One Guy's Journey to Freedom Through Passive Income. A Dividend Growth Investor. My name is Mike and I’m the author of The Dividend Guy Blog since 2010. I didn’t create this blog, I bought it because I loved it! Yes… I buy blogs amongst other things!
Back in September 2017, I started doing webinars about various investing topic. This reminds me of my good old times when I was working with clients. While I can’t and don’t provide buy/sell recommendations or personal financial advice during those sessions, I still enjoy the interaction I have with other investors. As a private banker, I enjoyed doing conferences and “teaching” how the investing world works. Now, I can reach thousands of people instead of a few hundred clients. If you haven’t attended to any of my webinars, you should register to my free newsletter, you will love them!
I did an exclusive webinar to DSR members not too long ago. The topic was to get rid of the buy/sell struggle. You know the second guessing feeling you have before you pull the trigger? The doubts that make you suffer from paralysis by analysis? This is what I was addressing. As an introduction, I was telling my attendees that I received my pension plan commuted value back in September 2017. I received $108,000 back then… yeah, that’s a lot of cash for a 36-year-old kid! Then I asked them if they thought it was a smart move to invest all my money back then… At an all-time high market. Guess what? Lots of attendees told me it wasn’t a smart idea. As I was saying… buy/sell struggle. And as the popular song goes…
My experience in investing 100K during an all-time high market
When I received my money, here’s what the market looked like:
Over the past 5 years, the S&P 500 almost went up all the time. There were 2 small speed bumps in 2015-2016 but it quickly bounced back. As for the Canadian market, it was a little bit more complicated. The oil bust and the low prices of commodities slowed down investors’ enthusiasm. While there were some fluctuations, the TSX was still up though… So as many readers of this blog were telling me to wait and see where the market would go back in September, I decided to invest all my money by the end of the year. Interestingly enough, even after the small market correction (which has already disappeared), it was worth it:
As you can see, both markets are still up since September. Even better, my own performance (as of February 9th) are a lot better than this:
That’s right, I’m showing a 5.1% return on my Canadian portfolio and nearly 11% for my US investments. My numbers were even better the week before the crash. Therefore, what was the reason to wait again?
Wait for the crash
The crash? What crash? Let’s get over the crash myth once and for all. The rationale behind waiting for the next market crash before investing could be detailed in a few points:
02 Investors who put their money in the market in 2009 show amazing returns today – yes
03 The next crash will come – yes
And then you sit and wait, and wait and wait. You look like this poor girl staring at her phone and desperately waiting for her crush to text her. If the guy is in love, he will eventually text her. So what is the point of sitting on your bed waiting for his text message? Just go on, live a normal life and you smile when the text arrive. Don’t stop living and wait instead. This is why we should add a few more points to the previous rationale:
04 The more you wait, the fewer dividends you get paid – yes
05 The more your wait, the more expensive stocks become – yes
06 The more you wait, the less chances stocks will get back to their previous crash level – yes
I like to use 3M Co (MMM) as an example to illustrate how waiting is bad for your portfolio. I wrote an article about 3M (MMM) back on November 2nd 2016 here. If you look at the comments, many investors adept of FAST Graph were saying the entry point for MMM was $155 (the stock was trading around $165 back then). Then, many investors are waiting to catch MMM at $155 while I bought it around $165.
The overcome here is catastrophic. Waiters lost a 40% loss on their investment. Even worst, they missed $6.06/share in dividend (assuming you missed the November 2016 payments). At $165 per share, this represents 3.67% of your investment. But there’s more to the catastrophic story. MMM is currently trading around $235 (as at February 16th when I wrote this article). In order to drop back to $158.94 (the November stock price of $165 minus dividend paid), MMM must lose 32% of its value. While this is possible, it is very unlikely. As you can see on the following graph, MMM stock dropped by -31.8% (wow… it’s like I’m making numbers up!) during the worst market crash ever:
An even then, this graph shows only the stock price return, it doesn’t include the dividend. Therefore, only 15 months after you thought that MMM was overvalued at $165, it is virtually impossible to catch it back at this price… EVER.
There is always a possibility that MMM drops at $150, after all, everything is possible, right? But on which side do you wish to be? On the side of investors getting paid quarterly and never have to worry about the market noise, or on the side of investors that are sitting on the bench and watch a very good game without playing.
If what you just read makes sense, I think you should definitely sign-up to my newsletter and get my exclusive webinars for free, don’t you think?
Last week, I discussed the difference between a retirement portfolio and a retiree’s portfolio. There is a big difference between investing for the future and withdrawing from this investment to live. I put my portfolio on fast forward and took a look at trades I would do to make the switch toward a retire-ready portfolio. I was quite surprised to see how different both portfolios were.
The point is that you must think about withdrawing money once you retire. Therefore, you need cash ready to be withdrawn, and you need a strong portfolio paying healthy dividend to support your lifestyle as much as possible. In a perfect world, we would all live off our dividend and give this well-built nest egg to our children. But the reality is otherwise.
My top 10 Canadian “Retirement” Stocks
To conclude this reflection on portfolio management, I’ve done some research and handpicked my top 10 Canadian dividend stocks for retirees. I could have selected the 6 big banks, 3 telecoms and 1 energy stock, and I would have been done within seconds. I’m actually starting with 2 banks and 2 telecoms, but I tried my best to build a solid portfolio with more options.
