Perspective: Staying the Course When the Market Dives

Back when I was young, dumb, and full of...energy, I often went for runs along the beautiful Rideau Canal. One summer night, while out for an easy 30 minute jog, listening to my new 64 megabite MP3 player, I ended up plastered across the hood of a car. Although I had many near misses with bikes, rollerbladers, and cars, that night was the first time I actually got hit. The car was trying to make a right turn on a red light, I assumed the driver saw me in their side mirror, and as I proceeded without much caution, BAM...I found myself sliding up toward the windshield of the car.

The S&P/TSX composite index ended Monday at 13,350. This value is about 9.5% below the starting value of the index on January 2, 2015 of 14,750, and 14% lower than the 2015 high point of 15,550.  This comes as no surprise to most Canadian investors as key sectors such as banking and energy have been hit particularly hard. Given that banking, energy, telecommunications, and REITs account for a major portion of my sector allocation, it's been a poor year for my portfolio measured from a return perspective. Even after making nine months of contributions to my portfolio and re-investing dividends, my total portfolio value is essentially flat compared to where it started 2015. Pretty underwhelming results.

However, being a dividend growth investor focused on the long-term, and considering the key metric I track is anticipated forward dividend income, the market downturn means I've been buying stock in companies at reduced prices and higher yields for the last nine months. The longer this correction or dare I say...bear market...lasts, the easier it is for me to meet my forward dividend income goals. Here's a little spoiler alert: with over three months to go, I've already surpassed my 2015 forward dividend goal! Seems like cause for celebration!

Don't get me wrong, I completely sympathize with newer investors, who see their portfolio value and net worth decrease with every stock purchase they make. To those people, my advice is simply to take advantage of this great buying opportunity. Having been through the technology bubble around the turn of the century, and the financial crisis of 2008, even though now feels like a hard time to stay the course, following your plan will be rewarding in the long-term. If you started investing in stocks without a plan, and with hopes of fast gains, this correction should serve as a wake-up call. For me, it's all about sticking to my plan, and possibly accelerating it if Mr. Market gets more depressed. 

While I was draped across the hood of the car, I did a mental check to ensure everything was still in working order. When I opened my eyes, my perspective immediately changed when I saw a young woman driver, who was absolutely devastated. I'll never forget the look of worry and shame on her face. Instead of lashing out and letting my temper get the best of me, I simply slid off the hood of the car, and very cautiously walked away after waving at the driver to let her know I was alright. When you find yourself on the hood of a car, or in a falling market, do your best to remain calm, count your blessings, and keep things in perspective. 

30 Canadian Large Cap Dividend Growers

After self-diagnosing as a gorger who yearns to nibble more, and because none of the four stocks I’d really like to buy this month have hit my strike price, I decided to run a screen to identify potential nibble candidates. Here are the criteria I used:

-          Traded on the Toronto Stock Exchange (TSX)

-          No preferred shares

-          Market capitalization over $1B (CDN)

-          Dividend yield of at least 3%

-          1-year dividend growth rate > 5%

-          3-year and 5-year dividend compound aggregate growth rate > 5%

Here is the resulting screen:

Unsurprisingly, I’m already very familiar with many of the 30 companies who met my criteria. In fact, I have positions in 14 of them. Other companies such as Algonquin Power & Utilities, Evertz Technologies, Brookfield Infrastructure, and Agrium have long been on my Google watch lists.  I’ve also owned Suncor and Home Capital before, and would consider them again if the price was right. There’s even one company on the list that I’m prohibited to investing in, as they are a major client of my employer.

More importantly, there are some companies I’ve never heard of and will now put them on my ‘Further Research’ list. In particular, as embarrassing as it is to admit, Russel Metals, Aimia, MDC Partners, Pason Systems, and Finning International are complete unknowns to me. Since researching potential investments is a fun part of the investment process, I look forward to seeing if any of the above are nibble worthy.

Do you own any of the names on the above stock screen? Are there any companies you don’t own that interest you?

