Brief Update As Year End Approaches

It's an interesting time to be a dividend growth investor in Canada. Looking at the TSX plunge day-after-day on lower oil prices makes it depressing to see the value of my holdings decrease. However, I'm ecstatic that a bunch of my holdings have recently announced dividend increases (i.e. ENB, NA, LB, IPL, etc.), thus boosting my passive income. Given the goal of my portfolio is to generate increasing amounts of passive income over time, and lower stock prices make it more affordable to increase passive income at lower prices, ultimately I'm quite happy.

As oil prices have plunged, I've taken the opportunity to invest in Suncor, Canada's largest integrated energy company. This might seem counter-intuitive to some, but Suncor was always too expensive for my liking, as it traditionally yielded under 3%. I took some of my short-term profits from trading Alaris in my TFSA this year and invested in Suncor at a yield of 3.2%. Then when it went on sale earlier this week, I was able to buy more shares with cash in my RRSP at a 3.4% yield. I'm ultra-comfortable investing with Suncor as I see high gas prices as sticky. As disfunctional as OPEC has proven themselves to be recently, I can't imagine cheap gas/heating oil as a long lasting phenomenon. When oil prices inevitably rebound, Suncor stands to benefit handsomely. In the mean-time, I see the 5% of my portfolio that I've allocated to Suncor as a life expense hedge.

The other material purchase I made in recent months was shares of Omega Healthcare Investors ("OHI") in my RRSP. I sold some of my beloved shares of Telus, as I was far over-weighted in that position, and put the money towards OHI, which is a healthcare REIT based in the US. The yield was over 5%, they have a super impressive record of distribution growth, and I was looking to add a play in the healthcare field in the US. With aging boomers accounting for a higher percentage of the population, I think OHI will benefit in the long-term.

I'm paying close attention to TransCanada Pipelines lately, as I'd like to add to my position given they recently announced plans to increase their dividend payout ratio. Plus, a couple activist investors are pressing them to up their yield materially and/or split apart their business. The oil price plunge is pulling down TRP's share price, making it seem like a good time to increase my bet on this Canadian dividend growth darling.

That about covers my big moves in recent months. I'm not necessarily looking to add to any positions this year, but, if Mr Market gets even more depressed, I might as well take advantage of it.

Un-mortgaged!

Today is a great day since my wife and I made our last mortgage payment on our house. This marks the second time I've been mortgage-free, and this time is even sweeter than when I paid off my condo. A couple posts ago I calculated that I spent about 18% of my monthly income on my mortgage.  For the remainder of 2014, the amount I would have spent on the mortgage will go towards my son's RESP. Then next year...well...the future is wide open :)

My quick tips regarding mortgages:

- Always use a mortgage broker to find you the best rate

- Don't necessarily take the lowest rate mortgage; make sure the low rate comes with acceptable options regarding pre-payments and accelerating payments.

- If you can manage it, make mortgage payments weekly instead of monthly. Your mortgage will disappear much faster

- My experience with Tangerine (formerly ING Canada) was much better than my experience with First National. Tangerine is more flexible in their payment options, while First National doesn't seem to have much experience dealing with actual clients (vs brokers).

- Make sure to get your mortgage discharged by a lawyer when you're done paying it off. 

Here's hoping my days of having a mortgage are permanently over. Financial independence feels that much more attainable :)

Three Financial Lessons from my Parents

Growing up in a middle class home headed by two fiscally responsible savers profoundly impacted my views on money. My parents were excellent financial role-models whose influence helped lead me down the path to financial independence. Below are the three financial lessons my parents taught me that most shaped my fiscal persona.

1. Save Some of What You Earn

Starting at the ripe old age of 10, I got my first job as a newspaper boy, delivering papers to over a hundred houses twice a week. My pay cheques were a jaw dropping $29.50 every two weeks, which was more than enough money to fulfill my candy/hockey card buying needs. Enter my parents who suggested I deposit $15 of each pay into a bank account. I had no trouble living large off my pocket money, and never missed the half of my pay that went into the bank.  As I entered my teenage years, and began making bigger bucks as a fry cook at a fast food joint, I continued to save and even increased the amount I set aside knowing I’d have to pay for university down the road.  Looking back, my parents never questioned me when I made purchases with some banked savings…probably since they realized I was an incredibly fiscally prudent child (some less-enlightened folks might say “cheap”).

2. Saving is Good, Investing is Better

Every time my bank account burgeoned to over $500, my parents would suggest I consider buying a GIC or bond. Savings in the bank, even 25 years ago, paid virtually no interest.  Instead of letting money sit idly in my savings account, I could buy a GIC or a bond paying over 5% interest! I remember thinking that I was getting a great deal, as I had no immediate use for the extra money, and was amazed the bank or the federal/provincial government would pay me so much interest just to borrow the money from me for a while.  I’m still a firm believer in putting one’s money to work for them. Beyond maintaining an emergency fund to respond to unforeseen material expenses, I prefer to be fully invested.  Of course GICs and federal/provincial bonds are no longer my investment vehicles of choice, as neither pays enough interest to offset inflation.

3. The Miracle of Compounding

I’m not sure why (my wife would argue that it’s because I have a poor short-term memory), but I have very few vivid memories of my childhood.  Oddly, one vivid memory is of my mom sending me into a bank to buy an Ontario’s Savings Bond at the age of 14. My parents always encouraged me and my siblings to visit banks ourselves, and become proficient in dealing with our own money. On the occasion in question, my sister and I were sent in separately to buy bonds, and were to come back to my waiting mother’s car when done.  I went into the Bank of Nova Scotia, filled out the necessary paper work, but was stumped when the bank teller asked me if I wanted the annual, semi-annual, or daily compounding option. I figured since the bonds paid interest twice a year, I’d go for the semi-annual option. After returning to my mother’s car, when she immediately asked me which option I had chosen, she informed me that I made the wrong choice, and would have to go back to the bank to correct it.  Despite being mildly embarrassed, I corrected my choice at the bank without incident. Later that day I asked the obvious question - why would I want money compounded quicker? My mom informed me that the quicker money compounded, the faster it grew.  My older sister even showed me a compounding table from a math textbook. As a young teenager, very few things with the exception of the opposite sex excited me more than the prospect of compounding interest.  Fast forward twenty-some years, and before I sell any position in my dividend growth portfolio (where compounding returns are the primary objective), I ask myself if it’s worth the opportunity cost of lost compounding.

