Thursday, March 31, 2016

Update on 10 Canadian Dividend All-Stars for 2016

Instead of a boring, cut and paste, repetitive entry recapping my March portfolio activities (sold Inter Pipeline Ltd., bought a little more Enbridge Income Fund, received two dividend raises from Bank of Nova Scotia and Realty Income), I thought it would be fun to take a look back at my 10 stock picks for 2016 from the Canadian Dividend All-Star list. Before the markets opened in on January 4th 2016, I used the above-mentioned spreadsheet to pick 10 stocks, one from each sector represented on the list.

Before presenting the results, my disclaimers from the initial entry remain quite valid. Certain sectors contained only a small number of potential companies, namely Real Estate (3) and Technology (2). Additionally, my knowledge of the Basic Materials and Technology sectors is extremely limited...and even that might be giving myself too much credit. Therefore, my picks in those two sectors were based mainly on financial ratios and technical information. Lastly, I only own three of the companies I selected (Enbridge, Telus, and Bank of Nova Scotia), and would need to perform more due diligence on any of the remaining seven companies before committing capital to it.

Without further delay, here are the results of my picks through three months.

Although the 8.6% average total return (assuming an equal weight for each pick) is impressive, some context is needed. The S&P/TSX Composite Index was up 3.8% (excluding dividends) over the same period. Adding 400 to 600 basis points to account for dividends results in a comparable gain of 4.2 - 4.4%. A more apt benchmark, the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSE:CDZ) rose 3.5% (excluding dividends) and made three distributions that bump its total return up to 4.6%.

One observation that makes me quite happy is that the three companies which I own (ENB, T, BNS) all returned over 10%. That said, my best pick Metro, which operates grocery stores, one of which is literally across the street from my house, did not impress me enough to invest in, probably due to their paltry 1.2% dividend yield (the lowest of the 10 companies). Its also interesting to note that my picks from the sectors where I feel least knowledgeable, Agrium (Basic Materials) and Evertz Technologies (Technology) performed the worst. There is probably something to be said with sticking to companies in sectors you understand.

I would be remiss if I did not mention a pick I made when a fellow blogger from my area asked for my top investment pick for 2016 (thanks again for including me R2R!). My pick, TransCanada Corporation, is up 13.5% (including a recently increased dividend) from the start of the year. Although I thought about increasing my stake in TransCanada when it was on sale in January, I did not have the conviction to pull the trigger. TransCanada's recently announced acquisition of Columbia Pipeline Group for $13B was definitely not on my radar of possibilities at the start of the year. That said, if the transaction helps move the company away from power generation, and causes management to be more focused in their capital allocation decisions, it could be beneficial going forward.

Although March was a slow month for my investment holdings, my "picks" are over achieving my wildest expectations. Maybe next year I should put some money behind my picks?

How have your stock picks heading into 2016 performed? 

Monday, March 28, 2016

Canadian REITS With Growing Distributions

Although I have much respect for real estate investors who achieve financial independence by growing their income through acquiring rental properties, this is not a path that tempts me in the least. My wife is far more handy around the house than I am, and the thought of taking calls from tenants in the middle of the night sounds like a nightmare. However, I have no issues collecting distributions from a variety of real estate investment trusts ("REITs") in my portfolio. After investing in a diversified portfolio of properties, the only work I have to do is figure out how much income from REIT distributions to declare in various categories at tax time.

Although I am very happy with my two US REITs, Realty Income and Omega Healthcare Investors, who regularly reward me with distribution increases, I am less content with my Canadian REITs, Riocan and H&R REIT. Both Riocan and H&R last increased their distributions in January 2013 by    2.2% and 8.0% respectively. Even though both of my Canadian REITs have reported solid results over the past 3 years, and remain the largest REITs on the TSX by market capitalization, neither has seen it necessary to raise their distributions. This sad fact, along with a growing amount of cash in my portfolio (~8% as of today), has lead me to consider adding a REIT in either my TFSA or RRSP.

The screen below lists nine REITs traded on the TSX who grew their distribution in the last twelve months. I only included REITs with market capitalizations in excess of CAD $1 billion and that generated positive funds from operations (FFO). I ranked the REITs by their distribution yield added to their 1-year distribution growth rate. I also included a Market Capitalization divided by FFO calculation to get an idea of how much the market was charging for the funds the REIT generated from operations.

Of the nine companies listed, Granite REIT jumps out at me for its highest growth plus yield, and the relatively cheap price/FFO. The company has a solid balance sheet as evidenced by their Baa2/Stable rating from Moody’s. Magna International Inc. (Baa1/Positive) is the biggest tenant accounting for 79% of rental revenue (down from 81% at YE14). Even though Magna is a strong tenant, Granite is clearly subject to the cyclicality of the auto making industry through their primary tenant. Vacancy at Granite’s 95 rental properties (~30 million square feet) was 1.1% at YE15. Comparable FFO grew 2.9% for the year as the result of acquisitions of properties and increases in rents. Revenues grew 4% in FY15 vs FY14. Granite concluded a strategic review at the start of March 2016 that saw the company consider a variety of options including transformational acquisitions, paying a special distribution, the sale of properties and the sale of the entire business. A private equity buyer was interested but did not pursue the acquisition due to higher credit costs in the market. I see the review itself and the fact a private equity investor was interested as major positives. The review shows me that management is open to any action that maximizes shareholder value, while the interested private equity investor demonstrates that the strong cashflow generation of Granite is being noticed by potential buyers.