Nibbling vs Gorging on Stocks

Sometimes in reading investing and personal finance posts, you run across a nugget in the Comments section that causes you to stop and reflect. Such was the case when I read a reply to a comment on Divhut over the weekend.  In response to a reader’s comment about adding to his positions in Canadian banks at a regular rate, Divhut responded:

 “As you have noticed I am a stock nibbler and not a gorger. Slow and steady small buys each month allow me to enter into a position with ease and not cause me great concern about wild market price swing. Slowly but surely is the motto…”

After reflecting, I came to the conclusion that I’m a gorger. Although I’d like to develop the nibbler mentality, and slowly create and add to positions over time, it’s currently not the way in which I operate. I have great respect for all the nibblers out there, but here are the three reasons why I gorge.

1. Transaction Costs

The best price I can get from my discount brokerage, Scotia iTrade, without making 150 trades per quarter, is $10 per trade. In contrast, Divhut indicates he pays only $2 commission per trade. Simply put, Canadian brokerages are not as competitive on price as their US counterparts. It’d be much easier for me to adopt a nibbler mentality if transaction costs didn’t account for 1% vs 0.2% of a nibble sized trade of $1,000. Additionally, most DIY investors are well aware that transaction costs drive down portfolio performance, and are to be minimized. Although I realize that my blog will never be action-packed, by trading less frequently, I hope to keep my transactions costs relatively low.

2. Nibbling Regrets

Back in January of 2013, when I was still in the early stages of buying shares in US companies for my RRSP, I nibbled by buying 100 shares of Microsoft at a time when I thought they were cheap ($26). My plan was to do some deeper due diligence after my initial nibble, and possibly add to the position to a point where it was meaningful in my portfolio. Before I got a chance to take a deeper dive into researching Microsoft, its shares climbed to around $38 a share at year end 2013, making it one of the best performers in my portfolio.  That said, Microsoft’s appreciation didn’t add much to my total portfolio return in 2013. The shares reached a point where I no longer considered them cheap. Now, as we close in on the last quarter of 2015, I’m finally starting to consider adding to Microsoft (which I find attractive around $40) as it remains one of the smallest positions I have in my portfolio.  One of my few investment regrets is not gorging on Microsoft back in January 2013.

3. Sticking to My Plan

My plan for 2015 revolved around making my portfolio more tax efficient and limiting my number of positions to make monitoring holdings easier. Moving holdings between my unregistered account, TFSA, and RRSP was best accomplished by making a couple of rather large transactions along with managing time delays to steer clear of unintended tax penalties. I’d characterize these types of moves as gorging, as nibbling would have only complicated matters further. Keeping my number of holdings low has resulted in severely limiting the number of new companies I invest in. Whereas in the past, I’d be apt to buy a 100 shares of a company to motivate me to do further research (i.e. Microsoft), I now only make investments in companies I’m very familiar with and willing to invest in for the long-term.

In closing, I’d like to re-iterate my respect and admiration for all the nibblers out there. Although I hope to someday be more like you, it’ll be a challenge for me to adopt your mentality.

Do you consider yourself a nibbler or a gorger?

August Goals Update & Challenges

Although my portfolio value and net worth trended downward in August, it was a very successful month for me in terms of achieving my non-financial goals.  All three of my non-financial goals were achieved as outlined below:

-    I posted eight entries, two a week, each Tuesday and Friday, in-line with my new schedule, and well in excess of my one entry per week objective.

-   By limiting my indulgences and exercising semi-regularly (still working on that), I managed to stay below my maximum target weight of 160 pounds.

-    I donated to the political party I will be supporting in the upcoming Canadian federal election. Although I hate what North American politics have evolved into, I strongly encourage all Canadian readers to cast their vote next month.

I’m a big fan of J. Money and his budgetsaresexy site. One of the reasons I admire him are his challenges, through which he challenges himself and his readers to try short experiments as a way to improve different aspects of their lives.  By thinking of these challenges as experiments, there is limited downside if you are unable to complete them. I decided I could do with a few changes in my life, so I decided to try two experiments in recent weeks.

Challenge #1: Commenting on Blogs

Here’s a secret – bloggers love to receive comments on their posts! It shows readers are engaged and care about what they wrote. With this in mind, in mid-August, I decided I’d comment on a different blog I enjoy every day for a week. Since I enjoy reading various personal finance and dividend blogs, but rarely ever comment to show my appreciation, this was overdue. I’m proud to say that I accomplished my mission easily! Two unexpected benefits of the challenge were a couple interesting comment conversations I started with bloggers who I admire, and the number of page views on my own blog increased. Going forward, my plan is to comment on posts I appreciate, especially longer ones that take a lot of research and effort.

