Monday, July 9, 2018

2018 Mid Year Check In

After a week's vacation spent at a cottage in the lovely Lac-aux-Sables region of Quebec, it seems an appropriate time to provide an update on my 2018 financial goal:

Increase forward dividend income by $3000 while achieving a dollar-weighted average organic dividend growth rate of at least 5%.

Through the first six months of the year, I added about $1800 of forward dividend income and my dollar-weighted average organic dividend growth rate was 2.74%.

The forward dividend income amount is misleading for a couple of reasons. The forward dividend income amount is likely overstated by holdings of the Keg Income Fund and A&W Income Fund in both my RRSP and TFSA, given my plan to sell my duplicated holdings in my RRSP later this month so as to avoid any attention from the Canadian tax authorities. Since I plan to use the proceeds to invest in US traded stocks in my RRSP, the forward dividend income will be less given the current exchange rate (~0.76 CAD/USD). The forward dividend income is understated due to the excess amount of cash I'm holding in my unregistered account (saving to bring my Rogers or National Bank position there) and RRSP (no firm plans on what to add at the moment).

The dollar-weighted average organic dividend growth rate is harder to forecast accurately. Since I received 25 raises from my 38 portfolio companies (including three from Realty Income), I know the number of raises during the second half of the year will be less. Plus, there are a number of companies that I don't expect dividend increases from during 2018 (Alaris, Rogers, Riocan, etc.). On the other hand, I do expect some decent sized raises in the second half of the year (Enbridge, McDonalds, Emera, etc.)  and second raises from a couple of my Canadian holdings (Telus, Royal Bank, Bank of Nova Scotia, etc.). I'm also considering adding Algonquin Utilities to one of my accounts, which would boost my dividend growth rate.

Despite the mere five transactions during the first half of the year,my progress toward achieving my 2018 financial goal remains steady. Barring any huge dividend cuts or wholesale changes to my investment philosophy, I'm cautiously optimistic that I'll hit my target.


Friday, January 26, 2018

50 Companies of the Canadian Shareholder Yield Index

I recently finished the book Millennial Money by Patrick O'Shaughnessy who you might know from his Invest Like the Best podcast. Both Patrick and his father James are prominent proponents of factor investing (a.k.a. evidenced based investing), researching and writing extensively on the subject. One particular factor that is prevalent in the Millennial Money book is shareholder yield, a term I decided to explore further.

Although I previously thought that shareholder yield was the sum of dividend yield and buyback yield, I discovered through the S&P TSX Composite Shareholder Yield Index a debt paydown yield is also incorporated. Using the methodology provided by S&P, I tried to recalculate the three components of shareholder yield for the 50 companies that are equally weighted in the index. Based on my results (especially the negative values for the four companies at the bottom of the list), I likely made some mistakes in trying to replicate the calculation methodology set out by S&P. However, I still think the below table identifies some Canadian-listed companies whose management teams are capable capital allocators based on their ability to enhance shareholder value by paying dividends, buying back their shares and paying down debt.




Some of my preliminary observations from the above table are:

- Most of the dividend yields presented above are lower than the current dividend yields (i.e. H&R REIT, Corus Entertainment, Shaw Communications, etc.). This is due to my attempt to stick to the S&P methodology of dividing the total dividends paid over the last twelve months by the market capitalization of the company twelve months ago.
- For the 24 companies with a negative buyback yield, it means they issued more shares than they bought back over the past twelve months. I found it fascinating that almost half of the top shareholder yielders in Canada were net issuers of shares.
- Buyback yield is pretty controversial as management teams have a history of buying their shares back at high prices and subsequently putting an end to share repurchase programs when shares are trading cheaply. For buyback yield to useful on its own, you'd likely have to pair it with a valuation metric.
- Although I find it admirable that Valeant has successfully paid down so much of their debt, they still have about USD 30M of debt and remain a very highly leveraged company (debt/EBITDA ~ 7X).
- Initially, I was impressed with companies like Thomson Reuters that have positive percentages in each of the three factors contributing to shareholder yield. Although, the more I reflect, I wonder if it doesn't make sense for their management teams to focus on maximizing the factor with the highest return (i.e. Spin Master whose sole focus is debt reduction).
-  For shareholder yield to be a useful metric, you'd have to trend it over time. I noticed Suncor retired a nominal amount of shares over the past twelve months. However, they did a huge equity issue in the preceding twelve months that negates any positive buyback yield for a longer-term holder.

Does a high shareholder yield make you more or less likely to invest in a company?

