2017 Investment Performance Review

In my last post I spoke about re-focusing on blog updates, and that includes periodic reviews of portfolio performance. Because I’ve been behind in blog updates in general, it took me a while to key in the last four months of returns to see where we sat at year-end. But, the numbers are in!

Highlights:

  • Total returns for the year 10.98% vs. benchmark of 10.70%
  • Passive income for the year in excess of $7,700, beating last years total by 11.51%
  • Assets under management growth of 26%

Monthly and Annual Performance

Monthly Performance as of December 31, 2017

The biggest drag on monthly performance for the past quarter was the purchase of some GE options following GE’s announcement to re-org.  From a long-term perspective I believe GE will pull through and ultimately increase share price.  Based on that, I’ve purchased some call options which expire in January 2020.  However, since that purchase GE has plunged even deeper: when I purchased the call options the market price was ~U$20, and it is now hovering at the U$15 mark, a 25% drop.  The options have dropped in a similar fashion.  However, I am not overly concerned.  That particular position accounts for only 0.14% of the overall portfolio, so even a material loss of 25% amounts to an insignificant drop in the overall scheme of things.

My employer has also been doing relatively well lately, so my EPSP and DC pension plan with the company have been performing well.  My DC is actually a model of the couch potato portfolio–similar to the LIRA–so for the most part it moves in lockstep with the benchmark.

Trailing Twelve Month Performance as of December 31, 2017

Trailing Twelve Month Performance as of December 31, 2017

On a year over year basis, we came in at 10.98% for the year vs. the benchmark return of 10.69%, so we just barely beat the benchmark.  At the end of 2016 we had come in at 10.63% vs. a benchmark return of 7.27%.  So we did not beat the benchmark as much as we did last year, but we still beat it.  To me, that is a win.

Passive Income

Passive income for the year came in at $7,700, which beat my goal of increasing by 5%.

2014 $4,400 n/a
2015 $7,000 58.7%
2016 $6,900 (2.3%)
2017 $7,700 11.5%

Reviewing the historical data, things are shaping up like I thought they would.  The large drop in 2016 was mainly due to liquidating a large chunk of the portfolio to purchase a house.  Since then, I have been aggressively working to increase overall income.  To date, the work seems to be paying off (no pun intended).

Asset Allocation

My asset allocation did not improve much year over year.  In fact, it got worse.

Asset Allocation as of December 2017

Asset Allocation as of December 2017

Total allocation to equity went form 73.15% in 2016 to 76.37% in 2017.  I’ve invested the majority of new capital into REIT ETFs, primarily Vanguard’s VRE, to increase my real estate exposure.  However, even with that, my real estate  exposure decreased from 11.35% to 10.94% year over year.  The primary driver for this was the overall increase in the value of my holdings: put simply, my stocks appreciated more than my real estate holdings.  Taking the long view this is not a bad thing, however I still have some work cut out for me to rebalance this year.

Total Returns Since Inception

All in all, the total fund came in at 10.98% for 2017, which has pulled the nine-year compounded return down from 12.35% in 2016 to 12.20%:

Year Return Since Inceptoin
2009 23.59% 23.59%
2010 14.69% 19.06%
2011 (1.60%) 11.73%
2012 13.51% 12.17%
2013 21.59% 14.00%
2014 15.41% 14.23%
2015 3.27% 12.60%
2016 10.63% 12.35%
2017 10.98% 12.20%

A 12.20% per year return is nothing to scoff at, so I am generally happy with the way that things have been going.

In terms of pure assets under management, total assets under management have gone up by 26% year over year.  Of the growth, 37% was organic (i.e. growth in holdings, dividends, favourable exchange rates), and the remaining 63% was accretive (i.e. new invested capital).  I’m happy to say that I have finally broken the quarter-million mark in AUM, since the portfolio now holds north of $310M.

Closing Remarks

My plan this year, other than the goals mentioned in my last post, is to stay the course.  Except for the gamble on GE I took, as a whole the portfolio has grown considerably.  Here’s hoping for another good year.

Onwards and upwards!

 

Save


2018 Goals and 2017 Review

The blog has fallen somewhat behind the past few months, and for good reason. In April 2017 the Baby Dividend Gangster (BDG) entered my life, and the past nine months has been a whirlwind tour of sleep loss, stress, laughter, tears, joy, and everything in between. But now that he is nine months old things are slowly stabilizing where I can start to focus on some of my other activities, such as this site.

