Sunday, September 18, 2022

Less Dividends, More Growth Experiment

As I've touched on in my Transactions Journal this year, I'm experimenting with owning some companies that are less inclined to pay dividends, and more focused on pursuing growth strategies. This is clearly a departure from my usual dividend growth holdings, and I wanted to provide context around my thinking behind the experiment.

One of primary reasons for undertaking the experiment is that my current Investment Holdings are doing a great job of generating rising income through dividend/distribution growth. The big downside of that growing income is that by living in a province with one of the higher marginal tax rates in Canada, during a stage in my professional career when my earnings have exceeded my expectations, my dividend income gets taxed quite aggressively. Simply put, if I can identify companies that reinvest their profits, instead of paying them out to shareholders, it is in my short-term and long-term best economic interests.

Another reason for pursuing growth oriented companies is to help switch my focus from income to total return. Although conceptually I know total return is more important to pursue than a rising income stream, my actions haven't reflected that knowledge. It's probable that by being motivated by "financial freedom" and avoiding scarcity, I have ventured much too far into the income oriented mindset. As I nudge closer to the next phase of my life, focusing on total return and adopting an abundance mindset will help me enjoy my time.

Lastly, I feel that by looking for companies that don't pay part of their earnings out to shareholders will help keep me mentally sharp. As I've bought and added to my positions in the same 25-or-so Canadian companies over the past decade, I missed opportunities to invest for total return. I've noticed in slowly building my experimental portfolio that there are compelling growth stories in Canada, that are worth devoting some time and effort. I'm reminded of a quote in a recent podcast featuring Tren Griffin, during which he talked about "choosing the paths in life that lead to the best stories".  His strategy of optimizing for memories really hit home with me.

So what types of companies am I experimenting with investing in? A couple characteristics are important:
- Above-average revenue growth
- Strong profit margins
- Runway for further above-average growth
- Consolidators are especially interesting
- Managed by good capital allocators

At this point, I've taken the plunge into three companies that match most of the criteria above:
- goeasy Ltd (TSX: GSY)
- Constellation Software (TSX: CSU)
- Dye & Durham Limited (TSX: DND)

Although the above names have all fallen since I initiated my small positions (pretty common for anything I invest in), I choose to reframe the lower prices positively as it speaks well for the potential return prospects in the future if the companies stick to their strategies, show good results, and price multiples return to their pre-2022 averages. In the meantime, I'm thinking about adding another position or two by year end, possibly one related to the environment and/or healthcare. Looking forward to seeing how this experiment turns out!

Sunday, February 27, 2022

Two Stock Portfolio - ETF Experiment Continued

In May 2016, I posted about my ETF experiment involving buying VCN (Vanguard FTSE Canada All Cap Index ETF) and VXC (Vanguard FTSE Global All Cap ex Canada Index ETF) for my son's Registered Education Savings Program ("RESP"). Although this was a clear departure from my normal dividend growth investing strategy, the main reason that I pursued the strategy was simplicity. Having added my daughter to the RESP after she was born in July 2017, the two stock portfolio continues to be straight-forward, as shown in the below diagram. 

On a yearly basis, I spend about fifteen minutes on the strategy. The first five minutes relates to re-learning what is a needlessly complicated bill payment I have to use to make the annual contribution through Scotia itrade. A day or two later, after the contribution "magically" appears in the RESP account (sadly, I'm not making that up), I spend another five minutes calculating how much VCN to buy in order to keep the position sizes relatively equal, accounting for future government matches (both federal and to a lesser extent provincial) and upcoming dividends that will be added to the account. The last five minutes are split between buying VCN, and then waiting to see that both government matches hit the account before buying VXC.

Some of the advantages of this two stock RESP include:

- Very simple: Compared to the amount of time I spend on my normal portfolio, 15 minutes a year is awesome!
- Good country diversification: With half the portfolio allocated the Canada, VXC provides me exposure to the U.S., Japan, China, France, Switzerland, Germany, etc. at a very reasonable 0.27% management expense ratio. 
- Minimal cost: Beside VXC's 0.27% management expense ratio, VCN has a management expense ratio of only 6 basis points, and the two buys a year cost me a total of $20 in commissions. 
- Can do it all online: It's only been in the last three years that Scotia itrade hasn't required I send in a physical cheque to fund the annual contribution. 

On the flip side, there are disadvantages to the two stock RESP as well:

- Owning companies you'd rather not: With market capitalization being a dominant factor, there are a handful of companies in VXC I'd rather not own (i.e. Tesla, Facebook, etc.).
- VXC's holdings are not reflective of global market capitalization: VXC is heavily tilted toward the U.S. (60.5% of the ETF's holdings), and ignores some large international companies that are publicly traded (i.e. Saudi Aramco). 
- Scotia itrade's shortcomings: Charging $10 for buying an ETF, seeing your annual contribution disappear for a couple days, waiting an extra day or more to pay out dividends...all the frustrating parts of being a client of itrade continue to impact this RESP strategy.

