0.0%
XIC.TO iShares S&P/TSX Capped Composite Index Fund $62.70 $65.70 $3.00 4.8%
XTC.TO Exco Technologies Ltd. $25.50 $54.00 $28.50 111.8%
CNR.TO Canadian National Railway Company $53.75 $53.75 100.0%
TOTAL $1,141.06 $1,106.33 ($34.73) (3.0%)

The two biggest laggards on the income for this month were High Liner Foods and the Vanguard MSCI REIT ETF, which were down 65.5% and 33.9% respectively. The High Liner drop was expected, as they cut their dividend by 50% earlier this year. I use the vanguard position to add real estate exposure to my portfolio, but because it is an ETF there is less predictability in its income. With those drags on the portfolio, there were some increases thanks to Exco Technologies and CN Rail, where I grew the positions compared to last year.

So, not a stellar month, but a good month nonetheless.

Onwards and upwards!


Passive Income Update for August 2019: 4.9% YoY Increase, 34% YoY TTM Increase

Our family was on vacation in August visiting Alberta—beautiful province!!—but while we were relaxing, the portfolio was still churning out returns. For the month of August, $509 was received in passive income. The drop relative to previous months can be attributed to this being a “non-quarterly month”: many companies pay quarterly dividends, and only a handful of my holdings pay monthly dividends/distributions.

Ticker Company Previous Year Return Current Year Return Variance Variance % Comments
BMO.N Bank of Montreal $47.50 ($47.50) (100.0%) Moved to CAD account, so captured I BMO.TO
BMO.TO Bank of Montreal $228.48 $296.64 $68.16 29.8%
C.N Citibank $4.11 $4.75 $0.65 15.7%
CIG50221.TO Sentry Small/Md Cap Income Fund A $40.02 $40.02 100.0% Replaces NCE721.TO
DII-B.TO Dorel Industries Class B $20.76 ($20.76) (100.0%) Paid in July 2019
EMA.TO Emera $25.73 $28.25 $2.52 9.8%
HYG.N iShares iBoxx $ High Yield Corporate Bond Fund $11.00 $11.02 $0.02 0.2%
NCE721.TO Sentry Small/Md Cap Income Fund $39.00 ($39.00) (100.0%) Replaced by CIG50221.TO. In 2018 the June transaction was delayed to July, so July 2018 is overstated.
VAB.TO Vanguard Canadian Aggregate Bond Index $64.84 $67.36 $2.52 3.9%
VRE.TO Vanguard MSCI REIT $30.75 $45.59 $14.84 48.3%
WRK.N WestRock $11.24 $12.12 $0.89 7.9%
XBB.TO iShares DEX Universe Bond Fund $3.29 $3.33 $0.04 1.2%
TOTAL $465.93 $509.09 $43.15 9.3%

Overall the trend is still an increase compared to this time last year, but for a true comparison some adjustments need to be made. First, last year Dorel Industries paid its dividend in July whilst this year it paid its dividend in August. Second, some of my shares in BMO were in my US$ brokerage account at this time last year, so I could receive the dividends in USD (which subjected me to currency exchange risk); I’ve since moved those shares to my CAD$ brokerage account. When I adjust (removing Dorel, merging the BMO line entries) to do a true year over year comparison, on a ticker-by-ticker basis I am actually up 9.3%.

On an even better note, trailing twelve-month (TTM) income was $9,600 last month, but with the returns this month and the increases throughout the year, TTM is now $9,700. That gain represents a 1.1% increase month to month, and even more impressive: an increase of 34% over the trailing TTM income in August 2018!

Onwards and upwards!

 


Passive Income Update for July 2019: a 24.6% YoY Increase

Continuing the trend of regular posting, I’ve finished compiling my July passive income update. Year over year, the portfolio was up 24.6% over July 2018, with some caveats.

