Goals Update at September 30, 2015

Before 2015, when this blog was basically a personal trading journal, one of my primary motivations of maintaining it was to hold myself accountable to reaching my financial and non-financial goals. Despite changes to make my blog more externally focused, at the end of each quarter, I still like to track my progress toward meeting my yearly goals. In prior years, I tracked far too many financial and non-financial goals. In order to simply things, I now only track three financial goals and two non-financial targets.  Here's how I progressed against my five goals in the third quarter of 2015.

Increase Expected Forward Dividend Income by $1,800/yr 

From the outset of 2015, I knew that this was an incredibly aggressive goal. In Q1, I was able to add $453, before adding another $687 to my total in Q2, putting me on track to achieve this goal. In Q3, I added $662 of expected forward dividend income, bringing my total to $1,802! Although it feels great to be ahead of my goal with three months left to go, I know that some of my remaining portfolio transformation trades (i.e. selling shares of Royal Bank and Bell Canada in my RRSP) will likely result in lowering my forward dividends in Q4. This decrease will occur if I choose to buy US stocks with the proceeds of my Canadian share sales since I expect to pay a 1.35 exchange rate to acquire US shares. In contrast,  I continue to track my forward dividend income using a CAD/USD exchange of 1:1.  That said, I plan to keep on adding funds to my investment accounts each month, and hope that the dividend increases (seven in Q3!) keep coming. 

Complete the Transformation of my RRSP by Year End

My RRSP transformation is all about making my portfolio more tax efficient, while moving shares in companies into the same account (TFSA, RRSP, and non-registered). I continued to make progress on this goal, initiating a position in Royal Bank in my non-registered account, and adding shares to my BCE position in the same account. All that's left to do in the last quarter of the year is to purchase some shares of Royal Bank in my non-registered account, so that I can sell them in my RRSP (after waiting at least a month in order to avoid creating a taxable event). I also have to sell my shares of BCE in my RRSP, as I now have an offsetting position in my non-registered account. Lastly, I decided to harvest a tax loss relating to the shares of Corus Entertainment in my non-registered account, and set up an offsetting position in my TFSA. Now I have to sell my shares of Corus in my non-registered account since more than a month has passed since I acquired Corus shares in my TFSA.

Give Twice as Much to Worthy Causes as in 2014

I'm one month behind my pace to double the amount of money that I gave to worthy causes in 2014, but have a plan to catch up. My plan is two make two larger contributions to two of my favorite causes during Q4. After donating to the Red Cross, the Canadian Cancer Society, and my local food bank in Q1,and Oxfam Canada's efforts in Nepal (a donation that was subsequently matched by both my employer and the Government of Canada!), St Paul’s church (where my son was baptized), the  Renfrew Hospital, and the United Way of Ottawa in Q2, I gave to the Terry Fox Foundation and a federal political party in Q3. 

My non-financial goals to maintain my weight under 160 pounds (revised downwards from 165 in June 2015) at the end of each month and average a blog post each week are both being met. In fact, I haven't weighed over 160 pounds since March, and currently maintain my weight closer to 155 pounds. Also happy to report I had 21 blog posts during Q3, well ahead of the pace of one per week. My goal since returning from vacation was to write two posts per week, and that consistency has really helped grow my number of page views. Here's a little secret: the number of page views I got in September was five times more than the number in July. To that end, thanks to all the new readers :)

Looking back, I had an awesome third quarter. The fact that North American markets were down allowed me to pick up shares of great companies at the lowest prices and best values in years.  I look forward to achieving all my goals in 2015, and setting more aggressive ones for 2016.

Are you on track to meet or exceed your investment goals for 2015? If not, what corrective action are you taking?

Recent Buy & September Dividend Increases

After publicly sharing my watch list for the first time at the start of September, I was a tad nervous my target prices were aggressively low.  When I saw the North American markets were slated to open lower on Monday morning, I wondered if TransCanada Corporation (my recent analysis) would drop as their ex-dividend date was Friday. Being a long-term investor, missing one dividend payment doesn't make much of a difference to me. While watching TransCanada's stock price fall over the course of Monday, the smirk on my face turned into a full blown smile. I'm happy to share that I was able to increase my position in TransCanada today by buying more shares at $41.99 (a full penny under my target price!). Although this doesn't complete my position with the company, it's a large step in that direction. 

The other reason why I have a smile draped across my face today is thinking about the three dividend raises related to my portfolio that were announced in September. 

- Enbridge Income Fund Holdings boosted their payout this month by 10% after completing a $30B asset purchase from Enbridge Inc. 

- Microsoft increased their dividend 16%, one of the largest percentage dividend hikes in my portfolio this year.

- Realty Income upped their monthly payout by 0.26% which was the 82nd dividend increase for the company since it went public in 1994.