The longer the two stock RESP experiment runs, the more I continue to love the simplicity of the strategy. I fully plan to stick to the strategy until my daughter turns 16, at which time the federal and provincial governments will no longer partly match the contribution. The only change I envision is potentially moving away from Scotia itrade given the shortcomings outlined above. 

Sunday, February 6, 2022

Water Your Flowers, Not Your Weeds

 "Selling your winners and holding your losers is like cutting the flowers and watering the weeds."
- Peter Lynch

An ongoing theme of my purchases in recent months is adding more to my positions in companies whose shares have increased in value ("winners"). Acknowledging this reality led me to explore the reasons behind this choice. Below are some of the key reasons why I have chosen to follow Peter Lynch's advice.

Accelerate the Compounding Process
Letting the power of compounding work for you by not selling winners early can lead to huge gains. My small October 2013 purchase of Microsoft grew to one of the largest positions in my portfolio. Before adding to this position in December 2021, I simply let the compounding process happen, but didn't accelerate it by adding additional shares. The choice to add to one of my biggest winners seems obvious in hindsight, but felt challenging over eight years given most of the metrics I track never led me to believe Microsoft's stock price would continue to rise.

Momentum is a Strong Force
Newton's first law indicates that "an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force". Extrapolating to a company's shares would seem to imply that stock prices will continue to go up unless there's a good reason they should stop or reverse course. Historically, I haven't put much faith in momentum when it comes to the stock market, and mentally have a very hard time "averaging up" my purchases. However, having seen the negative impact of averaging down on a couple of holdings (including Nortel around 20 years ago), I decided to make momentum my friend instead of fighting against it.

Lower Fear of Missing Out
After going through a phase of selling companies after I thought they became over-valued ("cutting the flowers"), that included exiting Home Depot prior to it tripling in price, managing my fear of missing out became more of a priority to tackle. Although I don't know who said it first, the idea that a company's stock price can always climb higher than you think is reasonable is something I've been trying to park at the front of my mind. Instead of trying to profit off of short-term stock price movements upward, being a long-term investor, I'm more interesting in sticking around for years when stock movement becomes indicative of business success.

Be Comfortable with Larger Positions
For years, I have tried to limit position sizes to a maximum of 5% of my portfolio. I have no idea why I used 5%, nor do I remember where the thinking came from. As I have tried to decrease my holdings over the past couple years, I started to question the 5% maximum, and now realize it's less realistic given only 35 holdings. Going forward, I'm scrapping 5%, and am comfortable if my large positions best represent my conviction and confidence in certain holdings. 

Clearly, the concept of adding to winners, and not averaging down on losers has been difficult for me. That said, I consider the implementation of the philosophy to be a journey, that will likely lead to a better destination as I follow this new path.

Sunday, January 16, 2022

14 Monthly Paying Canadian Dividend Growers for 2022

The 15th and last day of the month are special to me as I receive dividends from some companies in my portfolio that pay monthly. On the 15th, I receive dividends from Granite REIT, Canadian Apartment REIT, CT REIT and Realty Income. On the last day of the month, A&W Revenue Royalties Income Fund pays me my monthly distribution. If you get pleasure from seeing regular dividends coming into your portfolio each month, and you especially enjoy seeing them grow over time, the following table might be of interest to you. 

Using the Canadian Dividend All-Star list from December 31, 2021, I determined the monthly dividend growers for 2022. To be included, companies had to pay a monthly dividend, increase their distribution at least once in the last 12 months, and have a minimum 5-year history of annually increasing their payouts. From the 93 companies appearing on the initial Canadian Dividend All-Star list, there were only 15 who paid dividends monthly (the rest are quarterly payers). Sadly, I had to remove Chartwell Retirement Residences who had not raised their distributions in almost two years <- probably a good thing given the pandemic they have been navigating. The resulting 14 companies included nine real estate investment trusts (REITs). As the payout ratios and valuations of REITs are usually calculated based on funds from operations (FFO) or adjusted funds from operations (AFFO), looking at the EPS payout is not particularly relevant for these companies. For your browsing pleasure, here are the 14 monthly dividend payers heading into 2022:

CompanyDividend Growth Streak1-Yr Stock Price ReturnDiv Yield % (CAD)

