Beyond PADI

Every November when it comes time to renew the domain name for this blog, I promise myself that I'll write more in the new year. My best intentions usually lose steam in late January or early February. In order to recreate the spark, here is the fourth of what could best be described as 15 30-minute, quantity over quality, blog entries. 

Recently at work, a colleague and I conducted the second round of interviews for credit analysts, talking to six candidates. The last question we asked each candidate was “What do you feel is the best ratio to determine the credit worthiness of a company?” The question got me thinking about what the most important ratio would be to assess the health of an investment portfolio.

In the dividend growth investing space, based on what I see on blogs and Twitter, projected annual dividend income (“PADI”) seems to be the most popular ratio. Having used the PADI ratio as one of three metrics I calculate to assess my portfolio, I can see the draw. The number is precise, pretty easy to calculate, and its growth over time gives the impression that your portfolio is on the right track. That said, PADI can also mask the fact that you might be reaching for yield, or that you are simply adding lots of dollars to your investments. Importantly, PADI also assumes that dividend cuts don’t happen, which has not been my experience in the near 20 years I have invested in stocks.

 

The two other metrics that I use to assess the performance of my portfolio are dollar-weighted, organic dividend growth rate and portfolio IRR. The organic dividend growth rate keeps me honest in terms of limiting the number of times I reach for higher yielding stocks, while the IRR incorporates any inflows/outflows to/from my portfolio. Of these two ratios, the organic dividend growth rate is easier to manipulate, as I could choose to invest only in companies that grow their dividends at a rapid rate, or sell any company that cuts their dividend before the next time I calculate the ratio.

 
In case you’re wondering, there was no “right answer” to the interview question, we simply wanted the candidates to justify their responses. The answers were varied, but the depth of understanding the candidates showed by elaborating on their responses allowed us to differentiate the applicants. Similarly, I don’t feel that PADI is the perfect measure to assess portfolio health, given the wealth of other options available (without having even mentioned portfolio yield, various value metrics, FCF yield, etc.), so long as you’re able to explain why you choose other ratios to calculate. Like most aspects of investing, the metrics you choose to use should be relevant for you, and help you achieve your long-term goals.

Dividend Growth Watch List for April - June 2023

Every November when it comes time to renew the domain name for this blog, I promise myself that I'll write more in the new year. My best intentions usually lose steam in late January or early February. In order to recreate the spark, here is the third of what could best be described as 15 30-minute, quantity over quality, blog entries. 

     With dividends flowing in regularly, on top of my regular monthly contributions to my investment accounts, and a decent amount of cash in my TFSA and unregistered accounts at the end of the first quarter, here are some of the companies I'm considering buying shares in heading into the second quarter of 2023.

     The most likely purchase in my TFSA is to increase my position size in Brookfield Infrastructure Partners L.P. (TSX: BIP.UN). BIP has grown to be one of my top five largest holdings, as I like the fact it gives a good amount of geographic and sector diversification, I feel it has strong management, and leverages the well-known "Brookfield" name to get access to acquisitions that other infrastructure players might not even know are for sale. Being a dividend growth investor, the 4.5% yield and consistent 5-7% distribution growth rate are good reasons to like this company. If I don't add to my position in BIP, it will likely be because another short-term opportunity in a REIT or royalty company becomes a more obvious choice to add to my TFSA.

     As I expect to be making my annual RRSP contribution sometime during the quarter, the two likely candidates for me to upsize my positions in are Home Depot (NYSE: HD) and Johnson & Johnson (NYSE: JNJ). As I try to rebuild my former position in Home Depot, the company's stock has stayed pretty range bound during the past three months, and it's tempting to keep adding in this company with such a great history of compounding returns. In contrast, I see JNJ's shares as very reasonably priced, likely due to the uncertainties regarding Talc claims, and the splitting of the company (which I really wish they would not do....but it seems like a done deal).

     In my unregistered account, I've tempted to add to my positions in several Canadian banks (Royal, TD and Bank of Montreal) as they have been beaten down by a cooling Canadian housing market, the government's recent change in tax treatment of internal dividends, and the bank turmoil in the U.S. (and internationally in Switzerland). Although I'm already pretty heavy on the company, Capital Power Corporation (TSX: CPX) is also very interesting to me as a value/high dividend play. Lastly, I had planned on adding to my position in Constellation Software (TSX: CSU), but every time I checked in the past couple of weeks, the share price has kept increasing.