A couple of the other names on the list interest me (Smart REIT & CT REIT) so I will complete more due diligence on those companies. In the meantime, I will be adding Granite to my watch list for April. With the current yield and history of distribution growth, it would be a nice fit in my TFSA or RRSP.

Are there any Canadian REITs that you would consider buying at their current prices?

Tuesday, March 22, 2016

3 Lessons from Your Money or Your Life

Your Money or Your Life (affiliated link) taught me some very valuable financial lessons I wanted to pass onto my readers. If you have already read this ``seminal guide to the new morality of personal money management``, please comment and tell me what you learned from the book. For me, three lessons really stood out.

1. Defining Enough

There is very little I remember from my introduction to economics courses taken during my first year of university. However, I recall that as we spend more on a good or service, the additional utility we gain from increased consumption reaches a point past which we experience diminishing marginal returns. Simply put, past a certain point, spending more does not make us happier. The book`s authors, Joe Dominguez and Vikki Robin speak to the importance of determining what is ``enough`` for you, so that you can figure out how much money you need to fund this lifestyle. Although this might come as a surprise, I admit that I have never considered how much money I will require to meet my needs. This fact lead me to my next major lesson.

2. Calculating Enough

As much as I love reading J Money`s budgetsaresexy site, I have never been an advocate of budgeting. Despite my accounting background, I refuse to accept the basic principle behind most budgets that one has a fixed amount of resources (i.e. money) that they can spend to maximize their happiness. Through dividend growth investing, I have been able to grow my passive income each year, striking a blow against the budgeting principle of scarcity and shifting the paradigm to one of abundance. 

However, while reading Your Money or Your Life, I became more aware that there are certain re-occurring expenses I incur on an annual basis that are independent of my job and even my personal circumstances. By figuring how much my re-occurring expenses total over the course of a typical year, I can gather a better idea of how much I will need to fund them while allowing myself a margin of safety. Therefore, I created a simple spreadsheet to track my usual expenses in hopes of seeing how much passive income I will need in order to achieve financial independence.

3. Separate Your Job From Who You Are

In the social and professional circles in which I operate, it is common for new acquaintances to ask about what I do for a living. My usual response to this question is to give an overview of what I do at work.  Although this description is sometimes tricky to explain effectively to someone without a business background, I have plenty of experience in trying to provide it to people. Throw in the fact that I enjoy my day job, and this description has became a part of who I am.

Joe and Vikki provide readers permission to separate what they do to earn a living from who they are as individuals. Even though I like my job, if I won the lottery tonight (even though I never buy tickets), I would NOT show up to work tomorrow, or ever again. My passion in life is my family, and my job is a means by which I provide for them while trying to achieve financial independence for us. By separating who I am from what I do for 40 hours each week, I feel more focused while at work, and less distracted away from work. 

Like other personal finance books, Your Money or Your Life provides ideas and methods to gain better control of your financial situation. However, the above lessons made the book worthwhile for me, and will continue to benefit me for years to come. 

What is the most impactful financial lesson you ever learned from a book?

Tuesday, March 15, 2016

What My Top 3 Stock Holdings Reveal About Me

Being an introvert, one of my advantages when it comes to investing is my ability to look inward to learn more about myself. In past entries, I explored my most costly stock picking losses, my mixed feelings about holding cash in my investment accounts, and my tendency to gorge vs nibble on stocks. After reading a couple breakdowns of various bloggers`dividend income earlier this month, I decided to take an introspective look at what my top 3 stock holdings reveal about me. Since I do not provide detailed dollar disclosure on my investment holdings, this post will also shed some light as to the identity of my current 3 largest holdings.

1. Alaris Royalty

Since last summer, my biggest stock holding by a pretty large margin has been Alaris Royalty. Even before the recent 10% bump in share price after the company reported their Q4 2015 results, Alaris was my favorite company to own. Instead of boring you with numbers, here is a link to Alaris`s management`s definition of how they are building an optimal dividend stream for investors. This description really speaks to me as a dividend growth investor as my goal is to produce a low volatility, highly visible, extremely liquid, diversified revenue stream that increases my cashflow over time. On days when I worry about concentration risk in my portfolio (I have yet to meet a bank, telecom, or pipeline that I don`t take a closer look at), knowing Alaris has investments in 16 companies across a wide range of industries helps set my mind at ease. I am continuously impressed my Alaris`s management team that shows patience and long-term thinking in dealing with their portfolio of companies. Even with all these positives, I remain cautious that Alaris`s business model requires new capital to fund future investments. Although they can temporarily fund new investments from their recently increased revolver, the company will have to issue equity from time-to-time. That said, increasing their revolver last spring allowed the company to put off issuing equity until market conditions are favorable for them. Although I likely won`t invest more in Alaris, I do plan on buying shares in my non-registered account while slowly working down my position in my RRSP.

