Dividend Growth Stock Considerations for February 2016

After volatile market conditions in January 2016 that prompted me to make three quick buys before I could get around to posting a watch list, I wanted to be proactive in case February presents me with fantastic opportunities. The stock considerations below help me focus my research and monitoring efforts on a handful of companies. Included is a target price that would act as a buying trigger for me if it was met.

Toronto-Dominion Bank (TSE = TD); Target Price = $50

Five years after initiating my 'almost full position' in TD Bank, I am ready to complete my position with part of my 2016 TFSA contribution. I expect the bank's management to announce a dividend increase in February when they present their Q1 2016 results. Last year, the bank raised their dividend by 8.5%. The current dividend yield is just shy of 4%, and I am hoping for an earnings miss in February so that I can complete my position in TD at a dividend yield closer to 4.5%.

Suncor Energy Inc (TSE = SU); Target Price = $30

It felt great to initialize a position in Suncor last month and now I am ready to add more of the best integrated oil company in Canada. Although I do not think the company will boost its dividend when they release quarterly earnings, I am always open to positive earnings surprises. Even if some see the energy sector as scary, especially with Iran's production ready to be sold to the international market, I will continue to nibble opportunistically. Suncor's dividend is well-covered by their free cash flow, and I am looking to stick with this company for the long-term.

Enbridge Income Fund (TSE = ENF): Target Price = $26

After trading into and out of Enbridge Income Fund three times in November, and keeping my position when the month ended, I am open to add more shares this month.  The company continues to be fairly priced (P/E ~16X), yields over 6%, and hiked their dividend 10% in December. Another reason I would like to add to this position in my RRSP is the fact I pay my monthly gas bill to an Enbridge subsidiary, and the monthly dividends serve as a natural hedge to my gas bill. 

Cisco Systems, Inc (NASDAQ = CSCO); Target Price = $21

Cisco is another of my 'almost full positions' that I would like to complete in 2016. Currency headwinds and analysts' predictions of management providing unfavorable guidance for 2016 have lead to a recent 10%+ depreciation in this technology titan's share price. Currently yielding 3.5%, Cisco's AA-/Stable and A1/Stable bond ratings show their financial strength and reflect their industry leading position. My target price is close to what I paid when establishing this position in 2013.

As with other months, I always keep some cash aside to take advantage of great opportunities that might occur as market sentiment shifts. Here’s wishing all my readers fruitful dividend growth stock pickings this February!

What companies are on your watch list this February? 

Goals for 2016

"A goal without a plan is just a wish"
- Antoine de Saint-Exupery

After achieving all of my goals in 2015, I decided to set some ambitious objectives for 2016. Since I am on a quest to be financially independent and improve the quality of my life, my three categories of goals correspond to my over-riding themes: passive income, expenses and personal improvement. Keeping in mind the above quote, included below each goal are some bullet points forming a plan to achieve the target.

Increase Passive Income by 25%
- Make regular contributions to my investment accounts representing approximately 50% of my take-home pay
- Maximize my investments in tax preferred accounts (i.e. RRSP, TFSA, RESP)
- Achieve a weighted average dividend growth for my total portfolio of 5%
- Avoid dividend cuts
- Do NOT add to any holdings that have not raised their dividend in the past 12-months
- Add an additional source of passive income beyond dividend stocks
- Limit short-term trades to a maximum of one per month

Understand Where My Money is Being Spent
- Track large variable expenses such as costs associated with my car, gifts, work, taxes, sports, cottage, and anything appearing on my personal credit card
- Save at least $1000 this year on variable expenses
- Continue to make investments that decrease expenses over time (i.e. tools for changing the tires of our cars, hair cutting equipment, etc.)
- In-line with the above goal, get the roof of my cottage repaired

Personal Improvement 
- Visit a dentist, optometrist, and doctor this year; although this might seem like a very basic goal, it has been 10+ years, 2 years, and 5+ years respectively since I have visited these professionals
- Write at least 52 blog entries this year while focusing on quality (i.e. no filler entries)
- Complete at least five workouts every week
- Run a 5km, 10km, and half-marathon in 2016
- Take my wife on at least one weekend getaway
- Be mentally present and focused when spending time with my son
- Continue money/personal improvement experiments (i.e. developing a new skill in 20 hours)
- Identify three areas/jobs at my company that interest me and talk to employees in these areas
- Complete at least one personal development course relating to my profession
- Make meaningful donations of time, money, and stock to causes that I feel passionate about

Although it took me almost a month to figure out what I wanted to accomplish in 2016, I am very proud and excited about the above list of goals. In order to avoid short-term fixation, and to write only quality blog entries, my plan is to update this blog with my progress at midyear, and then again at the end of the year.

