Monday, February 8, 2021

Revisiting the Canadian TULF Dividend Growth Portfolio

One of the most read entries on this blog is my 2016 take on the Canadian TULF Dividend Growth Portfolio. When re-reading the post and a couple of critical comments that it generated, I thought it would be worthwhile to revisit the entry and take a different perspective. Since it's been almost five years since the entry, my personal viewpoints have changed, and I'm going to attempt to argue in favor of the TULF portfolio by presenting counter examples to invalidate my three criticisms of Tom Connolly's four stock portfolio. 

For any readers who aren't familiar with Tom Connolly, he published The Connolly Report investment newsletter for over 30 years, and is one of the best known Canadian dividend growth advocates. Mr. Connolly set out the idea of the four stock TULF portfolio, with "T" standing for telecommunication companies, "U" for utilities, "L" for low-yielding dividend growth stocks with growth potential, and "F" for financials. To ensure high quality companies, Mr. Connolly suggested investors limit themselves to the S&P/TSX Dividend Aristocrats Index, which consists of 87 members and can be traded under the CDZ ishares ETF. It is worth noting that Mr. Connolly had certain rules regarding eliminating any "high yield" stock with a payout over 6%, and then removing cyclical stocks (i.e. energy and mining) as they were perceived as too risky to include in a four stock portfolio.

My three criticisms regarding the TULF portfolio are include below in italics, with my counterarguments in normal font. 

1. Lack of sector and geographical diversification

Once you’ve filled up your portfolio with telecoms (4 candidates), utilities (5 candidates), and financials (12 candidates), you're left trying to identify low-yielders with above average dividend growth potential in the 28 remaining companies. Since Mr. Connolly fails to define what he considers a low-yielding company, it's fair to focus on the lower yielding half of the 28 remaining companies in search of candidates that would provide above-average dividend growth and sector diversification. 

Although a couple of the larger utility companies and financial firms that Tom recommends have exposure outside of Canada, limiting a portfolio to TULF companies would expose you heavily toward the small, resource-centered Canadian economy. Personally, I aim  to keep at least 30% of my investment capital dedicated to international equities in order to provide better geographical diversification.

Going through the 87 companies in S&P/TSX Dividend Aristocrats Index, I came up with some names to include in portfolios that would provide some geographic and sector diversification:

Sample geographically diversified portfolio: T: Telus (most international Canadian telecommunication player), U: Algonquin (or Fortis, or Emera would provide US exposure), F: Bank of Nova Scotia (Latin and South America exposure) or Brookfield Asset Management (global exposure, but a lower dividend yield), L: Magna (international exposure to vehicle manufacturers)

Sample portfolio to provide sector diversification: F: Onex (multisector holdings), T: Telus (health exposure in addition to telecommunications), U: Capital Power (producer and energy trader), L: Dollarama (general retailer)

Although achieving strong geographic and sector diversification is going to be a challenge with only 87 Canadian based companies to choose from, the sample portfolios above show promise in at least providing some geographic and sector diversification. 

2. Identifying low-yielders who can and will grow their dividends quickly is difficult and not necessarily relevant

Accurately identifying low-yielders who can continue to grow their dividends at a fast rate for an extended period of time is as difficult as timing the market. These special types of companies are even harder to find in the small and often domestically focused Canadian market. Furthermore, I have yet to see a valid case made from a mathematical standpoint of why including low-yielders in a portfolio is necessary. Assuming you get very lucky and select a company currently yielding 1.0% that can grow dividends at 20% for 10 years, your yield on cost would grow to 6.2% at the end of the period. In contrast, if you pick a company currently yielding 5%, that grows their dividend by a paltry 2% over 10 years, you end up with the same yield on cost of 6.2%.

Instead of trying to argue the math presented above, which is futile, I'll instead present the below names of companies (all part of the 87 S&P/TSX Dividend Aristocrats Index) who have relatively low yields, but have been able to grow their dividends annually over prolonged periods of time, which I checked through using the Canadian Dividend All-Star list at December 31, 2020.

