The World is in the Tank

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

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

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

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

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

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

Table – Weights of Dividend Income

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

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

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

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

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

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

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

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

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

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

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

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


What to do with a $1,000 SolarShare Bond

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

Option 1: Purchase a new bond

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

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

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

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

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

Option 2: Savings Accounts

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

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

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

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

Option 3: Equity Investing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Final Choice

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

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

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

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

Onwards and upwards!


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

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

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

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

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

Onwards and upwards!


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

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

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

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

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

Onwards and upwards!

 


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

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

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

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

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

Onwards and upwards!


Passive Income Update for June 2019

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

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

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

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

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

Onwards and upwards!


Portfolio Updates – March 2019

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

Monthly Performance Summary

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

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

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

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

 

Passive Income

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

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

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

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

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

Allocation

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

Closing Remarks

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

Onwards and upwards!

 


Portfolio Updates – December 2018

Highlights

  • Q4 crushed my portfolio, with a 7.6% loss, even though over $5,000 in cash was added
  • Due to the huge drop in market values, my allocations are closer to target than earlier in the year
  • Passive income up 21.8% year over year

It’s periods like this that I am happy I am a “buy it and forget it” type of investor. Long gone are the days where I would monitor my portfolio constantly and start freaking out about drops in the market; if I was still in that mindset I probably would have started selling pretty early in December 2018.

Monthly Performance Summary

The last quarter of 2018 was brutal for the portfolio. Overall, I completely missed benchmark targets: where the benchmark was down 4.0% for December, the portfolio was down 6.1%, which is roughly 50% worse than the benchmark. Even looking at the quarter as a whole, the fund was down 7.6% vs the benchmark 6.4% — not quite as bad as December, but no matter which way you cut it the fund was down.

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

No, the biggest drag on returns was the RRSP portfolio, which lost 8.6% over the quarter. This was followed by the LIRA which lost 6.8%, and right behind that was the TFSA which lost 6.7%. What’s interesting is that the LIRA portfolio tracks the benchmark (a variant of the Couch Potato portfolio), and the benchmark was only down 6.4% in the quarter – I attribute the variance there (6.8% vs 6.4%) due to rounding, and being constrained to purchasing whole shares, not fractional. The “rounding friction” leaves money on the table since the LIRA cannot stay 100% invested at all times (e.g. if I receive $35 in dividends but the stock is re-invested at $30, I am leaving $5 on the table, uninvested).

In my June 2018 update I mentioned that GE was a drag on the portfolio as well. Not surprisingly, GE was a large drag in October 2018, losing a little over 70% of its value in that timeframe, but for the other two months of the quarter it was flat.

The above graph illustrates the month over month declines when measured against the trailing twelve-month metric. Even more disconcerting is that over the course of Q4 I invested an additional $5,000 in the fund. So even with an absolute increase of $5,000, the fund still lost 7.6% over the quarter, but I still plan on staying the course, the reason for that being passive income.

For the half year update, I spoke of Aecon being one of the key drags on the portfolio. As I had hoped, when speculators jumped off of the merger wagon the price rebounded nicely in the latter half of 2018.

(Source: bigcharts)

Passive Income

So, the total fund lost a lot in the last quarter, in fact it lost 7.6% — even though I added money. However, as this is a dividend focused fund, a paper loss does not mean much to me when measured against realized gains.

So, even though on a total returns perspective the we did 50% worse than the benchmark (a loss of 7.6% vs a loss of 6.4%), as you can see from the above graph, actual income was much greater than the benchmark. Even though it looks like the benchmark did better in October (which it did, by about $600), in December the fund outperformed the benchmark by over $800. All in all, for Q4 the fund brought in $2,400 vs the benchmark $1,800. And the picture is even better when we revisit the trailing twelve months:

Total income for 2018 is north of $9,200, compared to the benchmark which was a little over $7,500. On a year over year basis, passive income also increased by more than 21% over the same time in 2017. Also, from my 2018 Goals List (link), my goal was to increase passive income by 5%, or to over $8,100 per year. I have more than exceeded that goal, which is a win! I’ll re-iterate what I said in July:

All things being equal, I would rather beat the benchmark on passive returns than on total returns, reason being that I am creating an income fund, not a capital gains fund.

Allocation

The other saving grace is that, because equities did so poorly in Q4, the overall allocation to equities dropped, increasing the exposure to fixed income and real estate.