Royal Bank (RY.TO) 3.61% yield
I know, I didn’t want to take only banks, but a Canadian dividend portfolio isn’t one without a few banks, eh? Over the past 5 years, RY did well because of its smaller divisions acting as growth vectors. The insurance, wealth management and capital markets pushed RY revenue. Royal bank also made huge efforts into diversifying its activities outside Canada. Canadian banks are protected by federal regulations, but this limits their growth. Having a foot outside of the country helps RY to reduce risk and to improve growth potential.
National Bank (NA.TO) 3.88% yield
I promise, this is the last bank of the group! I just couldn’t ignore this fast-growing regional bank! NA aimed at capital market and wealth management to support its growth. Since NA is heavily concentrated in Quebec, it concluded deals to do credit for investing and insurance firms under the Power Corporation (POW). Branches are currently going through a major transformation with new concepts and enhanced technology to serve clients. While awaiting the results, it seems wise to invest in digital features to reach out to the millennials and improve efficiency.
Telus (T.TO) 4.54% yield
Telus has been one of my favorite Canadian holdings since I established my 7 rules of dividend growth investing several years ago. Telus has been showing a very strong dividend triangle over the past decade. The company can grow its revenues, earnings and dividend payouts on a very consistent basis. Telus is very strong in the wireless industry and now attacks other growth vectors such as the internet and television services.
BCE (BCE.TO) 5.40% yield
BCE doesn’t have the same growth that Telus had over the past 5 years, but it is a very solid dividend payer. When you have the possibility to invest in a strong yielder as BCE and still hope for a small stock appreciation growth, you must take a hold of it. BCE shows a well-diversified business model and will continue to generate strong cash flow in the future.
Emera (EMA.TO) 5.67% yield
Emera is a very interesting utility now that it has completed the purchase of Florida-based TECO energy. EMA now shows $28 billion in assets and will generate revenues of about $6.3 billion. It is well established in Nova Scotia, Florida and four Caribbean countries. This utility counts on several “green projects” with hydroelectricity and solar plants. This decreases the risk of future regulations affecting its business as the world is slowly moving toward greener energy. Finally, EMA completed their Maritime Link project within its time limit and budget! I like when management can run large projects without going overboard with unexpected expenses.
Fortis (FTS.TO) 4.25% yield
Fortis aggressively invested over the past few years resulting in strong and solid growth of its core business. You can expect FTS revenue to continue to grow as it is expanding. Strong from its Canadian base business, the company is able to generate sustainable cash flow leading to 4 decades of dividend payments. The company has a five-year capital investment plan of approximately $14.5 billion for the period 2018 through 2022, up $1.5 billion from the prior year’s plan. Chances are most of its acquisitions will happen south of our border.
Enbridge (ENB.TO) 6.25% yield
Enbridge clients enter into 20-25- year transportation contracts. The company is already well positioned to benefit from the Canadian oil sands (as its Mainline covers 70% of Canada’s pipeline network). Now that is has merged with Spectra, about a third of its business model will come from natural gas transportation. The company has a handful of projects on the table or in development. Among those projects is the Line 3 replacement. The company expects the completion of this project in mid-2019. There are still regulatory processes to be completed, but this one could become a real growth driver.
Lassonde Industries (LAS.A.TO) 1.00% yield
A 1% yield in a retiree portfolio? Really? As much as I considered higher yielding companies, I think it’s important to add better diversification across this selection. Lassonde’s wide variety of brands enables it to occupy an important space in grocery stores. There aren’t many consumer products in Canada with such great metrics. LAS will continue to surf on many healthy products and to generate enough cash flow for future acquisitions. LAS recently completed a cost reduction program which should result in margin expansion. Lassonde may seem fairly valued according to the DDM, but this should change when management announces another dividend raise in mid-2018. Speaking of which, the dividend payment is healthy, and you can expect double-digit growth for the next decade.
CT Real Estate Investment Trust (CRT.UN.TO) 5.53% yield
I really like Canadian Tire in the Canadian investment landscape. Since CTC.A.TO pays only 2%, I decided to go with its spun-off REIT hosting their stores instead. Canadian Tire is a strong retailer with some unique advantage to fight against online giants such as Amazon. First, it owns several of its brands (and it just bought Bauer last week) providing them the exclusivity and full control over a good part of their products. Second, Canadian Tire is a loved brand by Canadians and will continue to attract many clients. Third, it also offers an online selling platform to ensure it doesn’t miss the internet boat. For all these reasons, CT REIT is probably one of the safest retail REIT in Canada.
Cineplex (CGX.TO) 5.21% yield
Cineplex had a difficult 2017. The company is working on transforming its business model toward a complete entertainment service instead of highly depending on Hollywood. As Cineplex evolved its business model toward more premium services, it enjoys not only a huge market share, but is able to generate interesting margins. Cineplex is also in line with its time with a successful online streaming platform. Finally, CGX is gradually building a serious bond with its clients through the SCENE loyalty program. From 600,000 members in 2006, SCENE now counts 7,9 million members.
This portfolio would generate a 4.50% yield. This means a retiree with $1M in hand could have $50K in cash to cover the upcoming year and receive $42,750 per year in dividend. Most companies would likely increase their payout enough to keep up with inflation. Therefore, a young retiree could easily live with $50K per year for the next 30 years with such a portfolio.
To be honest, I would probably increase the number of holdings to 30 for a $1M portfolio. 10 companies is not enough to ensure a full diversification. Imagine that Cineplex continues to go wrong. With a 10% weight, it would certainly affect our young retiree’s sleep. Since it’s not easy to find generous companies in different sectors solely in Canada, I’ll dedicate my next article on the top 10 U.S. retirement stocks.
What do you think? Do you have any holding that wasn’t part of this list?