[USD Ex = 1.2641]
1-yr DGR
3-yr DGR
5-yr DGR
TTM EPS Payout Ratio %
Granite REIT1135.30%2.94%3.30%3.30%4.40%23%
Allied Properties REIT1016.20%3.87%3.10%2.80%2.50%59%
Canadian Apartment REIT1019.90%2.42%2.10%2.40%2.60%20%
Canadian Net REIT1020.00%4.25%17.40%14.20%13.30%35%
Firm Capital Property Trust REIT1025.20%6.55%1.90%3.50%3.80%26%
First National Financial Corp100.20%5.65%14.80%6.80%6.60%64%
InterRent REIT1026.40%1.98%5.00%6.30%7.10%15%
CT REIT910.50%4.85%3.80%4.10%3.90%169%
Parkland Corporation9-13.90%3.55%1.70%1.70%1.80%135%
Savaria Corporation932.50%2.61%4.40%9.10%17.80%105%
Global Water Resources Inc.813.80%1.72%1.00%1.00%2.50%225%
Badger Infrastructure Solutions Ltd6-16.40%1.98%5.00%6.40%10.10%n/a
Killam Apartment REIT537.90%2.97%1.70%2.60%2.80%29%
Summit Industrial Income REIT572.20%2.40%3.00%2.50%2.00%9%

As with any other screen, the above list is simply a starting point for further research. Clearly, a deeper dive is required based on the average EPS payout ratio over 70%. That said, the above list had an average return of 20% in 2021, including a 3.4% dividend payout and appears to be growing distributions by about 5% yearly, all very impressive figures.

As always, if you know of any other Canadian monthly dividend payers with a history of boosting their payouts, please reach out to me so that I can correct the above list. 

Monday, January 3, 2022

Portfolio Results for 2021 & Goals for 2022

My portfolio suffered through the storm during early stages of the pandemic, as evidenced by my results from 2020  when my forward dividend income increased by $1,675, and my dollar-weighted average organic dividend growth was only 0.85%. Based on those relatively weak results compared to my historic standards, I set a modest goal to increase my forward dividend income by $3,000 in 2021, while targeting a dollar-weighted average organic dividend growth rate of 5%. As the worse of the storm passed, and the rainbow emerged, I ended up raising my forward dividend income by over $4,300 in 2021, and realizing a dollar-weighted average organic dividend growth rate of 9.23%

How did I manage to put up such lofty results? First, I'll be honest and say a lot of it was luck. One of my largest holdings, A&W Revenue Royalty Income Fund raised their payout from 10 cents per month to 15.5 cents per month during 2021, which definitely helped both my dividend growth rate and forward dividend income. When OSFI finally allowed the Canadian banks to raise their dividends and buy-back stock after their year end results, all five of my bank holdings boosted their payouts between 10.3% and 25.5%. Lastly, if you have followed my transaction journal, you likely noticed that my strategy of buying stock monthly, and adding to my winners, has helped grow both the forward dividend income and average dividend growth rate of my portfolio. 

Based on my results from 2021, and knowing I have more cash in my RRSP than I'd like right now (I received the proceeds from American Tower's purchase of Coresite's shares on December 31st), I'm aiming for a pretty lofty $4,600 increase in forward dividend income in 2022, while keeping my targeted dollar-weighted organic dividend growth rate at 5.0%. It's probably a good time to mention than I continue to count all US-dollar dividends I receive at a 1-to-1 exchange rate as if they were Canadian-dollar dividends. This impacts 15 of my 36 investment holdings. 

I made the most of my down time over the holidays and calculated some portfolio metrics for 2021 that I thought I'd share with you below.

- My internal rate of return on my portfolio in 2021 was 26.5%. Although this sounds awesome, it's a mere 4.5% higher than the 22.0% benchmark return, I get from calculating 66% of the Canadian dividend aristrocat ETF 'CDZ' and 34% of the US S&P dividend ETF SPY (the actual weights of Canadian and U.S. holdings in my portfolio). 
- The value of my portfolio rose by 33.3% in 2021, far better than the 6.7% in 2020. National Storage Affiliates and Microsoft were two of my best performers.
- The dividend yield of my portfolio was 3.4% in 2021, down from 3.9% in 2020, 3.9% in 2019, 4.2% in 2018 and 4.0% in 2017. The increase in the value of my holdings and larger amount of cash than usual at year end both drove the portfolio yield downward.
- Cash represented 4.4%, of my portfolio at year 2021, up from 4.2% at year end 2020, much higher than the 1.6% at year end 2019, and 2.7% at year end 2018. Receiving the value of my Coresite holding in cash on the last day of the year was a big driver of the relatively large amount of cash.
- My holdings raised their dividends 48 times during 2021, with Realty Income doing so 5 times, and A&W Revenue Royalties providing the largest percentage increase (55.5%).
- I conducted 23 trades in 2021, including 4 sells. This is down from 32 trades in 2020, and close to the 24 conducted in 2019. Going forward, I think averaging about two trades a month seems appropriate. 
- I ended the year with 36 positions, down from 37 in 2020, and down from an all-time high of 40 positions at year end 2019. I'd like to see this number keep declining each year.

I'll remember 2021 as a stellar year in terms of my investment results, even if it was a challenge on many other fronts. I wish all of you the best of luck in 2022 and hope everyone gets their rainbow and associated pot of gold this year!