2015 Goals Update - My Year in Numbers

Back on January 14, 2015, I set three financial and two non-financial goals for the year. Although there is still one business day left this year, I feel comfortable reporting on my progress now so that I can enjoy the last weekend of the winter holiday. Instead of droning on about each of my goals, I decided to report some pertinent numbers instead.

1. Increase Expected Forward Dividend Income by $1,800/yr 
Status = Achieved
Numbers:
41 dividend increases (including 8 in December)
3 dividend cuts (Kinder Morgan and PHX Energy Services twice before I sold my position)
8% dollar weighted average dividend increase pre-Kinder Morgan dividend cut
4% dollar weighted average dividend increased post-Kinder Morgan dividend cut
18 long-term Buys
6 Sales of long-term holdings
24.6% higher forward expected dividends at YE15 vs YE14
4.4% dividend yield on my portfolio at YE15 (vs. 3.9% at YE14)
1:1 CAD/USD exchange rate I use to calculate forward dividend income in CAD
1.39:1 CAD/USD actual exchange rate on December 30, 2015

2. Complete the Transformation of my RRSP by Year End
Status = Nearly Achieved (Just have to sell Royal Bank in RRSP)
Numbers:
4 companies I sold in RRSP after adding to positions in my TFSA and unregistered account (BCE, CJR.B, Telus, RCI.B)
1 company I sold in my unregistered account after establishing a position in my TFSA (HR.UN)
27 companies in my portfolio at YE14
26 companies in my portfolio at YE15

3. Give Twice as Much to Worthy Causes as in 2014
Status = Achieved
Numbers:
2.1X the donations to worthy causes I made in 2014
12 Charities and charitable organizations I supported during 2015
2 Causes I gave to more than once during the year
20% more I plan on giving to good causes in 2016

4. Keeping My Weight Under 160 Pounds
Status = Achieved
Numbers:
159.6 pounds I weighed this morning
163.6 pounds I weighed December 26th after returning from Christmas at my in-laws
165 pounds to keep under initially before revising downward in July 2015
7 pounds I lost one day that I was sick last February
0 weight goals I will have in 2016

5. Average At Least One Blog Post a Week
Status = Achieved
Numbers:
81 posts in 2015
4 hours spent moving and updating my Blogger site to my new domain name this morning
1.5 posts per week was my pace from January - June
2 posts per week was my pace from July - November
1 post per week was my pace in December
299 Twitter followers at December 30, 2015 (vs 0 on January 1, 2015)
14X more pageviews in December 2015 than January 2015
3 most popular posts this year (in order of popularity):
 - Why I Will NEVER Share My Net Worth Online
 - Nibbling vs Gorging on Stocks
 - Four Lessons from Buffet's & Munger's Biographies


Did you achieve all of your investment goals in 2015? Do you have your 2016 objectives set?

My Biggest Hits & Misses of 2015

As a kid, I loved listening to radio stations on new year’s day when they played their countdown of the biggest hits of the year. With a week left in 2015, I thought it would be a fun to take a look back and recap my biggest hits and misses. Why include my biggest misses? Simple, I learn more from the misses than the hits.

Hit: The Canadian Dollar Depreciating Relative to the US Dollar

The Canadian dollar has fallen about 17% against the US dollar since the beginning of 2015. On the downside, the weak Canadian dollar has made it more difficult as a Canadian investor to find US stocks with an adequate margin of safety. On the flip side, since about a third of my investment holdings are in US companies, a more expensive US currency has boosted my portfolio value and led to a higher inflow of dividends from my US holdings.  Although I don’t see the Canadian dollar depreciating by another 17% in 2016, depending on the price of oil, the level of interest rates on both sides of the border, and the performance of the Canadian economy, our dollar could very well fall further.

Miss: Kinder Morgan

When Kinder Morgan’s management cut their dividend by 75% earlier this month, I felt like the biggest loser on the block. My dividend growth rate for 2015 went from 8% to 4%, my forward dividend income decreased by a material amount, and my faith in management of all corporations (particularly that Kinder Morgan) was lost. Even worse, I added to my position in Kinder Morgan during the first week of November, when I should have known better. Now, I continue to hold my shares in Kinder, as I process the dividend cut, and try to determine my course of action.

Hit: Opening a Registered Education Savings Plan Account

Had I done a hits and misses list for 2014, my biggest miss would have been failing to get my act together and open a Registered Education Savings Plan ("RESP") for my son. All it took to receive a risk-free $500 grant from the Government of Canada was an hour of paper work, scanning some identification documents, and mailing a cheque for $2500 off to my brokerage.  Even though I managed to take over a year to complete the required submission, I still received that 20% return on the deposit toward my son’s education this year. Now I just have to figure out which ETFs to invest in, and I'm off to the races!  I’m a big fan of free money, and since I don’t expect as much of it from the new Liberal government, I’ll be happy to keep accepting the $500 grant yearly on behalf of my son.

Miss: PHX Energy Services Corp

As I wrote about in my most costly stock picking losses entry, I bought a position in PHX in September 2014, and held onto the oil well driller through 2 dividend cuts and increasing scary financial results before finally selling it in August 2015. Although PHX represents a big miss for me, learning to always have an exit plan when speculating on a security will help me in the future. As will my plan to only make short-term purchases in companies I don’t mind holding for the long-term.

