A Peak Inside my TFSA

After a week of all inclusive fun in Cuba, I'm back to the world of work and dividend growth investing.    Since I didn't actually have to make a deposit to my RRSP in order to purchase shares of Microsoft earlier this month (thank you dividends), I decided to max out my tax-free saving account ("TFSA") for 2013 by transferring in some cash from my non-registered portfolio (thank you again dividends) and making a deposit. Before I decide what exactly to use the money to invest in, I decided to give you a peak inside my TFSA.

After four years of maxing out contributions ($5K/yr), my TFSA was valued at approximately $26.5K today, representing an average return of 8.1% per year. Given the volatility of the market over the four years in question, and considering most people I know have their TFSA funds invested in a high-interest savings account (2-3% return), I'm pretty happy with the 8.1% return per year. I'm also pleased the Jim Flaherty has increased the contribution limit for TFSAs to $5.5K starting in 2013.

My holdings in my TFSA only consist of six stocks: Dundee REIT, Inter Pipeline Fund, Power Financial Corp, Rogers, SNC, and TD Bank. I've experienced very nice unrealized gains on Rogers, Dundee, and TD. Having only recently invested in Inter Pipeline, I'm up about 5% currently, and am interested in increasing my holdings in that company. I'm slightly down on SNC and PWF, but when accounting for dividends, am above water on both holdings.

I'm seriously thinking about selling Dundee given they haven't increased their distributions in 5-years, and I have no idea why the stock has almost doubled since I first bought it. I've also been waiting for a good exit point on Power Financial, as they have also had a stagnant dividend for the last several years. Plus, I've lost all faith in the Canadian public's continued support of high cost mutual funds (i.e. Investor's Group) given the increasing number of low cost, better performing exchange traded funds ("ETFs").

I've been looking at TD, Laurentian, and National Bank as potential investments in my TFSA in 2013. Of these, Laurentian looks the most tempting at the moment (highest yield and great history of dividend growth). As previously stated, I've also considered adding more Inter Pipeline Fund units, as the company has a great ability to throw off free cashflow. Lastly, I've thought about adding another REIT (likely replacing Dundee), but have held back given H&R's recent bid on Primaris's assets.

There's a brief peak inside of my TFSA. I'll keep you updated on any moves I make in it during 2013.

Selling Decisions

The toughest investment decision for a buy-and-hold investor like me is when to sell. The constant flow of dividends trickling into my portfolio, even from poor performing stocks, makes the decisions even harder. Afterall, even some of my weaker performing stocks have excellent yields that boost my overall portfolio return (i.e. Transalta at 7.3% and Power Financial at 5.1%).

Peter Lynch indicated in one of his books that you should hold onto companies so long as the story hasn't changed since you invested, and you still believe in your investment decision. Although I generally think this is good advice, for me, it's the philosophy behind the story that has changed. For instance, as previously indicated, when I used to follow the 'Dogs of the Dow' theory, I would look for  very high yielding stocks that had stable operating and financial performance. Transalta was one of those stocks. Although, I don't feel Transalta's dividend is in any real danger of being cut,  I also don't think they'll be raising it any time soon given changes in their industry.

Another stock I've been debating about selling lately is Canadian Western Bank. I bought CWB in 2009 when I was looking for lower yielding dividend stocks with a history of fast dividend growth (supported by strong cash flow generation). CWB continues to fit those parameters given their 70% dividend growth in the last 5 years, which has been supported by earnings growth, and a relatively low payout ratio (about 30%). My issue is that given the current dividend yield of 2.3%, I could easily double the dividend yield by investing in a larger, more established bank. The fact that CWB is held in my taxable portfolio also complicates matters, as I'd have to pay taxes on 50% of the capital gain I've achieved by holding CWB the last four years.

Decisions to sell are clearly complicated, but I come back to one of my goals for 2013: selling stocks with dividends that are stagnant at a certain level. Being a dividend growth investor, I can't be happy with companies that can't afford to increase their dividends, or choose not to pay higher dividends. Not being able to raise dividends or choosing not to are both unacceptable excuses given the large number of companies who make it a practice to increase their dividends regularly as their income and free cash flow grow. Those are the companies I wanted to be invested in for the long-term.