I’m very thankful that my parents shared their fiscal wisdom with me and wish more kids could benefit from a basic knowledge of personal finance.  When I have conversations about personal finance with others, I wonder how their upbringing contributed to their financial personas.  Despite the tremendous pressure from corporate America and peer groups, I still believe that basic concepts like saving for a rainy day, investing wisely, and letting compounding work for you over time are key to achieving fiscal independence. 

Update on Investment Goals at September 30, 2014 (Q314)

My investment portfolio had another solid quarter, even with the North American markets declining in September. Many of my goals for 2014 have already been accomplished, and I expect a relatively quiet last three months of 2014.

Increase my portfolio value by 17% :

My portfolio increased in value by over 27% at Q314 compared to its value at the start of 2013.  I made my regular contribution to my non-registered portfolio, and then made my Q4 contribution ahead of schedule in order to buy shares of Bank of Nova Scotia before the ex-dividend date. The depreciation of the CAD relative to the USD has also helped my portfolio grow. 

With this goal accomplished, I'm not re-adjusting it, or increasing it for YE14. With the current market downturn, I'm focusing on buying stock in quality companies at a cheaper prices in order to increase my dividend income.

Total Dividends Received Up 25% (Revised from 18% at June 30th):

With my forward dividends up 26.5% since the start of the year, I've crushed my initial goal, and am even ahead of my revised goal.  Instead of focusing on increasing forward dividends even higher, I'm considering a transaction that would potentially decrease my dividend income, but save me on taxes over the long-term. I'll discuss it at a later date, but I might sell an investment trust I own in a non-registered account and possibly re-purchase it in my RRSP or TFSA. 

Maintain US Holdings at About 30%:

My US holdings accounted for about 28% of my portfolio at Q314.  As the CAD continues to depreciate against the US dollar, and with plans to continue to shift my RRSP holdings to US and international stocks, this number should drift up over time.  That said, I must admit that with the CAD at a year-low against the USD (about 89.5 cents today), I'm finding it harder to force myself to buy US stocks and pay the 15% premium my brokerage thinks is fair. My rising stream of USD dividends helps to remind me to follow through with my plan. 

Doubling Down on Comfortable Holdings:

I continue to make good progress against this goal. My plan for Q4 involves looking at buying opportunities to finish positions in Coke and Realty Income Corp inside my RRSP. 

Get rid of all companies who haven’t raised their dividend in the past 18 months:

My two exemptions to this criteria remain Riocan REIT and H&R REIT. Riocan would be a mega-tax headache to sell, but I have thought about selling H&R if they haven't raised their dividend by year end. I continue to believe in the long-term value of the company, but think they need to start living up to their mission statement of paying out a rising stream of distributions. 

Figure out what to do with cash in excess of $500 (especially in TFSA and RRSP):

Given the current cash-producing nature of my portfolio, I've decided against pursuing this goal. I tend to invest when I have above $1000 in cash in any of my accounts. I figure transaction costs of less then 1% are fair. Plus, I like having some cash in my accounts just in case interesting opportunities arise.

My portfolio continues to perform well-above any expectations I had at the start of the year.  I'm curious how long the current market correction will last, as I'd really like to take advantage of some buying opportunities. Plus, with my mortgage likely being paid off in November, I'll have more to invest in a stagnant, or hopefully falling market.

Bought: Bank of Nova Scotia ("BNS")

After selling my position in the Bank of Nova Scotia ("BNS") over the summer to finance an investment in Kinder Morgan Inc, I used my Q4 contribution to my investment account to re-establish my investment in BNS. I know it's not quite Q4, but given the record date for BNS's dividend is October 2nd, and since it seems to take four business days for trades to settle on the TSX, I made my quarterly portfolio contribution early in order to re-establish my position in BNS. Here are a few reasons I feel so comfortable investing in BNS.
- Relatively low P/E of 12X in this highly priced market
- A fair dividend rate of 3.7X coupled with a dividend growth rate of 10% in the last year (and an average growth rate of about 10% over the past 5 years).
- High barriers to entry given the duopoly banking industry in Canada.
- Gives me some exposure to Latin America through BNS's operations in that region.

Lastly, with my plan to slowly move my Canadian holdings from my RRSP to my taxable account, this re-investment follows-through with my plan. Although it's only two-thirds of the total number of shares I held in my RRSP, if I can scrimp together some extra money in Q4, I plan to buy some more shares in order to re-establish my initial position.

(Full Disclosure: Long BNS and KMI)

Short-term Trade: Bought and Sold Alaris Royalty Corp.

After a nice gain on a short-term trade in Sirius XM Canada ("XSR"), Mr Market discounted my other favorite short-term trading target, Alaris Royalty Corp ("AD") on September 9th. Since the stock was down more than 3% that day on no news, and because I'd eventually like to own Alaris for the long-term, I bought in at $32.61.

Fast forward almost a week to September 15th, while I was waiting for a connecting flight in Los Angeles airport (LAX), using their free WIFI, I noticed that Alaris was selling about a $1/share higher. I exited my position at $33.61, and made another gain with my short-term trading fund.

The latest gain allowed me to repurchase Alaris on Friday at the great price of $32.45. I was even able to buy 10 more shares with the gains of past transactions and a dividend I received on Inter Pipeline fund (a company I own for the long-term in my TFSA). If Alaris falls below my purchase price, I'm perfectly happy holding them and collecting the 4.6% dividend (which grew over the summer)....but if they happen to rebound above $33 again, I'd likely look to sell them and buy more shares back at a lower price.

(Full Disclosure: No position in Sirius XM Canada, Long Inter Pipeline Ltd, holding Alaris for the short-term)

Savings Rate

I've read a couple interesting articles lately about the low savings rates of Canadians (apparently only 3.9% on average) and how 51% of us live pay cheque to pay cheque. I find these types of articles depressing and frustrating. One of the great values my parents instilled in me was that you should spend less than you earn and save/invest the surplus. That said, I was curious to calculate my own savings rate. Below is a rough estimation based on my revenues and expenses over the last 30-days. Since I'm the shy type, all numbers are presented in percentages.