Disclaimer: long all stocks mentioned besides CRT.UN in my DSR portfolios
In my last article, I discussed the first steps to transform a retirement portfolio into a retiree’s portfolio. Today, I’m going to press fast forward on my current pension account and see what changes I would make if I was going to retire tomorrow. Let’s imagine for a minute that I wake up at the age of 64 and in 364 days I will retire and expect to live another 20. Let’s see what can I do to make my portfolio “retiree lovely”.
Let’s start by looking at my current holdings… not retiree lovely!
Let’s pretend that I rebalance all my holdings to have equal value for each position. Let’s assume I have $1M invested and I need to generate $50,000 per year. I also want to keep up this $50,000 with a 2% inflation rate.
Therefore, my average yield would be 2%. I have 2 stocks not paying dividend and 3 paying 1% or less. This is a problem if I’m going to retire tomorrow. As a young retiree, I will want to earn a lot more in dividend as I will not aim at selling all my precious shares to generate the bulk of my income.
The second problem I have is the concentration in some sectors:
I obviously have an important concentration in techno and consumer cyclical stocks. While those sectors are perfect for what I want to achieve now (e.g. growth), they are more likely to provide additional volatility too. As a young retiree, I don’t want that. Canopy Growth (WEED.TO) is considered to be part of the healthcare sector… let’s just say I don’t have any in this sector!
Now… let’s see how I can modify my portfolio to A) generate higher yield and B) diversify my portfolio in order to avoid a big drop at a bad moment for me.
Which stocks am I dropping?
To be honest, when my friend pitched me the idea of making a “retire now” portfolio, I thought it would be easy. I thought I would simply change a few stocks and then write my article within an hour. But it turns out that changing an existing portfolio toward an income generating machine isn’t that easy.
My first goal was to raise my average yield over 3%. My second goal was to change my sector allocation to make sure I would not suffer from a crash due to a single industry.
Procter & Gamble
United Parcel Services
As you can see, I’ve made a lot of changes. The first thing I did was get rid of low yielding stocks:
Yup… that’s 9 stocks out of 20… nearly 50% of my portfolio! You can see how having so many low yielding stocks could be problematic when you try to generate income! I also “sold” one position to have the equivalent of 5% in cash.
I’ve added companies with higher yield, but that still show positive dividend growth over the past 5 years. National Bank will increase my exposure to Canadian bank. Emera will boost my average with a 5%+ yield. BCE and Telus are 2 great yielders that are part of an oligopoly. This is perfect for stability. I decided to sell Magna and replace it with TFI international as I rather get a higher dividend yield from a trucking company. On the US side, I’ve played it safe by adding classic dividend payers with Procter & Gamble, 3M Co and Pepsi. The new sector allocation is a lot more diversified as no industry represents more than 16% of the portfolio:
The new portfolio is “Retire Ready!”
Imagine that I have $1M in my portfolio. I now have 19 stocks for $50,000 each and a $50,000 in cash. This allows me to withdraw money from my portfolio on a monthly basis without worrying about the current state of the market.
The remaining $950K invested would generate roughly $30K per year. This amount will certainly keep up with inflation as all my 19 stocks are known to increase their dividend on a regular basis. Each year, I will only have to sell for $20,000 or 2% of my portfolio to finance my lifestyle. You don’t need to be a math geek to know that you will have enough to live for more than 20 years with this kind of plan.
This was a fun exercise and I realized it was more complicated than I thought. Starting from an existing portfolio aimed at growth and transform it into an income machine isn’t an easy task. I’m sure you have some suggestions of other stocks I didn’t include in this portfolio.
In the last part of this series, I will make a list of my Top 10 “retire ready” stocks for each market. Stay tuned!
A few months ago, I’ve received over 100K as the commuted value of my pension plan started working on my retirement portfolio. As the market was trading at an all-time high, I still decided to invest the full proceeds. Keep in mind I’m only 36 and will not be touching this money for a while. A friend of mine asked me if I had invested the money differently if I was about to retire. That’s a very good question. How do you invest your money as a retiree? Do you have to make anything different? Do you have to modify your retirement plan once you have crossed the finish line?
In the following three articles, I’ll be explain how I would change my portfolio if I was about to retire. Today’s part is about the difference between a retirement portfolio and a retiree’s portfolio.
What is the difference between a retirement portfolio and a retiree’s portfolio?
One may argue it’s the same. One day, you are in your 30’s, you sit down with a financial planner and you build a retirement plan. You start saving and you follow the course for 30 some years. Then, you wake up at 65 with a big pile of cash to manage in your portfolio. Do you keep the course? What is so different between having a retirement portfolio and a retiree’s portfolio?
A retirement portfolio is first and foremost about growth. The goal of a retirement portfolio is to grow large enough to finance a big part of your life without having to work. The advantage of the retirement portfolio is that you have several years in front of you. Market cycles, bears, bulls and goats don’t matter much as you have plenty of time to recover from it. Therefore, you can build a solid core portfolio and still have a part of your money invested into growth stocks. Companies like Amazon (AMZN), Helmerich & Payne (HP) or Canopy Growth (WEED.TO) are suitable for a retirement portfolio. However, their level of fluctuation may indispose many retirees.
A retiree’s portfolio is first and foremost about stability
The last thing you want as a retiree is not sleeping because your portfolio value goes up and down or because your dividends are being cut. Therefore, it’s not the time to hold AMZN, HP or WEED.TO in your portfolio anymore. Or at least, it is time to reduce those positions to less than 10% of your portfolio.