2. Royal Bank of Canada

My investment in Royal Bank, spread across my RRSP and my unregistered account proves I am lazy and slow to sell a good company. For the record, I do not consider either of those two characteristics to be huge downfalls as an investor. The story here is that my plan to migrate Canadian holdings from my RRSP to my unregistered account and TFSA is not yet complete, and I have been slow to sell my shares of Royal Bank in my RRSP as I have no idea where to invest the proceeds. Plus, the bank has twice raised their dividend in the past nine months, so I have kept collecting the higher dividend while I figure out what to invest in next in my RRSP. My large position in Royal Bank is also reflective of my comfort with the banking sector in Canada. Last December, I had about 20% of my portfolio in Canadian banks at a time when some pundits were forecasting huge oil-related loan losses that were imminent. After the Canadian banks reported record profits in 2015, and continued strong results in Q1 2016, some commentators are finally starting to realize that Canadian banks have diversified loan books and can generate top-line growth without underwriting questionable loans. Given that I work for an institution that could be thought of as a bank, and that I have spent part of the past 8 years analyzing foreign banks, my comfort with Royal Bank and the sector in general should not come as a huge surprise.

3. Telus

Had I not sold a couple shares of Enbridge Income Fund last week, that company would have edged out Telus as my third largest holding. Both are fantastic companies, which provide great visibility regarding their dividend plans, and have a record of delivering on those plans. Although Telus`s dividend yield of 4.3% is lower than Enbridge Income Fund`s yield of 6.2%, I sleep a bit better at night holding Telus as I understand their business model (telecom) with more clarity than that of Enbridge Income Fund (which is essentially a yieldco for pipeline assets). As an investor, I appreciate simple business models that even an idiot like me can understand. As much as I hate dealing with telecoms (I have been a customer of Rogers, Bell, and Videotron at various times), they have a unique ability to raise prices at regular intervals, provide highly demanded services to their clients, and operate in a somewhat oligopoly in Canada. In summary, Telus reveals my love of predictable, easy to understand business models, with management teams that know what is important to income investors (visibility and consistency). Although I am perfectly comfortable with my large Telus holding,  I do not plan to add to it in the near term given I would like to first build up my holding in BCE.

My top 3 investment holdings indicate that I gravitate toward visible, consistent, easy to understand companies whose management caters to income-focused investors. Even if I can sometimes be lazy and slow to act with my holdings, the comfort I experience by investing in predictable companies allows me to sleep well at night.

What do your top investment holdings reveal about you???

Wednesday, March 2, 2016

Dividend Growth Stock Considerations for March 2016

The stock considerations below help me focus my research and monitoring efforts on a handful of companies. Included is a target price that would act as a buying trigger for me if it was met.

Bank of Montreal (TSE = BMO); Target Price = $70

Due to a busy week at work, I missed an opportunity mid-February to complete my position in BMO. Having initiated the position in the bank in November of 2008, I am anxious to finally complete it. There is lots to like about the Bank of Montreal such as a dividend yield of 4.8% at my target price, a 1-year dividend growth rate of 5%, a payout ratio in fiscal 2015 of less than 50%, and A+/Stable, Aa3/Negative credit ratings. Although it is not the cheapest Canadian bank, the trailing P/E of 10.5X (at my target price) represents a good value for a bank ready to celebrate their 200th anniversary next year.

Cisco Systems, Inc (NASDAQ = CSCO); Target Price = $24 (up from $21 last month)

Cisco is another of my 'almost full positions' that I would like to complete this year. My desire to complete this position peaked after the company announced a 24% dividend increase in February. The Canadian dollar has finally started to climb a bit against its US counterpart lately, making US stocks slightly more affordable. My target price would lead to a dividend yield of 4.3%, which is well supported by the company’s strong balance sheet (AA-/Stable and A1/Stable bond ratings). 

Canadian Utilities (TSE = CU); Target Price = $32.50

After they released a sub-par earnings report last Friday, I came within a nickel of re-initiating a position in Canadian Utilities Limited. The company's 44-year streak of raising their dividend (the longest of any Canadian company) was extended in January when they boosted their payout by 10%. My target price represents a dividend yield of 4%, a level I can live with in order to gain exposure to the utility sector which is currently missing in my portfolio.

Tanger Factory Outlet Centers (NYSE: SKT); Target Price = $30

I hesitated between Tanger and Digital Realty Trust as I would actually like to own both of these two US REITs. However, Tanger wins out for featuring better dividend growth in the last year (16.7%  vs 3.5%) and paying a special dividend. Given my two full positions in Omega Healthcare REIT and Realty Income REIT, I would like to add another US REIT that has asset holdings unavailable on the Toronto Stock Exchange. The distinctive asset categories of Tanger (outlet malls) and Digital Realty Trust (data centers) would help further diversify my REIT holdings. 

As always, despite focusing on the above names, I keep an eye out for special opportunities that present themselves from time to time on the North American markets. With my cash holdings eclipsing 3% of my portfolio value, I stand ready to deploy my liquid powder into income producing stocks, but will wait for fair entry points.

What companies are on your watch list this month?