What are your goals for 2016? How are you tracking against your objectives?

Seven Things I Know For Sure About Dividend Growth Investing

While reading Rainn Wilson's autobiography The Bassoon King (affiliated link), I enjoyed his list of the ten things he knows for sure. Apparently, the 'things you know for sure' concept was based on a question that Gene Siskel asked Oprah that resulted in her own introspective knowledge sharing. Although I continue to make many mistakes as an investor and learn from them, I wanted to share the below list of things I know for sure about dividend growth investing in hopes that it might help some readers.

1. Avoid Chasing Yield 

My main objective as a dividend growth investor is to build myself a sustainable, growing income stream to help cover my expenses. Although it is tempting to buy a company with a high yield in order to temporarily boost my income stream in the short-term, it is risky for the stream's long-term sustainability. In order to avoid potential dividend cuts, every time I find myself interested in a security yielding over 5%, I ask myself if I am chasing sucker yield. Examining the trend in the firm's payout ratio and cash flow statement can help avoid chasing yield. 

2. All Other Things Equal, Yield > Growth 

Although I respect dividend growth investors with Visa, Apple and other low dividend yield, high dividend growth companies in their portfolios, I prefer yield over growth. Why? It takes a company yielding 1% and growing distributions by 20% per year a total of nine years to achieve a yield on cost of 5%. In contrast, choosing a mature company with a 5% dividend yield that grows their payout at 3% and holding it for the same nine years results in a yield on cost of 6.5%. Many things have to go right for a company to grow their dividend at 20% a year for nine years, while maintaining a 3% growth rate is more easily achievable. 

3. Fight Confirmation Bias

There are some companies that are very popular within the dividend growth blogging community (i.e. IBM, Emerson, AT&T, and formerly Kinder Morgan). In order to counter-balance the positive comments that many dividend bloggers express about these companies, I have started to read more widely in order to fight confirmation bias. This strategy can be as simple as reading the negative comments on a Seeking Alpha article related to a company or asking an equity analyst with a 'Sell' recommendation on that company for a copy of their latest report. Independent assessment of a company's prospects helps you make informed, unbiased investment decisions.

4. Establish and Follow Your Own Plan

Every investor has different goals, life circumstances, risk tolerance and timelines that require a customized investment plan. The most popular page on this blog is my investment holdings, which is ironic given that the list is only truly relevant for me. Having a personal investment plan and following that plan can help maintain motivation when market conditions are challenging.

5. Focus on the Long-Term

It is very easy to get caught up in the day-to-day market swings given the 24-hour news cycle. Tuning out the noise and focusing on long-term trends and goals has been the key to the success I have experienced as a dividend growth investor. For instance, although I know the market is down today, I choose to see it as an opportunity to buy great businesses at better prices than yesterday. Although I am aware of the trend in oil prices and its impact on the companies in my portfolio, I continue to think that betting against an increase in the price of a scarce resource would be foolish in the long-term.

6. Do Not Blindly Trust Management

Instead of pointing out management teams that I feel lied to investors in the recent past, it is more productive to question why investors trusted management in the first place. Although I continue to think that management can be an untapped tool for investors, I have learned to take what management says with skepticism until they prove deserving of my trust. Consider management's motivation for making statements and determine if their interests are aligned with yours. 

7. Always be Open to Learning New Things

My high school principal promoted the concept of being a life long learner. It is amazing what happens when you open yourself up to learning new things and undertaking different experiences. Being open to new ideas and experiences has resulted in my personal growth and increased satisfaction. Even if I make mistakes and experience negative events from time-to-time, being open allows me to appreciate the journey and not become fixated on the destination.