I think the most important thing when you build a retiree portfolio is to aim for a “stress-free” portfolio. For some, this will go through increasing the portfolio of fixed income. From my experience, a 75% fixed income and 25% equity portfolio is probably the best performing “safe portfolio”. The problem today is that fixed income assets aren’t paying much interest.
If I was to retire today, I would definitely keep all my money invested in stocks. The difference is that I would select more “bond-like” type of stocks. Companies that don’t move much over time, but that pay solid dividend through times. A few examples could be the classic Procter & Gamble (PG), 3M Co (MMM), Johnson & Johnson (JNJ) or Coca-Cola (KO).
The importance of yield
In an ideal world, one would never touch its capital. If you could live off, let’s say, dividend (ah!), that would be the perfect retirement plan. But in order to do so, you would need about $1,5M to $2M in order to generate about $50K per year and keep up with inflation. Yeah, I know, you can generate $50K per year in dividend with 900K invested in high yielding stocks, but good luck keeping up with inflation! Many people forget that 50K today won’t worth the same thing in 20 years from now. Using this cool inflation tool, you can see that 50K back in 1998 now worth 76K.
So yes, the yield is important, but it’s not everything. Low yielding companies such as Disney (DIS), Lowe’s (LOW), Canadian National Railway (CNR.TO), Alimentation Couche-Tard (ATD.B.TO) or Lassonde Industries (LAS.A.TO) will be discarded and replace by higher yield stocks. If I had to build a retiree portfolio today, I would probably shift a good part of my money toward stocks with a more generous yield. My target would be between 2% and 5%. In my opinion, anything over 5% may be considered risky. Plus, there is very little chance a 5%+ yielder is able to increase its dividend and keep up with inflation over time. And please, don’t look at the past 5 years to give me examples. We are in a middle of a very strong bull market and a growing economy. Everybody looks good on their Prom day. Try to take pictures of them the following morning
You need a withdrawing plan
As I just mentioned, chances are you will not have 1.5M$-$2M to live off your dividend only. If it’s the case, you will need a withdrawing plan. In fact, I would suggest you meet with a fee-based financial planner (CFP) that will write down a retirement plan. The advantage with a fee-based advisor is that he is not supposed to sell you anything. He is just supposed to write down a plan and charge something between $1,000 and $2,000 for it. If you have $800K to invest, see that 2K expenses as a one time management fee of 0.25%. It’s a pretty cheap price to make sure you know what, when and how to withdraw your money!
The year before my retirement, I would most likely leave all my dividend payment in my cash account and start selling a few shares of each position in order to cover for a full year of income. Therefore, if I expect I need $50,000 per year at retirement, I would make sure I have $50,000 in cash on day 1 of my retirement. The reason why I would do this is to make sure I have enough money to manage future withdrawals depending on how the market goes. Imagine you are fully invested and count on selling shares on a monthly basis. Then, the market crash by 30% and you are forced to sell lots of shares at a loss to finance your lifestyle. If you have a year worth of retirement in cash, you can wait until the storm passes and start selling again. Most market correction last less than 2 years. Even during the worst crash of the history, you could have waited a year before starting to sell and be in a better position:
What should be your main concern while building it?
I think the dividend yield becomes more important once you are retired. However, I would still focus a lot more on dividend growth perspectives. The reason is quite simple; if a company is able to increase its dividend for the next 10 years, chances are the stock will do well. A company that is not able to increase its payouts is a company that needs all its money to operate. Therefore, it leaves little room for any bad lucks or economic downturns.
I would write down my investment thesis for each position with a clear focus on dividend growth and future growth vectors. If I fail to explain how the company will grow in the future, I will simply ignore it and focus on another one.
In part two of this series, I will look at how I would transform my pension account into a retiree account. Let’s see how my portfolio would look like once I’m done with the transformation!
If you are a regular of this blog, you know that each year, I pick 30 stocks to beat a dividend ETF in the upcoming 12 months. Each year, I select 20 U.S. and 10 Cdn stocks and try to build a portfolio. So far, I have a great batting average where I had failed to beat my benchmark only twice (one on each market) since 2012… That was before 2017. Unfortunately, I failed to beat both markets last year. I went a little too aggressive on both selections and 1 pick in each portfolio nailed my results.
A look at 2017 performances
As I just mentioned, my performance in 2017 were below my expectations. When I look at my overall results, a single pick in each portfolio crushed my hope of beating my benchmark.
As you can see, I lagged my benchmarks by 1.63% and 1.29%. When you look at the overall performances, I have picked 11 companies out of 20 (55%) that beat the VIG and 6 companies out of 10 (60%) that beat the XDV. By taking off the worst performing stock in each portfolio (MHLD and CGX.TO), I would have beat both benchmarks by more than 1%.
This is not an excuse, but it shows you how easily you can make one mistake in your portfolio and underperform the market. On the other, I couldn’t really complain when my portfolios did 20% and nearly 10% return last year. At least, both portfolios beat the market:
Now, what about my 2018 book?
I have a feeling that my book is getting larger year after year. It’s the second issue with 2 pages analysis per stock. Each pick is represented in a similar way that we do at Dividend Stocks Rock with our stock cards.
I kept the idea of having 20 U.S. picks and 10 Canadian candidates. The whole book is over 15,000 words across 65 pages of content. Here’s an example of what you will find over there:
I don’t only love Starbucks coffee; I love the whole company and its business model. SBUX is one of the rare restaurant success stories. Founded in 1971 by the opening of the first coffee shop at the iconic Seattle Pike Place Market, it now operates 22,519 stores in 75 countries. Starbucks is known for its stellar customer experience and its variety of beverages. It built a reputation of listening to its customers and using technology (Facebook, Twitter, mobile payment) to continuously improve its in-store experience.