Metro Inc.: Yield at Dec 31st = 1.6%, 26 year streak of raising dividends, 1-yr div growth = 12.5%, 5-yr return = 22%
Candian National Railway: Yield = 1.6%, 25 year streak of raising dividends, 1-yr div growth = 7.0%, 5-yr return = 73%
Alimentation Couche-Tard Inc.: Yield = 0.8%, 11 year streak of raising dividends, 1-yr div growth = 19.0%, 5-yr return = 38%
Brookfield Asset Management: Yield = 1.2%, 9 year streak of raising dividends, 1-yr div growth = 12.5%, 5-yr return = 88%
Open Text Corp.: Yield = 1.8%, 8 year streak of raising dividends, 1-yr div growth = 6.7%, 5-yr return = 81%

Keeping in mind that the 5-year returns presented above don't include dividends, the benefit of adding these low-yielding stocks to a portfolio becomes obvious: potential for large total returns. 

3. Energy vs Utility Companies?

While Mr. Connolly suggests removing cyclical stocks such as energy and mining companies, he goes onto say TransCanada (classified in the Energy sector) was the first stock he owned. I also find it odd he advises against including energy companies and yet dedicates a whole category for utilities. There are blurry lines and high correlations between energy and utility companies. For instance, Enbridge Inc is classified in the index as an Energy company which would make it ineligible for the TULF portfolio. However, living in Quebec, Enbridge is viewed as a utility company by its many natural gas customers who pay their monthly bill to Enbridge subsidiary Gazifere. By discounting an entire category of companies he deems to be cyclical, Mr. Connolly leaves the investor with an even smaller potential universe of companies from which to select. 

The best way I can think of  to support Mr. Connolly's argument to include utility companies, and remove energy companies, is to compare the performance of indices representing these two sectors (which I did using 

TSX Energy Capped Index ($TTEN) 5-year Performance: -37%
TSX Utility Capped Index ($TTUT) 5-year Performance: +47%

It's hard to argue against 84% outperformance over the past five years. Although I do think a longer time frame would make for an even more meaningful comparison. 

Before wrapping up, I can think of a couple more bonuses for the Canadian TULF portfolio:
- Four stock portfolio is easy to construct, follow, rebalance yearly and would have low transaction costs
- Strict criteria can help automate decisions
- Starting with only quality companies that are part of the S&P/TSX Dividend Aristocrats Index is likely to lead to less big losses of capital.

Does your portfolio include all of the TULF components? 

Friday, January 15, 2021

11 Monthly Paying Canadian Dividend Growers for 2021

"Do you know the only thing that gives me pleasure? It's to see my dividends coming in."
- John D. Rockefeller

If like Mr. Rockefeller, you get pleasure from seeing your dividends coming in each month, and you'd like to see them grow over time, the below table might interest you. Using the Canadian Dividend All-Star list from December 31, 2020, I determined the monthly dividend growers for 2021.   To be included, companies had to pay a monthly dividend, increase their distribution at least once in the last 12 months, and have a minimum 5-year history of annually increasing their payouts. Much like in similar posts in 202020192018,  2017 and 2016, there was some additional filtering to come up with the below table. From the 100 companies appearing on the initial Canadian Dividend All-Star list, there were only 18 who paid dividends monthly. Sadly, I had to remove seven companies (ticker symbols: EIF, KEY, CAR.UN, PPL, SGR.UN, SRU.UN, MRG.UN) who had not raised their distributions in the past twelve months. The negative impacts of the covid-19 pandemic can be seen since the remaining 11 companies were much less than the 18 monthly dividend growers in 2020, and the 17 in 2019 and 2018, down from 20 in 2017, but only slightly lower than the 12 in 2016. The resulting 11 companies included six real estate investment trusts (REITs). As the payout ratios and valuations of REITs are usually calculated based on funds from operations (FFO) or adjusted funds from operations (AFFO), I decided to separate the resulting list in two so as not to confuse any casual readers. For your browsing pleasure, the resulting 11 monthly dividend payers are.