The best place to start would be to review the 2017 goals, and see how we fared.

2017 Goals

Goal #1: Increase TFSA Contributions

My goal entering 2017 was to contribute at least $20,000 to my TFSA. I’m happy to say that I beat that goal by 35%, contributing over $27,000 to my TFSA. I had actually exceeded the goal by more than that, but had to take some money back out of the TFSA mid-year for some miscellaneous expenses, so my net contributions put me right back at 35% over my goal.

Goal: Exceeded!

Goal #2: Minimize Taxes

We met this goal during the mid-year write-up.

Goal #3: Rebalance my Total Fund to my Target Allocation

My targets are 55% equity, 20% real estate, 20% fixed income, and 5% cash. Unfortunately I didn’t meet this goal: I actually increased my equity position from 73% to 76% in F2017 — mainly due to the overall stellar performance of the markets. I’ll continue to work at investing new capital into fixed income and real estate through F2018 to meet my target allocation.

Goal: did not meet. 🙁

Goal #4: Increase Passive Income by 5%

My plan was to increase total passive income across all accounts by 5%, to roughly $7,400 in F2017. Total passive income for F2017 came in at $7,700, beating the goal by roughly 6%!

Goal: EXCEEDED!

Goal #5: Update and Expand Investment Research

I was going pretty strong in my analysis by mid-year, but have slowed down since BDG was born. I’ve only published three articles since my June 2017 update:

All in all, I exceeded my goal, but I am not impressed with my slowdown the past few months.

Goal: Exceeded!

2018 Goals

So, where does that leave us for F2018?

As I said above, I’ve been lacklustre in updates the past few months (but for good reason!). I’ve also let most of my portfolio run on auto-pilot, and have been investing new capital straight into the Vanguard REIT, VRE.TO. My intent was to move excess cash into VRE.TO to increase my real estate exposure to support 2017 Goal #3. But whichever way you look at it, I haven’t been paying much attention to my investments as of late.

Goal #1: Re-focus on Blog Updates

As a target, I’d like to get back on track to publishing at least four updates per year (i.e. quartelry) on the portfolio. I’ve also got a backlog of ideas to write on, so I’d like to get those out as well. To that end, I would like to target at least 16 articles this year (one per month, plus an additional one per quarter for portfolio updates).

Goal #2: Increase Passive Income by 5%

This year’s passive income goal is $8,100/year.

Goal #3: Focus and Revisit Research

All in, my portfolio currently contains 52 individual companies and/or ETFs. Some of those I haven’t actually done research on, and some companies I have done research on but not invested in (e.g. Richelieu). Goal #3 will be to re-focus my analysis on the companies I own in the portfolio, and publish quarterly updates on each of those to stay current.

Goal #4: Publish the Dividend Gangster Dividend List

I had started in June 2017 with my initial post of dividend updates, but didn’t publish anything after that. The past year I have been compiling a dividend database for Canadian companies to help me in my research. For 2018, I’d like to get this list published on a periodic basis.

There you have it! It will be an exiting year to see how well I can meet those goals!

Onwards and upwards!


The Great Pension Experiment: 2017 Update

Another year has passed, which means it is time to review The Great Pension Experiment to see how we are doing.

This will be my second year of results to review, and as such I’ve had some time to mull over exactly how we can measure performance, to see how the experiment is running. When I first discussed the experiment, I decided to undertake it because I thought I could do better than what my previous employer was offering me for a pension when I turned 65 years old. Based on my pension with that company, I would receive a monthly pension of $600, or an annualized pension of $7,200. I argued that I could take the lump sum that the company would give me if I cashed out my pension, and over time, end up with a portfolio that would pay me more than $600/month. To that end, there are a few key metrics to see how well we are doing.

First and foremost, I want to check my actual returns over the previous 12 months, and compare them to the annual returns of OPTrust. This is mainly a source of pride: I’d like to see if I, as a small time investor, can beat the performance of a pension fund with over $19 billion in assets, which pays money managers $45 million in investment administrative expenses (See Note 10b of their 2016 annual statements). As an aside, for the purposes of my own portfolio I use a October 31 year-end, since I started the portfolio in November 2015. OPTrust uses a calendar year-end — so I will be comparing my November 1 to October 31 results to their January 1 to December 31 results.