The above list encompasses the knowledge I posses regarding dividend growth investing summarized in seven principles. My bet is that the list will change over time as I continue to grow and experience new things as a dividend growth investor. 

Do you have any additions or subtractions to the above list? 

3 Recent Buys - Royal Bank, National Bank & Suncor

As my recent tweet indicated, I am absolutely LOVING this bear market! I did not even have enough time to post a stock watch list this month, as many of the companies I was interested in saw their share prices drop 5-10% in the first week of 2016. Instead of sitting on the sidelines and trying to pick a bottom, I jumped in with both feet adding shares in three fantastic companies.

After appearing on my October, November, and December stock watch lists, I was finally able to add shares of Royal Bank in my unregistered account for under $70. Buying the second largest bank in Canada at a trailing P/E of about 10X and with a 4.5% dividend yield was a no-brainer for me. The purchase also allowed me to complete my position in Royal Bank in my unregistered account, so that I can now sell the offsetting position in my RRSP (after waiting a month to avoid tax implications). 

I used some of my monthly cash contribution to my portfolio to add to my position in National Bank in my TFSA. With a trailing P/E of less than 9X, a dividend yield of 5.5%, and an 8% dividend growth rate in 2015, I was happy to close out my position in this Quebec-based bank. There are still likely to be two additions to my TFSA holdings in 2016, hopefully in February if this lovely bear market continues.

After publicly acknowledging how much I regretted not owning Suncor for the long-term, I initiated a small position in the company in my RRSP. Despite the continued decline of oil prices, I see Suncor as the best in class integrated oil company in Canada. My assertion is based on the company's ability to generate free cash flow, their aggressive management (i.e. trying to pick-up Canadian Oil Sands at a cheap price), and the ever high price of gasoline ($0.969 per litre today at the station near my house) that helps protect the company's profit margins. 

My Investment Holdings page has been updated to reflect these three recent purchases. As a long-term investor, I sincerely hope that this bear market continues for years, as it allows me to purchase shares in strong companies at lower valuations than I had imagined possible.

Have you made any recent stock purchases or are you waiting for further market declines?

A Dividend Mentor?

The Oxford Dictionary defines mentor as “an experienced and trusted adviser”. If you have ever benefited from the wisdom and guidance of a mentor in your career or personal life, you can attest to how helpful and valuable they can be. Calling on a trusted adviser to guide you through experiences that you lack can lead to great successes. With Canada experiencing our first bear market since 2008, I wondered if there is a dividend mentor to help guide us through the challenging market conditions.

The most often quoted investor in the dividend growth blogging community seems to be Warren Buffett. Although Mr. Buffett used the float from his portfolio of companies to create the biggest financial snowball of modern time, it’s hard to classify him as a dividend investor, yet alone a mentor. As exhibit A, I’d offer the fact that his company, Berkshire Hathaway, has never paid a dividend. Mr. Buffett has indicated that he has no plans to initiate a dividend as he feels reinvesting the profits will be in the best long-term interests of Berkshire's shareholders. As exhibit B, I’d offer Mr. Buffett’s advice that "A low-cost index fund is the most sensible equity investment for the great majority of investors". 

There are definitely bloggers in the dividend growth community who I look up to and am inspired by. That said, I find that some of my favorite dividend writers have personal circumstances that are quite different from mine. Being married, having a young son, living in a high-tax province, and working in a career that sometimes limits my investment options makes it challenging to relate to the examples of single individuals, situated in low taxes jurisdictions, that are self-employed. The path you choose to achieve financial independence based on your personal circumstances and risk tolerance should be different from anyone else.  For instance, I feel that I can afford to be more risk tolerant in my investment holdings due to my defined benefit pension plan through work and my wife’s relatively stable employment situation.  

Although I hope that someone proves my ignorance in the ‘Comments’ section of this post, I’m not aware of any bloggers who have achieved financial independence from dividend growth investing. The closest example in Canada is Derek Foster who used dividend stocks to retire at the young age of 34. With all due respect to Mr. Foster, he seems to have changed from financing his expenses with dividends to undertaking a second career as an author and public speaker. Additionally, his later books explore investment ideas that are quite different (and riskier) from his earlier work. In the United States, you could argue that Jason from dividendmantra achieved financial independence through dividend growth investing. My viewpoint is that he found his true calling as an inspirational financial writer, an accomplishment just as impressive as financial independence.