Challenge #2: Spend Nothing

Last week at work, I used about $50 of cash, and had little to show for it. So this week, I decided I’d try to spend nothing (cash, debit, and credit). If I can make it through today, I’ll have accomplished this challenge. Lessons learned are that it takes some planning to bring in a lunch every day (i.e. I had to cook pasta at 9pm last night before bed), and that temptations are everywhere! For instance, I thought of buying an umbrella this week when my wife re-claimed hers one morning, but lucked out when it turned out to be a sunny day. The other lesson I learned was that it’s much easier not to spend money when you’re working from home, like I did yesterday.

Here’s hoping you accomplished your goals in August and are off to a good start in September.

What’s the toughest challenge you ever completed? Do you have any non-financial goals you track?

Stock Watch List for September 2015

Whichever dividend blogger posted their watch list first, I owe them a debt of gratitude. I freely admit that I use other investors’ picks as a starting point for my own research. There is an additional benefit of posting my own watch list, as a means of concentrating my efforts on a handful of companies. Speaking of a handful, I decided to limit myself to a maximum of five companies in order to limit my research and purchasing activities over the next month.  In order to be precise, I'm including a target price at which I’d likely buy the below mentioned securities (assuming adequate cash resources when the price was reached).  Here are the stocks I will consider buying in September 2015.

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

I established a half position in TRP almost three years ago, and haven’t added to it since. Previously, I was unimpressed with their stodgy dividend growth (4-5% a year) and how expensive their stock was with a P/E well in excess of 25X. Recently,management has committed to accelerating dividend growth (in the 8% range) and with a recent decrease in price, coupled with continued strong earnings, the stock is now priced much more attractively with a P/E of about 18X. My target price (close to the 52-week low of $41.95) would provide a dividend yield on cost of about 5%. Putting ethical questions about the company aside, reality is that Canada will continue to produce oil, and that the oil will need to be physically moved.  Looking at their cashflow statement, TransCanada continues to invest heavily in pipelines that should fuel dividend growth for years to come.

Alaris Royalty Corp. (TSX = AD); Target Price = $25

Despite already having a full position in Alaris in my RRSP, I’m very open to initiating a position on this high yielding (~6% currently) dividend growth royalty company in my unregistered account. 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 14.5X, and the fact they are now looking at smaller opportunities through a new business development stream. My target price represents a yield on cost of 6.5% and is only slightly below their 52-week low price of $25.50.

Canadian Utilities Limited (TSX = CU); Target Price = $34

A boring utility company with high exposure to the downtrodden Alberta economy? Sounds like the perfect opportunity to complete my position in this company and wait for a recovery in fortunes and perception in what was for many years Canada’s fastest growing province. Other reasons to look into this company include their long history of dividend growth (more than 10 years), its reasonable price with their P/E of 17X, and their strong financial position reflected in their A/Negative issuer rating.  My target price equates to a 3.4% yield on cost and is higher than their recent $31.00 52-week low that occurred on black Monday.

Omega Healthcare Investors Inc (NYSE = OHI); Target price = $32

With a limited amount of funds currently available in my RRSP, and a Canadian dollar worth only $0.76 of a USD, I have to be extremely sure of any US company prior to taking the plunge.  Therefore, I limited myself to only one US company on my watch list, with a honorable mention going to Kinder Morgan. Although I think Kinder is underpriced, I’m already overweight on the company. I’m simply more tempted to buy enough shares to complete my position in Omega. The company has raised its dividend for 13 quarters in a row and now yields 6.6%. The P/E of 23X is slightly misleading for this REIT that has a price to adjusted funds from operations of below 15X. I hope for more volatility that causes this great healthcare company to fall below its 52-week low of $33.10 to my target price.

There you have the list of companies I’ll be playing close attention to in September. I debated including Royal Bank on the list, due to its recent price weakness, but ultimately don’t see myself going even more overweight on my position in Canada’s biggest bank.

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