Second (and arguably the most important), we have to compare the monthly income my portfolio would give me, versus what my pension from the company would have given me. The best measure of this is to determine what the present value of the monthly pension from OPTrust would be, and compare that to the currently monthly income that my portfolio is giving me.

Finally, using Monte Carlo Analysis (MCA), we can run a model to see how well the current performance of my portfolio will project into the future. To do this, we will use actual returns up to the point of review (in this case, two years of actual returns), and then use MCA for the remaining years. For the experiment, the total duration (i.e. from when the portfolio started, to when I turn 65), is 26 years. Since we are two years into the portfolio, that means we have two years of actual returns, and will use  MCA for the remaining 24 years. From there, we can see if the probability of beating $600/month in income at age 65 (i.e. what my company pension would have been) is still favourable.

So, how did we do for 2017?

Portfolio Review

The returns will be discussed in a subsequent section. For 2017, I pretty much left the portfolio on auto-pilot. Using synthetic drips, my brokerage continued to purchase shares for me whenever a dividend/distribution was issued. The composition of the portfolio is now:

Ticker Weight Target Weight Over/Short
CASH 0.48% 0.48%
VCN.TO 26.05% 25.00% 1.05%
VXC.TO 52.12% 50.00% 2.12%
VAB.TO 21.34% 25.00% (3.66%)

All in, we picked up 12 shares of VCN.TO, 18 shares of VXC.TO, and 14 shares of VAB.TO. Because a synthetic drip cannot fully invest all proceeds, there has been a slow buildup of cash: in 2016 we had $106 in cash and we now have $370 in cash. When the cash account hits the $1,000 mark, I’ll redistribute it to one of the ETFs. There is little value in doing so right now with such a small amount: to do so would 2.7% going to transaction fees.

Total Returns

Period Ending Returns OPTrust Returns Beat (Miss) vs. OPTrust Assertive Couch Potato Returns Beat (Miss) vs. Couch Potato
2016-10-31 5.79% 6.00% (3.56%) 8.10% (28.57%)
2017-10-31 12.05% TBD TBD 10.60% 13.67%

Total returns for the period ending October 31, 2017, were 12.05%. This yields a 18.53% return since inception, or an 8.87% return compounded annually over the past two years. Since The Great Pension Experiment is based on the Assertive Couch Potato portfolio, it is useful to compare my results to the Assertive Couch Potato, since that is effectively my benchmark. Ignoring transaction fees, the return on the Assertive Couch Potato was 10.6%. All in, I have beat the benchmark by 13.67%. Unfortunately OPTrust hasn’t yet published its 2017 results, so I do not yet know if I have beat them, but I will publish an update once their results are in.

Monthly Income

Returns aside, the monthly income of the portfolio is the real “meat” of the investment: since this is what is supposed to support me in retirement. To that end, the following graph highlights the salient points:

Year Present Value of
OPTrust Annual Income
Annuity Income Real Income
2015 $4,297 $2,589 $0
2016 $4,383 $2,739 $1,429
2017 $4,471 $3,069 $1,590

For 2017, discounting back the OPTrust pension at 2%, the pension is worth $4,471/year or $373/month. The Great Pension Experiment is currently producing $1,590/year in real income (i.e. from dividends and/or distributions), or a hypothetical $3,069/year if we were to cash out the entire portfolio and buy a 4% annuity today. The real test of The Great Pension Experiment will be when one of the black lines crosses the red, since that will signal that The Great Pension Experiment is now generating income greater than the pension that OPTrust had offered me. It is much too soon to tell how well we are doing, but as long as the Real Income and/or Annuity Income are increasing over time, we should be okay.

Monte Carlo Analysis

Rerunning the Monte Carlo Analysis (MCA) using real returns for 2016 and 2017 still produces a favourable graph:

With the newest MCA completed, our probability of exceeding $600/month in income by 2041 is as follows:

Year Probability
2015 93.0%
2016 87.5%
2017 93.1%

So, while we had a dip last year, we’re back on track at a 93% probability of making our income targets.