Ticker Company Previous Year Return Current Year Return Variance Variance % Comments
ACO-X.TO ATCO Ltd. $75.32 $80.96 $5.64 7.5%
ARE.TO Aecon Group $31.25 $36.25 $5.00 16.0%
BNS.TO Bank of Nova Scotia $14.44 $15.13 $0.69 4.8%
CBO.TO iShares 1-5 Year Laddered Corp. Bond ETF $8.20 $0.00 ($8.20) (100.0%) Sold
CIG50221.TO Sentry Small/Md Cap Income Fund A $39.95 $39.95 100.0% Replaces NCE721.TO
DII-B.TO Dorel Industries Class B $10.39 $10.39 100.0%
HYG.N iShares iBoxx $ High Yield Corporate Bond Fund $11.43 $11.57 $0.14 1.2%
LGT-B.TO Logistec Class B $9.08 $9.98 $0.90 9.9%
NCE721.TO Sentry Small/Md Cap Income Fund $77.77 $0.00 ($77.77) (100.0%) Replaced by CIG50221.TO. In 2018 the June transaction was delayed to July, so July 2018 is overstated.
PM.N Philip Morris $149.92 $149.25 ($0.67) (0.4%)
T.TO Telus $12.74 $13.68 $0.94 7.4%
TD.TO Toronto Dominion Bank $67.00 $74.00 $7.00 10.4%
VAB.TO Vanguard Canadian Aggregate Bond Index $58.90 $55.17 ($3.73) (6.3%)
VCN.TO Vanguard FTSE Canadian All Cap Index $156.84 $165.46 $8.62 5.5%
VNQ.N Vanguard MSCI REIT ETF $271.26 $271.26 100.0% Previous year was in June
VOO.N Vanguard 500 Index Fund $30.32 $36.35 $6.03 19.9%
VRE.TO Vanguard MSCI REIT $32.08 $45.59 $13.51 42.1%
VXC.TO Vanguard FTSE Global All Cap Excluding US $292.17 $263.54 ($28.63) (9.8%)
WEQ.TO WesternOne $2.00 $2.00 100.0%
XBB.TO iShares DEX Universe Bond Fund $3.29 $3.33 $0.04 1.2%
TOTAL $1,030.75 $1,283.87 $253.12 24.6%

The 24.6% YoY increase should be taken with a pound–not a grain!!–of salt. As mentioned last month, there was no VNQ.TO payment as expected in June due to timing, and it came in July, so for comparisons $271.26 should be backed out. Also, NCE721.TO was replaced with CIG50221.TO in 2018, however even taking that into account, in 2018 NCE721.TO made double what CIG50221.TO did — the reason for this was timing as well. In 2018, NCE721.TO paid nothing in June but made two payments in July, so for a fair comparison $37.87 should be backed out from 2018’s July numbers.

With that in mind, the real July 2018 comparable income should be $993.05, and the 2019 comparable income should be $1012.61, resulting in only a 2.0% YoY increase. But, trailing twelve month (TTM) income for July 2019 is over $9,600 ,and for July 2018 is over $8,600, so by that measure we are up by 12.4%! Looking at the TTM is an important factor since it smooths out much of the timing issues, demonstrated above.

Onwards and upwards!


Passive Income Update for June 2019

I’ve been pretty lax in updating the blog recently, mainly due to family and work commitments.. But being a dividend focused blog, what better way to re-boot posting with a mid-year update? I will endeavour to start updating my passive income on a monthly basis. That said, June was “okay”.

Ticker Previous Year Return Current Year Return Variance Variance % Comments
BAM.N $92.44 $98.00 $5.56 6.0%
BBU.N $0.74 $0.73 $0.00 (0.6%) FX Impact
CAE.TO $4.49 $5.06 $0.57 12.7%
CBO.TO $8.20 $0.00 ($8.20) (100.0%) Sold
CIG50221.TO $39.84 $39.84 100.0%
DII-B.TO $20.61 $0.00 ($20.61) (100.0%) Timing; will be in July results
ENB.TO $4.52 $0.00 ($4.52) (100.0%) Timing; will be in July results
EPHE.N $8.78 $16.91 $8.13 92.6%
FTS.TO $9.86 $10.86 $1.00 10.1%
HLF.TO $103.97 $52.50 ($51.47) (49.5%) Dividend cut
HYG.N $11.53 $11.58 $0.05 0.4%
INTC.N $20.61 $22.49 $1.88 9.1%
MCD.N $26.68 $31.10 $4.42 16.6%
MFC.TO $3.37 $4.00 $0.63 18.7%
MGA.N $42.77 $48.48 $5.71 13.3%
R.N $13.70 $14.27 $0.56 4.1%
SLF.TO $65.35 $126.49 $61.14 93.6%
VAB.TO $65.26 $61.08 ($4.18) (6.4%) Reduced bond returns
VNQ.N $243.51 $0.00 ($243.51) (100.0%) Timing; will be in July results
VRE.TO $30.75 $45.59 $14.84 48.3%
XBB.TO $3.33 $3.33 $0.00 0.0%
XIC.TO $59.10 $64.80 $5.70 9.6%
XTC.TO $25.50 $36.00 $10.50 41.2%
TOTAL $865.08 $693.12 ($171.96) (19.9%)

Year over year, passive income was down $171.96, or 20%. The bulk of this was due to VNQ paying their dividend in July this year, whereas in 2018 it was paid in June. If we add in the dividend which was paid in July ($205.47) we actually made more year over year ($33.51, or up by 4%).