Hit: Sticking to My Plan

One of my goals for 2015 was to transform my portfolio to make it more tax efficient and easy to manage. By shifting my position in H&R REIT into my TFSA, moving holdings in Canadian companies from my RRSP to my unregistered account, and decreasing the number of companies I own, I stuck to my plan. Although there were temptations to add shares in other Canadian companies in the bear market of 2015, I’m happy to have held a steady course and should reap the benefits come tax time next April. 

Miss: Not Holding Onto Suncor

This one might sound odd given the current depressed level of oil prices, and my plan to decrease my number of investment holdings, but I regret not holding onto my Suncor shares during the 4-times I bought and sold it during 2015. When oil prices eventually recover, I’d love to own a position in Suncor to act as a hedge against gas prices. I drive past a Petro-Canada station (Suncor’s retailing arm) five days a week taking my son to day care, and my main observations are that there are always cars at that station, and that their gas price has remained stubbornly high.  Even though I consider the current price of Suncor’s shares expensive, it remains a company I'd love to hold for the long-term.

Now that my Casey Kasem inspired hit (and miss) list is complete, it’s time to relax and enjoy the holidays.  Here’s wishing everyone a Merry Christmas and Happy New Year!

What were your biggest hits and misses of 2015?

Diversification vs Diworsification

"The only investors who shouldn't diversify are those who are right 100 percent of the time."
- John Templeton

"An investor should act as though he had a lifetime decision card with just twenty punches on it."
- Warren Buffett

"Diworsification is investing in too many assets with similar correlations that will result in an averaging effect."
- Concept made famous by Peter Lynch in 'One Up On Wall Street'

The three quotes above speak to the inner turmoil I feel when I think about how to diversify or further concentrate my holdings in 2016. I know for a fact that I'm not right 100% of the time, and therefore must diversify. However, I fear as I add investments to my portfolio, diworsification is real risk. Many of the asset classes I invest in as a dividend growth investor ("DGI) are highly correlated. I'm also a big fan of the Warren Buffett 'punch card' approach, and prefer to concentrate my money in companies in which I have the most confidence and understanding.

Among the many things I struggle with as a DGI located in Canada, sector diversification is near the top of my list. Although nearly 20% of my investment holdings are in the Canadian banking sector, banks actually account for 39% of the TSX Composite Index. Similarly, my 17% weighting of energy and pipelines is slightly lower than the 18% weight in the TSX Composite Index. 



After completing the above table last weekend, a couple of observations stood out:

Home Country Bias
With about 34% of my holdings in Canadian companies, I'm not as globally diversified as I should be. However, one of the big reasons for my home country bias is the favorable tax treatment of Canadian dividends, and unfavorable tax treatment of foreign dividends. Unless I receive foreign dividends in my RRSP, there is withholding tax deducted, and I also may be taxed at my marginal rate on net foreign dividends received.

Sectors Not Represented
Certain sectors, such as mining, infrastructure, retail, and transportation are missing from my portfolio. Although there are specific, rational reasons for some sectors not being represented (like my complete lack of knowledge regarding mining), other reasons are irrational (like being burned once by SNC in the infrastructure sector, and choosing to avoid being burned again), or completely lacking (Magna is a successful Canadian transportation company with a global presence and an impressive history of dividend growth).

Cash Level is Low
In contrast to 2014 during which I made a couple large purchases using cash contributed to my brokerage account quarterly, in 2015, I contributed to my brokerage accounts each month, as a way to encourage myself to make regular, smaller purchases. Since I've made regular, smaller, monthly purchases, I now have a lower cash balance to take advantage of exceptional opportunities as they arise.

Relatively Low Number of Holdings due to Monitoring
I pared down my number of investments from 29 at the end of 2014 to 26 currently. I find it's still a stretch for me to monitor so many holdings, even with six Canadian banks whose results are highly correlated. Although I see many other DGI bloggers with portfolios of 30-60+ companies, I simply can't effectively monitor that many investments given time constraints. Although, through Alaris, I gain exposure to 14 different companies, which further increases my sector and geographic diversification.

As I formulate my investment plan for 2016, I'm interested in hearing from my readers how they balance diversification and diworsification. Any tips, techniques, or insights you have regarding balancing monitoring, diversification across asset classes and geographically, and eliminating home country bias in your portfolio, would be much appreciated.

Do you consider your investment portfolio diversified? 

Why I Will NEVER Share My Net Worth Online

There was an excellent post last Monday (November 30th) featured on Rockstar Finance by Mark titled Why 185 Bloggers Are Sharing Their Net Worth. Mark's article was well researched, informative, entertaining, and gave many reasons including honesty, progress, hope, motivation, accountability, inspiration, control, and freedom why people share their net worth online. I commend every one of the 185 bloggers who have the guts to update and post their net worth every month for all the world to see.

On the other hand, I will NEVER share my net worth online. Additionally, I can't think of a situation during which I'd share my net worth with anybody in real life. When asked to give my approximate net worth while applying for mortgages, credit cards, and opening brokerage accounts, I tend to give a nice round number that might have been applicable 10 years ago. There are multiple reasons why I choose to keep my net worth private, and I'll explain the main ones below. 

