Wednesday, April 29, 2015

The Beautification of My Blog

I decided to invest a little time in my blog today to make it easier on the eyes. No huge changes just four tabs that will help readers navigate the site more efficiently. If you ever wanted to know more about me, my investment philosophy, what I read, or what my holdings are, you're now in luck!

As always, your feedback is always welcome. Hope you enjoy!

Saturday, April 25, 2015

Johnson & Johnson Dividend Increase and Quick Obsevations

One of my beautiful, boring, US stocks with global sales diversification is Johnson & Johnson (“JNJ”). As they had for 52 consecutive years previously, on Thursday, the Board of Directors at JNJ increased their dividend yet again, this time by 7.1%. With a yield at close to 3%, and a reasonable P/E ratio of about 18X, I’m fine with continuing to hold JNJ, collecting an ever increasing stream of dividends year after year.

A couple of companies in my portfolio had some interesting price changes this past week. I thought I’d share a couple of observations regarding these price changes below, as I found them amusing.
-          Friday morning Microsoft announced strong quarterly results and their stock subsequently went up over 10%. It’s hard to believe in efficient markets when a stable, solid, stead-as-she-goes company like Microsoft can jump 10% on one quarterly earnings release. I know some equity analysts would tell you differently, but having read through the company’s comments, nothing material jumped out at me.
-          I own some monthly dividend payers (i.e. Alaris Royalty, H&R REIT, Corus, etc.) and always find it interesting to watch their price spike just before a shareholder of record date. I can somewhat understand when quarterly dividend payers show price spikes before their record dates, but for the life of me, I don’t get why monthly dividend payers show the same behavior. That said, I’ll totally take advantage of the usual fall off in price after the shareholder of record date to pick up shares on the cheap.
-          Prior to announcing their quarterly results, Rogers was trading at a 52-week low. After announcing mixed results (earnings miss, revenue meet), Rogers is now up almost 10% off their 52-week low. This might be short-term investors moving into the company in order to pick up the next quarterly dividend, it might be investors expecting bad results and then being pleasantly surprised, it could be lots of things. As a long-term investor in Rogers, I was happy to pick up my latest block of shares at a bargain basement price.

Here’s hoping that dividend aristocrats continue to regularly boost their payouts, markets continue to be inefficient, and that I’m able to benefit from both phenomenon!  A good weekend to all!

Wednesday, April 22, 2015

2015 Government of Canada Budget - My Thoughts

     As a Canadian working in the financial sector who has a keen interest in personal finance, there are very few days as important to my fiscal well being than federal budget day. After falling oil prices caused Joe Oliver, Canada's Minister of Finance, to delay his budget by several months, and with a fall election looming, yesterday's budget was full of goodies aimed at key constituents for the Conservatives, namely seniors and parents with families. Since my wife and I fall into the latter category of key constituents, there were a couple of perks for us in yesterday's budget.  Key among the goodies that impacted me were:

1. Increasing the Tax Free Savings Account Limit to $10,000 from $5,500
As a Canadian who saves and invests a substantial percentage of my earnings, the thought of being able to double the amount that can grow tax free is extremely appealing. Don't get me wrong, I know that only a small percentage of the population will actually be able to take full advantage of the $10,000 contribution room per year, but it's still a great perk for savers and investors. I'd argue that increasing the contribution limit on TFSAs could make our other main tax advantaged savings vehicle, Registered Retirement Savings Plans ("RRSPs") less relevant in the future. The flexibility that TFSAs provide regarding withdrawals (not taxed, no need to pay them back within a certain time frame) will appeal to younger savers who see RRSPs as rigid and irrelevant given their lack of faith in the concept of a government funded retirement.

2. An Enhanced Universal Childcare Benefit
Parents with children under the age of six will now receive $160 from the federal government each month to help offset the costs of childcare, as opposed to $100 previously. Although I'm not one to turn down "free money", I'd point out that $160 couldn't pay for childcare for one week in Ontario. Even under Quebec's subsidized childcare system, $160 won't go far at all paying for my son's care this coming fall. Pundits say that the Conservative government tries to encourage one parent to stay at home with the enhanced childcare benefit and income splitting. The NDP and Liberal parties in Canada have long proposed national childcare programs (similar to what we have in Quebec), but the Conservative party seems reluctant to consider such a costly program.

3. Decreasing the Mandatory Withdrawal Rate on Registered Retirement Income Funds
By the age of 71, senior must convert their RRSPs into registered retirement income funds ("RRIFs"). These RRIF rules required seniors to withdraw (and get taxed) on their funds at a rate of 7.4% at 71 and escalating to 20% by 94. Quite simply, with people living longer due to advances in the health, science, and technology, these mandatory withdrawal rates led to situations where seniors would outlive their retirement savings. The new mandatory withdrawal rates (5.3% to start increasing to 18.8% by 94) make a little more sense.