I first discovered SBUX as an investment when I compared it to McDonald’s (MCD). I’ve discovered a company that is moving fast (opening new stores everywhere), that is flexible (through its various menu offering and stores size) and whose sole purpose is to adapt to please its clientele (through their mobile app, membership program and social media). There is a reason why Starbucks has built an iconic brand in such a short period of time; because it is willing to do whatever it takes to stay close to its customers’ ever evolving tastes.
SBUX growth potential in the U.S. is nearly nonexistent. There is a limit to the amount of coffee that can be purchased by an American! Therefore, if the company faces headwinds in China or India, its growth potential will be highly reduced. The stock price is still at a PE of 28 (forward PE at 26.70); a loss of interest from the market could also hurt the valuation temporarily.
Dividend Growth Perspectives
Just by saying that management increased their dividend by 25% toward the end of 2017 is enough to convince me. SBUX shows a low payout can cash payout ratios along with a robust double-digit dividend growth rate over the past 5 years. The company is generating enough cash flow to fund both its stores’ growth and its aggressive dividend policy. SBUX is a keeper for years.
Starbucks’ future is still bright. The company is currently growing fast in China and there is no reason it won’t continue to do so. Therefore, while SBUX can continue to optimize their U.S. offering (store sizes, menus, etc.), it will open new stores in China where 1.3 billion people will start enjoying high quality coffee. The dividend yield is almost at 2% now with a great perspective of payout increase during their next quarterly report.
Discount Rate (Horizontal)
Margin of Safety
Upon management’s latest dividend increase announcement, we have decided to increase the 10 year dividend growth rate to 12%, and reduced the long term rate to 7.50%. SBUX may scare you with its high PE, but keep in mind that the company will continue to grow at a rapid pace throughout the next decade.
ANDREW PELLER (ADW.A.TO)
Andrew Peller (ADW.A.TO) owns wineries in British Columbia, Ontario and Nova Scotia. It doesn’t only produce its own wine, but also markets it along with other products. ADW owns several brands like Peller Estates, Trius, Hillebrand, Thirty Bench, Sandhill, Copper Moon, Calona Vineyards Artist Series VQA wines and Red Rooster. Currently the company has an estimated 14% share of the total wine market, and a 37% share of domestic wines. The company is known to grow its revenues through acquisitions. Since 1995, management invested over $114M to purchase 14 vineyards.
The company has built a solid relationship with provincial liquor stores, but also maintains company-owned retail stores in Ontario. Andrew Peller shows a strong and steady growth of its sales mainly due to the creation of multiple products, a strong marketing program, and several acquisitions. The Canadian wine business is doing well and ADW continues to ride this bullish trend. Its recent alliance with Wayne Gretzky vineyard will not only be good for wine sales, but will also open the door to whisky production.
The wine industry and the domestic and international market in which the Company operates are consolidating. While this could be a great opportunity, it also brings stronger competitors to the table. ADW must continue investing in its brands to keep its market share. Since Wine is a luxury product, any economic downturns would affect ADW sales. For now, I don’t think it’s an issue as the Canadian economy has proven to be more resilient than anticipated.
Dividend Growth Perspectives
Wow… such a low dividend yield for this wine company. Does it even make sense to invest? Well, if I sell you that while the yield went down from 3.75% to 1.28%, the stock price surged 260% over the past years, would you be more lenient? The dividend payment also increased by 36% or 6.34% annualized growth rate during the same period. After investing massively in their brand and new wines, ADW will most likely reward shareholders with another dividend raise in 2018.
In all honesty, ADW seems a bit pricey right now. When you find a company growing at this pace, it’s hard to not pay a premium. However, it seems the wine isn’t that pricey these days. It could be a good timing to buy some bottles. I think management is building a great future for this company with constantly growing through acquisitions and surfing on the growing wine trend in Canada. An investment in ADW, is buying the leader of a growing market, you can’t go wrong.
Discount Rate (Horizontal)
Margin of Safety
Where Can You Download the Book?
I think that getting the stock picks is great, but learning how to select those companies by yourself is the real deal. For that reason, I don’t sell the Best 2018 Dividend Stocks book alone anymore. I package it with the Dividend Toolkit. The toolkit will give you the methodology to pick the right companies and the Best Dividend Book will have done the job for you this year. Isn’t that cool?
Back in September, I’ve received slightly over $100K as a result of the commuted value of my pension plan. I decided to invest 100% of this money into dividend growth stocks. Each month, I publish my results. I don’t do this to brag, I do this to show you it’s possible to build a portfolio during an all-time high market. The market will crash… eventually. In the meantime, I’d rather cash some juicy dividends!
I started this pension portfolio in September with the sum of $108,760.02. As of February 2nd my portfolio shows a total value of $118,769.64 (after my US portfolio converted into CAD). That’s right, I lost about $6,000 in a single month… or should I say a single week? The market has been quite hectic over the past few days:
The fact that I’m investing in dividend growth stocks doesn’t protect me from market fluctuations. Many investors think that because they invest in blue chips sharing their wealth, they have found a perfect shelter from market crashes. I’m sorry to burst your bubble but fluctuation shelters are out of stock for now.
