Saturday, December 29, 2012

Asset Allocation at YE12

Before E-trade Canada was acquired by Scotiabank, they used to have this great asset allocation screen where you could go to see the breakdown of asset classes within your portfolio. Being a firm believer in diversification by asset class, I really miss that valuable output. Having a couple spare minutes, I decided to do some high-level calculations of my investment holdings at year end 2012.

I wasn't surprised to find out that 27.4% of my total investment holdings were in bank stocks. Shares of Canadian banks have historically been great dividend growers. Given their weight in my portfolio, I'm betting on this trend continuing in the future.

My second highest asset class is telecommunications/cable companies that represent about 21.3% of my total holdings. I'm a fan of the big 3 telco's in Canada (BCE, Rodgers, and Telus), as they've all proven successful at increasing their dividends at regular intervals over recent years.

My last two most popular asset classes are mainly used since I know I'm too heavily weighted in banks and telco's. I own shares in three REITs (Riocan, Dundee, and H&R) and they account for 12.4% of my total portfolio holdings. Similarly, a colleague at work introduced me to energy/pipeline companies, and I've jumped into Enbridge, TransCanada, and the Inter Pipeline Fund, to the point where they now account for 11.2% of my total portfolio.

The last calculation I performed was to determine how much of my total holdings are US companies. Given the greater array of large, steady, dividend increasers south of the border, I've tried to add more of these companies to my RRSP (to avoid the 15% withholding tax on dividend payments). With my October purchase of Western Union, US stocks now represent 19.9% of my total holdings. Given I've recently thought about buying some shares of Intel, I expect that number to grow closer to 25% in early 2013.

Sunday, December 23, 2012

Parting ways with an old friend

It's that time of the year again when most investors take a look through their portfolios to see if their holdings are performing. I'm no different in that I tend to review my portfolio in December to see if I have any stocks that I'd like to dump to create capital losses. Capital losses are particularly desirable this year, as I realized a capital gain on the sale of some CAE (bought during my momentum investing phase) I sold last January after it had doubled.

When looking at my holdings in my taxable portfolio, I asked myself if there were stocks that I would no longer invest in. The four holdings that jumped out as possibilities for me were SNC Lavalin (due to the impact of their ethical issues on the stock), Canadian Western Bank (dividend yield lower than my required 3%, but still growing nicely), Transalta (definitely a "dog of the TSX") and Capstone Infrastructure Corporation. Just before I had planned to sell Capstone in December 2011, they gave negative revised revenue/EBITDA guidance, and indicated they were looking at establishing a new dividend policy. Their stock promptly fell almost 50%, down to $4 where it has lingered for the last year. The company cut its dividend in April 2012, and although it refinanced some debt, their stock has been going nowhere fast ever since.

Although I sold at a capital loss earlier this month, having held CSE for several years, I actually came out even when distributions/dividends were included. There's no way I want to hold a company who cuts dividends, and has questionable management. Fair well old friend...maybe some day we'll meet again if you get your financial house in order.

Sunday, December 16, 2012

Emera Inc. or H&R Real Estate Investment Trust?

Outside of my window, a snowy blizzard is well underway.  Inside my head, there's an equally messy situation, as I try to decide between Emera Inc. and H&R Real Estate Investment Trust for my December investment dollars.

Emera got picked up on my stock screen for companies with dividend yields over 3% (current yield = 4.1%) and average dividend growth in the past 3 years of over 10% (right at 10% per year average). The latest payout ratio is at 66%, which while high, seems maintainable for this utility company. Emera has been aggressively investing in capital projects over the last 3 years (funded by CFO and long-term debt), which should position them well for future growth. Management has been able to generate the revenue growth I like to see, but at a decreasing rate over the last 7 quarters.

I've owned H&R before, and was looking to get back in given my other real estate holdings (Riocan and Dundee) seem pretty expensive at the moment, and have not announced any meaningful distribution increases in the last year. H&R currently has a distribution yield of 5.2%, which will increase in January (to 5.6% at the current price level) since the company recently announced a distribution increase. Their 3 year average distribution growth rate is 22%. Their property portfolio is concentrated in office buildings, but also includes a nice chunk of industrial and retail properties. I'm further impressed by their solid list of tenants, including some companies who I have already invested in.

Based on the above comparison, I've decided my December investment dollars go to H&R. I'll try to wait for a dip in the price to buy the shares, but am comfortable getting in at the $24.00 a share price H&R traded at on Friday.

Sunday, December 9, 2012

Investor Profile & Philosophy

Hello, my name is James, and I am a dividend-growth investor.

It's fine if you insist on telling me stories about your stock that shot up 1000% overnight. I'm excited that you received a great tip from your uncle on Bay Street about the latest IPO and are fully subscribed.  It's wonderful that you bought a cottage in Muskoka with your penny stock that went through the roof.

Me? I'm content working hard every day, keeping abreast of my portfolio of about 30 stocks via media alerts, and watching an ever increasing stream of dividends be deposited into my discount brokerage account each month.

When I started investing in stocks 15 years ago, I was definitely a speculator. The fact that Nortel was my first stock purchase serves as ample proof of my idiotic ways. Still, I'm glad I had a couple stocks go to zero (Nortel and 360 Networks), as I learned some valuable lessons and won't duplicate those mistakes. Over the years, I started to add more "solid" stocks to my portfolio, with Bank of Montreal and Riocan being two of my early picks that I still hold today.

My investment approach grew from momentum investing/speculating, to buying industries I thought had growth potential, to putting money into companies I was familiar with (aka my Warren Buffet/Peter Lynch phase), to looking at the Dogs of the Dow/TSX, to dividend growth investing. As corny as it sounds, Ms. Klugman's book changed my life. In recent years, I've modified my specific stock selection strategy to more closely resemble that of Mr. Miller's philosophy.

Currently, I have screens set up for US and Canadian equities to filter for companies that have a dividend yield of at least 3%, and have grown their dividend at an average rate of at least 5% over the past five years. If the current dividend yield plus 5-year average dividend growth rate is over 10%, I further investigate the stock. When performing more detailed due diligence, I look for sustainable dividend payout ratios (less than 60% is great), ample free cash flow (CFO - CAPEX - Dividends), and growing earnings (topline growth preferred).  It is difficult to find companies that meet all of these criteria, especially in Canada.

There are a couple reasons I decided to start this blog. Having described my dividend investment philosophy to friends, co-workers, and even during job interviews, I've realized that putting my thoughts and analysis on paper is helpful to me. There's also the fact that I enjoy reading some dividend-growth blogs, and thought it was time to reciprocate. Additionally, I find blogging cathartic, and have met some real characters via cyberspace. Lastly, having heard the investment philosophies of various friends/acquaintances/co-workers...I find it frustrating that people talk about buying RRSPs (vs buying assets to put in a RRSP), investing in high-cost mutual funds via an investment advisor (*shivers at the thought*), or how they're depending on the Canadian Pension Plan to serve all their retirement needs.

Finally, my disclaimer - whatever I post should not be considered investment advice. If you're interested in buying stocks and/or other financial products, you should read, talk to experienced financial professionals (hopefully those with the CFA charter), and do your own, independent research.  Having said all that, here's hoping you find this blog informative, or at least entertaining :)