I Invested on Thursday and Lost $352 on Friday

..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
2017-02-23 $59.20
2017-02-24 $56.43 (4.68%) (4.68%)
2017-02-27 $57.18 1.33% (3.41%)
2017-02-28 $56.79 (0.68%) (4.07%)
2017-03-01 $58.00 2.13% (2.03%)
2017-03-02 $57.86 (0.24%) (2.26%)
2017-03-03 $58.06 0.35% (1.93%)

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

I Need $14,000, or, Budgeting in 2017.

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
  • Food
  • 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!

Investment Goals: 2017

It’s that time of year where we start looking at investment goals for the new year.

I didn’t really have any goals F2016, except to become a member of thediv-net.com, which I’m happy to say that I was successful in accomplishing! I also mentioned in several posts in F2016 that up until recently I had lost focus on my investment portfolio. Well, for F2017, I plan on changing that trend.

To that end, the goals!

Goal 1: Increase TFSA Contributions

I have been an infrequent contributor to my TFSA for the past 2+ years. To pay off my business school loan, and to purchase a new house with my family, I made some significant withdrawals. Taking into account the $5,500 contribution limit for F2017, I have a little over $40,000 in contribution room in my TFSA. My goal for F2017 is to contribute to at least 50% of that limit, or $20,000.

Goal 2: Minimize Taxes

My investments fall into five investment books: a taxable margin account, a tax-free account, a tax deferred account, a certificated account, and a LIRA. My second goal for F2017 is to minimize taxes by consolidating investments into my tax deferred and tax-free accounts, where it is sensible to do so.

Selecting which investments go into tax sheltered accounts is not a trivial task. On the one hand, moving investments from my taxable account will defer any taxes payable (in the case of my RRSP), or eliminate taxes completely (in the case of my TFSA). However, tax sheltered accounts have a disadvantage in that any losses cannot be used to offset capital gains. This means that I will have to take a close look at the investments to ensure they are good fit to go into an account where I am unable to do any tax loss harvesting. Put another way: I have to ensure I am comfortable (financially, and psychologically) to move investments, confident that they will not go down in value to the point where I sell them at a loss.

That said, Goal 1 and Goal 2 are complementary: by moving investments from my taxable margin account to my tax-free account, I can easily come within throwing distance of Goal 1.

Moreover, by moving my US investments from my margin account to my tax deferred RRSP, I will reap an immediate 15% cost avoidance: US based stocks are not subject to the (15%) withholding tax on US dividends, which means I will receive the full amount of dividends from my US holdings.

Goal 3: Rebalance my Total Fund to my Target Allocation

When I started investing in earnest in F2012, I had a very rigid target allocation. The past few years I have deviated very far from that. So my third goal (and arguably the most important) will be to revisit my investment policy statement, and determine the appropriate asset mix for my investments.

Goal 4: Increase Passive Income by 5%

As I am a dividend investor, passive income is my primary goal for investing. Following my December 2016 results, I will be baselining my F2016 income, with a goal of beating that income by 5% this year.

I plan on accomplishing this goal through three key strategic activities:

  1. Re-allocation. I know for a fact that my portfolio is overweighted in some areas. Once I complete Goal 3, I will be reallocating funds to other holdings, to increase exposure to some of my more successful dividend holdings.
  2. DRIP Investing. I plan on increasing exposure to DRIP investments, as they provide a frictionless vehicle for quickly growing dividend income.
  3. TFSA Contributions. As mentioned with Goal 1, I plan on increasing my TFSA exposure. This increase will undoubtedly bring more passive income into the total fund.

Goal 5: Update and Expand Investment Research

Many of my investment research posts are horribly out of date. As the calendar year is starting, many companies I follow will be releasing their annual results in the coming months. I plan on updating all of the companies I follow based on F2016 results. Moreover, I am targeting to analyze at least four new companies this year.

And there you have it; the F2017 goals! I would love to hear what everyone else’s goals are for F2017.

Onwards and upwards!

DRIP Investing

Dividend Reinvestment Plan investing, or “DRIP” investing, is a very cost efficient way of making passive gains in your portfolio. I have been a big fan of this type of investing for years, as it completely removes two types of investment friction: rounding friction, and commission friction. Well, the second one is a bit of a lie: you are exposed to some commission friction, but it is minimal in the grand scheme of things. But, before I get ahead of myself, I’ll explain what DRIP investing entails.