Fear

What’s so scary about posting one’s net worth online? The fear of family, friends, colleagues, acquaintances and strangers judging me based on an irrelevant number (see reason 3). Everybody who posts their net worth online runs the risk of having people associate them with a number. We’re all complex, multi-faceted people that should be defined by more than just a financial figure. Yet, reading that blogger X has a net worth of $XXX could lead others to form conclusions on the individual that have little to do with reality. 

I also fear repercussions if I post my net worth online. I’m perfectly happy working for my employer, and the thought of them knowing exactly how far down the road to financial independence I am scares me. Through my own experiences and observations, I’ve seen employees let go from different companies for a variety of justified and arbitrary reasons. If a company is trying to decide to let go off a high net worth employee or a low net worth employee with a similar skills set, my bet is that they’d let go the higher net worth employee.

Privacy

In an era when people willingly give up their privacy to make their online presence more engaging, I prefer to leave a little mystery. Although I understand that providing an increased level of disclosure about your financial position makes it easier for readers to identify with you, it’s simply not a trade-off that I’m willing to make. That said, I completely understand why a blogger who is dependent on their website as an important source of income would make this trade-off in an effort to better connect with their readers.

Upon reflection, I think privacy is closely related to my fear. Even a technological dinosaur like me realizes that finding out the identity of an “anonymous” blogger is not a huge challenge for someone who is motivated and has the necessary resources and abilities. Since blogging is only a hobby for me, I’ll continue to avoid a high level of financial disclosure on-line.

Irrelevancy of Net Worth

Out of the three reasons I choose not to share my net worth, this will likely be the most controversial: I feel net worth is an irrelevant figure when it comes to assessing financial independence. The personal circumstances of an individual, like their family, work, and hobbies are ignored. Net worth says nothing about the income and expenses of an individual, and how those might change over time. The figure also does not speak to the ability of an individual to generate income from the asset components of their net worth, nor does consider the rates of interest associated with the liability component. I’d argue that when assessing financial independence, the percentage of an individual’s regular yearly expenses that are covered by their yearly passive income stream is a much better indicator of progress. Add in the expected percentage growth in passive income compared to an expected future inflation rate relating to regular expenses, and I think you’d have a highly relevant metric to judge progress toward financial independence.

Additionally, consider for a moment how many assumptions need to be made when attempting to calculate the net worth of an individual. If the individual owns a house, they would need to assess the value of the home (something even real estate agents with comparable home sales struggle with), real estate commissions, land transfer taxes, moving expenses, mortgage penalties, future mortgage rates, etc..  Are you part of a company pension plan? Congratulations! Now if you want to calculate your net worth all you have to do is accurately forecast future salary increases, rates of return on the plan, the year of your retirement, and a reasonable discount rate. Are any of your income producing assets in tax favored accounts? An accurate net worth calculation requires you to predict future income tax rates, additions and withdrawals to the accounts, and rates of returns on those assets.

In summary, I’ll never post my net worth online as I fear providing an irrelevant figure could cause people to judge me and might cause negative consequences if my privacy was ever compromised. It’s worth re-iterating that I have a great deal of respect for the 185 bloggers who post their net worth monthly. If updating the figure online monthly helps them track their progress, hold themselves accountable, motivate and inspire others, all the better! It’s just not for me.

Do you or would you post your net worth online? 

Four Lessons from Buffett's & Munger's Biographies

Part of my plan to improve as an investor is to learn from the successes and failures of others. Who better to learn from than two of the most successful investors of our time? Earlier this week, I finished reading 'Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger'.  It was Alice Schroeder's 'The Snowball: Warren Buffett and the Business of Life' that prompted me to read Mr. Munger's biography.  Below are four key lessons from the biographies of Warren Buffett and Charlie Munger.

1. Patience

Reading about how Warren Buffett waits for "fat pitches" and advises others to limit the number of punches on their lifetime decision card to 20 made me question my own patience. Charlie Munger's credo of "Preparation. Discipline. Patience. Decisiveness" is representative of his and Buffett's practice of investing a large percentage of their funds into companies in which they had great confidence. Looking at my trading activity in 2014 and 2015 objectively, it seems I've become a less patient investor. During 2014, when I was making quarterly contributions to my investment account, I tended to save up my funds to make a couple of large purchases over the course of the year. In 2015, as I made monthly contributions to my investment accounts, it is rare that I make it through an entire month without adding shares to one of my holdings. Clearly, I need to do a better job of emulating Warren and Charlie and wait for "fat pitches" to swing at.

2. Long-term Horizon

One of my favorite investing quotes is from Buffett's mentor, Benjamin Graham who famously said "In the short run, the market is a voting machine but in the long run it is a weighing machine." Buffett echos this sentiment with his assertion that he buys with the assumption that the next day the the stock market could close for five years. Mr. Munger also focuses on the long-term, as evidenced by his quote "Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things." In the last couple weeks, witnessing the downward spiral of Kinder Morgan's stock price, I'm convinced that most investors are incapable of focusing on the long-term horizon. Instead of obsessing on the rising cost of capital and leverage of the firm, I've been asking myself if the market shut down for five or ten years, would I worry about Kinder Morgan being around when it re-opened? The answer to that question is evidenced by the fact that the company remains one of my investment holdings. 