Work Income - 85%
Investment Income - 15%
Total Income - 100%

Payroll deductions (EI & CPP) = 5%
Bus pass = 1%
Charitable donations = 1.8%
Mortgage payment = 18.3%
Household joint expenses = 9.1%
Property taxes = 2.2%
Cottage expenses = 1.8%
Car = 1.8%
Cable and internet = 1.3%
Insurance = 1.8%
Miscellaneous (dining out, gifts, travel, clothes, frisbee, etc.) = 7.3%
Vacation = 1.8%
Total expenses = ~ 52.7%

After doing the above calculations, which are obviously laced with estimates (notice the 1.8% coming up relatively frequently), I'm not terribly surprised to see that I have about 50% of my income available for savings. A couple interesting points are included below to further explain my actual savings rate.
- Work deducts the equivalent of 10.3% of my total monthly income off of my pay cheques to fund my contribution to the work pension plan. This sounds like a lot, but having never received the money, I don't miss it.
- Every three months, I aim to invest 30.3% of my total income in stocks.
- I get a yearly bonus at work in February, and the great majority of that is usually invested in my TFSA and RRSP.
- Since moving to Quebec, I usually end up paying in the equivalent of 6% of my total monthly income in taxes at the end of the year. This might sound horrible, but I look at it as an interest-free loan from the government of Quebec.
- After the end of November, my largest monthly expense, the mortgage payment, should be history!
- Getting paid every two weeks, I receive two extra pays each years which aren't factored into the above breakdown.
- Although my work income is almost 6-times as much as my investment income, I'm much more proud of the latter.

Any of my readers open to calculating and discussing their savings rates? As long as it's positive, I think you're on the right track.

Short-term Trade: Bought & Sold Sirius XM Canada

As much as I consider myself a long-term investor, sometimes, the temptation to make a short-term trade overwhelms me and I give in. Most books I've read caution that this behaviour is risky, and to set a limit as to how much you'll commit to such trades. Through the first nine months of 2014, I've kept the amount of capital I use for such trades at no more than 3% of my total portfolio value. I've made seven of these trades and managed to generate a return of about 27% of my capital. Furthermore, I've generated this return by trading in two stocks that I'd be perfectly happy holding for the long-term (Sirius XM Canada and Alaris Royalty Corp). 

The latest trade was buying shares in Sirius XM Canada last week, when they were priced at a bargain basement $7.55. At this price, Sirius had a dividend yield of 5.6% (that does not considering the special dividend paid earlier this year). I've analyzed Sirius's financial statements and feel that not only is the dividend sustainable given their free-cash-flow generation, it could actually be increased provided operating and capital costs are kept in line. Today, through a limit sell order, I sold my share of Sirius at $7.76. Since my short-term trades have been done in my TFSA and RRSP, there are no taxes, only $20 in total brokerage fee transaction costs. 

My short-term trades have been infrequent because there are very few Canadian companies that I follow closely that I'm not already invested in. Furthermore, I like shares in these companies to fall about 3% on no news before I'd consider investing in this manner. This short-term strategy is not something I'd recommend for cautious investors. That said, so far this year, for me, the returns have been worth the risk. 

(Disclosure: No position in Sirius XM Canada or Alaris Royalty at this time)

A Recent Trade - Bought Kinder Morgan Inc., Sold Bank of Nova Scotia

I'd apologize for not posting in over a month, but I have an excellent excuse - our son Dominic was born on July 19th. Needless to say life has been vastly different the last six weeks as we adapt to our first child. Despite being ridiculously busy and constantly tired, I did make a change in my RRSP holdings in early August.

Kinder Morgan Inc. ("KMI") has been on my watch list for the better part of the last year. Although I found the stock pricey (P/E over 30X) and the company's structure hard to understand, I have a soft spot for pipelines as they are steady dividend payers with a long-term competitive advantage due to their high initial capital expenses. When KMI announced it was consolidating their four distinct businesses under the KMI umbrella, and that dividend growth was expected to be in the 10% range from 2015 through 2020...I felt compelled to invest in the company.

However, I was fully invested at the time of KMI's announcement with less than a thousand dollars of cash in my RRSP (where I'd have to hold KMI in order to avoid the 15% dividend withholding tax on US stocks). Therefore, after carefully considering which stock to sell, I decided to part with my shares in Bank of Nova Scotia ("BNS") as a recent run up in price had drove the yield down to about 3.5%. I do plan on re-initiating my position in BNS in an unregistered account, as I feel the big Canadian banks are exception long-term wealth creators.

As an added bonus, I was able to buy KMI on a small dip during the first day after the consolidation announcement, which resulted in a dividend yield on cost of about 4.5%. Going forward, I'm looking to add to my position in KMI as I feel it could be the US version of Telus, my favourite Canadian dividend growth stock, due to their transparency and disclosure regarding their future dividend policies and objectives.

(Full Disclosure: Long KMI)

Lessons from Value Investing and Moat Analysis

Being a dividend growth investor does not stop me from learning lessons from other investing philosophies. After reading The Little Book of Value Investing and The Little Book that Builds Wealth, I feel value investing and searching for companies with moats that create sustainable competitive advantages will help me in my investment research. A couple key takeaways from both books are outlined below.

Value Investing:
- Searching for low Price-to-Book and Price-to-Earnings stocks is a good way to identify companies that might be set to earn superior returns in subsequent periods if they can exhibit growth.
- There's value (pun intended) in identifying stocks in which company insiders are buying. Afterall, who better to know if a stock is undervalued than the company's employees and management?
- The list of successful value investors is long, and includes such names as Benjamin Graham, Warren Buffet, and Bill Miller. All of these investors were contrarians who didn't follow the herd mentality of the markets.

Searching for Companies with Moats:
- Sources of moats include intangible assets (brands, patents, or regulatory licenses - i.e. telecoms, waste removal), customer switching costs (due to integration with a customer's business - i.e. Oracle, Adobe), network economies (value of a product increases with users - i.e. credit cards, Ebay), and cost advantages (stemming from process, location, scale, or access to a unique asset - gravel pits, Walmart).
- Moats only exist if the company can benefit by having above-average profitability over an extended period of time (measured by ROA, ROE, etc.)
- Morningstar provides moat ratings on the companies it covers, indicating if the company has no moat, a narrow moat, or a wide moat.

I'm in the process of looking to add a US stock to my RRSP next month, and will be keeping the above information in mind when undertaking my analysis. Buying a company that's relatively cheap, with a moat that will help ensure above-average long-term returns can only help identify even better dividend growth stocks.