Nay for Intel, Yay for Microsoft

After spending a couple weeks taking an in depth look at Intel, I decided against buying their stock. Even though they have an economic moat, healthy liquidity, and could easily increase their tempting 4.2% dividend yield given their 38% payout ratio, I got scared off by the flat to decreasing revenue projections from analysts. I’m also not sure how Intel’s management will be able to adapt to the decrease in personal computer sales as consumers move toward tablets and smart-phones. I haven’t totally written off Intel as an investment, it’s just moved down my list of potentials.

Instead of Intel, my first buy for 2013 was Microsoft. In Microsoft, I get a 3.5% dividend yield with room to grow given their 37% payout ratio and history of almost doubling their dividend amount in the last 5 years. There’s also the fact that Microsoft’s capable management is sitting on a $66B pile of cash and securities, and has very little debt. In my view, this enviable liquidity position should allow them to respond to competitive threats relating to their operating system not being used on many tablets or smart phones. It was also encouraging to see that analysts are expecting mid-single level revenue growth for the next several years, which should enable management to continue to increase their dividends. Lastly, I managed to buy Microsoft on a little dip January 10^th, where they closed in on a 52-week low.

The Microsoft position allows me to diversify into a new sector (technology) while increasing the US content of my portfolio. This assists in accomplishing two of my goals for 2013. Now if only Microsoft’s stock price stays low until April, when I should find out how much I can contribute to my self-directed RRSP in 2013. 

Buffet Book in Brief

One of the ways I've enhanced my investment knowledge over the years is through reading the investment approaches of professional investors and money managers. When I saw 'Tap Dancing to Work - Warren Buffet on Practically Everything, 1966-2012' available through the library at work, I couldn't help but checking it out. I've read a couple Buffet biographies before, but nothing as comprehensive as Carol Loomis's offering. 

The book centers around various articles about Buffet and by Buffet in Fortune magazine over the years, with Loomis's (who edits Buffet's annual letter to shareholders) inside perspective on each story. Although the details around Buffet's investment approach aren't explained in as much detail as I'd like (which was expected), the book does give a great deal of insight into Warren Buffet the person.  The various stories led me to admire Mr. Buffet even further as a person, based on his thoughts on wealth distribution, capitalism, tax codes, and charitable giving. His ability to be rational, and not swayed by his emotions (especially fear and greed) is most commendable. 

There was one piece of advise that Mr. Buffet gave a group of business students that I found particularly interesting. To quote the great Oracle from Omaha:

"Pick out the one person you admire the most, and then write down why you admire them....And then put down the person that, frankly, you can stand the least, and write down the qualities that turn you off in that person. The qualities of the one you admire are traits that you, with a little practice, can make your own, and that, if practiced, will become habit-forming."

Although Warren Buffet isn't the person I admire the most, I am planning on being more rationale, and less ruled by emotions in my investment decisions. I'd highly recommend you check out the book if you get a chance. 

Investment Goals for 2012

As the new year starts, instead of resolutions, I've decided to set some investment goals for 2012.  The investment objectives relating to my portfolio management are outlined below.

1. Get Rid of Non-Dividend Growers
Having previously followed other investment philosophies before experiencing the fantastic results of dividend growth investing, I have a couple of non-dividend growers left in my portfolio. My goal by the end of 2013 is to rid myself of all stocks in companies that have failed to increase their dividend in the last 12 months. Specifically, I'll target exiting such companies as Power Financial and Transalta unless they re-commit to increasing their dividend regularly.

2. Increase my Dividend Income and Total Portfolio Value by 25%
In 2012, I managed to increase dividend income by 45% while increasing my total portfolio value by 34%. My goals for 2013 are more modest, as I won't have the proceeds of the gain on the sale of my condo to invest, and I also have a wedding to pay for. Having said that, by re-investing my current dividend income, making modest monthly transfers of new funds into my portfolio, and focusing on high quality dividend growth companies, my 25% targets are definitely achievable in 2013.

3. Increase my Non-Canadian Investment Holdings from 20% to 25%
As per my last post, I'm having an increasingly difficult time finding solid companies with a long history of dividend growth in Canada. Although I'm limited by how much I can contribute to my self-directed RRSP, I feel there is an opportunity to divert some funds currently invested in Canadian banks and telecoms (my two heaviest sectors) into foreign companies. I'm also going to commit to examining if foregoing the 15% with-holding tax on dividends from US companies might be worth it in the long-term to add international diversity to my TFSA.

In addition to the above investment goals, I also plan to write at least one blog post per week. I'm finding these posts help me sort out my thoughts on various companies and provide a different perspective from my normal investment research.

Here's wishing everyone a healthy and prosperous 2013!