Wednesday, June 29, 2016

3 Recent Buys - GRT.UN, CSCO and BMO

There has been a lot written about last week's "Brexit" vote, and since I have no idea how the drama will ultimately play out, I decided to take advantage of the market volatility to complete a couple of my positions: Cisco Systems and the Bank of Montreal. Those two recent buys came after I re-initiated a position in Granite Real Estate Investment Trust inside my Tax Free Savings Account ("TFSA") in early June. Since the last month in which I bought shares in three companies was January 2016 due to an all-too-short market correction,  I will share what made me decide to pull the Buy trigger three times in June. In addition to the company specific reasons for buying shares outlined below, the volatility caused by the Brexit vote and the fact my portfolio contained over 10% cash mid-month (currently down to ~7%) both played into my buying decisions.

Granite REIT (TSE= GRT.UN): Bought at $39.10

After identifying Granite REIT as an attractively priced distribution grower in March 2016, initiating a position in my RRSP in early April, then stupidly selling the full position at a profit in late April (common mistake #2 - selling too early), I was happy to re-initiate my position in Granite in early June. One of the reasons why Granite is now in my TFSA is that I am determined to minimize trading in my TFSA so as not to attract the attention of the Canadian Revenue Agency, who have taken an aggressive approach to pursuing investors who use their TFSA for short-term trading. I continue to think that Granite's management team has the best interests of their unit holders in mind as they have reviewed a full range of strategic options in the last year including selling the company, going private, and paying special dividends. Buying Granite at a P/FFO of 11.4X, at a slight discount to their book value, and yielding 6.2%, seems like a no-brainer to me.

Cisco System (NASDAQ = CSCO): Bought at $28.00 (USD)

After first buying shares of Cisco in November 2013, I waited two and half years to complete my position with a small purchase last Friday. Instead of focusing on how I could have bought the shares to complete my position in early 2016 in the $23 range, I took a fresh look at the company and realized that paying the slightly higher price still translated into a fair P/E of 14X and a 3.7% dividend yield. The fact management boosted the company's dividend by 24% earlier this year also played into my decision. As interesting as I find some lower yield, higher dividend growth companies, it's hard to argue against a global industry leader with AA-/Stable and A1/Stable credit ratings who boosted their already significant dividend by almost a quarter. After completing my position, I'm now considering going overweight on Cisco as I feel it offers exception dividend growth at a reasonable valuation.

Bank of Montreal (TSE = BMO): Bought at $79.95

After buying some shares of BMO in my unregistered account in November 2008 (remember the financial crisis?), I waited a mere seven and a half years before completing my position this past Monday. Much like Cisco, I was stuck kicking myself for not buying BMO earlier in 2016 when it traded around $70. Un-anchoring myself from that unrealistic target price allowed me to see that the fourth largest Canadian bank was trading with a P/E less than 12X, yielding north of 4.3%. After waiting seven and a half years, completing my position in my sixth Canadian bank felt fantastic.

My three recent purchases are all reflected in my Investment Holdings page. Here's hoping that the Brexit fallout was beneficial to your portfolio.

Did the Brexit vote cause you to make any changes to your investment plan for 2016?

Thursday, June 23, 2016

Five Common Mistakes Dividend Investors Make - My Self Assessment

My favorite newspaper columnist who covers the world of dividend investing is The Globe and Mail’s John Heinzl. Last Wednesday in his ‘Yield Hog’ column, John presented Five Mistakes Dividend Investors Make. Since critically assessing my performance as an investor can only help me improve, I thought reviewing how often I make the five mistakes John pointed out in his recent column would be a beneficial exercise.   

1.       Focusing Solely on Yield

Focusing solely on dividend yield at the expense of dividend sustainability and growth is perhaps my biggest challenge as a dividend investor. Most screens I run to identify potential investments include a minimum dividend yield of 3%, thus limiting potential higher dividend growth companies. Additionally, by only focusing on two metrics of portfolio performance (forward expected dividends and weighted average dividend growth rate), I tend to shun dividend stocks with better growth trajectories in favor of current income. In order to compensate for my preference for a higher initial yield, I make a special effort to analyze the sustainability of a company’s a dividend payment in order to avoid dividend cuts. Despite the above mitigant, until I start assessing my portfolio’s performance by total return, I freely admit to focusing too much on dividend yield at the expense of dividend growth.

Self-Assessed Grade = D

2.       Selling Too Early

Even though I claim to be a long-term investor, my actions sometimes prove otherwise.  Through the first half of this year, I conducted six short term trades earning a profit on each. However, each of the company's shares I bought and sold are now selling at a higher price than when I closed my position. In the past, I sold positions in Walgreens and Home Depot after they had grown to prices that I estimated to be unwarranted given their earnings multiples and growth rates. Although selling too early is a weakness I am well aware of, and I feel that I am improving in this area, it remains tempting to make a quick profit in the hope of buying back into a great company at a later date. 