However, there is one thing a dividend growth portfolio provides you: the assurance of receiving an increasing pay cheque each month. In just one month, Lazard (LAZ) announced their special dividend of $1.30 per share. That will be another $132.60 USD in my pocket in a few weeks. After increasing their dividend payment in November from $0.165 to $0.195, Visa (V) is back in February with another increase! Management increased their dividend to $0.21. This is what happens during market fluctuation; you still get paid. Let’s take a look at my marvels this month:
Canadian portfolio (CAD):
Canopy Growth Corp
U.S. portfolio (USD):
United Parcel Services
The largest part of the money lost during the past few weeks was generated by my “mystery stock”. The same one which was +40% at one point in 2018… Canopy Growth (WEED.TO).
BOUGHT 185 Shares of Canopy Growth (WEED.TO) @ $30.06
I know…. WEED is definitely very far away from any dividend growth investors’ strategy. I promise, this is the last non-paying dividend stock I’m buying after making trades on Amazon (AMZN) and Shopify (SHOP.TO). But for the record, SHOP.TO is up 22% since October (when I bought those shares) and AMZN (which is part of my RRSP account) is up 31%.
While WEED had a crazy start, the whole marijuana industry is taking a deep dive since then. In this case, my investment thesis is quite simple. The pot industry should generate about $5 billion in sales on Canadian soil per year. While there are lots of uncertainties around legislation and how it will play out, there is definitely strong potential there. I decided to pick the largest producer in this industry as I like having leaders in my portfolio. Canopy Growth is multiplying its partnerships to make sure it has large production capacities.
I’ll be honest, investing in the pot industry is a gamble. I can afford to risk $5,500 on such a trade. My total retirement accounts which include this pension account and my RRSP account worth nearly $200K. Therefore, I have less than 3% invested in a risky business. I would never add more money to this position as I certainly don’t want to jeopardize my whole retirement in the name of greed. Still, we can have some fun trading!
Dividend Income: $93.45
When I reported my first dividend income report in October, I completely forgot that the dividend that was paid as in USD. I realize that now since I received both CAD and USD dividend this month. Therefore, from now on, I will post the dividend received by each company in their currency, but use a total dividend payout in CAD. The conversion rate will be mentioned at each time for transparency purposes.
Canadian Holdings payouts: $18.68 CAD
Andrew Peller: $18.68
U.S. Holding payouts: $61.30 USD
Total payouts: $93.46 CAD
*I used a USD/CAD conversion rate of 1.22.
In 4 months, I’m already at $413 received. I already know that February will be a great month since Lazard (LAZ) will send me a solid dividend of over $100.
During the first negative wave on the market in the past 2 years, I easily find peace with my dividend payments. Besides WEED, chances are I will hold the rest of my portfolio for the next decade and over. Therefore, even if the market drops by 15% in 2018, it won’t change anything. What about you? Are you nervous about the current market drop?
For many, 2018 will be the year of the crash. Those Black Swan Fans have been praying for this over the past 3 to 4 years. They have been sitting on the sideline for so many years that they don’t even look at how much they have lost by not investing. In fact, it’s probably too late for them anyway. Even if the stock market crashes in 2008, it will only get back to the 2013 to 2014 level!
Both for those like me who stayed the course of their investing strategy throughout the years, is there anything you should change for 2018? Is there a special tweak to be made on your strategy? If you are comfortable with your investing strategy, I will tell you upfront to not change anything. But if you are uncertain or if you have not yet developed a real investing strategy, here’s my investing guide for 2018 in three lessons.
01 Earnings seasons will be rocky – how to prepare
We have seen this phenomenon a few times back in the fall; companies declare strong earnings and their stock jumps by 10% the same day. Fail to please the market and your stock drops like a rock as well. Let’s take IBM (IBM) and Hasbro (HAS) for example.
You can see clearly when both companies disclosed their third quarter. As the market keeps trading at higher levels each week, you are going to see such movement more often. For one reason or another, investors will take profit or jump on an occasion upon earnings reports. Here’s how you can manage volatility.
First, when you hold a stock jumping or dropping – don’t do a thing. When you open your online portfolio and you see a massive movement, the first reflex is to jump on your screen and look at how much you made or lost. Ignore the noise (e.g. price variation) and head toward the company’s earnings press release. This will give you a better idea of what happened, and you will get additional explanation. If you are lucky, you will even have slides to look at in order to grasp what happened with the stock. Then, you take this “new” information and validate your investment thesis. If you haven’t written an investment thesis, here’s an example of what it looks like. If the company meets your investment thesis, keep it. If it doesn’t, drop it. But don’t let the price fluctuation get in the way.
Second, if you don’t hold stocks jumping or dropping – don’t do a thing. A company free falling attracts a few vultures along the way. You may be catching a stock that will rapidly rebound, but keep in mind that catching a falling knife is risky. It’s not because XZY used to trade at $40 and now trades at $31 that it is a good deal. History is filled with companies that never bounced back. General Electric (GE) will become a great example of that. If you don’t hold the stock yet, it’s the perfect timing to take a second look and determine what would be the reasons to buy it (your investment thesis). Don’t start thinking “darn! IBM is up 10%, it’s not the time to buy it anymore.” I have a secret for you; +10% is nothing.
02 +10% is nothing, don’t let your paper profit blur your judgement
I wrote about the triple digit club not too long ago. Those are stocks in my portfolio showing over 100% in return. I’ve encountered many investors in my life that use a “trading rule” such as:
“I’m selling each time a stock jumps by 30% in my portfolio.”
If you follow such rules, you probably emptied your portfolio in the past 3 years. I started managing my children’s school fund (RESP) about 2 to 3 years ago and most of my holdings show over +50%. Is it a reason to sell? Should I cash my profit? I’ll sound like a broken record, but keep your stocks as long as your investment thesis remains.