3. Buying Wonderful Businesses at Fair Prices

Warren Buffett credits Charlie Munger for helping him see the benefits of buying wonderful businesses at fair prices instead of fair businesses at wonderful prices. Quite simply, paying fair prices for quality companies, instead of focusing on "cigar butt" type businesses helped the two build Berkshire Hathaway instead to the low maintenance, decentralized, cash generating machine it is today. I feel that dividend growth investors have an advantage in the area of identifying wonderful businesses - we know that cash is king. When we see a company that generates increasing amounts of cash each year, and has a history of paying out more cash to their shareholders, we get excited. Personally, I have a much harder time determining fair prices for wonderful businesses. Despite accounting and finance designations, my faith in dividend discount models, P/E multipliers, and peer comparisons is less than 100%. That said, when various valuation metrics all point toward the same conclusion, that a wonderful company's stock is below or near it's fair price, action is warranted.

4. The Value of a Supportive Partner

Buffett and Munger derive great value from using the other as an objective sounding board to discuss investment ideas. Neither gentleman is a 'yes man', and both seem totally comfortable critiquing and questioning the assumptions of the other. Although few formal partnerships exist in the blogging community, it's interesting to see how much constructive and informed dialogue occurs. Frankly, I find the feedback from other bloggers and commenters is much more civilized than on other platforms (i.e. Seeking Alpha). Regarding Warren and Charlie, one of the more eye-opening aspects of their biographies was learning how they both completely immersed themselves in their investment analysis. Reading how Mr. Buffett's life revolves around reading annual reports, papers, and trade journals, at the expense of spending time with his family, showed me how much work being a great investor takes. I don't think many marriages could survive having one spouse totally immersed in their own pursuits, and I give the wives of Warren and Charlie a lot of credit for tolerating their husbands' obsession.

Incorporating the four lessons above into my investment process can only help me improve as an investor. I yearn to be a "learning machine" like Warren and Charlie, but have to steer clear of immersing myself in investing at the expense of spending quality time with those I care about.  

Have you learned any important lessons from Warren Buffett, Charlie Munger, or other famous investors? 

December Stock Watch List

With the exception of my quarterly goal updates, monthly watch list posts have quickly become my favorite recurring entry. These posts help me focus my research and monitoring efforts on a handful of companies. With the North American markets still trending sideways heading into 2016, there are several companies that I’ll be keeping a close eye on this month.

Royal Bank (TSE = RY): Target Price = $72 (vs $72 last month)

The main reason that Royal Bank continues to be on my watch list is that I need to pick-up some shares in my unregistered account so that I can sell the corresponding position in my RRSP (after waiting a month to avoid tax penalties) in order to complete my portfolio transformation. Although I’m currently overweight Royal Bank, I continue to think it’s reasonably priced (P/E ~ 12X). I don’t mind collecting quarterly dividends (yield over 4%) while I wait for an opportunity to pick up shares on a dip.  On the flip side, if the share price climbs over $80, I’d likely sell my position in my RRSP as I feel Canadian banks’ results will suffer in 2016 due to the prolonged slump in the price of oil.

Bank of Montreal (TSE = BMO): Target Price = $72

After starting my position in BMO late in 2008, adding more shares during March 2013, I’m looking to complete my position in this bank on weakness in share price. After announcing a dividend increase today (the second this year), the shares are up over 1.5%. However, the shares are still reasonably priced (P/E just over 12X) and yielding 4.2%. 

Enbridge Income Fund (TSE = ENF): Target Price = $28

After trading into and out of Enbridge Income Fund three times in November, I’m considering keeping a position in my RRSP over the winter. Each time I sold my temporary position in my RRSP last month, I felt sad about getting rid of this fairly price (P/E ~16X) pipeline asset play yielding almost 6%, with a likely 10% dividend hike coming this Thursday. Part of the reason I’d like to keep this in my RRSP over the winter is the fact I pay my monthly gas bill to an Enbridge subsidiary, and the monthly dividends would help hedge my gas bill if this winter turns out to be another cold one. At the very least, I plan to be a shareholder in my RRSP this Thursday when I anticipate an announcement of the previously telegraphed dividend hike.

Digital Realty Trust (NYSE = DLR): Target Price = $68

Although I put Digital Realty Trust on the list, generally what I’m looking to do is to take advantage of an expected US interest rate hike in December to add some diversification to my current US REIT holdings of Realty Income and Omega Healthcare. Ideally, I’d like to invest in a type of REIT that I can’t buy on the Toronto Stock Exchange. Other options include Tanger (discount shopping centers), Chatham Lodging (hotels), or Extra Space Storage (storage). I admire Digital Realty Trust due to their strong balance sheet (BBB/Baa2 credit ratings), history of dividend growth, and the wide moat management has created with their business model.

As with other months, I always keep some cash aside to take advantage of great opportunities that might occur as market sentiment shifts. That said, with the exception of possibly adding a bit more to my overweight Alaris position, my bet is that any buys this month will come from the above list. Here’s wishing all my readers fruitful pickings in the last month of 2015 :)

What companies are on your watch list this December? 