Closing Remarks

All things considered, I would consider 2017 to be a good year for The Experiment. While I am still a far ways away from beating the pension that OPTrust would have given me (I’m about two-thirds there when using the Annuity Income projection, and about one-third there when using the Real Income value), I do have a very long time horizon: I still have in excess of 20 years to make this work! So for now, I will sit back and let the portfolio do its thing.

Onwards and upwards!


Aecon Group’s Buy-out is an instant 22% Gain!

Back in May I wrote a review on Aecon Group, and recommended it as a buy. Following my own advice, since then I have been purchasing shares on dips in both my TFSA and corporate accounts. It seems that I wasn’t the only one that thought Aecon was under valued, and a worthy investment, because CCCC International Holding Limited (CCCI) has offered to purchase Aecon Group at a price of C$20.37/share!

From the Aecon Group press release:

  • All-cash consideration of $20.37 per share; 42 per cent premium to unaffected share price
  • Aecon gains access to new platforms and partnerships for continued growth in Canada and abroad; CCCI advances its global growth strategy
  • New growth and employment opportunities expected as Aecon gains significant capabilities and financial strength by joining the world’s largest network of engineering and construction companies
  • Aecon will retain its name, continue to be Canada-headquartered and led by its Canadian management team
  • Aecon and CCCI share a strong commitment to maintaining customer service excellence and a safety-first culture
  • Aecon board of directors unanimously recommends transaction to shareholders

This is great news for me. My adjusted cost basis is $16.67, and with an offering price of $20.37 that nets me a healthy 22.20% gain!

I had originally purchased Aecon for its strong dividend growth—21% compounded annually since 2007—and great underlying fundamentals, and I will be sad to see a solid dividend payer go away. However, given the capital gains attached to the sale, this is a great win. What makes things even better is that half of my holdings are in my TFSA, which means that the 22.20% gain is tax-free.

All in all, a great way to end October; this was certainly a treat!


Portfolio Update – September 2017

Time for the quarterly results review!

Highlights for this quarter:

  • I’ve increased my payroll contributions to take advantage of employer matching, which should result in some instant returns
  • TTM passive income came in at $6,500, beating the benchmark TTM passive income of $6,000 by 8%
  • Asset allocations are still out of whack

Let’s start off with the monthly performance summary:

This has been a rough quarter; in fact, the past five months have been rough. We have underperformed the benchmark since February, and in the tail end of the summer both the benchmark and my own total fund returns were in negative territory. That said, I did not let this deter me; if anything I went deeper into the market at that time and picked up additional shares of Aecon, Ryder, and Vanguard’s REIT index (VRE). As evidenced by the graph, in August we started to drift upwards again, and as of this quarter we are now exceeding the benchmark again.

One important thing to point out is that the margin portfolio is composed entirely of US stocks at this point; in fact: it is composed of a single US ETF, that of HYG (iShares high yield US ETF). I keep this ETF mainly as a way to generate passive US income for any time I travel to the US. You’ll notice that June, July, and August, had negative returns for that portfolio, and those negative returns were primarily a reflection of bonds dropping in the US at that time, as well as a weakening Canadian dollar against the US dollar. Finally, as expected the LIRA portfolio closely matched the returns of the benchmark — this makes sense since the LIRA and benchmark both track the Canadian Couch Potato strategy. That said, as the LIRA portfolio is only 25% of the aggregate portfolio value, it is only a small contributor to overall returns.

On a trailing twelve month view, we are still relatively in positive territory. We have lost the monstrous 20% TTM returns from earlier this year, but are still coming in at a respectable 7.5%, which is virtually a match to the benchmark. Again, these aggregate TTM returns are being pulled down by the US only margin portfolio.

Of course, month over month returns are one thing, but as an income investor, total passive income is the key metric. The following two graphs show the story there:

The rolling month over month passive income is not that impressive: we have lost to the benchmark virtually every month. However, as discussed last time, this is mainly an artifact of timing. Illustrated in the second graph, TTM income is still relatively strong, and beating the benchmark by ~$500.

You’ll notice that there is a bit of a discrepancy from the March report: in March we reported less than $6,000 in TTM income, but now that number has been exceeded. I had inadvertently excluded some passive income from the certificated portfolio, and from my work DC pension plan, which adds to overall tax-deferred income. The latest numbers paint a rosier picture. That said, I also mentioned a concern with passive income dipping due to a large withdrawal in 2016 to help purchase our new home — that is still a going concern, as we are nowhere near the $8,500 TTM passive income that was occurring in 2015.