Blog Name Change

In order to keep things fresh, interesting and accurate, I decided to change the name of my blog from “Adventures in Canadian Dividend Growth Investing” to “Dividends in Hand”.

The new name is a play off of Myron Gordon and John Lintner’s ‘Bird In Hand’ theory which postulates that investors prefer stocks with high the certainty of dividend payments to the possibility of potentially higher future capital gains.  Admittedly, I’m a subscriber to the Bird In Hand theory as it’s very much in-line with my level of risk aversion. Why speculate on potential future gains when I can limit my downside risk by investing in a company with a history of raisings its dividends to shareholders in line with their profitability?

I also felt that “adventures” in my previous blog title was a little misleading. As a dividend growth investor, boring is my best friend. I’ll leave adventures for those inclined to bet their money on the next hot IPO, day traders, and commodity speculators. Having a portfolio of investments that consistently grow their payouts is much more in-line with my temperament and preference to let my portfolio churn out regular, worry-free returns.

Here’s hoping your investment process allows you to increase the dividends in your hands!

Check-Up H&R REIT (TSX:HR.UN)

As a dividend growth investor, I get a little frustrated when a company I add to my portfolio does not increase their distributions at regular intervals. I can appreciate that sometimes companies have challenging years, and aren’t able to increase their dividends as they have in the past. That said, even though I consider myself quite patient, when a company goes 18-months without increasing their payout, my initial reaction is to sell the investment and move onto a company that rewards its shareholders regularly.  

I’ve held shares of H&R REIT (“H&R”) in my non-registered account (not the smartest decision for tax purposes) for the last three years. I bought shares when the company was regularly increasing their distributions (about every six months) as they acquired new properties that allowed them to grow their funds from operations (“FFO”).  H&R acquired Primaris in December 2012, allowing them to become Canada’s second largest REIT. Ever since that acquisition, their distributions have been stuck at $1.35/unit. After tolerating a stagnant distribution for 18-months, I took a deeper dive to determine if this investment was worth keeping in my portfolio.

While reviewing their quarterly filings, press releases, and news for the past six months, I came across two pertinent pieces of information.

-          Despite the fact that they have kept the distribution static, H&R’s FFO per unit was up nicely from $0.44 / share in Q113 to $0.47 in Q114. This tells me the company can afford to increase its payout since their payout ratio as a percentage of FFO dropped from 75.6% to 72.3% over the same period.

-          H&R got approval in April for their plan (announced in February) to repurchase up to 25 million shares of their units. The 25 million shares represents about 9% of their outstanding shares. I’m not normally a fan of share buybacks, as I’m not looking to tender my shares. However, if management actually buys back 9% of outstanding shares over the next year, and H&R continues to operate as efficiently as they have in the past, the value of my units could rise substantially.

I’ve decided that I’ll hold on to H&R to see how the share buyback impacts the value of my shares. With a current distribution yield around 5.8%, the P/E about 20X, and management running the company efficiently, I’m curious to see how things shape up in the next six months.  If the company’s shares are undervalued (as I assume management thinks given their 25 million share buyback plan), the value of my holdings should increase, making up for the lack of distribution raise.

(Full Disclosure: Long HR.UN)

Restructuring RRSP - Bought Telus

Over the next 18 - 24 months, I plan to sell my Canadian stocks currently sitting in my RRSP in order to create some room to invest in US and international stocks. Considering my investment portfolio currently consists of almost 75% Canadian companies, international diversification is a must for me. However, when I sell the Canadian stocks in my RRSP, unless I am terribly overweight in them, or that I think the security is overvalued, my plan is to buy the same amount of stock in my unregistered investment account (thus the process taking me 18-24 months). 

After Canada's Industry Minister let it be known that he planned on tilting the next spectrum auction in favor of new entrants and bit players, Mr. Market depressed the prices of the big three Canadian telecom companies yesterday. Knowing that the Government of Canada has been favoring smaller players and new entrants in spectrum auctions for the past 6 or 7 years, and that the strategy has been an absolute failure (the big three telecom companies control about 95% of Canada's wireless market), I saw this as a great opportunity to start my RRSP-to-non-investment account shift strategy. With my Q3 contribution to my non-investment account, I bought shares in Telus at $38.20. 

In order to be safe, comply with Canadian tax law, and not have to realize a capital gain on my Telus shares inside my RRSP, I'm planning to wait at least 30 days before I sell an equal number of shares of Telus inside my RRSP. Although this seems complex, Canadian tax law as it relates to capital gains is a bit of a challenge for my simple brain. I'm very happy to have bought the shares of Telus at what I consider to be a decent bargain in the current elevated market. Today, Telus has already bounced back about 1.5%, and is trading over $39.00. 

Even before this trade, Telus was my largest individual company holding across my investment portfolio. Since it accounted for less than 10% of my total portfolio, I'm likely going to maintain my current position in the company. Telus has a great record of announcing dividend increases in advance, fallowing through with previously announced regular dividend raises, and growing revenue/earnings in order to keep the dividend sustainable.  Telus is a pretty great company to buy when Mr Market gets depressed. 

(Full Disclosure: Long Telus, Bell, and Rogers)

The Little Book of Behavioral Investing - Lessons Learned

I've been on a behavioral finance reading spree lately, consuming Inside the Investor's Brain (Richard Peterson), A Random Walk Down Wall Street (Burton Malkiel), and Behavioral Finance (William Forbes) in the last month. As much as I enjoyed those books, The Little Book of Behavioral Investing - How Not to Be Your Own Worst Enemy by James Montier was my favorite of the bunch. In a little over 200 pages, Mr. Montier went over many of the common mistakes/biases investors make, and suggested ways to over come them. A couple of my key take-aways are outlined below.

Less Information Is More
When looking at a public company as an investment opportunity, it's overwhelming to consider all the information available. Concentrating on a few key facts, such as yield, payout ratio, history of dividend increases, EPS growth, and P/E for a dividend investor yields far better results than trying to incorporate every piece of data available.

Focus on Facts, Not Stories
Just because a company has a great story, it doesn't mean the company is a great investment. Don't get me wrong, I enjoy hearing how Tesla is attempting to move consumers away from gas-guzzling cars, I wish First Solar lots of luck in installing solar solutions around the world, and I hope Go Pro can live up to the hype of their IPO, but I wouldn't invest in any of these companies. Their facts simply don't fit into my investment criteria, and I doubt they ever will.