StreakCADDiv.Dividend Growth RatesEPS PayoutP/E
CompanyYearsYieldCurr.1-yr3-yr5-yr10-yrRatio %TTM
First National Financial Corp95.06CAD7.
Parkland Fuel Corporation83.01CAD1.71.72.4-0.493.831.2
Savaria Corporation83.32CAD4.417.822.418.786.725.97
Global Water Resources Inc.72.01USD1.01.83.1N/A599.02311.73
Badger Daylighting Ltd.51.58CAD5.31210.63.553.3333.57
Granite Real Estate Investment Trust103.85CAD3.33.74.818.959.6112.17
Allied Properties Real Estate Investment Trust94.36CAD3.
Firm Capital Property Trust98.04CAD1.94.44.4N/A68.098.38
InterRent Real Estate Investment Trust92.38CAD5.08.17.11012.735.32
CT Real Estate Investment Trust85.13CAD2.04.23.6N/A230.5744.61
Chartwell Retirement Residences65.47CAD2.

As with any other screen, the above list is simply a starting point for further research.  Clearly, a deeper dive is required based on the average EPS payout ratio of 130.86% and the pricey trailing average P/E of 49.44X. As indicated on my Investment Holdings tab, I currently own twor monthly paying Canadian Dividend All-Stars (Granite REIT and CT REIT). Of the remaining nine companies, First National and Allied Properties both look interesting to me based on the metrics above. The psychological boost I get from holding a couple monthly dividend payers in my portfolio helps me relate to the pleasure Mr. Rockefeller felt about receiving regular dividend payments.

Do you hold or are you interested in purchasing any of the 11 monthly payers?

Sunday, January 10, 2021

Portfolio Results for 2020 & Goals for 2021

 "Whenever we are surprised by something, even if we admit that we made a mistake, we say, 'Oh I'll never make that mistake again.' But, in fact, what you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That's the correct lesson to learn from surprises: that the world is surprising."
- Daniel Kahneman

Heading into 2020, I was on a high after achieving my 2019 goal of increasing my forward dividend by $3,300 while obtaining a dollar-weighted average organic dividend growth rate of 6.8%. Therefore, I set a stretch goal of adding an additional $3,600 to my forward dividend income in 2020, while targeting a dollar-weighted average organic dividend growth of 6.0%. My results from 2020 were surprising: my forward dividend income went up by $1,675 and my dollar-weighted average organic dividend growth was a mere 0.85%. 

Although I managed to sell early enough to avoid dividend cuts from Alaris Royalty and Tanger Factory Outlet Centers, the distribution cuts from Laurentian Bank and A&W Revenue Royalties Income Fund severely impacted my dollar-weighted average organic dividend growth rate, especially given A&W is one of my larger positions. Similarly, the Office of the Superintendent of Financial Institutions' ("OSFI") March 2020 decision to halt dividend increases for the Canadian banks that it regulates also negatively impacted the organic dividend growth of my portfolio given I hold seven Canadian banks, and only three (CIBC, Royal Bank & TD Bank) increased their payouts before OSFI's march decision. 

Falling almost $2,000 short of my forward dividend income goal isn't quite as surprising if you followed my transaction journal during the last couple months of 2020 and noticed I traded into and out of Brookfield Renewable Partners units twice in three months. Although holding onto my position in Brookfield Renewable Partners at year end wouldn't have allowed me to meet my goal, the deficit wouldn't have been at large. That said, the two trades I completed allowed me to book a profit in excess of the $2,000 shortfall. Other big contributors to the forward dividend income shortfall include selling Alaris Royalty and Tanger Factory Outlets in advance of their announcements to cut their dividends, the lower organic dividend growth noted in the above paragraph, and the fact I continue to count any US dollar dividend income on a 1:1 exchange rates with Canadian dollars (impacts 15 of my 37 holdings). 