Finally, there is the issue of portfolio allocation:

While I have been aggressively investing any spare capital into my tax-free account, and purchasing iShares REIT ETF–VRE.TO–I have not made much of a dent in the allocation. I am still grossly over-allocated to the equity sector, and as such the focus will continue to be on building up the real estate exposure of the portfolio. I plan on doing this by continuing to allocate spare capital into VRE.TO, H&R REIT, and RIOCAN, as the opportunities arise.

Closing Remarks…

While many Canadian’s experienced a stellar summer, they did not experience stellar markets. However, even in down times the important thing is to stay the course, and take advantage of market downticks if you can, by deploying any excess funds you have into the market while prices are suppressed.

Onwards and upwards!


2017 Goals: Mid-Year Checkpoint

As we pass the halfway mark of this year, it’s time to review the goals that I originally laid out in January.

Goal #1: Increase TFSA Contributions

My target for this year was to cut my TFSA contribution room in half. Going into this year, I had a little over $40,000 in contribution room, so to cut that in half meant I had to invest at least $20,000 into my TFSA. I’m happy to say that so far this year I have beaten that goal by 35%. Moreover, if I am able to maintain this pace, I will have completely used up all of my contribution room, meaning next year I would start with a fresh $5,500 limit.

Keep in mind that the funds transferred into my TFSA were not necessarily net new cash – much of it was moving holdings from my margin account to my TFSA to reduce my tax burden. Regardless of the source of money transferred in, the net result is that any gains from inside my TFSA will be tax free, forever.

Goal #2: Minimize Taxes

I’ve managed to completely eliminate about 98% of my margin account holdings, by moving all of my US investments into my RRSP, and all of my Canadian investments into my TFSA. One downside to doing this is that if I have any losers in my portfolio, I will no longer be able to use the capital losses to offset any capital gains. But, that shouldn’t matter…All investments in my TFSA are exempt from capital gains taxes, and any (capital) gains in my RRSP won’t be taxed until I retire years from now. So the loss of a tax write-off is more than made up for in the gain in no taxes.

Goal #3: Rebalance my Total Fund to my Target Allocation

I had intended on revisiting my IPS this year, but haven’t had a chance yet to do so. Sadly, I haven’t had a chance to do that yet, nor rebalance my portfolio. Luckily I still have six months to do so!

Goal #4: Increase Passive Income by 5%

One goal was to increase my passive income by at least 5%, and that could have been done organically (i.e. through dividend increases), or accretively (i.e. through purchasing of additional shares). At the end of last year, my projected annual passive income was over $6,000. As of June 30, 2017, my projected annual income is has gone up by 20.15%, or $7,400. The source of the gains was both organic and accretive: dividend increases accounted for 28.10% of the overall gain, and accretive gains (i.e. new investments) accounted for 71.91% of the gains.

But wait, it gets better.

Because all of my investments are now in tax advantaged accounts, I no longer pay taxes at the moment on any of those investments. Assuming a marginal tax rate of 35%, that means I am currently avoiding over $2,600 in taxes!

Goal #5: Update and Expand Investment Research

Finally, I wanted to increase my investment research, by researching at least four companies this year. To support this goal, I started writing articles on Seeking Alpha, along with articles on this site. To date, I have written 12 articles on this site, and 9 on Seeking Alpha:

I have certainly passed my target of 4 companies to research!

Summary

To summarize, so far this year I have completed 4 of my 5 goals:

  • Increase TFSA Contributions: Exceeded!
  • Minimize Taxes: Complete!
  • Rebalance: Not yet started.
  • Increase passive income: Exceeded!
  • Update and Expand Research: Exceeded!

The rest of the year will be spent on re-formalizing my IPS, and continued research.

What about you? How are your investment goals going?

Onwards and upwards!