There is Great Value in Doing Nothing
The media, the investment industry, and financial intermediaries all encourage investors to trade frequently to build wealth. Due to transaction costs, over-trading kills investment returns. Furthermore, investors suffer from biases of trading out of winners too soon, and holding onto losers. Unless there's a compelling reasons for me to trade, I'll simply sit on my investment portfolio, and invest new cash in the most promising investments.

It's All About the Investment Process
Mr. Montier encourages investors to focus on their investment process, as opposed to the outcomes. He suggests investors keep a trade journal (much like I've used this blog) to keep track of their process and how they came to their buy/sell decisions. Since the market is largely out of the investor's control, focusing on the process allows the investor to see flaws and correct them going forward. One particular lesson I learned in this area is to document my trade decisions when selling a winner. I fall into the group who sells winners too soon (i.e. Home Capital, Walgreens, Canadian Western Bank, etc.) and I have to figure out why I do that. Holding on will help my investment returns in the future.

The Little Book of Behavioral Investing has helped me see flaws in my investment process and thinking, and I'll be adding it to my permanent investing library. I'd encourage all serious, long-term investors to give Mr. Montier's book a thorough read. You'll be happy you did.

Update on Investment Goals for 2014 at June 30th (H114)

It was another fantastic quarter for my investment portfolio, with many of my goals for 2014 accomplished or well on track.

Increase my portfolio value by 17% :

My portfolio increased in value by about 18% in H114 vs YE13. This was impressive, even with my RRSP contribution for the year.  I also made another contribution to my non-registered investment account. My portfolio value would even be higher if not for the CAD appreciation to its US counter party. 

With this goal accomplished, I'm not re-adjusting it, or increasing it for YE14. I'm hoping for a market downturn so I can focus effort on improving progress toward my next goal even more dramatically.  Buying stock in companies at a cheaper price would be a dream at this point in time. I feel the market is fairly valued, and bargains are hard to come by.

Total Dividends Received Up 18%:

I accomplished this goal in the last couple days in June, with forward dividends up a little over 18% since the start of the year. Six of my holdings increasing their dividends in Q2 (Bank of Montreal, Laurentian Bank, Telus, National Bank, Realty Income, and Alaris Royalty).

In contrast with my portfolio value goal, I've decided to set a stretch revised goal for YE14. Instead of 18%, I'm now aiming for my forward dividends to be up 25%. 

Maintain US Holdings at About 30%:

My US holdings accounted for about 27% of my portfolio at Q114.  After selling a few US holdings in the first half of the year (Walgreens and Western Union) and replacing them with Canadian equities, I knew this goal would be a hard to maintain at June 30th. Add the depreciating US dollar into the mix, and my portfolio consisted of about 25.1% of US stocks at H114. That said, my plan is to slowly sell my Canadian holdings in my RRSP, and move into US stocks to increase my international diversification. I figure the entire process could take my upwards of 18 months, but I should be back around 30% by YE14. 

Doubling Down on Comfortable Holdings:

I continue to make good progress against this goal. I recently added some shares of Pfizer to my RRSP, and will look to use the proceeds from stock sales of Canadian holdings in my RRSP to add to positions in US holdings. 

Get rid of all companies who haven’t raised their dividend in the past 18 months:

After selling Western Union and Intel, two companies who didn't raise their dividends in over 18 months, during Q1, I don't have many stragglers (non-dividend raisers) left in my portfolio. The only two exceptions might be Riocan REIT and H&R REIT...both of which would be mega-tax headaches for me to sell. I'll wait closer to December to see if these two companies raise their dividends in 2014 as I thought they would. 

Figure out what to do with cash in excess of $500 (especially in TFSA and RRSP):

After thinking about this goal, I'm happy I didn't choose a vehicle to invest cash in excess of $500 in my TFSA and RRSP. I have a couple positions in both of these accounts that I'd like to slowly add to, and amounts around $1,000 will buy a nice amount of stock in the companies I'm looking to increase my holdings in. Plus, with a $10 trading cost, transaction costs will only be about 1%.

Obviously, half way through the year, my portfolio is far ahead of where I imagined it would be. During the second half of the year, I'm going to focus more on increasing my forward dividends, and slowly moving Canadian holdings from my RRSP to my taxable account. 

Bought General Mills, Inc (NYSE: GIS)

Being patient and having some extra cash in my RRSP paid off on Wednesday as I was able to initiate a position in General Mills, Inc. When General Mills missed the consensus Q4 EPS estimate of $0.72, and reported EPS of a mere $0.67, the stock tumbled over 4%, and I was able to initiate a position in this great company that has been on my watch list for over a year. Here are a few reasons why this stock has been on my watch list:

- Dividend yield of 3.2% at purchase, well supported given the payout ratio of 54% (slightly above historical norm of ~50%).

- An impressive history of dividend growth over the last five years (averaging annual growth of 14%) and 24% over the last year.

- Reasonably priced at a P/E of 18X at cost.

- Strong balance sheet reflected in credit ratings of BBB+/Stable and A3/Stable.

- International sales account for about 30% of total sales, which enhances diversification of my portfolio.

My purchase of General Mills also allowed me to reach my forward dividend income goal that I had set for December 2014. With six months still to go, I'll have to re-set this goal, and figure out what it is I'd like to accomplish during the rest of the year.

Bought Pfizer (NYSE: PFE)

Even though I’m finding it difficult to buy US stocks with the S&P 500 reaching all-times daily, and the CAD/USD exchange rate making every company south of the border look even more expensive, I pulled the trigger today and added to my position in Pfizer. Even after Pfizer’s proposed acquisition of AstraZeneca (“AZ”) was rejected by AZ’s board, I still find a lot to like about Pfizer:

-          A dividend yield of 3.55% that is sustainable given their 30% payout ratio.

-          A solid record of dividend growth over the last five years (averaging 13% per year) and in the last year (8.3%).

-          A reasonable valuation with a P/E of 17.9X

-          A strong portfolio of drugs still on patent and a promising pipeline of new drugs

-          Great geographical diversification with only 39% of sales in the US, 22% in emerging markets

-          Strong balance sheet reflected in credit ratings of AA/Stable and A1/Stable

Adding to my position in Pfizer is in-line with my 2014 goals of increasing amounts invested in companies I’m comfortable with and puts me temptingly close to achieving my forward dividend goal for the next twelve months.  Since the forward dividend goal was to be accomplished by the end of the year, I’ll have to revise it if I have it met by next Monday.