November Update – Dividend Raises, Goals and Money Experiment

November flew by in a blur. After two weeks of making multiple purchases this month, my portfolio is in good shape heading into December. Here’s a recap of my dividend raises received in November, how I progressed with my non-financial goals this month, and the results of my latest money experiment.

I’m happy to announce that three of my holdings decided to reward me for being a loyal shareholder with a dividend raise this month.

-          Telus increased their quarterly dividend from $0.42 to $0.44, their second dividend increase this year, and tenth under their multi-year dividend growth program. Although their third quarter results weren’t spectacular, they continue to generate revenue, earnings and free cash flow growth.

-          Inter Pipeline Fund announced record Q3 results, and then boosted their monthly dividend from $0.1225 to $13 per share. I’m glad to have increased my stake in this great company within my TFSA during November.

-          After McDonalds posted Q3 results that showed growth in comparable location sales, they upped their quarterly dividend from $0.85 to $0.89. It’s promising to see some positive signs that the company’s turnaround efforts are taking hold.

Progress was strong against my non-financial goals in November. This post raises my total to eight this month, doubling my minimum target of one post per week. Although one fewer than my nine posts in October, the quality of entries improved this month as I put more effort into planning, researching, and writing. The result was a rewarding boost in my page views and a better level of engagement from readers via comments. Being inexperienced in directing a blog toward external users, I still have a lot to learn in this area, and definitely need to up my social media game in 2016.  I’m also proud to say I stayed under my maximum weight of 160 pounds. The start of the month was tough, as many co-workers brought in Halloween treats to work, but I’ve been more consistent visiting the gym, and my regular Thursday night ultimate frisbee game has also helped my weight maintenance efforts. Lastly, I made donations to Movember and to the Children’s Aid Foundation of Ottawa during the month. I’m a regular contributor to Movember as funds go toward research into prostate and testicular cancer, and mental health. All issues that are close to my heart. The Children’s Aid Foundation donation was to sponsor a colleague who participated in a trivia night fundraiser.

After limiting my out of pocket cash expenses to under $100 in October, I not only replicated that feat in November (I have about $3 left as of today), I challenged myself to earn some active income. Although this month’s experiment was initially envisioned with plans to sell some items on Ebay (something I’ve never done), I ended up making three short-term stock trades that netted me about $420. To be clear, I won’t be replicating this challenge in December. Short-term trading added extra stress to my life, and three trades in a month was much too high. During December, I plan to “invest in myself”. I have some fun ideas and have budgeted $100 to pursue these initiatives. I’ll report back next month to let you know if my investments in myself pay dividends ;-)

Did you meet your personal and financial goals in November? 

The Best Dividend Growth Investing Metric?

Here’s an embarrassing confession: Despite having identified myself as a dividend growth investor for years, last week, for the first time ever, I calculated the dividend growth rate of my portfolio!  The calculation for 2015 took me two tries and about 15 minutes to get to a number that I thought looked reasonable. My result of 6.1% (the dollar weighted average growth rate of dividend increases for my 26 holdings YTD in 2015) prompted two immediate reactions. Firstly, with at least three upcoming increases (Pfizer, Enbridge, and Enbridge Income Holdings) expected next month, I was elated that my dividend growth rate was already over 6%. Multiplying the growth rate by my forward dividends yielded a happy dance inducing result. The second result of my calculation was a simple question – why have I waited so long to do this calculation?

The answer to the simple question above is somewhat complex. If you read any of my quarterly goal updates in 2015, you’ll notice that my main focus is on forward dividend income. Forward dividend income is derived from taking the number of shares of a company I own and multiplying it by the company’s current dividends per share. Many of my brilliant readers will quickly note that the product of the above equation, when subsequently added for each of my holdings, results in a figure that assumes dividends will stay static over the next twelve months. What a horrible assumption! Although I tolerate two REITs in my portfolio who have kept their payout constant over the last year, if any of my other holdings decided to keep their dividend constant without a very good reason, they’d likely find themselves looking for another shareholder.  The other downside of focusing on forward dividend income is it might lead me to seek higher yielding securities at the expense of sacrificing future dividend growth. For instance, basing my decisions only on forward dividend income could result in justifying a purchase of a high yielder like AT&T while writing off a possible dividend growth poster child like Visa, Ross Stores, or Apple.

On the other hand, focusing solely on dividend growth would result in the opposite scenario: sacrificing income for future income growth. A portfolio full of rapid dividend growers does not interest me as I’d question if management of such companies can sustain double-digit dividend increases for an extended number of years. For example, if a company with a dividend yield of 1% grows its dividend at 20%, it will take nine years before the dividend yield on cost would equal 5.2%. In the same nine years, a dividend payer with a yield of 5%, growing their dividend at a paltry 2% would achieve a 6% yield on cost.   

In the past, I’ve focused on the dividend yield of my portfolio; another imperfect measure. Dividend yield ebbs and flows with market movements and is mostly out of the control of the investor. I’d argue it’s not even possible to tell what kind of year you had based on the dividend yield of your portfolio. In my experience, dividend yield is more likely to tell you what kind of year the market had.