Leaving Money on the Table

I spent Sunday helping out my brother in organizing his finances. He joined a major Canadian corporation a little over 11 months ago, and is approaching the point of vesting for his defined contribution pension plan. Within this context, vesting means that his employer will start matching any pension contributions he makes, subject to certain rules and maximums. This is a very common investment vehicle available to Canadians: many companies do not have Defined Benefit (DB) pension plans anymore, opting to provide Defined Contribution (DC) pensions instead. As an incentive for employees to save towards retirement, companies that offer DC plans often provide a “match”. A “match” is a provision wherein the employer will match any contributions an employee makes, subject to certain conditions. For example, one company I know of offers this match structure:

  • Match 100% for the first 2% of contributions
  • Match 50% for the next 2% of contributions
  • Match 25% for the next 2% contributions

In the above, the “2% of contributions” means 2% of the employee’s salary. A more concrete example would be as follows: Assume an individual makes $40,000/year, and wishes to maximize her employer match. The numbers would add up like so:

Employee contribution %

Employee contribution $

Employer match %

Employer match $

2.0%

$800

100.0%

$800

2.0%

$800

50.0%

$400

2.0%

$800

25.0%

$200

As you can see above, the employee contributed $2,400 of their salary, but the employer contributed $1,400. This means that the employee received an instant 58% return for doing nothing! This is quite literally free money: your employer is giving you an instant top-up as incentive to save for your own retirement. Let’s take the example a little further: assume someone starts working at age 30, works for 35 years to age 65, and maximizes their contributions every year. Moreover, assume they get a 1% raise every year. If we plot this example over the duration of the person’s employment, the difference—while still a 58% gain—is even more pronounced.

By the end of 35 years, the employee would have contributed $103,000 on their own, if they had contributed 6% of their salary. But, thanks to the employer match, their effective contribution was $164,000! They have received an additional $61,000 all for doing nothing.

However, when an individual contributes to a plan such as the above, they don’t just save the money; they typically invest in mutual funds which are made available to them through the DC plan. We can modify the above graph to show the theoretical balance at retirement, assuming 2%, 4%, and 6% returns on the investments.

Again, there was a 58% gain when you compare the Employee only to the Employee and Employer Match:

Employee Only

Employee + Employer

2% returns

$146,188.44

$231,464.99

4% returns

$194,337.71

$307,701.37

6% returns

$322,391.14

$510,452.58

The astonishing thing is that many people don’t take advantage of the employer match that is offered in their pension plans (here is an interesting read from the Financial Post). This means that there are people who are literally giving up free money. Often some people say that the reason they don’t do this is that they can’t afford to contribute money to their company sponsored pension plan, because that means that they will have less money paycheque to paycheque. To that, I have a couple of comments:

  • If you are truly living paycheque to paycheque, then there are more systematic issues at hand that you need to look at; you really need to sit down and plan out a proper budget for yourself.
  • You really can’t afford not to take advantage of a pension plan: if you don’t save now, then you will ultimately have to work longer later.
  • Contributing to your pension plan is a tax-advantageous activity: meaning that if you wish to contribute $500 to your DC pension plan, your effective contribution is lower because your taxes will be lower; I will be writing about this in a future blog post.

So there really is no reason not to contribute. Imagine this: you are walking home and there is a fork in the road to go around a building. Both roads from the fork lead you to the same place at the opposite end of the building. From your vantage point, you can see a $20.00 bill lying on the ground up ahead on the road to the right, and on the road to the left, you can’t see any money lying around. Would you take the fork to the left? Of course not, you would be foolishly ignoring money that was just lying around. Your pension is the same: don’t take the road of no contributions, but take full advantage of the free money your employer is willing to give you.

Onwards and upwards!


The Nine Year Plan

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:

  1. Retire from full-time work in 9 years, working at most 6 months out of the year
  2. 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:

  1. The $100,000 average before-tax salary will naturally adjust by inflation
  2. 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
Total Hours 975
Hourly Rate $70
Total Revenue $68,250
Less CPP Contributions $969.15
Net $67,280.85

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?


Notable dividend announcements for the week ending June 2, 2017

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.

CAE Inc.

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

Top Financial Firms by Market Capitalization

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.

Saputo Inc.

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
  • Mortgages
  • 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.

Closing Remarks

The following table summarizes the above discussion:

Summary

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

The CART Model

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.

Historical Data from BMO InvestorLine

Historical Data from BMO InvestorLine

Globe and Mail

Historical Data from The Globe and Mail – Globe Investor

To that end, I have created the CART model:

  • Cursory
  • Analysis
  • Research
  • Template

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:
    • Revenue
    • 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!