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?