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!