Although there might not be an obvious dividend mentor to guide us through this bear market, it shouldn’t stop you from continuing on your path to financial independence. If you’re anything like me, you’ll make some mistakes along the way, but as long as you learn from them, you’ll end up just fine. My closing advice – be your own dividend mentor!

Do you have a dividend mentor? Do you know of any dividend investors who achieved financial independence through dividend growth investing?

10 Canadian Dividend All-Stars Set to Shine in 2016

If I were a new dividend growth investor located in Canada, my first stop to look for potential companies to research further would be the Canadian Dividend All-Star list updated monthly at Dividend Growth Investing & Retirement. The monthly spreadsheet contains Canadian listed companies with a record of increasing their dividends annually over at least the last five years. Along with basic price, dividend, DRIP, payout, growth, and market capital information, the spreadsheet also includes some interesting financial ratios and technical information.

After seeing a fellow Canadian dividend blogger selling his top 10 dividend picks for 2016, my competitive nature kicked in, and I decided to compile my own 10 picks  based on the Canadian Dividend All-Star list. Instead of sticking with the well represented utilities, banks, and energy companies you would likely find in most Canadian dividend growth investors' portfolios, I'm limiting myself to one pick per sector. With only 78 names on the December Canadian Dividend All-Star list, I will let you know when my picks in certain sectors were limited. The only other filter I used to the list of 78, was to remove any company with a dividend yield less than 1%, which left me with 73 companies. On to the picks!

Although I made a pick from each sector on the Canadian Dividend All-Star list, there were an extremely limited number of potential companies in the Real Estate (3) and Technology (2) sectors. Given my love of Financial Services and Communications companies, I found those the two most challenging sectors in which to pick only one company. Lastly, I will freely admit that my knowledge of the Basic Materials and Technology sectors is extremely limited. Therefore, my picks in those sectors were mainly based on financial ratios and technical information.

Here's a very brief overview of why I made each pick:

Canadian Utilities - The company's exposure to the depressed Alberta market led to a 23% drop in share price in 2015. In my opinion, this was a huge over-reaction to the company with the longest record of annual dividend increases in Canada.

Enbridge - Kinder pulled down the share prices of some fantastic pipelines in 2015. Unlike Kinder, Enbridge can always raise cash by selling completed projects to Enbridge Income Fund at fair market prices. Plus, the price of natural gas that I buy from Enbridge has only went up each year.

Metro - Strong operating and financial results, great management, and strong gross margins at their Metro line grocery stores that are infamous for high prices. The 16% dividend growth rate in 2015 was also quite impressive.

SNC - Although ethical concerns persist, this company has customers around the world, and is the best Canadian infrastructure play. Canadian infrastructure spending should only grow in the next four years as it is a priority for the new federal Liberal government.

Canadian REIT - Out of the three REITs on the list, this company has the highest market capitalization making it the easiest to follow. The company also had the longest streak of raising its distributions.

Telus - After Shaw announced their acquisition of Wind in December, Telus's shares lost about 10% of their value, while Rogers & Bell were down much less. Although Shaw will eat into Telus's subscriber base in western Canada, Telus's relatively high customer satisfaction ratings and low churn should dampen the blow of new competition, especially compared to the other two national wireless players.

Evertz Technologies - Higher dividend yield and dividend growth rate and lower payout ratio than the only other Technology sector company, Computer Modelling Group.

Magna International - Magna's global customer base and essential components on key automobile platforms should limit cyclical volatility.

Bank of Nova Scotia - Strong consideration was given to Canadian Western Bank whose share price has been hammered due to Alberta exposure. Ultimately, Bank of Nova Scotia was more desirable due to their exposure in Latin America and an extra percentage point of yield (5% vs 4%).

Agrium - Despite my lack of knowledge in the Basic Material sector, Agrium's 3.9% dividend yield, 12% growth rate in 2015, and low (60%) payout ratio made it attractive to me, as did their US dollar denominated dividend.



Are any of the above companies in your portfolio or on your watch lists? Would you have picked other companies on the Canadian Dividend All-Star list in place of the ten above?