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)