Friday, January 19, 2018

Monthly Paying Canadian Dividend Growers for 2018

The list of Canadian companies that pay growing monthly dividends was one of my most read posts in 2017 and 2016. Using the Canadian Dividend All-Star list from December 31, 2017, I determined the list of monthly dividend growers for 2018.   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.  The initial screen this year yielded 21 companies before I removed three organizations that had not raised their payout in the last 12-months (Exchange Income Corporation, Atrium Mortgage Investment Corporation and Pizza Pizza Royalty Corp). I also removed Boyd Group Income Fund due to their unimpressive 0.5% dividend yield. Although the 17 monthly dividend growers for 2018 fell from 20 last year, it still remains higher than the 12 companies in 2016.

The resulting 17 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 lists are included below.

 
Here are some quick comparisons between the monthly dividend payers and the complete list of Canadian Dividend All-Stars:

- 21 of the 101 Canadian Dividend All-Stars at December 31, 2017 pay dividends monthly.
- Although the average yield of all Canadian Dividend All-Stars of 3.13% is considerably less than the seventeen monthly payers listed above (5.25%), the 1-year average dividend growth rate of 9.07% is significantly greater than that of the monthly payers (5.12%). 
- The average 3, 5, and 10-year dividend growth rates of the Canadian Dividend All-Stars of 10.08%, 11.90% and 8.55% are much greater than the comparable growth rates of the monthly payers 6.08%, 6.26%, and 3.15%. 

As with any other screen, the above list is simply a starting point for further research.  Clearly, a deeper dive is required given the average EPS payout ratio of 292% and the high average trailing P/E of 47.3X valuation (partly due to nonsensical values for TransAlta Renewables). As indicated on my Investment Holdings tab, I currently own four monthly paying Canadian Dividend All-Stars (Granite REIT, Canadian Apartment Properties REIT, Enbridge Income Fund Holdings and Enercare Inc.). Of the remaining thirteen companies, I have owned Inter Pipeline in the past, and have included Altagas, First National and Cineplex on past watch lists. 

Do you hold or are you interested in purchasing any of the 20 monthly payers?

Friday, January 5, 2018

Q1 2018 Dividend Growth Watch List

Before I even had a chance yesterday to post my Q1 2018 watch list, I conducted my first transaction of 2018, adding to my Brookfield Infrastructure Partners position in my TFSA. Although I don't have any immediate plans to buy or sell shares, I still wanted to share my watch list. Since my investment holdings consists of my unregistered account, my TFSA, and RRSP, that will be the format in which I present my considerations.

Unregistered Account

This quarter, the theme of my watch list seems to be “utilities”. At current prices, I’m open to adding to my two utility holdings of Canadian Utilties (TSX: CU) and Emera (TSX: EMA). Both of these companies are reasonably priced, have attractive current dividend yields, and have a history of annually dividend increases (46 and 11 years respectively). For similar reasons, when I start to look at companies outside of my holdings, I gravitate towards Fortis (TSE: FTS) and Algonquin Power (TSX: AQN).  I’d consider initiating positions in these two companies since I feel both provide something slightly different than my current holdings. In the case of Fortis, it’s the extensive exposure to 11 states in the US. Exposure to the utility markets in New York, Illinois and Arizona are particularly attractive to me as I see these three states as having largely inelastic and growing demand for power. For Algonquin, it’s the company’s clean energy assets that I’d like to add to my portfolio. Additionally, the company offers investors the option to receive dividends in either US dollars or Canadian dollars, which I also find attractive.

TFSA

I wrote the below paragraph before adding to my position in Brookfield Infrastructure Partners (TSX: BIP.UN) on January 4, 2018. 

My utilities theme extends to my plan to increase my holding of Brookfield Infrastructure Partners. Despite the nearly annual dilutive share offerings in order to finance their growing backlog, I continue to have faith in Brookfield’s excellent management team to effectively manage their utility, transport, energy, and communication infrastructure assets. The company’s recently announced $1.3B sale of an aging Chilean utility investment to a Chinese buyer might mean less or no dilution through share offerings in 2018. Exposure to a worldwide set of infrastructure assets that generate steady amounts of rising income continues to be desirable for me.

RRSP

Although my plan is to let dividends accumulate and add them to my annual RRSP contribution in Q2 2018 to purchase more shares of Digital Realty Trust (NYSE: DLR), there’s one position I might add to in the next three months. With A&W Income Fund (TSE: AW.UN) announcing the addition of 35 net new restaurants to their royalty pool for 2018, it could be an opportune time to add to this position before increased royalties from the new restaurants flow through to A&W’s financial results.


