Cash: The Blessing and Curse

The best thing about being a dividend growth investor is the increasing amount of cash that trickles into my investment accounts each month. The dividends add up quickly and along with my monthly contributions, allow me the opportunity to buy more shares of great companies. These great companies increase their distributions over time, and the virtuous cycle continues.

At the same time, for me, the downside to being an income focused investor is the constant need to make decisions relating to the allocation of cash. Simply put, I hate sitting on cash. Even though cash provides me with ammunition to take advantage of market over-reactions, the opportunity cost of not investing in income producing securities weighs heavily on my mind.  Looking back over the past couple of years, some of my worst investment decisions came at times when I felt obligated to put cash to work.

Due to some recent sales designed to rebalance my portfolio and my regularly monthly contributions, my cash balance presently accounts for 7% of my total holdings.  Even though this percentage might seem reasonable enough, my mind tends to multiply the cash balance by my average portfolio yield (~4%). The resulting amount is almost enough to meet my forward dividend growth goal for 2015…six months ahead of schedule. 

Before I make a series of rash trades that decrease my cash balance, I have to keep reminding myself that financial independence, goal achievement, and investing in general, aren’t races. Plus, given about two thirds of my current cash will remain in my taxable account, any investment decisions I make will be for the long-term and aimed at minimizing the amount of taxes I pay.

Here's hoping that instead of rushing into trades simply to boost my forward expected dividends, I can be patient and make good decisions to allocate the cash in my investment accounts.

Portfolio Rebalancing: Sold Telus, Bought Alaris Royal Corp.

     Part of my plan to make my portfolio more efficient involves putting all my shares of certain holdings in one account. Since I bought the same amount of Telus shares for my taxable account that I held in my RRSP in March, I've been looking to sell those shares in my RRSP in order to avoid being VERY overweight Telus. Having stuck around for another dividend holder of record date, I sold the shares of Telus I owned in my RRSP on Monday when shares were up a couple percentage points. Although Telus remains my largest holding due to their impressive record of reliably increasing their dividends semi-annually at a rate of ~10% per year, I now hold all my shares in my taxable account.
     With the proceeds of the Telus sale, I promptly initiated a position in Alaris Royalty Corp. Over the last twelve months, I've owned Alaris a half dozen times, but sold each time to capture small profits ($100-$300). Although I wouldn't guarantee that I won't do the same this time around, I genuinely would like to build a full position in this Canadian royalty company with a long record of regularly increasing their dividend as they invest in new companies and collect a growing stream of royalty payments. Simply put, I feel Alaris is the only true private equity type company traded on the TSX with a diversified portfolio of investments. I was able to initiate my position at a dividend yield of over 5% (due to a recent increase), and a respectable P/E ratio of 17.5X.
     On a more frustrating note, as the Eurozone situation regarding the potential Greek default appears to be clearing up, the markets seem to be incorporating a deal being completed that would avoid the "Grexit". With a considerable amount of cash to deploy, I'm hoping for a dose of pessimism to hit equity values in the North American market in the short-term so that I can buy two companies' shares at more attractive prices, in order to complete my portfolio transformation. Here's hoping for some Greek turmoil!

A Raise, a Sale, and a Donation

     As the Canadian stock market continues to slump, it turned out to be a great week for me due to a raise, a sale, and a donation.
      The raise came thanks to Realty Income Corp (NYSE :O), that keeps chugging along, turning out regular raises, and yielding about 5%. The five basis point raise doesn't sound like much, but this real estate investment trust pays monthly, and has an impressive record of raising their distribution 81 times since 1994.
     As part of my plan to pay less taxes going forward, over a month ago, I bought a full position of H&R Real Estate Investment Trust (TSX: HR.UN) in my TFSA, in preparation of selling it in my unregistered account. I was happy to take advantage of a price spike on Thursday to sell my H&R shares in my unregistered account at a profit. This frees up some capital to help complete my portfolio transformation that should make my holdings more tax efficient in the future. I plan on putting this extra capital to use in the near term, so stay tuned.
     A week ago, I took part in the annual Government of Canada's ultimate tournament for charity. The charity that benefited from the tournament this year was the United Way of Ottawa, who directed funds raised from the day toward youth initiatives. Supporting this organization, along with regular payroll deductions going to United Way Centraide (aimed at the community in which I live) have helped me reach my goal of donating as much through six months in 2015, as I did in all of 2014.
     All in all, an excellent week that ended last night by taking my younger brother to the absolutely hilarious Entourage movie. It's sad to think that will be the last time seeing Vinny Chase and the boys all together, but what a way to go out!
   

Saving Too Much?

One of my favorite newspaper columnists is The Globe and Mail’s John Heinzl.  His ‘Yield Hog’ columns are full of great ideas for dividend investors and his ‘Investor Clinic’ pieces are always educational. His column from last weekend Yes, a person can save too much hit a nerve with me.

The article introduces the notion of ‘compulsive savers’ who have difficulty spending even after they have achieved financial security.  A financial planner indicates about a quarter of his clients have a hard time loosening the purse strings. Another financial planner explains that one way he overcomes the fear his clients face relating to spending is to show them projections which clearly indicate they can afford to indulge from time to time.  However, some clients still have irrational fears relating to money that cause stress and impact the quality of their relationships with their spouses.  The article ends with the following quote that succinctly summarizes the complex emotional connection that people have with money: “Money can be very emotional and they are going to be set in their ways.”