Do you know the greatest power of investing? It’s called compounded interest. In other words, it’s making money on your own profit. If you let your stocks ride the bull market and hike their dividend year after year, you will capitalize their return and invest profits/dividend into more dividend growth stocks. Forget about the double-digit return, you will get a triple digit total return at one point. 2018 is not the year to take your profit away. 2018 is the year where you continue to make money.
03 Don’t buy just to be part of the gang
One reason why many DIY investors lose money on the market is because they sell when the market is down. The other reason why they lose money is because they buy when it’s high. You keep reading on this blog that “overvalued doesn’t mean anything” and that “waiting on the sideline is not a good idea.” I continue to believe that.
However, if you have been waiting on the sidelines, this doesn’t mean you should invest all your money in the stock market in 2018. Don’t invest to be part of the crowd. Invest because you have found something interesting. Look at a company like Starbucks (SBUX) which has been dead money for the past 2 years.
SBUX is an example of a company that may drag the market but is still interesting. There are definitely other companies in the same situation. They are obviously harder to find today than they were back in 2009, but it doesn’t mean you should not invest your money.
If you have been sitting on the sideline for many years, don’t wait for the next crash. Start entering slowly in the market with careful buys. Don’t try to catch falling knives like GE, and don’t try to catch this month’s market darlings like Walmart (WMT). Both types will burn your hand. However, you can find solid companies that have been ignored by the market’s greed. The DSR buy list is a great place to start looking for stock pick ideas.
Finally – Make sure you know why you invest
When the market is that high for such a long time, I think the most important thing is to remind yourself why you invest. Define your investment plan, build an investing strategy, and get back to this document once in a while. Are you in the market to retire in 20 years or to earn retirement revenues in the next 6 months? Are you funding your young children’s future education or are you buying a house in 2 years? Do you want to beat the market or meet your investing plan? For the last question, I hope you will focus on the latter…
I don’t take much time to share my life as an entrepreneur these days and there is a very good reason for that: I prioritize. I hate when people say they don’t have the time to do this or that. I know that I wrote that I would update my other site, Chaos 1981, with my entrepreneurial journey, but I have just let it slide for the past quarter. The reason? I had plenty of time to work on this site… but I preferred to use it elsewhere. Since I don’t expect to use my time on this site for the upcoming quarter either, I thought it would be nice to let you know how it is when you work from home. Let’s start with the great news…
My favorite line since I started to work full time back in July 2017 is the following:
“Man, this month was better than last month…”
I’ve been using this line during each of my monthly meetings with my partner. So far, we have consistently beaten what we made last year. Each month is better than last year’s month. I’ve already written about my goal of doubling my revenue in 2018 from 2017. January 2017 was my second best month last year. I can tell you upfront that I did more than double that this year!
Of course, some of you received emails about my membership promotion during the 1st week of the year. I assume this is the small price you have to pay to register for my free newsletter. I will also keep offering lots of free content and great webinars and when I receive emails like the following, I think I’m doing a good job at building my membership site:
“I have just acted on something you mentioned and that I should have done along time ago. Your mention of “stop/sell” approaches that limit losses is something I have now done with all of our stocks. I have issues “stop/limit” orders on all holdings so my exposure is greatly reduced.
Memories of KMI make this very helpful.
My guess the value of our subscription has likely been covered already!
Thanks for your help!”
Dividend Stocks Rock is not just my business; it is a real tool helping real people making real money. In February, we will host three exclusive webinars for our members. No sales pitches, no promotions, just great content.
Web TV Interview
Back in December, I had my first live Web TV interview at Cheddar. I was nervous and I wasn’t fully comfortable. The interview went super-fast in my head and I was surprised by some questions. I’m telling you, I have great respect for those who do live interviews all the time!
But it appeared that I wasn’t that bad! Last week, I had the opportunity to do a radio interview and another appearance at Cheddar TV. This time, I think things went very well and I truly enjoyed my experience. You can see it here. Doing live webinars has helped me to control my stress and be ready for any kind of questions. The more I study the market, the more I write about it, the more I can articulate my thoughts and share them with an audience.
But if you get contacted by any media, don’t get your hopes up. The exposure brings a little bit of traffic and boosts your credibility, but it doesn’t change your life. You also have to be ready for any drawbacks. Imagine if you fail to answer properly during your interview because you are too nervous… that could cause your credibility to take quite a hit! I take each interview opportunity as a means to learn and improve my ability to discuss financial topics. So far, I certainly enjoy this part of my job!
300 Orcs down…
What do orcs have to do with an entrepreneur’s life? In my opinion, everything! Last week, I had a very productive and demanding Monday. I met with my Business Core Manager for a full day of brainstorming and process review. Then I met with my partner for our monthly meeting. During that day, we accomplished so much in so little time.
Then, on Tuesday, I woke up and felt completely dead. I had no energy whatsoever. I felt like I had a cold, but with no symptoms whatsoever. For three days, I couldn’t do much. I just didn’t feel like it, I was just very tired. But instead of doing “face time” in front of my computer all day and pretending I was working, I just decided to “call it a day”, went downstairs and I started my war against Orcs in Shadow of War, a very cool PlayStation game.
I don’t write this to brag that I’m making money while I’m playing video games. I don’t want you to believe that being an entrepreneur is easy either. It is quite the opposite. However, I want to highlight that, too often, we keep working even though we shouldn’t. Taking time to rest doesn’t make you a lazy person… it makes you a smart one!
Taking a three-day break in the middle of the week gave me enough time to “recharge my batteries” and attack Friday like there was no tomorrow. I obviously didn’t have enough time to do everything I wanted last week. But I was back “on fire” for the last day of the week and I know that this week, I will crush it.