Self-Assessed Grade = C-

3.       Avoiding Tax-Sheltered Accounts

Despite the many mistakes I make as an investor, I routinely maximize my investments in tax-sheltered accounts. When I report on my progress toward my 2016 goals later this month, my greatest achievement will be contributing the maximum amount to my TFSA and RRSP, and my son's RESP. With the exception of shares of Riocan REIT I hold in my unregistered account, I also manage to be incredibly tax efficient with two Canadian REITs in my TFSA, and all my US stock holdings in my RRSP. The accountant in me shines through in this area in order to avoid and delay paying unnecessary taxes on my investment income.

Self-Assessed Grade = A

4.       Not Diversifying

In John Heinzl's article, he makes the case that many Canadian dividend investors stick to certain sectors that have a history of dividend growth (i.e. utilities, telecommunications and banks). Although I am overweight in both telecommunications and banks, I do not own any utility companies (though I recently considered five). I also feel that my largest position, Alaris Royalty, provides me with decent diversification given their investments in 17 partners. Lastly, I have a growing stable of nine US companies in my RRSP that help give me some geographical diversification. All that said, I continue to look for investments that add diversification to my portfolio, but they must be quality companies with attractive growth prospects.

Self-Assessed Grade = C

5.       Not Reinvesting Dividends

Mr. Heinzl makes the strong case of using dividend reinvestment programs (DRIPs) or at least using dividends to buy new shares of quality companies. Although I have yet to find a DRIP program I feel comfortable enough to enroll in for the long-term, I do use my dividends to invest in quality companies, mostly those currently in my portfolio. However, as recently mentioned in various posts, I am having a hard time pulling the 'Buy' trigger over the last three months. My only new position in 2016 is Granite REIT, but there are a couple of restaurants I hope to initiate positions in shortly. 

Self-Assessed Grade = B-

Looks like my overall average for the five mistakes most common to dividend investors is about 'C', making me average. I will have to maintain course on my plan to add positions to better diversify my portfolio, focus on the long-term to avoid selling too early, and think more in terms of total-return instead of solely dividend yield. 

Of the above five mistakes, which is your greatest challenge?

Tuesday, June 14, 2016

Five Reasons I Still Own Kinder Morgan Inc

On December 8th, 2015, Kinder Morgan stunned many in the dividend investing community when they cut their dividend from $0.51 to $0.125 per quarter. Much was written about KMI management's decision to cut their dividend in order to fund expansion projects with their internally generated cash flow instead of continuing to issue high cost debt and equity. The decision to cut their dividend also helped the firm maintain their investment grade debt ratings (BBB-/Stable and Baa3/Stable) by avoiding adding more debt to their already levered capital structure. The dividend cut led many income focused investors to sell their position in KMI. Although I considered parting ways with Kinder Morgan after their dividend cut announcement, I held onto my position in my RRSP. Below are some of the reasons why I continue to maintain my position in KMI.

1. Kinder Morgan's Assets

With 84,000 miles of pipelines, Kinder Morgan is the largest energy infrastructure company in North America. For a quick comparison, the next biggest firms, Enbridge and Williams Companies operate about 16,900 and 13,600 miles of pipelines respectively. In today's challenging regulatory environment, recreating a pipeline network anywhere near the size of KMI's would be impossible. As much as I hope that our society can move away from relying on fossil fuels, so long as a demand exists for those products, Kinder Morgan will play an important role in transporting them throughout North America. It is also worth noting that despite the difficult regulatory environment, Kinder has recently received authorization for the Elba Liquefaction Project, and recommended approval for its Trans Mountain expansion project.

2. Strong Cash Generation

Looking at Kinder's Q1 2016 results, it is evident that the company is still able to generate strong free cashflow. Despite revenue being down 12.5% in Q116 vs Q115, the company still generated cash from operations in excess of a billion dollars. The company's own "distributable cash flow" metric was $1.23B in Q116 marginally less than the $1.24B generated in Q115. These strong results helped the company increase their revolver size from $4B to $5B and negotiate a $1B unsecured term loan during Q116. This financing will help the company as it moves away from issuing equity for financing in 2016.

3. No Taxable Benefit from Selling

With my KMI shares inside my RRSP, there will not be a taxable capital loss carryforward that I would gain by selling my shares. Selling my shares in my RRSP would simply represent a loss of funds contributed to my RRSP that I would never be able to recoup. In contrast, had I held my Kinder Morgan shares in my taxable account (which would have been silly given the withholding tax on US dividends), I likely would have sold after the dividend cut announcement in December to lock in a capital loss I could carryforward indefinitely under Canadian tax law.