     Despite feeling the above names are the most likely to be additions to my portfolio this quarter, I'm reminded of the saying "Man plans, god laughs". 

     

Dividend Reinvestment Plans Are Not For Me

Every November when it comes time to renew the domain name for this blog, I promise myself that I'll write more in the new year. My best intentions usually lose steam in late January or early February. In order to recreate the spark, here is the second of what could best be described as 15 30-minute, quantity over quality, blog entries. 

     Many dividend growth investors choose to use dividend reinvestment plans (“DRIPs”) to add shares to their positions instead of receiving their dividends in cash. With some DRIP programs offering shares at a discount to the current share price, and given the long-term objective to grow large positions in certain companies, it can make sense to leverage these plans. However, I’ve made a choice never to use DRIPs in order to avoid complexity and maximize financial flexibility.

     Having complained about my discount brokerage many times over the years (never create an account with Scotia iTrade), and looking to keep my interactions with them at a bare minimum, not using DRIPs makes sense for me. Having to register shares for a company’s DRIP program, or even using a synthetic DRIP provided through iTrade, I’m happy to use the month or two it usually takes my brokerage to respond to requests in more productive ways. Plus, any DRIPs I started for positions in my unregistered account would entail me keeping track of the adjusted cost base of shares, given I have no faith in iTrade’s calculations based on past negative experiences. As I’ve gotten older, and had kids, I’ve learned that sometimes avoiding complex situations is important to maintaining my sanity.

     In my opinion, the best thing about being a dividend growth investor is the growing cashflows that appear in your investment account each month. Given my preference to make one or two purchases a month, I choose to retain control over my investment process and decide which companies are the best use of cash each month. Investors act as the Chief Investment Officer of their respective portfolios, and their most essential duty is deciding how to best allocate capital. When a share price shoots up prior to a dividend payment, adding more to a potentially inflated position wouldn’t leave me with a good feeling; nor would adding to a position that was on a losing streak. Receiving cash each month provides me with optionality in how I choose to allocate it in congruence with my current goals and the realities of the financial markets.

     Although avoiding complexity and maximizing financial flexibility are good enough reasons for me not to use DRIPs, I can see how they might be great for younger investors, with different goals, and better brokerages to pursue those plans. There might come a time when I rethink participating in DRIPs, but for now, I’ll keep receiving my dividends and distributions in cash. 

My Dividend Growth Investing Origin Story

Every November when it comes time to renew the domain name for this blog, I promise myself that I'll write more in the new year. My best intentions usually lose steam in late January or early February. In order to recreate the spark, here is the first of what could best be described as 15-minute, quality over quantity, blog entries. 

Since I love hearing about how people decided to adopt a certain approach to investing, I wanted to share my “origin story”.
Like most 20-somethings, I started to make lots of mistakes after I opened my self-directed brokerage account. A couple of my first purchases of shares were in companies that ended up going to $0 (Nortel and 360 networks). I also bought shares in a China ETF that ended up losing ~80% of its value, and a Canadian technology ETF whose performance was only slightly better than that of Nortel. On the other hand, the shares I bought in the Bank of Montreal and RioCan REIT, climbed steadily, and also distributed cash regularly.
Collecting dividends and distributions felt great given I was working in a series of entry level accounting and finance jobs that are notoriously difficult. Realizing that by investing some of my salary from these tough jobs, I could built a side income that could be leveraged to perhaps work less in the future, or at least pick a more enjoyable, if slightly less well paying job, held strong appeal to me.
For context, during this period in the early 2000s, a number of large corporate fraud cases were being discovered, leading to the downfall of such companies as Worldcom, Tyco and Enron. Hearing about these frauds caused me to distrust corporate executives, which coincided well with the idea of looking for companies who decided to return funds to shareholders, instead of retaining them to build their personal vanity projects.
Although the transition from a growth oriented, story-focused form of stock picking to dividend growth took almost ten years, I’m still proud of making that change. Looking back, I see lots of mistakes I made chasing yield, being seduced by management guidance, and concentrating my holdings in obscure, semi-illiquid shares, but those are the type of mistakes that pay figurative dividends now that I can hopefully avoid them, or at least minimize them.