I did not publish an update for Q3, but even compared to Q2 he balance is better: Equity exposure dropped from over 70% to a little over 60%, and fixed income and real estate increased as well. The $5,000 of additional funding I spoke of earlier primarily went to VRE.TO to increase my real estate exposure, and the plan is working.

However, I am still a far cry from my target allocations. 2019 will be focused on pouring more money into real estate ETFs to force that component of the portfolio up. With concerns over interest rates, etc., in Canada, I actually expect real estate prices to drop, which means I may be able to pick up real estate ETFs on the cheap over the next twelve months.

Closing Remarks

I’ve been very lazy the past 6-9 months, with work and fatherhood taking the majority of my time. That laziness somewhat worked in my favour as I was pretty oblivious to the drop in my portfolio until I sat down to crunch the year-end numbers; I simply wasn’t paying attention to the financial news. Since my focus has been on increasing real estate exposure, any free cash flow I had went straight into VRE.TO.

My concerns about a drop in the passive income from paying off my car did not really materialize. I was worried about the loss of $250 in passive income, but due to my aggressive investing in VRE.TO I made up the difference on the other $5,000+ I had invested.

The bigger question is what I will do this year. For now, I am cleaning things up and looking for gaps in the portfolio, including re-initiating coverage on companies I used to research before; at the very least, to ensure that they are still good investments. A challenge with being a passive “buy it and forget it” investor is sometimes you get antsy when you are not doing anything. Next steps will be to revisit my 2018 goals, plan 2019 goals, and see where that takes me.

Onwards and upwards!


Staying on the FIRE Path

One of the greatest challenges of investing is keeping the long-term plan in sight. If you are like many investors who are on the FIRE path, then you are probably reading blogs on a regular basis, watching financial TV shows, listening to podcasts, etc., to keep abreast of things. Constantly submersing yourself in media is a recipe for the fear of missing out (or “FOMO” as the kids call it these days). However, keeping your long-term goal in view will help you to properly avoid these fears and keep you on the FIRE path.

Over the past few years I’ve seen a number of hot topics, and seen a lot of people make quick money. Two key areas that have constantly crossed my path have been bitcoin (or any coin or ICO based off of blockchain or some derivative), and marijuana stocks. I have read about many folks making tonnes of money off of bitcoin, and when I overheard someone who works at my local cafeteria talking about it—and how she leaves her computer on all the time to mine bitcoin—I knew that bitcoin had hit the mainstream.

Many of my friends also ask me about marijuana stocks. I personally know of at least one person who made over 100x her money by buying penny stocks in the marijuana sector a few years ago, and those stocks are north of $5.00. If you buy for $0.10 and sell for $5.00 you’ve made a 4,900% (yes, four thousand nine hundred percent). To rub salt in my FOMO wounds, she put the money in her tax-free account, which means she walked away with not having to pay any capital gains taxes.

My view is that folks who make tonnes of money off of early trends/hype such as bitcoin or marijuana are either incredibly patient, have a very strong stomach for the potential of losing money, or are incredibly stupid. Of course, one view is that you should always have “play money” for your investments. E.g. if you say that you’ll spend $100/year on any stock you want, you can probably have some fun playing with penny stocks or bitcoin. Heck, you may make a hell of a lot of money. However, for the most part I see a lot of people being sucked into hype because they do fear missing out on the next big thing, on the next “dot com” craze, or some other fad.

For myself, I have a long-term plan, and to support that goal I’ve got several goals and sub-goals, to help keep me on track. Of late, one of my tactical goals is to improve my asset mix. As I mentioned in my previous quarterly update, my focus over the next six months will be to increase my real estate exposure, which is just over 10%, a far cry from my nominal target of 20%. I consider myself disciplined in that I have an investment strategy at hand that forces me to avoid things like bitcoin and marijuana stocks (however, I have been toying lately with allocating 0.10% of my portfolio towards “fun stocks”, which would open me to up being able to invest in anything just for kicks).

However, even when ignoring hype stocks, by my listening to podcasts, reading, and compiling The Dividend Gangster dividend list, I have been exposed to several interesting companies. For example, one company which recently caught my eye is MTY Food Group Inc. (covered in my July 20, 2018 dividend update). The company recently agreed to purchase sweetFrog Premium Frozen Yogurt. The firm also has a fairly solid (albeit short) dividend history with some consistent increases, and depending on the valuation model it is may be considered undervalued. Seeing companies like this ignites a FOMO reaction, and makes me wonder if I should buy some shares of MTY to get in on the ground floor before it shoots up even higher in value, or makes its next dividend increase.

