Tuesday, August 3, 2021

My No-Longer Unwritten Rules

Since I haven’t been posting much over the last couple years, but I’ve kept consistently adding to my portfolio, I thought it was time to formalize the unwritten rules I’ve been following.

-          Make at least one purchase every month: The rationale is that if I get in the habit of regularly adding to my portfolio, I’ll be less likely to hoard money in an attempt to time the market.

-          Only add to positions that have grown their dividend in the past 12-months: Although there are companies in my portfolio who have not grown their distributions in the past year, I simply won’t add to them as I’d rather focus on exceptional companies that are able to grow their distributions regularly over time.

-          Do not add to any position if the result is the holding accounting for more than 5% of my total portfolio value: Although I’m not against holding concentrated positions, I’d prefer that they develop organically via share price growth, as opposed to through my overconfidence.

-          Sell losers, not winners: The analogy of harvesting flowers and watering weeds is pertinent for me, especially in my unregistered account, where tax loss harvesting is an excellent strategy to minimize my long-term taxable capital gains. Plus, I’m almost always wrong when I think “This stock can’t possibly go any higher…it’s already so overvalued!”

-          Never compare myself to anyone else: I used to track my progress against some of you who are reading this, but the reality is that we likely have very different goals, personal circumstances, and investing philosophies. Although I'm always happy to see a peer who is making progress in their journey, I find my joy focusing on my own process of investing. 

That's all for now. I hope to keep updating this post as I find more rules that I'm following.

Monday, March 29, 2021

Thought Experiment: Canadian Apartment Properties REIT + Activist Investor

Having owned shares of Canadian Apartment Properties REIT (TSX: CAR.UN) since 2013, I have benefited from the long-term appreciation in their unit price. However, over the past two years, as the REIT has ceased growing their annual distribution (last increase was in March 2019), the share price has grown a paltry 5%. As a comparison, since March 2019, Granite REIT (TSX: GRT.UN) has increased their distribution twice for a total of 7.3%, and their unit price is up over 21%. 

One of the main differences between CAR.UN and GRT.UN is that in May 2017, two activist investors (Sandpiper Group and FrontFour Capital Group) effectively took control of the Board of Directors of Granite, on the platform of selling non-core assets, increasing leverage, and acting in a more shareholder friendly fashion (i.e. raising distributions). Lately, I have been thinking what a similar type of activist investor strategy might look like for CAR.UN and what results it might yield.

Could an Activist Take Control?
One of the reasons that Sandpiper and FrontFour were able to take control of Granite's board with only 6.2% ownership of outstanding units is the company's prior management team had very little skin in the game. A similar situation exists with Canadian Apartment Properties, with no current management or Directors appearing in the company's top five holders. In fact, CAR.UN insiders only hold a total of 1.2% of outstanding shares, making the company a relatively easy target for an activist investor. Based on the $9.3B market capitalization of CAR.UN, an activist could own more than all the insiders of the company combined for around $120M.

Could an Activist Repeat the FrontFour/Sandpiper Playbook at Canadian Apartment Properties?
An activist investor could easily make the argument that CAR.UN should divest their interest in European Residential REIT (TSX: ERE.UN), as it takes away the former company's focus on their domestic market. Canadian Apartment Properties' 11% interest in ERE.UN is worth about $45M based on the latter's market capitalization. Beyond the stake in ERE.UN, within CAR.UN's domestic portfolio, a case could be made to sell some buildings in certain Canadian cities whose appreciated values don't translate into higher projected cashflows.

There is also a straightforward case that CAR.UN could take on more leverage given their debt to gross book value ended 2020 at a modest 35%, and the REIT was easily able to cover their interest needs evidenced by their debt service ratio of 2.0X. For a quick comparison, Minto Apartment REIT, reported a debt to gross book value ratio of 39% at the end of 2020, and also had a debt service ratio of 2.0X. Taking on more debt in order to invest in buildings and development, at a time when apartment living becomes more appealing due to rising house prices in Canada could prove to be a very smart long-term strategic decision for Canadian Apartment Properties.

On the shareholder friendliness front, CAR.UN seems to take pride in showing off the decrease in their FFO payout ratio from 65% in 2019, to 61% in 2020. However, as a unitholder, I find it frustrating to see that ratio so low, compared to most REITs that payout closer to 80% of their FFO. Adding to this frustration for me is the fact that CAR.UN has kept their occupancy high throughout the pandemic (98% at year end 2020), and collected over 99% of their rents throughout the year. As a shareholder, I have to wonder why the current management team sees fit to not distribute any of the growing FFO as a distribution to loyal unitholders. 

Thanks for joining me on this thought experiment. It will be interesting to see if any larger REITs or activist investors start agitating Canadian Apartment REIT to change their rather static course.

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 www.barchart.com). 

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.