Another dividend blogger once wrote a detailed article of why he used total return to assess the performance of his portfolio. Although I’d agree that total return is an excellent indicator of how well your portfolio performed over a specific time period, I question its relevancy to income focused investors. Ultimately, dividend investors want to know how much cash their portfolio generates, and are much less interested in the capital gain/loss component of their total return. Being somewhat limited in my technical skills, my thought is that calculating an accurate total return would be a nightmare for dividend investors, who regularly receive dividends, make contributions to their portfolio, and re-invest in additional shares of companies. Maybe there’s a short-cut to calculate total return that wouldn’t require me plugging in reams of data into a spreadsheet once a year?

As I look forward to 2016, I don’t know what metric I’ll focus on. So far, I’ve decided toexpand beyond one metric as I don’t feel any single value tells me enough about my portfolio. This leads me to an obvious question to my readers: 

What metrics do you use to track the success of your portfolio?

In Defense of Market Timing

In my recent post on DRIP-ing, I defended the practice of market timing. One of my main issues with automatically re-investing dividends into more shares of the companies I own is my fear of buying shares at their high points. Based on the comments I received on the post and my impression from other dividend bloggers, buying at high points seems a common fear.

Yet, most of the investors we idolize condemn retail investors for trying to time the market. Below is a sample of this condemnation.

Peter Lynch"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."

John C. Bogle

"The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly fifty years in this business, I do not know of anybody who has done it successfully and consistently."

Bernard Baruch

"Only liars manage to always be out during bad times and in during good times."

Warren Buffet

“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”

Out of the above quotes, I find the Warren Buffet one the most interesting. Buffet resists slamming the door closed on market timing. Another quote from the Oracle of Omaho furthers my perception that Mr. Buffet enjoys buying companies on sale as much as anyone:

Warren Buffett

“The best thing that happens to us is when a great company gets into temporary trouble… We want to buy them when they’re on the operating table.”

On a similar note, I enjoy buying companies near their 52-week lows, especially when their share price has been knocked down for no specific reason. Common causes of these situations are over-reactions to perceived negative news and when good companies get pulled down during sector sell-offs. A specific example of an over-reaction to perceived negative news is the 8% drop in Alaris's share price after their so-so Q3 earnings results release earlier this month. The fact that TransCanada is down about 15% year-to-date, despite continuing to post strong results is an example of a good company being pulled down in the pipeline sector sell-off.

A distinction can also be made between attempting to time the market and trying to time purchasing shares in individual companies. There are so many economic, political, geographical, and psychological factors that influence the movement of the market as a whole, I'd agree that no one could possibly forecast specific market movements with any sense of certainty. On the other hand, individual companies' share prices are much more a function of their operating results. Unless you're investing in complex multinationals that face a variety of risks, an argument can be made that projecting the course of a company is easier than foreseeing the course of the market as a whole.

Lastly, although I'll admit to trying to time my purchases at opportune instances, I know that I'll never buy an individual company at the bottom.  If I happen to perform this trick once, it will be dumb luck. I'm more interesting in stacking the odds of a purchase in my favor by buying a company with an adequate margin of safety. To me, that margin of safety is usually represented by an adequate dividend yield (at least 3%), a history of dividend and earnings growth, and a low P/E (or P/FFO in the case of REITs). 

Unlike some, I don't mind being called a market timer. I wear the title like a badge of honor. Afterall, the opposite of trying to time stock purchases would be indiscriminately buying shares when they near their all-time highs or when they look expensive. Not much of a plan if you ask me...

Do you consider yourself a market timer?

To DRIP or not to DRIP?

One of my main goals as an investor is to be open to other points of view. Learning from the successes and failures of others will only help me in the long-term. To that end, after one of my favourite dividend bloggers, Monsieur Dividende, indicated last week that he DRIP-ped the shares in his RRSP, I decided to explore the possibility of DRIP-ping again.

Before my blogging days, I decided against enrolling in Dividend Re-Investment Programs (“DRIP”) run by companies in which I held shares. Such DRIP programs allow shareholders to use dividends earned from their shares to automatically purchase additional shares of the company. These additional purchases are usually done at no cost to the investor, and most of the time at a discount to the market price of the company’s shares. Even though DRIP programs are great in theory, I had some reasons for not enrolling in them:

1.       Time and cost to initially enroll in the DRIP. Having talked to my discount brokerage about five years ago about a DRIP that interested me, it quickly became obvious that there was some leg work I’d have to do before I was able to register for the DRIP. At the time, the effort required was greater than my perception of the benefit I’d realize once enrolled.

2.       The idea of buying shares at inopportune times. I like to buy shares in companies when they are on sale for less than I think they are worth. Call it market timing if you want, but I continue to prefer stocks trading near 52-week lows or that are being sold off for no company-specific reason.

3.       The satisfaction of cash deposited into my account stops. Having dividends deposited into my investment accounts each month opens up a universe of possibilities. I can use that cash for anything, including buying more shares of the company that gave it to me.

Of the above reasons, the second and third still hold true. In contrast, although there’s still some effort in enrolling in DRIP programs, my recent research suggests that it’s now a less cumbersome process. Additionally, I see a couple of obvious benefits besides buying additional shares of companies I like with no brokerage fees and at a discount:

1.       Negating the USD/CAD exchange rate. My brokerage offers me a low exchange rate when converting my USD dividends into CAD, and then charges me a high rate when I buy shares in US companies. By using USD dividends to buy shares directly through the US companies I own, I’d be removing my brokerage and their uncompetitive exchange rates from the investing equation.