But it is times like this when discipline and keeping your eyes on the long-term goal—sticking to your plan—is most important. I could certainly go out and buy some MTY next week when I make my bi-weekly stock/ETF purchases, and buying it would certainly satisfy the itch of adding another company to my portfolio, and a potentially strong dividend player at that. When I look back at other companies I could have purchased “for a steal” (e.g. I was originally looking at Lassonde when it was $100/share, and it is now north of $200; or Canadian Tire at $90 and it is now north of $160) but didn’t bother, I am reminded of opportunities I missed out on. That said, purchasing common equity would push me further away from my tactical goal of re-balancing the portfolio by building my real estate exposure.

The simple reality is that capital (for most of us, that means plain old money) is a limited resource. To quote one of my professors, strategy is the “allocation of scarce resources”. Within that context, strategy in investing is the allocation of scarce capital, i.e. the money you have to spend. There is only so much money to go around. And when I view my portfolio in that context, the need to balance my portfolio to reduce overall risk by sticking to my target allocation outweighs the need to scratch the investing itch by finding a new company to add to my holdings.

So, when friends and peers ask me about a hype stock (bitcoin, marijuana), or even a non-hype stock (should I buy some BMO for my portfolio?), my first question back to them is, “What are your long-term goals?” If a stock—hype or otherwise—makes sense to add to a portfolio, by all means, do so. But only if it makes sense. Buying to follow the crowd because you’re sacred of not making the quick money is one of the furthest things form investing strategy I can think of.

Onwards and upwards!


Dividend News for the Week Ending August 17, 2018

There were a number of dividend announcements this week, but nothing really material. Of all of the companies that announced, there were none that increased their dividend since their last payout.

Ticker Company Record Date Payment Date Dividend Amount Frequency
APR-UN.TO Automotive Properties Real Estate Investment Trust 2018-08-31 2018-09-17 $0.067000 Monthly
ARX.TO ARC Resources Ltd. 2018-08-31 2018-09-17 $0.050000 Monthly
AX-UN.TO Artis Real Estate Investment Trust 2018-08-31 2018-09-14 $0.090000 Monthly
BTB-UN.TO BTB Real Estate Investment Trust 2018-08-31 2018-09-17 $0.035000 Monthly
CJT.TO Cargojet Inc. 2018-09-20 2018-10-05 $0.212000 Quarterly
CRT-UN.TO CT Real Estate Investment Trust 2018-08-31 2018-09-17 $0.060670 Monthly
CSH-UN.TO Chartwell Retirement Residences 2018-08-31 2018-09-17 $0.049000 Monthly
CUF-UN.TO Cominar Real Estate Investment Trust 2018-08-31 2018-09-17 $0.060000 Monthly
EIF.TO Exchange Income Corporation 2018-08-31 2018-09-14 $0.182500 Monthly
FN.TO First National Financial Corporation 2018-08-31 2018-09-14 $0.154167 Monthly
GDC.TO Genesis Land Development Corp. 2018-08-28 2018-09-12 $0.240000 Ad-Hoc
GRT-UN.TO Granite Real Estate Investment Trust 2018-08-31 2018-09-14 $0.227000 Monthly
H.TO Hydro One Limited 2018-09-11 2018-09-28 $0.230000 Quarterly
HLF.TO High Liner Foods 2018-09-01 2018-09-15 $0.145000 Quarterly
HOM-U.TO BSR Real Estate Investment Trust 2018-08-31 2018-09-17 $0.041700 Monthly
HOT-UN.TO American Hotel Income Properties REIT 2018-08-31 2018-09-14 $0.054000 Monthly
INE.TO Innergex Renewable Energy Inc. 2018-09-28 2018-10-15 $0.170000 Quarterly
IVQ-U.TO Invesque 2018-08-31 2018-09-15 $0.061390 Monthly
KBL.TO K Bro Linen Inc. 2018-08-31 2018-09-14 $0.100000 Monthly
MI-UN.TO Minto Apartment Real Estate Investment Trust 2018-08-31 2018-09-14 $0.034160 Monthly
MRG-UN.TO Morguard North American Residential Real Estate Investment Trust 2018-08-31 2018-09-14 $0.055000 Monthly
MRT-UN.TO Morguard Real Estate Investment Trust 2018-08-31 2018-09-14 $0.080000 Monthly
MRU.TO METRO INC. 2018-09-05 2018-09-26 $0.180000 Quarterly
NWH-UN.TO NorthWest Healthcare Properties Real Estate Investment Trust 2018-08-31 2018-09-17 $0.066670 Monthly
PBH.TO Premium Brands Holdings Corporation 2018-09-28 2018-10-15 $0.475000 Quarterly
PLZ-UN.TO Plaza Retail REIT 2018-08-31 2018-09-17 $0.023330 Monthly
PTG.TO Pivot Technology Solutions, Inc. 2018-08-31 2018-09-14 $0.040000 Quarterly
PZA.TO Pizza Pizza Royalty Corp. 2018-08-31 2018-09-14 $0.071300 Monthly
RCI-B.TO Rogers Communications Inc. 2018-09-14 2018-10-03 $0.480000 Quarterly
SES.TO SECURE Energy Services Inc. 2018-09-01 2018-09-17 $0.022500 Monthly
SGY.TO Surge Energy Inc. 2018-08-31 2018-09-17 $0.008333 Monthly
SMU-UN.TO Summit Industrial Income REIT 2018-08-31 2018-09-14 $0.043000 Monthly
TNT-UN.TO True North Commercial Real Estate Investment Trust 2018-08-31 2018-09-17 $0.049500 Monthly
TOG.TO TORC Oil & Gas Ltd. 2018-08-31 2018-09-17 $0.022000 Monthly
TVK.TO TerraVest Capital Inc. 2018-09-28 2018-10-08 $0.100000 Quarterly
VET.TO Vermilion Energy Inc. 2018-08-31 2018-09-17 $0.230000 Monthly
WCP.TO Whitecap Resources Inc. 2018-08-31 2018-09-17 $0.027000 Monthly
WPM.TO Wheaton Precious Metals 2018-08-29 2018-09-13 $0.090000 Quarterly