At its core, a company which offers a DRIP allows the shareholder to re-invest dividends issued by the company directly back into additional shares in the company. So if the share price is $5.00, and you received $10.00 in dividends, you will receive 2 shares. In addition to this core functionality, there may be additional benefits and/or constraints:

Item Description Potential Benefts Potential Constraints
DRIP Enrollment The process of enrolling in the DRIP May have a minimum number of shares required, e.g. you may need 100 shares to even sign up for the DRIP.
OCP/SPP Optional Cash Purchase or Share Purchase Plan. This is the ability for you to buy additional shares directly from the company. May offer a discount on additional shares, e.g. 2% off of the current share price.
  • May have a minimum cash amount required (e.g. $100.00)
  • May charge a small commmission per transaction
Automatic Contributions Automatically debit from your bank account on a periodic basis. This allows you to slowly build your position over time, virtually effort-free on your part. Same as OCP/SPP Same as OCP/SPP

So, how does this all work?

With DRIP investing, you normally have a share of stock in certificated form. Classically, this would mean that you have a physical paper certificate for the company in which you are investing. Today, there are alternatives such as the Direct Registration Sytsem (DRS), but the core of the matter is that the share(s) of the company are registered directly in your name. This differs from a typical stock trade through a brokerage where shares are held in street name (more info may also be found here), where the shares are actually in the name of your broker/agent, and not yourself.

This is important, because once an investment is certificated, you can start participating in the DRIP. You cannot participate in the DRIP if the shares are in street form.

Once you have your certificated share, enroling in the DRIP is as easy as filling out the requisite paperwork.

So, how is this a good thing?

As I mentioned above, one form of friction that DRIP investing eliminates is rounding friction. Recap the example ealier:

[i]f the share price is $5.00, and you received $10.00 in dividends, you will receive 2 shares.

I had picked those numbers for convenience, as they gave us a whole number of shares to re-purchase. However, what if the share price was $7.50, and you received $5.00 in dividends? With a normal brokerage, you would receive $5.00 in cash, and no shares, since the share price is greater than the received dividend. With a DRIP however, you can receive fractional shares. So your $5.00 in dividends will purchase you 2/3 of a share (since $5.00 is 2/3 of $7.50).

Let’s look at OCPs. If you have an extra $100 lying around one day, you might decide to purchase some stocks. Moreover, let’s say you own Telus (T.TO) in your DRIP. The current market price (as of business day close on Sep 9, 2016) is $42.03. If you were to buy shares at a typical broker, assuming $9.95 commission, you could only buy 2 shares, and be left with $5.99 in your pocket ($100.00 less $9.95, and purchasing two whole shares at $42.03). But, because Telus offer OCP/SPP, and no commissions, you can buy 2.379252 shares!

These fracitonal elements are important, because you can now take advantage of true compounding. As an example, let’s use Telus again, with the following assumptions:

  • Share price grows at 3%/year
  • The dividend grows at a rate of $5%/year

At a regular brokerage, after 5 years, here is what you have:

# Numbe of Shares Period Dividend Dividends Received Share Price Dividend Bank Shares Purchased Dividend Bank (end) Net Value
1 1 $0.46 $0.46 $42.03 $0.46 0.000000 $0.46 $42.49
2 1 $0.46 $0.46 $42.34 $0.92 0.000000 $0.92 $43.26
3 1 $0.46 $0.46 $42.66 $1.38 0.000000 $1.38 $44.04
4 1 $0.48 $0.48 $42.97 $1.86 0.000000 $1.86 $44.83
5 1 $0.48 $0.48 $43.29 $2.35 0.000000 $2.35 $45.64
6 1 $0.48 $0.48 $43.61 $2.83 0.000000 $2.83 $46.44
7 1 $0.48 $0.48 $43.94 $3.31 0.000000 $3.31 $47.25
8 1 $0.51 $0.51 $44.26 $3.82 0.000000 $3.82 $48.08
9 1 $0.51 $0.51 $44.59 $4.33 0.000000 $4.33 $48.91
10 1 $0.51 $0.51 $44.92 $4.83 0.000000 $4.83 $49.75
11 1 $0.51 $0.51 $45.25 $5.34 0.000000 $5.34 $50.59
12 1 $0.53 $0.53 $45.59 $5.87 0.000000 $5.87 $51.46
13 1 $0.53 $0.53 $45.93 $6.41 0.000000 $6.41 $52.33
14 1 $0.53 $0.53 $46.27 $6.94 0.000000 $6.94 $53.21
15 1 $0.53 $0.53 $46.61 $7.47 0.000000 $7.47 $54.08
16 1 $0.56 $0.56 $46.96 $8.03 0.000000 $8.03 $54.99
17 1 $0.56 $0.56 $47.31 $8.59 0.000000 $8.59 $55.90
18 1 $0.56 $0.56 $47.66 $9.15 0.000000 $9.15 $56.81
19 1 $0.56 $0.56 $48.01 $9.71 0.000000 $9.71 $57.72
20 1 $0.59 $0.59 $48.37 $10.30 0.000000 $10.30 $58.66

In the above, the “Dividend Bank” is where you would store all dividends received until you had enough to purchase one share, and “Dividend Bank (end)” is the money left over in the dividend bank after buying a share. But, as you can see above, we were never able to purchase any shares! This is because it would take us forever to save up enough of the dividend income to buy a share, plus we have to save up enough to cover the commissions as well.

Using a DRIP, with the same growth assumptions, here is what you have:

# Numbe of Shares Period Dividend Dividends Received Share Price Shares Purchased Net Value % Gain from Without DRIP
1 1.000000 $0.46 $0.46 42.030000 0.010945 $42.49 0.00%
2 1.010945 $0.46 $0.47 42.341740 0.010983 $43.27 0.02%
3 1.021927 $0.46 $0.47 42.655791 0.011020 $44.06 0.06%
4 1.032948 $0.48 $0.50 42.972172 0.011598 $44.89 0.12%
5 1.044546 $0.48 $0.50 43.290900 0.011642 $45.72 0.19%
6 1.056188 $0.48 $0.51 43.611992 0.011685 $46.57 0.29%
7 1.067873 $0.48 $0.52 43.935465 0.011727 $47.43 0.40%
8 1.079601 $0.51 $0.55 44.261337 0.012379 $48.33 0.53%
9 1.091979 $0.51 $0.55 44.589627 0.012428 $49.25 0.68%
10 1.104408 $0.51 $0.56 44.920351 0.012477 $50.17 0.84%
11 1.116885 $0.51 $0.57 45.253529 0.012525 $51.11 1.02%
12 1.129410 $0.53 $0.60 45.589178 0.013192 $52.09 1.22%
13 1.142602 $0.53 $0.61 45.927316 0.013248 $53.09 1.44%
14 1.155850 $0.53 $0.62 46.267962 0.013303 $54.09 1.67%
15 1.169153 $0.53 $0.62 46.611135 0.013357 $55.12 1.92%
16 1.182510 $0.56 $0.66 46.956853 0.014102 $56.19 2.19%
17 1.196612 $0.56 $0.67 47.305135 0.014166 $57.28 2.47%
18 1.210778 $0.56 $0.68 47.656001 0.014228 $58.38 2.77%
19 1.225005 $0.56 $0.69 48.009469 0.014289 $59.50 3.08%
20 1.239294 $0.59 $0.73 48.365559 0.015054 $60.67 3.42%

Where the “% Gain from Without DRIP” is the relative difference between a brokerage-based portfolio and our DRIP. Looking at the above, by using the DRIP, over our 5 year example time horizon we have gained 3.42%, all for doing nothing. And, if you throw OCPs into the mix (e.g. setting up regular contributions), your holdings grow even quicker.

Not all companies offer DRIPs. In Canada, two of the major providers are Computershare Canada and CST (the CST link takes you directly to their DRIP page). But even for those companies that offer DRIPs, not all DRIPs are created equal. Not all companies offer OCP/SPP. Some charge for DRIP, OCP/SPP, and/or withdrawals to/from the plan, and some have minimum balance requirements. That said, when I am looking for a company to DRIP with, other than my regular stock analysis, I look for those who offer and OCP/SPP, and as an added bonus, regular automated contributions by deducting from my bank account. Moreover, those that offer discounts on OCP/DRIP (e.g. Emera which offers up to a 5% discount on DRIP) are even better.

