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. 




Friday, November 6, 2020

Avoiding Stupid Investment Mistakes During the Pandemic

Within the first month of moving into our house with my then-girlfriend, now wife, I shrunk one of her favourite sweaters. Over the next eight years, I have only managed to replicate this embarrassing feat once more. I attribute this improvement to my choosing a very risk-averse approach of air drying almost all of my wife’s shirts, sweaters and pants, rather than risk shrinking another item in the dryer. My wife finds my over-reaction of barely ever using the dryer on any potentially shrinkable items humorous. Now that we’re both working from home out of the office in our basement, after I’ve put the clothes on a drying rack and start the dryer with mainly my clothes and those of my kids, my wife often checks what is on the rack, and moves the majority of her clothes into the dryer. She then usually laughs at me and tells me not to worry about shrinking her t-shirt, pajama pants, pullover, etc.. Despite these repeated assurances from her, I continue to put the great majority of her clothes on the rack each time I perform this part of the laundry.

I share this anecdote with you as I'm worried about making preventable mistakes since my portfolio has been negatively impacted this year due to the coronavirus pandemic. Between Canadian banks being told by the national regulator not to increase their dividends, A&W suspending and then decreasing their distribution due to lower traffic in their restaurants, and the disruption to retailers caused by local restrictions that has meant landlords like Brookfield may have to rethink their distributions, I've been feeling the will to undertake more transactions than I normally would in order to avoid more dividend cuts. Instead of going crazy, and totaling revamping my dividend growth strategy in the middle of this pandemic, I am making a conscious choice to hold off on making any huge changes until after covid-19 is behinds us. A large part of my reasoning to ride this out is based on my desire to avoid making mistakes similar to those of shrinking my wife's clothes. 

To avoid making a bunch of mistakes in the middle of the covid-19 pandemic, I decided to focus on my process for choosing investments. By following the short checklist below, I hope to simplify my investment decisions and keep focused on my long-term goal of financial independence through dividend growth investing.

 

1.       Does the company pay a dividend/distribution of at least 2%/3%?

2.       Has the company increased their dividend/distribution by at least 5%/2% in the last 12-months?

3.       Is the dividend/distribution sustainable as evidenced by a TTM EPS/FFO payout rate of 80%/90% or less?

4.       Is the price of this company reasonable indicated by a P/E or P/FFO of 25X or less?

5.       If this is a new position, what exposure does this company provide that current companies in my portfolio do not?

6.       If this is a new position, what is the thesis of why this company is undervalued?


Here's hoping that after covid-19 is behind us, my investment portfolio looks more like an organized, well sorted drying rack, like that curated by my wife today.




Sunday, September 13, 2020

How To Be An Unsuccessful Dividend Growth Investor

Recently, I listened to Derek Sivers on Shane Parrish's Knowledge Project podcast. My favourite part of the conversation consisted of Derek reading his directive How to Stop Being Rich and Happy. I loved Derek's minimalist, instructive and pithy directives and they made me want to challenge myself to write my own . Since I don't feel qualified to draft the affirmative set of instructions, I thought I'd reverse engineer and draft my ideas regarding what it takes to be an unsuccessful dividend growth investor. My next entry will be examples of the ways in which I have disobeyed the below six instructions over the years. 

How To Be An Unsuccessful Dividend Growth Investor

     1.       Chase Yield

-          Pay no attention to payout ratios, declining revenue and profits, or management’s guidance. Forget about dividend growth, higher yields mean more cash now.

2.       Think Short-Term

-          Constantly monitor your portfolio, pay attention to every little movement of stocks, and trade frequently. More trading means more profits.

3.       Ignore Valuation

-          Since you’re basing your buying and selling decisions on your thoughts and gut feelings, ignore what the companies you transact on are actually worth. Stocks are merely numbers on a screen, and no-one knows what a fair price might be more accurately than you.

4.       Do No Research

-          No amount of regulatory filings, in-depth analyst analysis, or contrarian pieces could provide you with additional insight into the stocks you choose to purchase. Never let research change your gut feelings..

5.       Brag About Successes

-          Using every social media account you have, brag about any stock on which you make money. Everyone will know how successful you are, so there’s no need to outline your investments that resulted in losses. Obviously the losers were not your fault. 

6.       Forget Diversification, Focus on Concentration

-          Why diversify away market risk when you can only buy a handful of winning stocks. Holding three or maybe four stocks in your portfolio will ensure you maximize returns since you'll only be investing in your best ideas. 




Friday, August 14, 2020

Picking 10 Companies to Hold for 10 Years - Part 4: Popular Picks

For the last post in this series, I thought it would be interesting to see which companies were the most popular for people to pick in order to hold for 10 years. With 128 replies to Dividend Growth Investor's tweet, and most of the replies listing U.S. companies, I was also curious to see how my U.S. picks would compare to the most popular choices.  