2.       Using the discount in share price to accelerate my accumulation phase. Although the discount rate companies offer on their shares through their DRIP programs tend to vary between 0 – 4%, a decent discount rate can take the sting out of buying shares at higher prices than I’d prefer. Given I’m still in the accumulation phase, a couple percentage points of a discount rate could materially boost my dividend growth rate over time.

3.        Removing emotions from the investing equation. Building on the point above, it’s hard to argue with the mathematical reality of compound interest. As an investor, my emotions influence my investing decisions. Simply putting a portion of my portfolio on ‘automatic’ and letting compound interest work its magic seems logical.

Based on the above reasons and the fact that I don’t foresee any events that would require me using some of the dividends from my investments to cover life expenses, I’m going to further explore DRIP programs offered by some of the companies I own. In particular, I’m most interested to determine the level of discounts on DRIP-ping in some US companies in my RRSP in which I have a lot of confidence (i.e. Realty Income, Omega Healthcare, and Microsoft). I’ll keep you posted if I dip my toes into the DRIP waters.

Do you DRIP any of your dividend stocks? 

Three More Recent Buys - TransCanada, Inter Pipeline and Alaris

After writing a disclaimer as part of last week's entry recapping six transactions, and explaining how unusually high that number was, I made five transactions this week. In fairness, my three long-term buys this week all corresponded to planned purchases of stocks trading below the target prices set out in my November watch list. The other two transactions relate to short-term trade I made today in my RRSP. 

On Tuesday, less than a week after Inter Pipeline Ltd announced record results and increased their dividend by 6%, their stock fell below $24. I took the opportunity to acquire enough shares in my TFSA to re-establish my full position in the company. Using some accumulated dividends to buy shares at a discount to my average cost and at a dividend yield north of 6% was a no-brainer for me. 

Also on Tuesday, when Alaris Royalty's stock fell over 5% after announcing their Q3 results,  I established a position in the company in my unregistered account. Even though I already had an overweight position in Alaris in my RRSP, I wanted to open a position in my unregistered account as I feel comfortable contributing to this dividend grower any time it goes on sale. Instead of explaining yet again why I love this company, I'll refer you to a reply I made to a comment on last week's entry. Alaris is now my largest holding, and I wouldn't hesitate to go even further overweight on it. 

On Wednesday, I added enough shares of TransCanada to complete my position in my unregistered account. TransCanada's share price has been trending downward since President Obama denied the Keystone XL permit, but the company has many other projects on the go, and was even rewarded a $500M contract to build a pipeline in Mexico. Completing my position in TransCanada that yields over 5%, and has plans to grow its dividend by at least 8% annually through 2017 was an easy decision. 

This morning, I saw an opportunity to purchase shares of Enbridge Income Fund below $30, and jumped at it with some over-reaction money I keep inside my RRSP. As the stock recovered a couple hours later, I decided to exit the position at a nice profit. 

My Investment Holdings page has been updated to include the above purchases. To paraphrase last week's ending thought 'with five transactions under my belt, I can assure you that the rest of November will be quieter.' 

Do you make any short-term trades or are you solely focused on holding securities for the long-term?

Management - An Untapped Tool for Dividend Growth Investors

Do you have any companies in your portfolio that haven’t raised their dividend in the last year? There are two companies in my Investment Holdings that haven’t rewarded me with a distribution increase in the last twelve months. After one* of my two non-raisers reported record earnings last week, then didn’t raise their distribution, I tracked down the CFO’s email address and asked why the company wasn’t increasing their payout.

Despite being an investor since 2001, and always trying to think like an owner, last week was the first time I’ve ever contacted management of one of my investment holdings. Communicating with company management has never been part of my investment process. In retrospect, this is odd considering the amount of time I spend talking and meeting management of different companies in my professional life over the last eight years. Yet for my investments, I acted more like silent partner, relying on public filings from the company and earnings call transcripts.

My silent partner approach to investing officially ended when I received a reply from the CFO of the company on Friday, one day after my initial email. He explained to me in great detail why his company was not increasing their payout, and how he planned to use the cash instead. Being a long-term investor in the company, the CFO’s answer gave me great confidence in management’s ability to deploy cash in the most efficient manner. It’s a shame the company doesn’t hold earnings calls, since the CFO’s enthusiasm and depth of knowledge would provide other investors the same confidence it provided me.

Even with various security laws limiting what management can disclose to investors, I’d still encourage you to contact management of public companies. In my day job, I’ve been pleasantly surprised by how open management are to at least consider my questions. Even if management doesn’t address a query, sometimes a non-answer speaks volumes to management’s intent and priorities. My experience has taught me that there is absolutely nothing to lose by contacting a company and asking a question.

Going forward, if questions arise that are not answered in public filings, earnings transcripts, interviews, or other sources, I won't hesitate to go directly to the company with my query. Investor relations departments exist for a reason, so why not use them? :)

Have you ever contacted a company’s management to get an answer to your question before investing? What was the result?

* I chose not to identify which of my portfolio companies I contacted since I don’t want to single out a CFO who already has lots of his plate. I respect and appreciate the time he took to answer me in a very detailed and thorough way. 