And OCP/SPP is key. The reason being, if you have only one share to start, it will take you forever to get to the point where you can take advantage of material growth through DRIPping.

How does one get started?

You only need one share to start a DRIP, and then you can use an OCP/SPP purchase to purchase any additional shares as needed. You can leverage places such as The DRiP Investing Research Centre‘s Share Exchange board to find individuals who are selling individual shares, or you can even post a message asking for a particular share. Typically individuals selling on these forums ask for a $10.00 convenience fee. This is pretty much in line with most discount brokerages, and since you can easily recoup this cost through the DRIP process itself, it is a small price to pay. Alternatively, you can purchase shares through a regular (discount) brokerage, and then ask the brokerage to withdrawal your shares in certificate form. DRIP Primer has a great list of brokerages, and the fees to do so.

One final thing to mention is synthetic DRIPs. With a synthetic DRIP, a brokerage will buy you any whole shares that it can when the dividend is issued, and any money remaining is given to you as cash. Looking back to Telus, if the share price were $42.03, the dividend were $0.46/share, and you had 100 shares, you would receive $46.00 in dividends. Your brokerge would take this $46.00, purchase one share, and leave the balance ($3.94) in your account as cash. The advantage to this is that the brokerage does not charge you a fee (i.e. commission) for the purchase. The disadvantage is that you cannot take advantage of the fractional shares as with a true DRIP; i.e. you are still subject to rounding friction.

To summarize:

  • DRIPs offer a great way to build compounding returns, through re-investing dividends and purchasing fractional shares
  • Often, companies offer discounts on DRIP and OCP/SPP, but not all DRIPs are created equal; some have better features than others
  • DRIPping does not save you from doing your research: as with all investments, only invest in companies after doing a thorough analysis

And some good resources:

Happy investing!

Yield on Cost vs. Yield on Price? It’s Opportunity Cost that Counts.

I read an interesting article on the Globe and Mail recently, about the “Yield on Cost Myth” (Archived copy may be found at this link). In a nutshell, the author argues that it is erroneous for an investor to consider the yield on cost when they are looking at the dividend yield for a stock; and as a dividend investor this is a very important topic for me. When you are looking at the cash flow stream from an investment, do you look at it from the perspective of what you paid for the stock, or what you would pay today for a stock?

First, some definitions. Yield on Cost is exactly what it sounds like: the total yield returned based on the original cost of the investment. Mathematically:

Yield On Cost=\frac{Dividend}{Average Cost Basis}

This compares to Yield on Price, or what typically we refer to as the normal “dividend yield” of a stock. This is simply the yield based on the current cost of the investment. Mathematically:

Yield On Price=\frac{Dividend}{Current Price}

Now, I do agree that one should focus on the Yield on Price of a stock, not the Yield on Cost of a stock. The reason for this is opportunity cost. Let’s consider the example cited in the original article:

  • You purchased BCE at an average cost of $30.00/share.
  • BCE’s current price is $62.95/share.
  • BCE’s current dividend is $2.73/share.
  • Shaw’s current price is $26.50/share.
  • Shaw’s current dividend is $1.19/share.

Summarizing all of that, let’s do the comparison of the different yields:


Company ACB ($) Price ($) Dividend ($) Yield on Cost Yield on Price
BCE 30 62.95 2.73 9.10% 4.34%
Shaw n/a 26.5 1.19 n/a 4.49%

The ACB and Yield on Cost for Shaw are n/a because we don’t actually own them yet. As pointed out in the article, at first glance it makes perfect sense to sell your shares of BCE, and purchase the shares of Shaw, and reap the additional 0.15% yield (which equates to a 3.55% relative gain between yields, since 4.49% is 3.55% greater than 4.34%).

The challenge with this is that it assumes that we live in a frictionless environment. By swapping your BCE shares, you’ll be victim to all at least two, and possibly three, types of friction that I mentioned in one of my earlier posts. Unless you are in a tax-deferred (e.g. RRSP) or tax-free (i.e. TFSA) account, you will be subjected to capital gains tax on the sale of the BCE shares. In addition to this, you will be hit with one, possibly two, commission charges by selling the BCE, and purchasing the Shaw.