After taking a couple weeks to digest my shortcomings in 2020, I decided to shoot for a more realistic forward dividend income increase of $3,000 in 2021, while targeting a dollar-weighted average organic dividend growth rate of 5%. Although I personally feel like the coronavirus will continue to impair regular economic activity in North America well into the summer, I'm optimistic that immunization shots will be effective and will become more plentiful in the second half of the year. Other lesser goals for 2021 include:
- At least one quality blog entry per month.
- At least one purchase of stock per month.

Since I had some down time over the holidays, I calculated some portfolio metrics for 2020 that I thought would be fun to share.

- My internal rate of return on my portfolio in 2020 was 1.0%. Although this sounds sadly low, it compares well to -3.9% benchmark return, I get from calculating 67% of the Canadian dividend aristrocat ETF 'CDZ' and 33% of the US S&P dividend ETF SPY (the actual weights of Canadian and U.S. holdings in my portfolio). 
- The value of my portfolio rose by 6.7% in 2020; much better than I expected after experiencing some large declines in March. Algonquin Power & Utilities and Microsoft were two of my best performers north and south of the border respectively.
- The dividend yield of my portfolio was 3.9% in 2020, in-line with the 3.9% achieved in 2019, lower than 4.2% in 2018 and 4.0% in 2017.
- Cash represented 4.2% of my portfolio at year end 2020, much higher than the 1.6% at year end 2019, and 2.7% at year end 2018. A big contributor was having traded out of Brookfield Renewable Partners at year end. 
- My holdings raised their dividends 35 times during 2020, with Realty Income doing so 5 times, and Power Corporation providing the largest percentage increase (10.5%).
- I conducted 32 trades in 2020, including six sales. Although this is high compared to the 24 conducted in 2019, it still only represents a couple basis points in terms of cost. 
- I ended the year with 37 positions, down from an all-time high of 40 positions at year end 2019. The plan is to slowly decrease this number again this year. 

Having made it through the very surprising 2020, I wish all of you the best of luck in 2021 and hope the surprises we experience collectively are less negative this year. 

Thursday, December 17, 2020

9 Canadian Companies Providing Dividend Growth Guidance

In 2017 and last year, I shared a list of Canadian companies that provide dividend growth guidance. I've decided to update  this list as I find dividend growth guidance useful in helping me assess the capital allocation plans for companies, introducing a soft control by which to judge management's actions, and assisting me in projecting the organic dividend growth rate of my portfolio for 2021. 

Of the Canadian companies that provide dividend growth guidance, Enbridge Inc. (TSE: ENB, NYSE: ENB) is likely the best known. During their Investor Day presentation on December 8th, they raised their dividend by 3.0%, below their projected 5 - 7% guidance tied to their forecasted distributable cashflow growth rate through 2023. Although the magnitude of Enbridge's dividend increase might have disappointed some investors, it is worth noting that with the shares currently yielding around 8%, any more of a raise might have set off alarm bells for investors wary of sucker yields. 

The table below could be considered a starting point for further research. Please, let me know of any other Canadian companies that provide dividend growth guidance. I'll gladly update the table with your input. Like last year, I almost included BCE Inc. as management has been consistent in raising their dividend by about 5% since 2009. However, management has been reluctant to confirm this target during conference calls and in their presentations to investors. Therefore, I opted for the conservative approach of not including them below. Lastly, the percentage beside the company's ticker symbol in brackets is the amount of the most recent dividend increase.

TC Energy Corp (TRP - 8.0%)
Dividend growth of 8-10% through 2021, 5-7% after 2021
Enbridge Inc (ENB - 3.1%)
Dividend growth of 5-7% through 2023
Emera Inc (EMA - 4.1%)
Dividend growth of 4-5% per year through 2022
Telus Corp (T - 6.9%)
Dividend growth of 7-10% per year through 2022
Capital Power Corp (CPX 6.8%)
Dividend growth of 7% per year through 2021, 5% in 2022
Fortis Inc (FTS - 5.8%)
Dividend growth of 6% per year through 2025
Algonquin Power (AQN - 10.0%)
Dividend growth of 10% per year through 2021
Brookfield Infrastructure Partners (BIP.UN - 7.0%)
Annual distribution increases of 5-9%
Brookfield Renewable Partners (BEP.UN - 5.3%)
Annual distribution increases of 5-9%

For those of you with a sharp eye, you may notice that Brookfield Property Partners (BPY.UN) and their expected annual distribution growth of 5-8% is missing from this year's list. After delivering a paltry 0.8% distribution increase in January 2020, the company changed their distribution guidance to "annual distribution growth in-line with earnings growth". However, given BPY's current yield of 8.7%, and the absolute terror that the pandemic has had on their retail and office property portfolio, most unit holders would be happy if management simply maintains the current distribution. 