Goals, Algonquin, Watchlist & Canadian Compounders

My apologies for the jumbled format below, but in an effort to write at least one monthly entry, I’m choosing good-enough over perfection. 

Goals:

At the start of 2022, I set a goal to increase my forward dividend income by $4,600, while targeting
a dollar- weighted organic dividend growth rate of 5.0%. I’m proud to report that I overshot my goal, 

raising my forward dividend income by $5,300+, while achieving a 5.3% organic dividend growth rate.

 

I’m taking my foot off the gas a little in 2023, aiming to add $3,200 (now, a bit more than that
after Algonquin Power & Utilities cut their dividend in January 2023), to bring my expected total
dividend income to a milestone amount. I’d also like my dollar-weighted organic dividend growth
rate to exceed 5.0% again this year. If I can accomplish the $3,200 goal, I’d then focus on building
the compounding portion of my portfolio, and adding a broad ETF to my unregistered account.
For tax reasons, it no longer makes sense for me to grow forward dividend income so
aggressively while I’m still working.

 

Other Objective for 2023:

After reading Bill Perkins’ ‘Die With Zero’ last year, listening to some episodes of Ramit
Sethi’s ‘I Will Teach You to Be Rich’ podcast, and then consuming Morgan Housel’s ‘The
Art of Spending Money’ last week, I’ve been focusing on ways to convert money into
memories. I have difficulty spending money, often falling into analysis-paralysis, which
subsequently impacts my level of happiness. Choosing to spend on things my kids
might remember as they get older is a priority in 2023. A couple of quick examples
this month have been tickets for my son to see his first professional hockey game,
a Gatineau+ pass that has allowed me to bring my kids to an indoor skating rink over 

the holidays, and even grabbing lunch at a restaurant after spending the morning at
the Ottawa central experimental farm. Lastly, since the objective is about more than
making memories for my kids, I brought home some flowers for my wife, and after
using my pair of 30+ year old second-hand, cross-country skiis for the past three
years, I invested in a pair of brand new skis, that I’m planning to explore trails with
this year. Hoping that I can get better at converting money to memories over the
course of this year.

 

Algonquin Dividend Cut:

As mentioned above, and outlined on my ‘Investment Holdings’ tab, I have a position in Algonquin
Power & Utilities (TSX: AQN). With the 40% dividend cut, planned $1B of asset sales, and continued
pursuit of Kentucky Power, I’m not sure what my plans are with respect to the holding. My faith in
their management team is low, releasing another negative earnings estimate sure hasn’t helped, as
has the decision to continue to seek regulatory approval for their Kentucky Power acquisition.
Although, the latter simply might be mouth-service to avoid paying a walk-away fee if the
transaction doesn’t close by April (when they can walk away for a much lower payment).I’m
taking a wait and see approach in the short-term.

 

January 2023 Watchlist:

Texas Instruments Incorporated (NYSE: TXN) – Reading about how management has aggressively
retired shares, focused on operating profit and FCF generation, and thinks so thoroughly about
capital allocation has made me consider initiating a position in this stock. Of course, since I started
to track it, the stock has risen over 5%.

 

Brookfield Infrastructure Partners (TSX: BIP.UN) – Of all the Brookfield units, I like BIP’s mix of assets,
geographical diversification, and results the best. Although this is already one of my larger portfolio
positions, I’m still very comfortable adding more to it inside my TFSA. As potential buys usually do,
BIP has steadily risen through January 2023.

 

A&W Revenue Royalties (TSX: AW.UN) – With this being the only Canadian stock left in my RRSP, my
thoughts areto add to my position in A&W in my TFSA, and then wait a month to sell my position in
my RRSP. This would free up funds to invest in a U.S. stock in my RRSP (possibly Texas Instruments).

 

Waste Connections Inc (TSX: WCN) – An environmental company I’m considering adding to the
“compounder” portion of my portfolio.

 

Canadian Compounders

One of my aims for this blog is to always provide readers with something helpful. If you’ve come this far,
I thought you might enjoy this tweet from @long_equity with a list of the Canadian companies with the
most linear share price growth over the last 10 years.

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