However, the biggest challenge is with rounding friction. This is illustrated by the below table, which illustrates the net change in your cash flow stream, based on holding 10, 100, and 1000 shares of BCE:

Activity Scenario 1 Scenario 2 Scenario 3 Scenario 4 Notes
Number of BCE Shares 1 10 100 1000 What you started off with
BCE Share Price $62.95 $62.95 $62.95 $62.95
Shaw Share Price $26.50 $26.50 $26.50 $26.50
Commissions $9.95 $9.95 $9.95 Per trade commission
Proceeds of Selling BCE Shares $62.95 $619.55 $6285.05 $62940.05
Shaw shares purchased 2.38 23 236 2374 Number of shares you can purchase from the BCE proceeds
BCE dividend $2.73 $27.30 $273.00 $2730.00 Net dividend pre-swap
Shaw dividend $2.83 $27.37 $280.84 $2825.06 Net dividend post-swap
Delta $ $0.10 $0.07 $7.84 $95.06
Delta % 3.55% 0.26% 2.87% 3.48%
Implied Delta % 3.55% 3.55% 3.55% 3.55% The relative difference between the Shaw yield and the BCE yield.
Delta Variance (3.29%) (0.67%) (0.06%) How much over or under we are in our real gain in yields, relative to the base case.

Looking at this, you can see that the difference in yield is not necessarily as clear-cut as one would think. Scenario 1 represents the base case in a frictionless environment, and from there we can see that the implied delta, and the actual delta, are equal. However, once we get into the real world (e.g. rounding, commissions), this quickly changes. Looking at 10, 100, and 1000, shares, the actual gain varies. You do come out ahead, but not by as much as the frictionless scenario. Moreover, this example assumes no taxes! When we introduce taxes, things get even worse, illustrated below:

Activity Scenario 1 Scenario 2 Scenario 3 Scenario 4 Notes
Number of BCE Shares 1 10 100 1000 What you started off with
BCE Share Price $62.95 $62.95 $62.95 $62.95
Shaw Share Price $26.50 $26.50 $26.50 $26.50
Commissions $9.95 $9.95 $9.95 Per trade commission
Proceeds of Selling BCE Shares $62.95 $619.55 $6285.05 $62940.05
Tax Rate 16.95% 16.95% 16.95% 2016 Ontario Tax rate for $83M-$86M income tax bracket, from taxtips.ca
Available proceeds to purchase Shaw shares $62.95 $514.54 $5219.73 $52271.71
Shaw shares purchased 2.38 19 196 1972 Number of shares you can purchase from the BCE proceeds
BCE dividend $2.73 $27.30 $273.00 $2730.00 Net dividend pre-swap
Shaw dividend $2.83 $22.61 $233.24 $2346.68 Net dividend post-swap
Delta $ $0.10 ($4.69) ($39.76) ($383.32)
Delta % 3.55% (17.18%) (14.56%) (14.04%)
Implied Delta % 3.55% 3.55% 3.55% 3.55% The relative difference between the Shaw yield and the BCE yield.
Delta Variance (20.73%) (18.11%) (17.59%) How much over or under we are in our real gain in yields, relative to the base case.

Again, with Scenario 1 as our base case (no taxes, no commissions, no rounding), we see that our net gain is exactly 3.55%, which is what we would expect. However, the net result looks gloomier with 10, 100, or 1000, shares: our total income is less after we have made the swap!

At the end of the day, while yield is important, and understanding the difference between Yield on Cost and Yield on Price is important, it is opportunity cost which is the most important. Even though BCE’s Yield on Price was lower than Shaw’s Yield on Price, the cost to make the switch effectively cost us 14% in annualized net income!

Reset button.

It has been a little over a year since my last post, and there have been a number of changes occurring personally, professional, as an investor, and with this site, all of which are intertwined.