Does dividend growth guidance make you more likely to invest in a company? 

Saturday, November 21, 2020

My Top 5 Canadian & U.S. Stock Positions

 “Don’t tell me what you think, tell me what you have in your portfolio.”
― Nassim Nicholas Taleb, Skin in the Game: Hidden Asymmetries in Daily Life

I remember hearing Taleb use this quote in an interview when promoting Skin in the Game. The quote is so simple, yet profound...I absolutely love it. Although I try to be transparent in showing my Investment Holdings, I admit I'm slow to update these holdings, and my Transaction Journal. Furthermore, I don't feel comfortable posting exactly how many shares I own in companies, which limits my transparency. 

After writing over the summer about the top five Canadian and U.S. companies I'd be comfortable holding for 10 years, I decided to post the below two lists to check if I'm "eating my own cooking". As a reminder, these were the five Canadian and U.S. companies I said that I'd be comfortable holding for 10 years:

My top five Canadian and U.S. holdings by value on November 20, 2020 were as follows: 

Top 5 Canadian Holdings
1. Brookfield Infrastructure Partners L.P. (BIP.UN)
2. Granite REIT (GRT.UN)
3. Telus Corp (T)
4. A&W Revenue Royalties Income Fund (AW.UN)
5. Fortis Inc. (FTS)

Top 5 U.S. Holdings:
1. McDonald's Corporation (MCD)
2. Microsoft Corporation (MSFT)
3. National Storage Affiliates Trust (NSA)
4. Johnson & Johnson (JNJ)
5. Digital Realty Trust, Inc. (DLR)

I'm pretty consistent on the Canadian side, with the only difference being my fourth largest holding, A&W Revenue Royalties Income Fund replacing Royal Bank. There's two big reasons for this discrepancy. First reason is that since I own seven Canadian banks, I've been reluctant to invest a large amount in any one. This is partly due to my job, but also speaks to my trying to avoid being overconfident in any given Canadian bank. Secondly, with the hindsight afforded to me with the current pandemic, I am definitely overweight in A&W, despite really liking the strategic decisions management had made for this restaurant chain. I'm in no rush to make any big changes currently to my A&W holding, but will likely look to decrease it after the pandemic is behind us. 

I'm less consistent in the U.S., having large positions in National Storage Affiliates and Digital Realty Trust in my portfolio, instead of Realty Income and Amazon. After first sampling National Storage late last year, I've added twice more in 2020 during which the company has produced some very solid results that have lead to a higher share price. Frankly, I'm fine with this position having grown steadily as the company boosted their dividend twice by ~6% combined over the past year. Digital Realty has also been a steady performer during the pandemic, the share price has risen, and I haven't actually added to my position since September 2018. Realty Income is my eighth largest U.S. position, but I will likely add to it before year end boosting it up to closer to total value of Digital Realty. Although I like the company's proven business model, I am a little fearful of their theatre, gym and retail exposure during the pandemic. Lastly, I haven't yet bitten the bullet and invested in Amazon. Reasons for this is my current quest to avoid making stupid mistakes during the pandemic by buying companies beyond my circle of competence that don't pay dividends, the recent European Union investigation into Amazon's use of third-party sellers' data, and Bezos' admission to congress that he couldn't guarantee Amazon employees didn't use proprietary data in order to compete with third-party sellers. 

Overall, I feel what I say and what I do are pretty consistent, with some obvious gaps, especially related to Amazon. There's always room for improvement and being consistent will definitely be an area of focus for this blog going forward.