     I'd feel guilty leaving out the fact that income splitting for tax purposes, which my wife and I benefited from in fiscal 2014, remains a part of the 2015 budget. This was an incredibly controversial matter when introduced due to the high cost (~$2.2 billion per year) and relatively low percentage (estimated ~15%) of households who benefited.

     Putting aside my saver/investor persona for a second, and changing into full fledge accountant mode, I'd like to point out several points that really irked me about this year's budget.

1. You Don't Balance Budgets by Selling Assets and Cutting Contingency Funds
The government incorporated gains on their sale of General Motors shares (bought during the 2008 auto industry bailout) and cut a $3B contingency fund to $1B in order to balance the 2015 budget. Clearly, these methods are unsustainable, and can only be done once. Plus, I have to question a government who had a $3B contingency fund incorporated in previous budgets. To me, this is the equivalent of charging unforeseen expenses to "miscellaneous".

2. Announce Now, Spend Later
In terms of horrible political tricks, announcing major spending initiatives now, but not actually delivering the funds for years, is despicable. The Conservative government announced major spending on national defense, infrastructure, health care, and innovation...but don't expect to see any dollars invested in those key sectors until 2017/2018. Instead of ranting about this deplorable tactic, I'll simply say it amounts to false advertising.

3. Buying Votes
As alluded to in my opening paragraph, if you happen to be a senior, or be part of a younger family, the 2015 budget was aimed at you. You could go as far as to generalize that the Conservatives are trying to beef up support with seniors (who vote in higher proportions than most other age groups), soccer moms, and conservative Christians (the Conservatives stronghold in Western Canada). For the record, my vote has never been for sale, and despite the perks offered to me in budget 2015, I'll continue to vote for the best local federal candidate that I feel will represent my interests parliament.

     As tempting as it is to start a tirade on the 'Balanced Budget' legislation the Conservatives introduced, I'm going to steer clear of that. There's ample evidence that proves that such legislation is ineffective, not to mention disingenuous given the Conservatives' own fiscal record.

     Do any fellow Canadians have thoughts on the 2015 budget? Or am I the only one geeky enough to find it a compelling read? 

Sunday, April 19, 2015

Kinder Morgan and Omega Healthcare Investors Raise Dividends Again

     At work, if I meet expectations and my organization has a good year, I receive a small raise come February. As a dividend investor, as long as I pick the right companies to invest in and sit patiently, I receive regular raises as often as quarterly. After Kinder Morgan and Omega Healthcare Investors were kind enough to give me small raises during the first quarter of 2015, each increasing their respective dividends by a penny, both recently gave me another raise!
     Omega Healthcare Investors boosted their quarterly dividend by another penny, despite cautioning their previous 2015 guidance was too aggressive. Although it took longer than expected to complete the merger with Aviv, management still had the confidence to boost their distribution for the tenth quarter in a row. Having recently added more shares to my position in Omega, I loved management's vote of faith in the combined company.
     Kinder Morgan could very well be the best dividend growth stock in the United States over the next five years. With a dividend yield of 4.4% currently, and management expecting to grow their dividend by 10% per year through 2020, I'm glad to be a part of this juggernaut's flight path. Pipelines such as Kinder have huge competitive advantages in that it would take a new organization a huge amount of time to get the necessary regulatory approvals and money to actually build the infrastructure in order to be able to compete current companies. Ethical objections aside, as long as America needs to transport fuel, I expect Kinder to continue to increase the flow of dividends to its shareholders, just as it sees more oil and natural gas flowing through their pipes.
     The second quarter of 2015 is off to a strong start, and I expect the positive news to continue as Telus and Johnson & Johnson should also soon announce dividend raises. 

Wednesday, April 15, 2015

Recent Buy - Rogers Communications

     In a beautiful twist of fate, as Mr. Market marked the share price of Rogers Communications ("Rogers") down almost 2% today for no reason at all, I was able to buy one of my favorite dividend growers of all time! Better yet, by purchasing these shares in my tax-free savings account ("TFSA), I was able to get closer to completing my portfolio transformation.  I'll just have to wait more than a month to sell the same number of shares in Rogers that I bought today in my RRSP, and then I'll hold all my Rogers stock in my TFSA.
     Rogers has been a long-time holding of mine (over 5-years), and I've slowly added to my position over time.  Although their customer service is notoriously bad, something the relatively new CEO has indicated is a priority to improve, I can assure you there are many positives about the company. These positives include:

- They're the industry leader in wireless in Canada with over 9.5 million subscribers. They're also the second biggest cable company in Canada servicing cable, internet, and fixed line phone subscribers.
- Despite our TSX hitting all-time highs, Rogers is still priced at a very reasonable P/E of ~16X.
- Their balance sheet and financial performance is strong as reflected in their BBB+/Stable and Baa1/Stable issuer ratings from S&P and Moody's respectively.
- The dividend yield of 4.5% is impressive, as is the 1-year dividend growth rate of 5% and the 5-year average dividend growth rate of 10%.