4. Avoiding the Point of Maximum Pessimism

I also felt that by selling my shares directly after the dividend cut announcement or early in 2016, I would have been selling at the point of maximum pessimism. Despite losing faith in Kinder Morgan's management (i.e. I will never put any faith in their management guidance again), I do believe that cutting the dividend was in the long-term best interests of the company, as fueling expansion with equity and debt capital costing over 10% would have been unsustainable and forced a restructuring. It should also be noted that the company's shares are already up almost 50% (including dividends) off their 2016 low of $12 per share in January.

5. Lack of Outstanding Ideas for Capital Redeployment

As might or might not be obvious from my monthly watch lists and screens covering various sectors, I am having a hard time deciding where to deploy fresh capital. Until a great opportunity presents itself to me, I have no issue collecting a ~3% dividend from Kinder Morgan especially given my expectation that their share price would benefit from a sustained rise in the price of crude oil. With KMI's management indicating that their 2016 forecasts were based on oil trading at  an average of $38 for the year, the company's share price will likely increase if oil holds near its current ~$50 per barrel.

Beyond the five reasons outlined above, the fact that I have started to look at my portfolio from a total return perspective also explains why I have kept my shares in KMI. Expanding off my fourth reason above, from a consumer's point of view, I felt that $20/barrel of oil was too good to be true. As an investor, early in 2016, I decided that owning companies that would benefit from the inevitable mean reversion in oil prices would be beneficial to me. Since January/February, a number of my energy (i.e. TransCanada, Enbridge, Kinder, etc.) and non-energy (i.e. Canadian banks, REITs with exposure in Alberta, etc.) holdings have seen strong price appreciation. As much as I enjoy receiving dividends, it is ultimately the cumulative value of my investment holdings that will allow me to achieve financial independence.

Have you bought, sold, or held Kinder Morgan since their December 2015 dividend cut???

Monday, June 6, 2016

Two Longs and a Short - June 2016 Watch List

After posting about how much I enjoyed reading Dead Companies Walking, I decided to try something related to the book for this month's stock considerations. The book's author, Scott Fearon outlines a contest he conducts with other money managers, asking them for two of their current long 'Buy' picks, and one company they would short 'Sell'. Although I traditionally think about dividend growth companies in which I want to invest for the long-term, I can see the benefit of determining a company that I consider overpriced. I would be remiss if I did not mention that this new 'Two Longs and a Short' watch list is also a reflection of an exceptional post I read last month (or possibly in April?) on another blog where a DGI investor talked about dividend stocks he would not buy. Sadly, I simply cannot remember which blog this article appeared on. Feel free to remind me in the Comments section so that I can give them the credit they deserve.

Two Longs

1. Iron Mountain (NYSE = IRM)

One of my plans within my RRSP is to create a basket of US REITs covering industries that I cannot invest in through the Canadian markets. This specialized REIT offers storage and information management services to companies worldwide. Although I am usually reluctant to buying a stock trading near its 52-week high ($37.08), there is a lot to like about this unique company. The 5.3% dividend yield, guidance indicating double digit annual dividend growth in 2017 & 2018 with 4% growth thereafter, Price to estimated 2016 FFO =~ 17X, Price to estimated 2016 AFFO =~ 15X, and a recently upgraded BB-/Stable credit rating from S&P all help provide me comfort initializing a position. For a more detailed analysis of the company, here's a link to Brad Thomas's recent Seeking Alpa article. 

2. A&W Revenue Royalties Income Fund (TSE = AW.UN)

As I hinted at in my response to one of the comments on my post related to Ten Canadian Restaurants With Growing Dividends, I was leaning toward A&W as an investment in this sector. Despite the fact the stock is trading near its 52-week high ($31.90), the strong same-store-sales growth (7.6% in 2015), four dividend increases over the past year (11% growth), and the P/E ratio of about 20 lead me to believe the company is fairly valued. Also of interest is the fact that none of their 2015 distribution was a return of capital, which is rare in the royalty fund / investment trust space. My only issue with this company is the relatively low number of shares that trade each day (~15K). However, as a long-term investor, the larger Buy/Sell spread would not stop me from initiating a position.

One Short

1. Chevron Corporation (NYSE = CVX)

Although I acknowledge that there is a very low probability that Chevron will file for Chapter 11 in the next year, there are numerous red flags that scare me away as an investor. The company's rising debt level ($42B at Q116 vs $34B at Q115), falling revenues ($130B in FY15 vs $200B in FY14), negative free cash flow in FY13 - FY15, no dividend growth and selling off quality projects / properties lead me to believe that this is not an attractive long-term investment. The fact that the stock is trading just off its 52-week high ($104.26) baffles me. I can understand that optimists might think that the oil industry is turning a corner with oil back around $50 barrel, but why not wait for improved business results before investing one's hard earned dollars in this company? 