(Full disclosure: Long Pfizer)

James Bond-less

I was reading an article in the summer issue of MoneySense magazine about the role of bonds in a portfolio. The author mentioned that during the stock market crash of 2009, bonds helped some investors limit their losses. At that point in the article, about three paragraphs in, I stopped reading since I predicted the author would go on to say that bonds help smooth portfolio returns in difficult times. Although I can't argue that point,  I stopped investing in bonds in late 2007. Despite mountains of "experts" who drone on about the benefits of holding bonds, I don't ever plan on buying a bond, bond etf, or anything of that nature again. 

Over the long-term, which is the period I plan to hold my investments, bonds returns average between 5-6%, while stocks returns average a little less than 10%. Granted stock returns have higher variability, but the rewards (almost double the bond returns) far outweighs the risks for me. Currently, a government of Canada 10-year bond is yielding around 2.3%.  With inflation at 2.3% in May, your government of Canada bond only allows you to conserve purchasing power...and that's if you believe inflation is actually only 2.3%, and assumes it will stay at that rate or lower over the next 10-years. 

Like most investors, before converting to dividend growth investing, I owned bonds. Specificially, I owned province of Ontario bonds, government of Canada bonds, and even a bond ETF from ishares (TSX: XBB). The rates on all these fixed income securities are very low (XBB yields around 3%), and worse yet, the interest income is taxed at the full marginal rate...a nightmare for investors living in Quebec. In comparison, my portfolio yields a little over 4%, and the stocks I invest in have a healthy habit of increasing their yields each year. Plus, the income my dividend growth stocks generate is taxed at a lower rate due to the dividend tax credit. If I ever need to sell my shares, capital gains are taxed at half the marginal tax rate. 

The closest thing I have to bonds in my portfolio are shares in Riocan REIT (yielding 5.2%) and H&R REIT (yielding 5.9%). If interest rates shot up, I expect both of these holdings to decrease in values, and I'm ok with that. In the long-run, I know both REITs are great companies, with portfolios of properties that would be hard, if not impossible, to duplicate. In the event of rising rates, I'd gladly pick up more shares in both entities, as I think their distributions will grow over time, and the value of their well managed properties would follow suit.

Before you add bonds to your portfolio, I think you should ask yourself why you're doing it. If it's for safety, you can always go with a safer investment (CDs/GICs) that wouldn't be impacted by an increase in interest rates. If you're investing in bonds for the income, then why not try a portfolio of dividend growth stocks instead? Not only would such a portfolio give you a higher yield, you could look forward to raises every year in order to bet keep pace with inflation. 

(Full Disclosure: Long REI.UN and HR.UN)

The Power of Patience

After reading Richard Peterson's book "Inside the Investor's Brain", in which he explains some of the common mistakes/biases investors make when trading, I decided to conduct a little experiment. Having read about investors' tendency to overtrade, I decided to avoid looking at my investment account balances for a week.

One of the great things about a dividend growth portfolio is that it is supposed to be low maintenance; good companies keep earning superior returns, increasing their dividends over time, while I sit back and collect an increasing stream of dividends. Although this sounds very reasonable in theory, I found myself reading daily news alerts on my companies, and checking my account balances each night after coming home from work. Checking my investment account balances was a daily habit. After reading that investors who check their account balances are far more likely trade stocks, and knowing that trading decreases returns due to transaction costs, I decided to break this potentially wealth-destroying habit.

This Friday I can once again check my investment account balance, and get a gauge of how things went over the week. Not knowing exactly how every stock is moving each day is very liberating. I realize that I have faith in my investment process (on both the buy/sell sides), and checking in daily is simply not necessary.

Three US Stocks on my Watch List

About half the money in my self-directed RRSP is invested in US equities. Generally, I use US equities in order to get exposure to the international market, without having to worry about different accounting standards and dividend with-holding rules. For this reason, I gravitate to US based multi-nationals like Coca-Cola, Microsoft, and McDonald's.

With my annual RRSP contribution deposited in my account in the last month, and a nice collection of dividend payments made in the first half of 2014, I'm sitting on an unusually high amount of cash in my RRSP. One of the reasons for my inaction is the outrageous 1.11 USD/CAD exchange rate my broker wants to charge me on any US stock I buy. This compares to the actual 1.09 USD/CAD rate at market close today. There are very few US companies I'd consider paying an 11% premium on, but cash sitting in my account earns me negligible interest. I thought I'd share some of my US watch list companies with you, and why I'd consider paying an 11% premium to buy into them.

Microsoft - I initiated my position in Microsoft around this time last year, and saw it sore from $26.50 a share to its current level around $41.00. The company raised it's dividend by 22% in that period, and with a payout ratio around 38%, there's plenty of room for another big bump this year. My issues with adding to this position are that I'd be buying near the company's 52-week high ($41.66) and at a dividend yield of 2.7%. That said, very few companies have the revenue/EPS growth record that Microsoft boasts, and I feel it is well-managed company. 

Procter & Gamble - Another well-run, global company, trading at what I consider to be a very fair price. Other pluses are PG's 3.2% dividend yield, recent 7% dividend raise earlier this year, and payout ratio of 62%. That said, that company has not been able to grow revenue and EPS at the same pace Microsoft has over the last few years, and there's no 'must-have' product in the pipe line that would drive that type of growth in the future. My main hold-back on this is thinking that I'll end up paying about $89 per share, which would drive my actual dividend yield down to 2.9%. 

Kinder Morgan - I've done very well investing in Canadian pipelines, and have been looking at opportunities to invest in that sector in the US. Granted, this is no where near as multi-national as the typical US companies I usually consider. However, the 5% dividend yield is enticing, as is the record of dividend growth (over 5% per year). The fact the company has almost doubled revenues over the last 5-years, and increased EPS by about 50% in that period, also helps offset the lack of international exposure. As is usually the case, as soon as I start to even consider adding a new position, the stock tends to take off before I can make up my mind.

In addition to the above three securities, Chevron has also caught my attention as a potential new position. It's another case where the 3.5% dividend yield (7% dividend growth yoy) looks great, until I factor in the 11% premium I'd pay on the shares. Here's hoping the Canadian dollar gains some ground on its US counterpart, to make adding US shares in my RRSP cheaper.