The other big blow was HLF, which cut its dividend in half earlier this year. HLF represented a large part of my income portfolio; in 2018 at this time it provided $100 in passive income, which has been literally cut in half this year.

In any case, trailing twelve month passive income is in excess of $9,000 whereas last year at this time it was $8,100, so year over year on a twelve month basis we are up more than 11%! I call that a win.

Onwards and upwards!


Portfolio Updates – March 2019

  • Major rebound since the last quarter
  • Overall, now exceeding the benchmark again
  • Passive income still doing well

Monthly Performance Summary

Like many investors in the market, there was a major correction following the dismal performance of Q4 in 2018. Overall the general trend has bee upwards, as illustrated in the monthly performance graph below: every single portfolio posted positive gains, even the margin portfolio which typically has negative gains due to the GE options.

This is a great story to tell as it reinforces the notion that when the waters get choppy, one must stick to their principles and ride out the storm. Also, it puts timelines into perspective: if I panicked—and did not remember that I have a very long (10+ year) time horizon, I may have pulled out of the market in December when everything was dropping and missed out on some great gains. It is also nice to see that, except for March, I beat my own benchmarks in January and February; in March we technically “did” beat at an 1.8% return vs the benchmark 1.7%.

From a trailing twelve-month perspective, things are looking positive as well. The total fund line (solid black) is now trending above the benchmark line (dotted black). The biggest TTM performer is the Certificated portfolio, but I attribute that to the large bump in November 2018 which is bringing up the TTM overall for that one portfolio; from the December 2018 update:

The portfolio that lead the way in Q4 was the Certificated Portfolio, and the huge spike in November can be attributed to Emera which gained 10% in November – and since that holding is the largest in the Certificated portfolio—at 24%—that 10% increase pulled the rest of the portfolio up with it. Another big winner was CAE which jumped quite nicely, spiking from a 12% gain in October to a 31% gain in November. Even after the December crash, the certificated portfolio managed to break even, with only a $1.00 variance between Q3 and Q4. Regrettably, the Certificated portfolio only accounts for 3% of the total fund, so even with its stellar performance it wasn’t enough to pull the rest of the holdings up.

 

Passive Income

Income continues to be strong quarter over quarter. As expected, there was a “loss” in January when measured against the benchmark, but this is nothing new: since the benchmark is composed of ETFs which typically pay quarterly, there are large payouts only four times a year. This compares to my actual portfolio which is made up of various quarterly and monthly dividend payers, which are staggered throughout the year yielding a smoother distribution of income.

The better view is the TTM which smooths out the bumpiness of the benchmark income:

Sadly, the overall trend has been flat/decreasing. This warrants some additional investigation—which I hope to get to in the following weeks—as I have made little change to the composition of the portfolio. However, there are a handful of ETFs which are not necessarily always non-decreasing (i.e. flat or increasing), which may be dragging the TTM numbers down. That said, overall, we are still beating the benchmark which is the ultimate goal.

A new graph I am viewing is the overall distribution of passive income between taxable, tax deferred, and tax-free accounts:

The green bar (green is good!) is passive income which will never be taxed, and it is that bar that I wish to grow over time. The trend has been increasing, and soon I hope to have 20% (if not 25%) of total passive income be tax free within the next 12 months.

Allocation

Sadly, due to competing priorities, I have been unable to invest much new cash into any of the portfolios, so the asset mix is at the whim of the wider markets. Real estate and fixed income are still lagging considerably, and I expect to see that trend maintain itself for at least another 12 months until I can infuse a large amount of capital back into the fund.

Closing Remarks

Overall the quarter did well, simply by staying invested and not worrying about the hem and haw of the wider markets (e.g. forum commentary!). That said, I do expect a drop in passive income in the coming months as I had to liquidate some of the portfolio to pay off 2018 income taxes.

Onwards and upwards!