Which companies appear at the top of your watch list for Q1 2018?

Friday, December 22, 2017

Goals, Lessons and Mistakes in 2017

When setting my simplified investment goal for 2017, I knew it would be a stretch to attain. Adding $2,600 of incremental forward dividend income in a frothy bull market, while simultaneously achieving a dollar-weighted average organic dividend growth rate of at least 5% proved to be extremely challenging. It took me 355 days, but I’m happy to report that my latest purchase of Digital Realty Trust pushed me over my benchmark of forward dividend income and my dollar-weighted average organic dividend growth rate ended up at 6.95%. 

Admittedly, there’s a great deal of relief and pride in achieving such a lofty goal. Although I don’t blog very often anymore, I know that having posted my goal helped keep me accountable throughout the year. For that reason, I’m going to bite the bullet and float my 2018 goal:

Increase forward dividend income by $3000 while achieving a dollar-weighted average organic dividend growth rate of at least 5%.

By setting my forward dividend income goal even higher, I’m hoping to motivate myself to keep my foot on the gas and my eye on the prize. As tempting as it is to stray from my strategy of investing in dividend growth stocks, the reality is that my passive income has kept growing at a rapid clip due to my persistence. 

Part of my reason for posting less frequently has been in an effort to avoid entries that add no value to readers. In that vein, I thought sharing my top three investment lessons and mistakes from 2017 might make this entry more worthwhile.

Lesson 1 - Stick with the Plan

In a year where FAANG, Bitcoin and marijuana stocks soared, it was very tempting to jump on those trends. Instead, I stuck with my plan to focus on dividend growth stocks that help built my passive income. Although my strategy is not at all sexy, my results are strong and allow me to sleep well at night.

Lesson 2 - Think Lots, Trade Little

With only 20 trades during 2017 (18 buys, 2 sells), I set a personal low for transactions. Beyond the excellent excuse for not trading of having an infant daughter at home during the last 5 months, my other tactic to avoid churn is to wait at least a week after I think about conducting a transaction. Although I'll never buy at the bottom or maximally profit from a one-day dip, my transaction costs are minimal (less than 10 basis points during 2017).

Lesson 3 - Read, Listen and Absorb

As comfortable as I am with dividend growth investing, I find myself attracted to books, articles and blogs that explore other styles (deep value, contrarian, short selling, evidence based investing, GARP, etc.). I'm also a recent convert to podcasts such as Invest Like the Best, Capital Allocators, Animal Spirits and other more niche offerings. I'm thoroughly convinced that by absorbing these materials,  I can learn from the successes and failures of others. 

Mistake 1 - Letting Performance Metrics Drive Behaviour

My focus on increasing forward dividend income while keeping my dollar-weighted organic dividend growth rate over 5% drove many of my investing decisions in 2017. For most of December, I felt compelled to make one last buy in order to achieve my forward dividend income goal. Similarly, I have passed over a couple of interesting situations such as Home Capital and Cineplex, knowing that they would negatively impact my dividend growth goal. 

Mistake 2 - Adding Positions I Don't Have Time to Properly Monitor

I moved from 33 positions at the end of 2016 to 38 current positions by adding six during 2017 and exiting one (Corus Entertainment). To justify the high number of positions to myself, I consider all seven Canadian banks to be similar holdings, both Enbridge companies are commonly controlled, Aecon should disappear from my portfolio  early in 2018 assuming the Federal Government approves their purchase, and I'm two years into my five year plan of giving away my RioCan shares to charity. Having said all that, there's definitely opportunities to narrow the number of companies I own to make monitoring easier. I have to be more content and comfortable with what I own, and not look elsewhere when considering investments.

Mistake 3 - Committing Numerous Behavioural Investing Errors

This could easily be a blog entry on its own, but just in the past month, I've irrationally anchored on low stock prices that I did not take advantage of, fallen for the sunk cost fallacy by feeling the need to get the most out of my $30 US dollar friendly fee from my brokerage, avoided taking a capital loss on Alaris which I could definitely use in future years, and wasted loads of time trying to justify investments (particularly in Amazon and marijuana stocks) instead of sticking with my strategy. Every time I read anything about behavourial investing, I realize how often I make simple behavioural investing mistakes at every turn. 


Although I plan to share my Q2 2018 dividend growth watch list before year end, on the chance that I don't get around to it, I wanted to wish everyone the happiest of holidays and a prosperous 2018! Thank you for stopping by, reading my thoughts, commenting and providing feedback.