Although I also expected McDonald's Corporation to announce a dividend increase in September based on their historical pattern, their CFO indicated in their Q2 earnings call that they would wait for November to make an announcement. This seems reasonable given the company would want to see some preliminary results of their all-day breakfast initiative in the US before making capital allocation plans for 2016. Personally, I don't mind waiting since November is usually a very quiet month for dividend raise announcements in my portfolio.

Three dividend raises in a month and adding to a position at a aggressively low target price make me feel very positive about September. I'll update later this week with my progress towards my 2015 goals.

Did you add to or initiate any positions during today's market drop???

Dividend Stocks to Offset Specific Life Expenses

My definition of financial independence is reaching the point at which my passive income exceeds my life expenses. With that goal in mind, I started to invest in dividend paying stocks in order to generate passive income to offset specific life expenses. Additionally, realizing most of my life expenses would grow over time, my focus was on investing in stocks that grew their payouts so that my rising passive income would exceed my rising life expenses.

The first time I explicitly invested in a company with the goal of neutralizing a specific monthly bill was Bell Canada. I had recently moved into a one-bedroom condo, and hated paying the $22 monthly cost of a having a telephone landline. Although there was definitely a convenience associated with having a landline, sending a monthly cheque to Bell (which had a monopoly for home phone services in Ontario at that time), was mentally tough on me. The day I realized that by acquiring 200 shares of Bell Canada, I would reach a point where my dividends (200 shares x $0.33 per quarter x 4 quarters = $264) would offset my yearly payments $264 ($22 x 12 months = $264), I was on a mission! I immediately started on a quest to accumulate 200 shares in Bell Canada. After completing my quest that year, I was ecstatic. In my mind, Bell Canada was no longer making a dime of profit off of me. Psychologically, I felt like I had beaten the system and I was getting my home phone service for free! Better yet, after Bell raised their dividend to $0.365 a share per quarter, and my bill didn’t go up by as much, I was basically being paid by the company to have a home phone J

Other specific bills that I’ve manage to offset include

-          Cable and Internet: Thanks to Rogers and Telus, my monthly Videotron bill is eclipsed.

-          Bank fees: Thanks to the six Canadian banks I own, I no longer care what CIBC (the one major bank I don’t own) charges me in fees.

-          Property taxes (at least my share of these): Thanks to Riocan REIT, H&R REIT, and Realty Income Corportation I considered my property taxes covered.

-          Fast food: Thanks to my position in McDonalds, I don’t hesitate to indulge in fast food when there’s no healthier and more convenient alternatives.

There are three bills I’m currently working on offsetting:

-          Heating: By growing my positions in Enbridge Corporation and Enbridge Income Fund Holdings, I soon hope to be in a position to neutralize the cost of heating my house through Enbridge’s subsidiary Gazifere.

-          Electricity: Although my position in Canadian Utilities helps to offset these costs, the late fall IPO of Hydro One (from Ontario) might prove interesting to me, depending on its price.

-          Gas: Since we have two cars, but mainly drive my wife’s car, I can generally get by with filling up the tank of my Honda Civic once a month, costing about $40. With Suncor paying a $0.29 quarterly dividend, my long-term goal is to acquire enough shares of the company (~400 currently) to completely offset my gas costs.

Clearly, not all of the companies I have invested in perfectly offset my monthly bills. For instance, instead of investing a small fortune in Quebecor, and relying on their paltry 0.5% dividend yield to offset our cable and Internet bill, I’ve chosen their better managed and more diversified peers, Telus and Rogers with dividend yields over 4%. Additionally, I know that my REIT holdings don’t truly relate to my property taxes, but I figure my approach of having real estate income offset real estate expenses is close enough. I also understand that my imperfect hedges totally ignore taxation on dividends. That said, the majority of my stock holdings are held in my RRSP and TFSA, where dividends are not taxed. Plus, the mental and emotional boost I get from setting up these offsetting stock positions more than makes up for the reality of being imperfectly hedged.  There's also the fact that I have positions in a number of dividend paying companies that don't specifically offset any expenses (i.e. Pfizer, Omega Healthcare, Alaris, etc.).

In the long-term, if I can set up enough positions in dividend stocks to offset each of my regular life expenses, I’ll acheive my goal of financial independence. In the short-term, it’s extremely fulfilling to be able to offset another monthly bill by building a position in a dividend paying company.

Are there companies that you have invested in as a way to offset the amount you pay them? 

Recent Buy: Enbridge Income Fund Holdings

There are three Canadian dividend growth stocks that I find tempting to buy any time their price unexpectedly decreases: Telus, Alaris Royalty, and Enbridge Income Fund Holdings. The reason is that all three companies have management whose primary objective is to grow their dividends over time. Not only have all three sets of management talked the talked, they've also walked the walk. 

Last week, when Enbridge Income shares were down 4% for no apparent reason, I decided to scoop some up in my RRSP. I was able to buy my shares of Enbridge Income with a dividend yield of 5.3% (dividends paid monthly) and at a very reasonable P/E of 18.5X (vs their 2015 YTD average P/E of 22.7X). Since an Enbridge subsidiary, Gazifere provides the natural gas that heats my house in the winter, this buy also provides me with a "life hedge"; where my increasing stream of dividends from the company help pay my monthly gas bill.