     As you may have guessed, I'm extremely happy to keep progressing toward my goal of finishing my portfolio transformation. Holding all my shares of the same company in the same account, and focusing on tax-efficient placement of my holdings are one of my big three goals for the year.

Sunday, April 12, 2015

Recent Buy - Omega Healthcare Investors

     Perhaps the best aspect of being a dividend investor is watching dividends and distributions role in without any action on your part. Dividends added up in my RRSP over the past three months to the point where I had some cash to add to one of my growing positions last week; Omega Healthcare Investors ("OHI").
     For those of you unfamiliar with OHI, the company is a US-traded REIT which provides financing and capital to the long-term healthcare industry in the US with a focus on skilled nursing facilities. At the end of 2014, OHI's portfolio of investments included 560 healthcare facilities in 37 states. Omega is in the process of completing a $3B merger with Aviv in a deal that will result in a combined portfolio of 789 properties in 41 states. One big advantage of the Aviv/OHI merger is that the combined companies will leverage their existing 83 operator relationships to increase the number of acquisition opportunities.

     From a dividend growth perspective, OHI has the kind of track record that makes me salivate. In particular, for the past 11 consecutive quarters, Omega has increased their distribution. This translates to 5.9% dividend growth over the past 12-months. Even more impressive, the company has averaged an annual distribution growth of 13% over the past 5-years. For those of you who think all good things must come to an end, I'd point to the fact that in Q414, OHI's AFFO payout ratio was a perfectly healthy and very sustainable 73%, Even without the pending Aviv merger, there's still lots of room to grow the company's payout ratio.

     On Thursday, when the market sent down shares of all major US REITs, I was only too happy to purchase 30 shares of OHI at $39 and a distribution yield of 5.5%. One of my lessons learned through more active trading with a small portion of my portfolio last year was that it feels great to buy into quality companies on dips. Taking advantage of a 3% dip in OHI's share price gave me increased confidence to add to my position. Although I still haven't completed my position in the company, I'm inching closer, and felt good putting my capital back to work. My only complaint is that my discount broker, Scotia Itrade, charged me a ridiculous high exchange rate, only to increase it the next day when the trade settled. Even though I have their assurances that they're working on implementing a US dollar RRSP solution in 2015, I'm dangerously close to transferring my RRSP holdings away from Itrade, into a brokerage which would allow me to deal in US stocks at much fairer exchange terms.

     Although I'm not anticipating any more long-term buys in the immediate future, I continue to hold some cash in my TFSA and unregistered accounts earmarked for a good deal on Rogers, Royal Bank, Bell and TD Bank. Here's hoping Mr. Market gets depressed and irrational so that I can put more capital to work.

Sunday, April 5, 2015

Dividend Growth Investing vs Indexing

Two weeks ago, Mark at had a thought provoking piece on the merits of indexing vs dividend growth investing ("DGI"). A couple days ago, a friend of mine posted a link to this Wall Street Journal story questioning whether Benjamin Graham would have hated index funds (spoiler alert: No, Mr. Graham was an early proponent). Both links seemed timely, as I had just finished re-reading Andrew Hallam's Millionaire Teacher book, which is a great introduction to index investing.

Over the last year, as I dedicate more time to researching investments, executing portfolio strategies, and ultimately managing my money, I've asked myself several times if indexing wouldn't make more sense for me. The big selling points of indexing are it's easy (maybe a couple hours a month) and in theory, you should get the market returns of the indexes you buy (less transaction costs). Having an eight month old at home, I can assure you that the idea of more sleep at night and less hassle during the day is extremely tempting. However, despite my growing interest in the concept of indexing, I stick to DGI for a couple key reasons.

1. Show Me The Money
A quick peak at Google Finance shows me that the TSX 60 IShares index fund (TSX: XIU) yields a respectable 2.6%. In contrast, my unregistered trading account, which consists of shares in eleven large Canadian public companies with a history of dividend growth yields 4.4%. If history is any indicator of the future, I'm also willing to guarantee that the growth of distributions I realize in any year is at least double that of the index distribution growth. Simply put, my portfolio throws off more more now, and its distributions will grow at a higher rate for years to come.

