Monday, June 2, 2014

Three US Stocks on my Watch List

About half the money in my self-directed RRSP is invested in US equities. Generally, I use US equities in order to get exposure to the international market, without having to worry about different accounting standards and dividend with-holding rules. For this reason, I gravitate to US based multi-nationals like Coca-Cola, Microsoft, and McDonald's.

With my annual RRSP contribution deposited in my account in the last month, and a nice collection of dividend payments made in the first half of 2014, I'm sitting on an unusually high amount of cash in my RRSP. One of the reasons for my inaction is the outrageous 1.11 USD/CAD exchange rate my broker wants to charge me on any US stock I buy. This compares to the actual 1.09 USD/CAD rate at market close today. There are very few US companies I'd consider paying an 11% premium on, but cash sitting in my account earns me negligible interest. I thought I'd share some of my US watch list companies with you, and why I'd consider paying an 11% premium to buy into them.

Microsoft - I initiated my position in Microsoft around this time last year, and saw it sore from $26.50 a share to its current level around $41.00. The company raised it's dividend by 22% in that period, and with a payout ratio around 38%, there's plenty of room for another big bump this year. My issues with adding to this position are that I'd be buying near the company's 52-week high ($41.66) and at a dividend yield of 2.7%. That said, very few companies have the revenue/EPS growth record that Microsoft boasts, and I feel it is well-managed company. 

Procter & Gamble - Another well-run, global company, trading at what I consider to be a very fair price. Other pluses are PG's 3.2% dividend yield, recent 7% dividend raise earlier this year, and payout ratio of 62%. That said, that company has not been able to grow revenue and EPS at the same pace Microsoft has over the last few years, and there's no 'must-have' product in the pipe line that would drive that type of growth in the future. My main hold-back on this is thinking that I'll end up paying about $89 per share, which would drive my actual dividend yield down to 2.9%. 

Kinder Morgan - I've done very well investing in Canadian pipelines, and have been looking at opportunities to invest in that sector in the US. Granted, this is no where near as multi-national as the typical US companies I usually consider. However, the 5% dividend yield is enticing, as is the record of dividend growth (over 5% per year). The fact the company has almost doubled revenues over the last 5-years, and increased EPS by about 50% in that period, also helps offset the lack of international exposure. As is usually the case, as soon as I start to even consider adding a new position, the stock tends to take off before I can make up my mind.

In addition to the above three securities, Chevron has also caught my attention as a potential new position. It's another case where the 3.5% dividend yield (7% dividend growth yoy) looks great, until I factor in the 11% premium I'd pay on the shares. Here's hoping the Canadian dollar gains some ground on its US counterpart, to make adding US shares in my RRSP cheaper.

Full disclosure: Long MSFT, KO, and MCD

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