My feelings regarding the article are mixed. I absolutely hate the example given below regarding a need to upgrade cars when you have the personal resources to do it.  For the record, my 12 year old Honda Civic continues to perform just fine, and I walked away from my only accident without a bruise. Furthermore, I’d be no happier if I upgraded to a new(er) car. In my case, the opposite would be true.

“Some people will continue driving an old beater that’s barely roadworthy, for example, when they could easily upgrade to a new model with all the modern safety equipment.”

My other main beef with the article is the notion that spending makes people happier.  I'd argue that as long as your basic food, housing, and clothing needs are taken care of, spending won't necessarily equate with increased happiness. Having deep conversations, taking walks in scenic places, and connecting with friends and family don't cost anything, but all will lead to a happier life. 

One the other hand, if obsessive saving leads to marital discord, or if you associate your worth as a person by the balance of your bank/brokerage account, you clearly have issues. I also enjoy the fact that the article at least introduces the notion that for some savers “spending money isn’t a source of pleasure”.  I count myself lucky to be part of this group. 

The main reason why this article caught my attention is that I’ve recently been asking myself why I’m saving such a comparatively high percentage of my income, and if I should take my foot off the gas a bit given I’m well ahead of my goals.  To be honest, I’m having a very difficult time coming up with a specific, rational answer to the first question. I’m closer to answering the second question; I just don’t know exactly how much pressure to take off the gas pedal.

Is anyone else out there wrestling with the ‘compulsive saver’ issues?

Recent Buy: Canadian Utilities Ltd

As a long-term investor, the slump in the Canadian markets of late has made the smile on face a few inches wider. Companies that have been on my watch list for years are finally starting to reach reasonable prices as short-term traders drive the market down with their worries about a Greek default, rising interest rates in the US, the permanently low price of oil…and any other issues used as justifications when markets move.  Instead of freaking out, I’ll keep calmly buying shares in great companies that have a history of raising their dividends over time.

Coincidently, over the last three weeks, I established two-thirds of a position in Canadian Utilities Ltd. What attracted me to this company? Glad you asked!

-          A history of raising its dividends yearly since 1972

-          An attractive entry yield of 3.3%

-          A dividend raise earlier this year of 10.3%

-          An attractive entry point with P/E(trailing) of 15.4X and the stock trading at a 52-week-low

-          A strong balance sheet (A/Stable rated) and a relatively low payout ratio of less than 60%

-          The consistent cash flows generated by the majority of its sales in regulated industries.

It’s not often that great businesses go on sale, so I felt obligated to stock up.  This means there’s almost no chance I’ll be able to complete my portfolio transformation by the end of June (Q2), but I should still have it wrapped up come September (Q3). Here’s hoping the market continues to plunge so that I can pick up more shares of great companies on the cheap.  

May Donation and Non Financial Goal Update

I decided to split my May charitable contribution between two worthwhile causes. We celebrated my son’s baptism last weekend and I made a donation to the beautiful church in which he was baptized. St Paul’s church was recently reconstructed after a fire and my son was one of the first six children to be baptized in the new building. The remaining portion of my donation was directed to Renfrew Hospital in recognition of the excellent care they provided my father. Since the Ontario government doesn’t seem to be directing sufficient funds toward primary care facilities, these important institutions have increasingly relied on donations to fund their tight operating budgets.

With my job change in May, I feared my non-financial goal of averaging a blog post per week was in jeopardy. Luckily, due to some writing early in the month, I managed to draft six posts, thus helping me achieve this non-financial goal. My favorite post was Eating Frugally in the States, since it provided me with a challenge during my last business trip.

Despite putting on eight pounds during that business trip (mainly due to luxurious dinners I did not have to pay for in Texas), I ended the month weighing in at 157 pounds (down five pounds from my monthly high of 162 pounds), well below my goal of 165 pounds. Going forward, I decided to revise my maximum weight objective at month end to 160 pounds. My hope is that this will keep me heading to the gym and out on runs more regularly.  Although my eating habits are decent, I simply haven’t been getting regular exercise outside of my weekly game of ultimate frisbee.

Here’s hoping all my readings met their financial and non-financial goals in May.

Three Dividend Raises by Canadian Banks

     As Canadian banks reported their second quarter earnings last week, I was the lucky recipient of three dividend raises. Even with the price of oil still depressed, Canadian banks continued to churn out record-setting profits that supported boosting their dividends. My three raises were expected (all three banks raised their dividends in the same quarter last year) and are outlined below.

-          Laurentian bank increased their quarterly dividend by $0.02 (3.7%) to $0.56 per share.

-          Bank of Montreal raised their quarterly payout by $0.02 (2.5%) to $0.82 per share.

-          National Bank increased their quarterly dividend by $0.02 (4.0%) to $0.52 per share.

     I continue to be a big believer in the long-term prospects for Canadian banks. Their strong industry lobby group The Canadian Bankers Association , along with a favorable regulatory environment, and little foreign competition should help keep profits and dividends growing.  As you can see on my Investment Holdings page, I own every major Canadian bank with the exception of CIBC.  I wait patiently for the next time Canadian banks go on sale so that I can add more to my holdings in this important sector of the Canadian economy.