The biggest event was that I was displaced in June 2015 due to downsizing at my former employer.  This was a massive hit professionally and financially, as I saw my defined benefit pension fly the coop, and I took a drastic paycut.  The summer of 2015 was a rocky one: instead of going to the beach, enjoying the weather in a park, or drinking on a patio with my mates in Toronto’s downtown core, I was hunkered down at home applying for jobs all summer.  Towards the end of August 2015 I landed a contract position, and from there started up my new life as an independent project management consultant.  So, in the end, things worked out, but it was still a bit of a professional roller coaster; and I will miss the defined benefit pension.

Personally, my family purchased a home earlier in 2016, just ahead of the massive Toronto Housing Bubble.  We lucked out; similar properties in the neighbourhood we moved into have gone up about 10% since we purchased our house earlier this year.  Needless to say, the market is hot, and I am certainly glad not to be part of that fire!

Which brings me to the changes as an investor.  The majority of my investments were being saved for the next big purchase, or retirement, whichever came first.  Needless to say, retirement is a far way off, so I ended up liquidating a number of my holdings to help pay for the house.  While the sting of selling off those holdings is still wearing off, I am happy that overall my previous investment decisions were good ones.  The biggest sale I had which contributed to the house was my long position of CCL Industries, which netted me a tidy return of 517.8%; I had purchased a while back in the high $30 range and sold in the $220 range.  I had some other big gainers (e.g. High Liner Foods returned in excess of 200%), but CCL was definitely my big winner!

Which brings us to today.

With the cashing out of my defined benefit pension, and the selloff of a number of positions in my portfolio, my portfolio has taken a net hit of about 17%.  Moreover, the tax distribution in my portfolio has changed drastically: before all of these major changes, 45% of my portfolio was taxable (i.e. non-registered), and 55% was in non-taxable or tax-deferred accounts, such as an RRSP or a TFSA (i.e. registered).  Now, the mix stands at 10% in the taxable portion, and 90% in the non-taxable.

This split is both good and bad.

The good, is that the majority of my US investments are now in my RRSP – this means I save an instant 15% of withholding taxes, since Canadians do not pay withholding tax on dividends from US corporations if they are in an RRSP.  Moreover, having 90% of my portfolio “locked away” means that I truly am saving for retirement: taking the money out of the registered portions of my portfolio would result in an immediate tax hit.

The bad, is that only 10% of my investments provide present day disposable income.  So, if I need to use any dividend income to offset present day purchases, I am unable to do so.

From a salary perspective, I am not yet at the point where I can pay myself the same salary as before I was displaced, since I have to build up some capital in my corporation.  My salary today is 17% less than one year ago, not including  any short-term bonuses, the losses of which may be even larger.  Contrary to popular belief, independent consultants are not rolling in cash!  Due to this change in salary, I am not able to invest as aggressively as before, which means my portfolio growth will be seriously constrained until I can increase my net cashflow.

As investors, diversification should be one of the primary objectives of our investment portfolios.  I’m happy to report that during the ups and downs of the past 24 months in the markets, my portfolios have done relatively well, all things considered.   With that in mind, the irony of the situation is that my income streams were not diversified.  While I received some income from dividend investing (in 2015, dividends attributed approximately 3% of my net cashflow), like most normal people, the majority of my income came from my place of employment.  So when your job changes, your net income could take a massive hit; such was my case.  With that in mind, I am looking at diversifying income streams as well.

I have moved this blog from a WordPress.com hosted site, to one hosted on my own servers.  This will give me more opportunities for revenue generation through the site; what that means, I am not quite sure, but at least the option is there.  You may see some ads on the site going forward, and clicking through to those will help me in keeping this site on its feet.

I started off by noting that it has been over a year since my last post, and I have a whole slew of ideas and things to write about.  While the original focus of this blog was on dividend investing, I will be branching out into new areas.  From an investing perspective, dividends are typically the payouts a shareholder receives from the profits of the company in which they own shares.  However, a broader definition is “anything received as a bonus, reward, or in addition to or beyond what is expected.”  That said, future posts will also focus on other methods of generating net positive cash flows: this could either be from hard inflows of cash (i.e. income), or cost avoidance, which ultimately results in more disposable income to use in other investing activities.

One thing is certain: I am certainly glad to be back here blogging and sharing my views and ideas, and I look forward to receiving criticism and feedback from my readers.

Welcome back.