Speaking of increasing streams of dividends, at the start of September, Enbridge Income Fund's management raised their dividend by 10% after completing a $30B acquisition of assets from Enbridge Inc. Management indicated it plans to raise the dividend another 10% in January 2016 and each year their after through 2019. If it this sounds familiar, it's very similar to the intentions of Richard Kinder at Kinder Morgan (albeit his planned increases run through 2020).

I'll admit that this might be a short term trade. The shares have already recovered a couple percentage points from when I bought them, and I might be tempted to sell and reinvest in a long-term holding  (i.e. the companies on my September watch list at their target prices). Either way, I'll keep you posted.

Are there companies that you would consider adding to your positions even if they represent a disproportionately large share of your portfolio?

Stock Analysis: TransCanada Corporation

One of the four stocks on my September watch list is TransCanada Corporation. Although well known to Canadian dividend growth investors, despite also being traded on the New York Stock Exchange (NYSE: TRP) and its proposed Keystone pipeline being vetoed by President Obama in February 2015, the company isn't a familiar name for most US dividend growth investors. The analysis below is meant to demonstrate why I think TransCanada is worthy for consideration to include in a dividend growth portfolio.

Business Overview: 

The company company has operated for over 60 years and reports on three segments: natural gas pipelines (56% of H115 revenues), liquid pipelines (25% of H115 revenues), and power generation (24% of H115 revenues). TranCanada has over 68,000 kilometers of natural gas pipelines, The company is also one of North America's largest providers of gas storage with over 368 billion cubic feet of storage. Lastly, the company is a growing power producer with interests in over 10,900 megawatts of power generation.

Since 2000, the company has grown its asset base from CAD $26 billion to $63 billion of quality, long-life pipeline and power generation assets. TransCanada reports that they have $46 billion of new growth projects under long-term contracts or regulated business model.

Financial Results & Credit Ratings:



Over the past 4.5 years, TransCanada has managed to grow their revenue at a compound annual growth rate of 9%, while growing their net income at 7%, and EBITDA at 10.2%. The company's EPS CAGR over the same period was 6.5%, while their dividends grew at 4.6%.

The company has issuer ratings of A-/Stable from S&P and Baa1/Stable from Moody's.

Dividend Growth, Yield and Safety:


Since 2000, TransCanada has grown its dividend from $0.80 per share to $2.08 per share, for a CAGR of 6.6%. During Q2 2015, the company indicated that they remain committed to 8-10% dividend growth through 2017. This commitment was first made in the winter of 2015, when the company stated their intentions to grow their dividend by at least 8% through 2017 based on its strong asset base, and predictable earnings and cash flow generation from its sizeable portfolio of small to medium-sized, near-term growth projects.

On September 17th, TransCanada's dividend yield was approximately 4.7%.

Although the company's payout ratio of 81.2% might seem high when calculated using EPS (see the table in the Financial Results section), it is only 43.8% using EBITDA which gives a better indicator of distributable cash for pipelines.

Analysts Recommendations & Valuations:

Of the 14 analysts who cover the company, 6 rate its stock a Buy, 7 rate it a Hold, and 1 rates it a Sell. The consensus analyst price target is CAD 59.19.

On September 17th, TransCanada trades at a Price / LTM EPS multiple of 18.2X. This multiple compares to an average Price / LTM EPS multiple of 21.6X YTD 2015, and an average Price / LTM EPS multiple of 19.7X over the past 5 years.

Using a very simplified dividend discount model, assuming a 5% growth rate, and an 8% required return, the fair value of the company's shares would be $72.80.

Key Risks:

Key risks relating to TransCanada include:
- Heightened regulatory and permitting risk to pipeline approvals due to political and environmental concerns.
-  High capital expenditures associated with their large scale projects that will require significant external funding.
- Uncertainty related to both the likelihood and timing of large scale projects that will also expose the company to execution risk. 
- Safety risk: Leaks, ruptures, and other safety concerns can cause delays in approval and reputation damage to pipeline operators.
- Sensitivity to commodity prices: If the price of oil or natural gas was to stay at a depressed state for a long period of time, the rates pipeline operators could charge when contracts are renewed would decrease. 

Final Thoughts:

Given the current valuation of TransCanada compared to past P/E multiples, the company's impressive history of revenue and dividend growth, and their strong balance sheet as evidenced by their investment grade credit ratings, I'm looking to add to my position. I'm aware of the key risks of investing in pipelines, but think their competitive advantage of being difficult to duplicate without intense capital investment, and the fact that they majority of the revenues they collect are predictable and subject to long-term contracts, help compensate me for assuming the risks involved.

Do you hold shares in any pipelines and are there others you would consider as future investments?