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!).


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!