Full disclosure: Long MSFT, KO, and MCD

Special Dividend from Sirius XM Canada Holdings (TSE: XSR)

When I first started reading about dividend growth investing, authors would give examples of companies who paid special dividends. I found the examples intriguing, but thought trying to pick a company that would pay a special dividend would be much like trying to pick a potential take-over target...too hard for this simple country hick. While initiating a position in Sirius XM Canada Holdings ("Sirius") a few months ago, the thought of a special dividend was not a consideration.

What interested me in Sirius was their steady sales growth (11% in FY13), strong free cash flow generation, and tempting 5% dividend yield. The fact that they are a market leader in their domain in Canada (with their competition coming from conventional, free radio programming), with quality programming, and have been successful in negotiating with automotive OEMs lead me to believe they had established a sustainable competitive advantage.

Fast forward to today when after refinancing a debt obligation (at a much lower rate) and signing a new revolving credit facility, Sirius declares a special dividend. The market initially reacted with a 4% bump in share price, before a rather strange small decrease (0.5%) over yesterday's closing share price. Being invested for the long-haul, I'm 100% fine with sitting on my position and collecting my first ever special dividend next month. That said, if Mr Market continues to react irrationally by making Sirius even cheaper for me to buy, I'm tempted to add to my current position, as I have a great deal of faith in Sirius's Canadian business.

(Full Disclosure: Long XSR)

Update on Investment Goals for 2014 at Q114

Only a month late, but here's an update on my progress toward my investment goals for 2014. 

Increase my portfolio value by 17% :

My portfolio increased in value by about 10.9% in Q114 vs YE13. This was impressive, even with my TFSA contribution for the year. It also includes about $700 I made in three quick trades (held for about two days each time); a strategy I decided to discontinue after quarter end. I'm well on my way to achieving this first goal.

Total Dividends Received Up 18%:

Great progress was made toward this goal in Q1, increasing my expected forward dividends by 9.4%! This was due to a couple purchases in my TFSA, and seven of my holdings increasing their dividends in Q1 (Bell, TransCanada, Scotiabank, Cisco, Rogers, TD Bank, and Royal Bank). As of the end of April, I'm extremely close to reaching this goal. Might even revise it upwards at June 30th.

Maintain US Holdings at About 30%:

My US holdings accounted for about 27% of my portfolio at Q114. After selling Walgreens early in Q2, and given the Canadian dollar has gained a tad against its US counterpart, I think I'll be quite a bit under this goal come June. This is mainly due to me not seeing the value in paying a 10% premium to buy US companies that I look to hold for the long-haul. Instead, I've identified a couple Canadian companies I'm building positions in (Corus, Alaris Royalty, and Sirius Canada). 

Doubling Down on Comfortable Holdings:

Good progress was made on this goal, when I doubled positions in solid companies like Laurentian Bank, and lately, Corus Entertainment. There's still some US companies I'd like to add more to my holdings, but I'm willing to wait out what I see as a high exchange rate at the current time. 

Get rid of all companies who haven’t raised their dividend in the past 18 months:

Western Union and Intel, two companies who didn't raise their dividends in over 18 months, were sold from my portfolio during Q1. I'll do a check in June, but I'm pretty comfortable saying the rest of my holdings have raised their dividend within the last 18-months. 

Figure out what to do with cash in excess of $500 (especially in TFSA and RRSP):

Sadly, I made no progress on this goal. I continue to sit with growing amounts of cash in all three of my accounts. This is definitely something I want to address, and just need to spend a couple hours figuring out which ETF I can trade in/out of for free with my brokerage in order to get a higher return on my cash.

Looking back, Q1 was pretty awesome, despite some market weakness in periods. The high-light for me is knowing how close I am to achieving my dividend goal of the year, despite being only four months into 2014. Here's hoping the rest of this year goes just as smoothly!

What does retirement look like for you?

Yesterday, my French teacher at work asked the members of our class to describe their mental image of retirement. Answers ranged from the funny (bathing daily in a pool of cash) to the traditional (traveling the world while stopping long enough to visit with grown kids) to the brutally honest (worrying what they'll do with their spouse every day). Luckily, before it was my time to answer, my teacher flashed an image of a couple walking along a tropical beach. With the visual clue in mind, I told Pierre that I pictured myself and my wife holding hands while lounging on a beach. It drew 'awwwws' from the female students in my class, but it was simply the only answer I could come up with at the time.

Reality is that I have very little of an idea of what my retirement will be like. There are so many factors that are yet to be determined (when I'll retire, where we'll retire to, how many kids we'll have, advances in technology, etc.) that it's an extremely blurry picture right now. Since I'm 35, retirement seems like a long way off. That said, most of the investment and career decisions I've made center on how they'll impact my retirement. The fact I've chosen to invest in companies that regularly increase their dividends gives me peace of mind knowing that I won't have to rely on a work pension plan or the Canada Pension Plan, both of which could prove unsustainable given current demographic and investment return trends.

There are certain aspects that I can picture as part of my retirement. I love travelling, especially doing house exchanges with other couples, as I feel this gives me a chance to truly experience the culture of another country. Additionally, I find being close to water relaxing, and can picture myself on a lounge chair, reading a good novel. Staying physically active is something I've focused on, and plan to continue in the future, be it through running, swimming, or a yet to be discovered activity. Of course I'll continue investing, as it's something I enjoy, and benefit from in multiple ways. Spending time with my wife and children, is perhaps the activity I look forward to the most of all.

The main thought I associate with retirement is freedom. Imagine waking up in the morning and having the freedom to do whatever it is that you want to do that makes you happy. It's that thought of having the ability to determine the direction of each day that drives me to work hard now and invest successfully.

I'm curious, what does retirement look like for you?

Bought & Sold Alaris Royalty Corp in 48 hours

Back in January, I mentioned that I planned to set aside some money in my TFSA in order to take advantage of market over-reactions. The vast majority of my investment portfolio is invested in companies that regularly grow their dividends/distributions. These are companies I'm comfortable owning for the long-term, that have proven histories of sales/earnings/profit growth to back up their dividend/distribution increases.

When Alaris Royalty Corp (TSX: AD) announced their 2013 results on Monday morning, I couldn't believe the market reaction to the company's fantastic results - the stock fell over 5% on record earnings! Granted, Alaris is currently in the midst of sorting out a non-material (in my estimation) tax issue with the Canada Revenue Agency ("CRA"), but I knew that Mr. Market was over-reacting by beating down the stock. 