2. My Return is Higher, More Certain, and Less Variable
At the risk of sounding boastful, I believe the return I'll realize over time will be higher, more certain, and will show less volatility than any index out there. Although studies tend to come up with slightly different numerical results, most academic studies indicate that dividends account for the bulk of total stock market return over long periods of time. If I'm investing in an index, my underlying belief is likely that the basket of companies in the index will become more profitable over time, thus increasing their attractiveness, and demanding higher price multiples in the market. In a sense, I'm betting on a capital gain in the underlying securities. Instead, a DGI investor assumes the companies they invest in will increase profits over time, and pay them out as even higher dividends. Dividends are sticky, and management that has a history of raising distributions over time, is only likely to cut them in extreme emergencies. Dividend stocks, where payouts account for a higher percentage of total return, will be less volatile in trying economic times, and their companies should be around for the long haul.

3. Index Problems
At its peak, Nortel accounted for about 30% of the TSX 60 index. Before March 2015, Apple, the largest company in the world by market capitalization, accounted for 0% of the famous Dow index. Simply put, I think buyers should beware that not all indexes are created equal, and that research has to be taken in order to ensure you're receiving what you expected. Academics continue to debate the merits of value weighted vs price weighted vs equal weighted indexes. With the explosion of index investors, it seems there are all kinds of country/commodity/sector/region/you-name it indexes, none of whose contents are entirely well known. Another index problem is that the funds who create them choose not to act in the best interest of shareholders, and instead vote with current management recommendations via their proxies.  If index owners truly want to own a piece of multiple businesses, shouldn't they encourage index managers to vote like owners, and not lap dogs?

Contrary to what might be implied from the above, I'm not anti-indexing. I think indexing, when done correctly, can be an incredible low effort activity that generates good results. I continue to practice DGI since I simply love the flexibility that fresh cash in my investment accounts brings to me each day. I also see DGI as better path toward my ultimate goal (retirement by way of passive income from dividends/distributions) than indexing, in which I'd likely have to convert my portfolio to a annuity in order to ensure that my income needs are met until I die.

Sadly, I've lost the source of one of my favourite DGI quotes, that went something along the lines of:
"There are very few former income investors."

Wednesday, April 1, 2015

Financial Goals at March 31, 2015

One of my primary motivations of maintaining this blog is to hold myself accountable to reaching my financial and non-financial goals. At the end of every quarter, I like to check in to see if I'm trending in the right direction, or need to take corrective action. To simplify things, I decided to only track three financial goals and two non-financial targets in 2015.  Here's how I did against my five goals in the first quarter of 2015.

Increase Expected Forward Dividend Income by $1,800/yr 
When setting this goal, I knew it was incredibly aggressive. Despite twelve dividend raises in the first quarter of 2015 (yay!), and transferring a relatively high percentage of my pay cheque into my investment accounts, I've only added $173 to my expected forward dividend income. The dividend cut from PHX Energy Services Corp and my continuing to hold quite a bit of cash in my accounts at quarter end has resulting in me being 9.6% of the way toward my year end goal, instead of the 25% I'd expect. I'll continue to look for good opportunities to deploy cash, while pursuing my portfolio transformation in the second quarter of 2015.
(EDIT - Turns out I forgot to include the dividends of one of my holdings. Instead of only adding $173 to my expected forward dividend income, I actually added $453. This puts me slightly ahead of goal pace. The moral of this story? Accountants can't be trusted with basic math.)

Complete the Transformation of my RRSP by Year End
On a high level, what I'm hoping to do is buy shares of four companies in my non-registered account and TFSA, while moving my H&R REIT shares from my non-registered account into my RRSP, without triggering a capital gain. I'm happy to report that I'm very much on track to complete my transformation sometime this summer, and possibly even by the end of the second quarter. My recent purchase of Telus in my non-registered account got things rolling. The result of the transformation will be a much more tax efficient portfolio, and holding all shares of the same company, in the same account going forward.

Give Twice as Much to Worthy Causes as in 2014
Having just completed my tax return for 2014, I now know exactly how much I gave to charity last year. I'm a little ahead of pace to double last year's amount, exactly where I'd like to be! With donations to the Red Cross, the Canadian Cancer Society, and my local food bank, I continue to hope my donations make a difference for others less fortunate. 

My non-financial goals, to maintain my weight under 165 pounds at the end of each month and average a blog post each week are both being met. In fact, due to rather horrible stomach bug I caught in March, that resulted in me losing five pounds in a day (seriously quite scary), I weighed in this morning at a very trim 154 pounds. Also happy to report I had 15 blog posts at quarter end yesterday, well ahead of the pace of one per week. In an interesting twist, I had more page views in March than any other month in history. To that end, thanks to all the new readers :)

Looking back, it was a good, but definitely not great first quarter in 2015. I really need to step up to the plate and make some investments in high quality dividend growth companies in order to close the gap on my forward dividend income goal for 2015. I'll keep you posted at the end of next quarter of how I'm tracking against my goals.