That said, Cargojet, First National (covered July 20, 2018), and High Liner provide opportunities for more investigation.

Cargojet Inc.

Ticker CJT.TO
Amount $0.21
Projected Annual Dividend for 2018 $0.85
Record Date September 20, 2018
Payment Date October 5, 2018
Market price as of August 17, 2018 $77.10
Forward Yield 1.10%
Rating AC1
CAGR (since 2010) 6.72%
CAGR (since 2005) 2.47%

Cargojet Inc operates domestic overnight air cargo co-load network in Canada. It provides aircraft service to customers on an Aircraft, Crew, Maintenance and Insurance basis, and operates scheduled international routes for multiple cargo customers. (Source: TSX)

Cargojet has become more interesting in recent years. It is given an AC1 rating because it cut its dividend in 2009, but since then it has been on an upwards trajectory. Even if we exclude the special dividend in 2013, overall it has been increasing since 2010, providing a 6.72% CAGR since then. However, its forward yield is only 1.10%.

High Liner Foods

Ticker HLF.TO
Amount $0.15
Projected Annual Dividend for 2018 $0.58
Record Date September 1, 2018
Payment Date September 15, 2018
Market price as of August 17, 2018 $6.60
Forward Yield 8.79%
Rating A1B2
CAGR (since 2003) 21.83%

High Liner is the leading North American processor and marketer of value-added (i.e. processed) frozen seafood, producing a wide range of products from breaded and battered items to seafood entrées, that are sold to North American food retailers and foodservice distributors. The retail channel includes grocery and club stores and their products are sold throughout the U.S., Canada and Mexico under the High Liner, Fisher Boy, Mirabel, Sea Cuisine and C. Wirthy & Co. labels. The foodservice channel includes sales of seafood that are usually eaten outside the home and our branded products are sold through distributors to restaurants and institutions under the High Liner, Icelandic Seafood and FPI labels. The Company is also a major supplier of private-label value-added frozen premium seafood products to North American food retailers and foodservice distributors. (Source: Company filings)

I’ve covered High Liner a few times, most recently in March of this year. High liner is very interesting right now as there has been a large drop since the firm announced its quarterly earnings, which has cut the price by about 1/3 the past week, and increased the yield. However, at first glance I do not see the dividend being in jeopardy, so this may be a buying opportunity for an overall great company, which has a compounded annual growth in its dividend if over 20% since 2003.