With the stock down 5%, the dividend yield (which has a history of growing strongly) at around 5%, and with my stash of 'hedge fund' cash in my TFSA ready, I bought 200 shares at the end of the day at $29.50. Then it was just a matter of waiting for investors to come to their senses and realize Alaris's stock had been unfairly beat down due to a minor dispute with CRA. 

In less than 48 hours, I decided the stock had bounced back enough, and sold my 200 shares at $30.40. After subtracting the $20 in transaction fees, I netted a $160 profit (2.7% of my investment) in less than two days. 

Not all trades with my 'hedge fund' money will be this easy, but I'm extremely happy to get off to a positive start with my side project for 2014. 

Sold Western Union; Bought Coca-Cola

Yesterday, I received an email from my discount brokerage offering me a commission-free trade, as I had yet to make any trades in 2014. Being a buy-and-hold investor, I'm quite comfortable sitting on the sidelines for long periods of time and collecting my ever growing dividends. However, after reading about Coca-Cola's Q413 earnings miss, and given how long I've wanted to add this company to my investments, I decided to take a look to see if any of my holdings were ripe for selling.

As stated in my "goals for 2014" post, one of my focuses is to get rid of companies who have stopped increasing their dividends. For me, when management breaches investors' trust by failing to raise dividends in a regular manner, they no longer deserve my funds invested in their company. For this reason, when looking at holdings to sell that would create some liquidity in my RRSP (where I hold all US dividend growers - for tax reasons), I focused on Western Union (WU) and Intel (INTC) who had not grown dividends in the past year. I was sitting on a 40% gain in Western Union, and realized that they had failed to raise their dividends in 5-quarters (thus breaking the trend they previously set raising dividends every 3 quarters). Although I can respect the fact that they had been investing in anti money-laundering technology, and that a lot of their cash is held offshore, I simply could not forgive them for failing to raise their dividends in a regular manner.

With the proceeds of the sale of Western Union, I bought into Coca-Cola, a company I've been wanting to add to my portfolio for the past 5-years. With their 50+ year record of raising dividends, talk of another increase later this week, a dividend yield of 3% (finally!), and a P/E of 19.5X, I was happy to add this excellent company to my portfolio. The fact that Coca-Cola is a global company also makes it very attractive to me, as I see it as a play on emerging markets that will add further geographic diversification to my holdings.

They say good things come to those who wait. Today, at least for me, I feel finally adding Coca-Cola to my portfolio was well worth the wait.

Plan for 2014 TFSA Contribution

Ever since the start of the year, I've been trying to figure out what companies' stock to invest in with my 2014 Tax-Free Savings Account ("TFSA") contribution. Initially, my plan was just to top up my investments in TD Bank, Inter Pipeline Ltd, and Canadian Apartment Properties REIT...all of which I currently hold in my TFSA, along with Rogers Communications and National Bank of Canada. Over the past couple weeks, any stock that I've thought of adding to my TFSA has risen to the points where I think it's fairly or over valued.

Thus my new plan - use this year's $5.5K contribution and cash proceeds of dividends/distributions to create a small hedge fund to take advantage of what I perceive to be over-reactions in the market. I used a similar strategy during 2012/early 2013 to buy beat-down dividend growth companies like Western Union, Microsoft, Cisco Systems and Telus...but never sold them. Quite frankly, I already pay enough taxes, so taking advantage of market over-reactions in my TFSA is an appealing prospect. Plus, I can even look at over-reactions in US and other foreign markets, as capital gains won't be taxed. The goal will be to sell the investments made with these funds within a month, so I can avoid with-holding taxes on any dividends.

This style of investment is very different from my normal buy-and-hold solid dividend growth companies, but I'm really looking forward to seeing the results in 2014.

Financial Goals for 2014

Although I’m not much for resolutions, I enjoy setting goals for myself each year. Putting objectives on paper, or “on the cloud” helps me focus.  Since I spend a fair amount of my free time researching companies and investments, I decided to share what I’m looking to do with my investment holdings in 2014.

Increase my portfolio value by 17% :

Since I’m not comfortable disclosing how much my investment portfolio is worth, I have to state the first two goals in percentages. The 17% increase in value corresponds to a number I’d like to hit by year end. Although I had very strong returns in 2013, I don’t expect the same this year. However, I do expect my portfolio to appreciate, I’ll reinvest the dividends I receive in 2014, and I should be able to deploy some new capital, all of which should help me meet this goal.

Total Dividends Received Up 18%:

As indicated above, the 18% also corresponds to the amount of dividends I expect to receive in 2014. None of the companies in which I'm currently invested should cut their dividends in 2014. Alternatively, I expect most, if not all of the company’s I own will increase their payouts during 2014. Add to this some new capital I plan to inject in my portfolio, and this is a realistic goal.

Maintain US Holdings at About 30%:

I ended 2013 with holdings of US stocks accounting for 28% of my investment portfolio. With the USD appreciating against the CAD, this number is now closer to 30%. I feel that by investing in large multinational companies with sales across the world, my portfolio gains geographic diversification. Even though the US market was hot in 2013, I’m comfortable with all my US holdings.

Doubling Down on Comfortable Holdings:

As my investment portfolio grows, I’ve learned that in order for a strong performer to make a difference to my portfolio return, there has to be a material investment in the company. A good example is Microsoft, a great dividend grower, who was up about 40% in 2013. However, since I only bought 100 shares, the impact on my portfolio was minimal. My plan is to invest in fewer companies, but increase the amount of money I invest in my core holdings.

Get rid of all companies who haven’t raised their dividend in the past 18 months:

During 2013, I was very happy to get rid of all the laggards in my portfolio, who hadn’t recently raised their dividends. I think it shows good financial management on the part of companies who are able to increase their payouts without raising their payouts ratio to unsustainable levels. I plan to get rid of any companies that haven’t raised their payouts in the last 18 months. So far, I think only Intel and Western Union are on my watch list in this area.

Figure out what to do with cash in excess of $500 (especially in TFSA and RRSP):

Given the amount of distributions I receive each month, I find myself with excess cash in my various investment accounts that isn’t doing anything. Since iTrade allows me to buy and sell a number of ETF without commissions, I plan to pick one or two high yielding ETFs to deploy my excess cash in when I don’t have any investment ideas I’m looking to test. I’ll pay particular attention to my TFSA and RRSP since I can buy and sell ETFs without worrying about tax implications.