The last change to this month's watch list is a lack of target prices relating to the two companies I am considering buying. Not only did I find setting price targets extremely difficult, I had a tendency to anchor on those targets and not update them when new material information was announced. Going forward, instead of trying to initiate and add to positions at an arbitrary price point, my focus will be on making purchases at fair prices.

What are your two long and one short stock picks for June?

Wednesday, June 1, 2016

Three Lessons from Dead Companies Walking

An important element of selecting companies with the ability to continually grow their dividends is weeding out organizations that are on the path to failure. For this reason, Scott Fearon's book Dead Companies Walking was the most useful investment book I have read in the past year. Not only does Scott indicate the six common mistakes that he looks for before short-selling a company's shares, he also writes about attributes to look for in long-term investments and shares how to become a better investor.

Six Common Mistakes Unsuccessful Companies Make

Through numerous real world examples, Scott expands on the six common mistakes that leaders of unsuccessful companies make.

1. They learned from only the recent past

2. They relied too heavily on a formula for success

3. They misread or alienated their customers

4. They fell victim to a mania

5. They failed to adapt to large shifts in their industries

6. They were physically or emotionally removed from their companies' operations

Of the above six mistakes, numbers two and four really hit home with me. Despite being comfortable with my position in six of the seven biggest Canadian banks, their annual exercise of raising retail banking fees in their Canadian operations while cutting personnel costs is unsustainable in the long-term.  Banks that rely on the same formula will no longer see any new investment dollars from me, as I will instead direct those new funds to financial institutions who focus more on international growth and investments in technology (i.e. TD Bank and Bank of Nova Scotia). My personal observation regarding manias is that they tend to happen with more frequency. The dot-com bubble, automobile manufacturer meltdowns, sub-prime housing lend crisis, and the current oil market mania all abruptly impacted multiple areas of the economy and the effects were long lasting. Leaders of companies must quickly identify and react to the various manias in order to ensure survival.

Also worth noting is that Mr. Fearon raises a key red flag to look for in companies that are in the process of failing. Seeing a company's revenues fall while their debt is growing is an important warning signal for all investors. When companies need to access external capital to finance their operations for an extended period of time, it proves the organization is not self-sustaining. When external sources of debt financing dry up, companies will try to tap shareholders for their capital needs. For investors, this will result in a diluted stake in a failing business.

What Makes a Good Long-Term Investment?

What jumped out at me most in Scott's book was the importance of continuous improvement and innovation if companies want to experience long-term success. We seem to be entering an era of business in which a disproportionate large share of revenues and profits go to winning companies. Category killing organizations like Amazon, Google, and Netflix are dominating industries that they themselves help create, while displacing traditional industries. Mr. Fearon argues that you cannot put a price tag on a company's ability to continue to innovate, a point on which Apple's current shareholders would likely agree.

Mr. Fearon also notes that organic growth, whereby the company expands slowly through reinvesting their operating cashflows into the business is a characteristic of a winning company. Although this path to growth is slower than borrowing to acquire another business, it shows that management has the patience to first generate profits, and the mental discipline to reinvest them into projects with positive returns on investment.

If a strategy is not working, management has to demonstrate the mental flexibility to abandon it, and go in another direction. Instead of blaming things outside of the company's control (i.e. the weather, the stagnant economy, government policies, etc.) management has to accept the blame themselves, and move onto another strategy. Scott talks about what a good quitter he is, and how much money that has saved him as an investor over the years.

Becoming a Better Investor

Flexibility is also key to growing as an investor. Scott talks about how he missed out on investing in Starbucks and Costco because he was very stuck to his 'Growth at a Reasonable Price' philosophy. A lot of us in the dividend growth community are susceptible to group think and ignoring other investment philosophies if we become too set in our ways. One of the reasons I bought two ETFs for my son's RESP was in order to test a different strategy. The benefits and lower maintenance of index investing are hard to argue against. On a similar note, Scott indicates that the ability to exit losing investments quickly is essential for investors. He notes that his philosophy of "quitting early and quitting often" has helped him preserve capital.

The second last chapter of the book is incredibly negative on the american financial industry. Scott discusses the various tricks and frauds that financial companies and investment houses commit in order to separate investors from their money. He goes onto say that the SEC and other entities whose job it is to regulate the financial industry are under-resourced and do not perform their functions as they should. Simply knowing that a financial advisor, bank representative, fund manager, or company executive has their best interests in mind, and not yours, should have help you as an investor. You are the one who cares the most about your financial situation.


I agree with Mr. Fearon that failure should be recognized and even celebrated in the investment community. After reading his book, I am much more open to the concept of short-selling stocks, as failure is a natural and normal part of the business process. Regardless of what type of investor you consider yourself to be, I highly recommend you take the time to read Dead Companies Walking.

Having you ever considered shorting a company's stock? If so, which company?