The process I undertook to determine the most popular picks was very low-tech. I simply copy and pasted the complete twitter thread into a word processor. Using the thread, I searched the name and stock symbols for the companies that seemed popular and recorded those mentions. I didn't record any company with less than five mentions. Then the mentions were ranked by popularity. The resulting top 10 most popular picks are below:

Microsoft – 41

Johnson & Johnson – 31

Google – 30

Amazon – 29

Visa – 26

Pepsi – 17

Berkshire – 14

Disney – 11

Apple – 11

Facebook – 10

 

Some interesting facts about the top ten choices:

  • Four companies do not pay a dividend (Google, Amazon, Berkshire and Facebook).
  • Of the above companies, the highest dividend yield  is 3.0% from Pepsi. 
  • Of the above companies, the longest streak of consecutive dividend raises belongs to Johnson & Johnson at 58 years. 
  • Eight of the top ten picks are part of the top 10 biggest businesses by market capitalization in the U.S. (only Disney and Pepsi are not)

For those of you interested in the next ten most popular choices, here they are:

 

Starbucks – 9

P&G – 9

McDonald’s – 8

Coca-Cola – 7

Costco – 7

Tesla – 7

Mastercard – 6

Abbvie – 6

Home Depot – 6

Realty Income – 5

 

I was pleasantly surprised that my five picks of US stocks (Microsoft, Johnson & Johnson, Amazon, McDonald's and Realty Income) were all accounted for in the top 20. It's also interesting to note that nine of the ten companies above pay dividends, which is more in-line with what I would expect given Dividend Growth Investor asked the thought provoking question. 



Which of the above 20 companies do you think will generate the highest returns over the next 10 years???


Wednesday, August 12, 2020

Picking 10 Companies to Hold for 10 Years - Part 3: U.S. Companies

Having establishing my criteria for picking companies to hold for the next 10 years, this post will explain how my five U.S. companies meet, or in one case, doesn't exactly meet, these criteria. Before progressing, I want to give credit to Justin Law for taking up the torch from David Fish and updating the Dividend Champions spreadsheet which can be found on this website. I encourage you to visit the site filled with valuable resources for dividend-focused investors, including the Champions spreadsheet which is updated monthly. 

In case you haven't had a chance to look at the criteria entry, the six criteria I used to pick the five U.S. companies that I would hold for 10 years are:

1. Dividend Yield & Dividend Growth
2. Established Track Record
3. Reasonable Valuation
4. Diversification (across sectors and geographically)
5. Momentum
6. Current Ownership (or high on my watch list)

My five U.S. companies are:



Realty Income:
Wanting to select at least one U.S. REIT, I felt the obvious choice was "The Monthly Dividend Company". Over its 51-year operating history, Realty Income has paid out 601 consecutive months of dividends, raised the distribution 91 times, and provides good geographical exposure across the U.S. through their 600+ tenants. Although the stock in down about 10% in the last year, the price is a reasonable multiple of about 19X trailing FFO. A key risk to consider is the ability of Realty Income's tenant base to continue to pay their rent despite the coronavirus pandemic. The fact that 91.5% of tenants paid their July rent should provide some comfort in that respect.

Johnson and Johnson:
Based on demographics alone, choosing a healthcare company to invest in for the next 10 years seemed like a good choice. What JNJ provides in terms of geographical diversification (almost half their revenue is generated outside the U.S.), product diversification (providing consumer, pharmaceutical and medical devices), along with the potential upside from their covid-19 vaccine make this a worthwhile selection. The 58 consecutive years that company has increased its dividend, and the current ~2.8% yield (despite the 15% YoY increase in share price) help make the pick easy. The downside I see for JNJ is the regulatory risk and possible lawsuits that could materially impact their financial results. Still, I feel comfortable owning shares for the long-term. 

Microsoft:
When considering a global technology company to include in my picks, Microsoft seemed obvious for a couple reasons. With about 48% of revenue generated outside the U.S., Microsoft is truly global and nature and has an incredibly strong credit profile reflected in their AAA S&P rating. With the share price up over 55% in the last year, the company has experienced strong momentum. When looking at dividend and valuation metrics, the company has a very modest 1% dividend yield, but has grown their payout annually for 18 consecutive years, including a 7% raise last year. The biggest downside I see with Microsoft is a lofty valuation of 36X trailing earnings, which is hard to justify given the ~13% revenue growth over the last year. 

McDonald's:
With 63% of their sales generated outside of the U.S., and one of the most recognized logos in the world, McDonald's seems like a good bet to hold over the next 10 years. With 44 consecutive years of dividend increases (including about 8% last year), and a 2.4% yield, management has proven that returning cash to shareholders is a priority. On the other hand, the stock price is down about 5% over the past year, yet the company continues to trade at a rather lofty 33X trailing earnings. More than another other company in the ten I have selected for this exercise, I think the coronavirus pandemic could have lasting negative effects on McDonald's sales. I do take some comfort in the fact that local McDonald's drive-through was constantly busy during the three months of partial shutdown here in Quebec. 

Amazon:
The strikes against Amazon are pretty obvious: no dividend, trading at 121X trailing earnings, and the only company I don't personally own of the ten selected. Why would I pick it to own for the next 10 years? Momentum is a factor (up almost 80% in the last year), geography/product diversification, and most importantly, market domination. I'm not sure any other single company (possibly Zoom?) stands to benefit more from this pandemic than Amazon. Are people more comfortable shopping online during a pandemic? Are they thankful to be entertained by Amazon Prime movies, shows and video games? Does Amazon web services stand to grow as more businesses move to web-based storage and software? The big risk I see for Amazon is regulation. Hearing Jeff Bezos not guaranteeing to Senators that Amazon didn't use competitor selling data to create their own private label products was alarming. I wouldn't discount having some sort of forced breakup thrust upon the company by a regulatory authority (more than likely outside of North America)...but, Bezos has a way of sniffing out opportunities to profit where others don't follow. I won't bet against him succeeding over the next 10 years.


Do you see any key risks in my five choices above that I overlooked???