Recent Buys - Kinder Morgan, Alaris Royalty & Omega Healthcare

I feel like the below post should come with a disclaimer for any first time or casual readers of my blog. It's highly unlikely you'll ever see me make six transactions in a week (or even a month) again. I usually make about 10 trades a quarter. This week was highly abnormal for me.

Since mentioning that November could be quite busy in my watch list post, I made the most of the first week of the month. As indicated in my updated Investment Holdings page, I took the opportunity to go overweight in both Kinder Morgan and Alaris Royalty this week, while completing my position in Omega Healthcare Investors.

After reading various blogger, Barrons, and Seeking Alpha posts of Kinder Morgan, reviewing their Q3 10-Q, and doing my own analysis, I decided to add another 100 shares to my position at $26.  Before doing this transaction, I craved and paid $30 for 3-months of “fair” exchange rates from my broker.  

With the $30 sunk cost incurred, I decided to complete my position in Omega Healthcare Investors today. The threat of a possible US interest rate hike in December is playing havoc on US REITs, so I completed my position in OHI in my RRSP.

Earlier this week, when Alaris Royalty slipped below my strike price of $27, I doubled my position in the company. Quite simply, at a P/E of 15X, with a 6% dividend yield, and a history of dividend increases, I decided to increase my position in my favorite Canadian dividend grower.  There was a great article in the Globe and Mail on Alaris last week, in which their CFO stated “My job is to just keep on increasing that dividend”.  Makes me want to hug the guy!

In the interest of full disclosure, I also completed two short-term trades this week in my RRSP that generated several hundreds of dollars of profits. I again sold my position in Canadian Utilities. After qualifying for the dividend, the stock increased to a point (mid $35) that I’m not that interested in it.  Additionally, I picked up some shares in H&R REIT on Wednesday when they were on sale for $20.60, and sold the next day after they unexpectedly released strong Q3 results.  I continue to maintain my position in H&R in my TFSA.

With six transactions under my belt, I can assure you that the rest of November will be quieter.

Did you buy anything in the US REIT sell-off today? 

Stock Watch List for November 2015

Posting my September and October stock watch lists helped focus my research and tracking efforts while also increasing my accountability to readers. With more cash in my unregistered, TFSA, and RRSP accounts than normal, November could very well be a busy month for me. Here are the stocks I will consider purchasing in November, along with target prices that would make them difficult to resist. In order of appearance, there’s a new entry, two stocks that remain on my watch list from October, and a re-entry from September’s list.

Inter Pipeline Ltd (TSX = IPL); Target Price = $24

My favorite thing about being a dividend growth investor is the constant and growing inflow of distributions into my investment accounts. As my TFSA continues to throw off cash, I’m looking to “nibble” in order to re-establish a full position in Inter Pipeline. Investors have punished pipeline companies in 2015 as commodity prices have fallen, and I feel lucky to be in a position to add more shares to this monthly dividend payer with a 6% dividend yield. The company increased their dividend by 14% last December. The company has reported record profits through six months in 2015, and I expect another large (10%+) dividend increase this year.

Alaris Royalty Corp. (TSX = AD); Target Price = $27 (up from $26 last month)

Despite already having a full position in Alaris in my RRSP, I remain open to adding more shares of this high yielding dividend growth royalty company. There are so many things to love about this company, but a few of my favorites are their diversified royalty revenue stream, the fact it’s a monthly payer, their very affordable P/E of  ~15X, and the fact they recently started looking at smaller opportunities through a new business development stream. My revised target price represents a yield on cost of 6% and is higher than their 52-week low price of $25.50.

Royal Bank (TSX = RY); Target Price = $72 (up from $70 last month)

I continue look to add to my position of Royal Bank in my unregistered account so that I can subsequently sell the same position in my RRSP in order to complete my portfolio transformation. After initiating the position in RY in my unregistered account in June 2015, I’ve been overweight Royal Bank, making it my largest Canadian bank holding. I haven’t lost any sleep over being overweight this wonderful company since it’s fairly priced (P/E of 11X), has a healthy 4.3% dividend yield, and has very shareholder friendly policies. My target price represents a premium over the $68 52-week low.

TransCanada Corporation (TSX = TRP); Target Price = $42

After adding to my position in TransCanada in September, I’m a “nibble” away from completing a full position in this company. I grew more positive on TransCanada when management committed to accelerating dividend growth (in the 8% range).  With pipelines still in investors’ doghouses, TransCanada current P/E of ~18X seems reasonable and their 4.8% dividend yield is tempting.   My target price corresponds to what I paid when I added to my position in September and is almost a dollar higher than the $41.10 52-week low. Looking at their cashflow statement, TransCanada continues to invest heavily in pipelines that should fuel dividend growth for years to come.

There you have the list of companies I’ll be playing close attention to in November.  There are a handful of US companies I’m keeping an eye on (i.e. Kinder Morgan, Omega Healthcare Investors, and Emerson Electric), but I’d likely hold off on any of these until my brokerage FINALLY introduces a US Dollar RRSP. The notion of paying $10 a month for a “fair” exchange rate is completely illogical to me.

What companies are on your watch list for November? Do you have differing positions on any of the four companies outlined above?