So next time you don’t feel well, don’t push yourself for nothing. Take a break and come back stronger. Come play some Orcs with me in the meantime!
Last week, I wrote an article in reaction to Rob Carrick’s praise for ETF investing. I showed in this article that I was able to beat ETF indexing with dividend growth stocks on a constant basis. Am I a genius? Am I ready to become the next Warren Buffett simply because I beat the market for a few years in a row? I don’t think so. In fact, I think I’m far from this point. The most important factor explaining my performances has nothing to do with my investing abilities or knowledge. The most important reason why I beat ETF investing is because I stick to my investment strategy. There are various reasons why a single investor can hope to beat the Street Pros. There are also many factors helping dividend growth investors to beat ETFs. Here are my top 3:
01 You don’t get to decide
I guess this is the reason why so many people decide to pick their own stocks to build their portfolio: they like to decide and to remain in control. Beyond the taste of independence DYI investing can give you, it may also help you to beat several ETFs. The problem with ETF investing is that stocks are picked for you based on metrics or a philosophy that may not be entirely yours. In other words; you are not investing according to your strategy but according to someone else’s.
A Canadian investor could be tempted to invest in well-known dividend paying ETFs instead of building his own portfolio. After all, you save time, you save fees and you get a “professional diversification” with a single holding.
Let’s take a look at 2 Canadian dividend paying ETFs to see what is inside the hood. Since I’m a big fan of BlackRock (BLK), I’ve selected the CDZ (Canadian Dividend Aristocrats Index ETF) and the VIG (Canadian Select Dividend Index ETF). Many investors would be tempted to invest in the CDZ as it has the label “aristocrats” in it. After all, we are talking about companies showing stellar dividend growth profile. Here what is looks like:
I don’t know about you, but I would feel uncomfortable having 20% invested in the highly volatile energy sector. Plus, there are companies in the top 10 that are screaming “sell” in my opinion.
Corus Entertainment (CJR.B.TO) is not going into the right direction and I would never hold this company in my portfolio at the moment. Advertising revenue is going away from traditional media such as radio, newspaper and TV, and gets concentrated toward internet marketing. Why? Simply because internet marketing provides stats, metrics and funnels no other type of advertising can. With internet marketing, you can target exactly your “perfect customer” and talk to him. Even better, you will know how he will answer to your ads. Where is your perfect customer when he switches between a hockey game and the Disney Channel?
Now, if we look at the VIG, we don’t get a better picture…
In this case, we have a different problem. The top 10 is filled with strong companies I would like to have in my portfolio… but they are almost all coming from one sector! Having 65% of your portfolio invested in a single sector is just plain stupid.
Therefore, in both cases, a dividend growth investor can easily follow his investing process to the dot and build a stronger portfolio.
02 Not really active management
In today’s market, some situations change rapidly. A dominant player in a strong niche could rapidly see its revenue evaporating like it’s in a sauna. Talk to any BlackBerry shareholders if you want to have an idea of what it feels.
As I highlighted in my first point, some holdings should not be part of an ETF. Corus is the perfect example as everything was doing well a few years ago. The company was solid and delivered strong returns during the last market crisis. The stock even outperformed the market between 2012 and 2014:
However, the landscape isn’t the same one since then. While a dividend growth investor could have seen this coming by reading Corus quarterly earnings and looking over his portfolio, the CDZ just kept CJR in its portfolio as there was nothing. Today, the stock is showing a 13+% and there is probably other bad news coming our way. What’s happening with the ETF? Nothing. It stays the course.
03 There are lots more than yield and dividend growth metrics
By definition, classic ETFs will track a specific group of stocks. You can buy an ETF tracking Canadian aristocrats, the energy sector or the market as a whole. From what I can see, most dividend focused ETFs are built based on a name (aristocrats), yield or dividend growth.
It makes sense to create a basket with such metrics, but I would add a little bit more human thinking in the process. Then again, Corus does qualify as a dividend aristocrat and it is part of the ETF since its job is to track all “aristocrats”.
I also use a set of metrics to start my research. However, metrics only tell us one thing about the company’s past. It doesn’t tell us much about what is coming. You need to look at graphs to see trends and you need to read quarterly earnings and annual reports to understand where the company wants to go. Unfortunately, most ETFs don’t read. If you want to solve this problem, you need to find actively managed ETFs… which becomes not too far from a mutual funds to some extent.
This point also highlights the fact that you need to know what you are doing even if you invest in ETFs. The moment you stop investing in ETFs tracking major indexes and you look for specific ones, you enter in a world of infinite possibilities.
While I just painted a pretty dark landscape for ETF investors, I still think it is a very good way to invest one’s money. ETFs offer a wide diversification and it is the best vehicle if you want a simple way to invest in the stock market. You just have to buy something that track the S&P 500, the TSX and the MCSI and you will do just fine. Things get messier if you try to track specific sectors or type of investments. This is why I will continue my journey with dividend growth investing. I can’t wait to see what will happen when the market crashes…
I’m known to be an optimist, a guy that will always tell you that today is the best day to invest your money… since you missed yesterday! While I’m confident that I will have another great year in the stock market, I’m also not a lunatic with pink glasses either. Unfortunately, there are some dark clouds rising at the moment which concern me. Here are three things that scare me the most in 2018.
01 Canadian Debt Level & Housing Market
I’ve been concerned about the Canadian housing market since 2012 and I’m sure I sound like a broken record. However, this situation doesn’t make sense to me:
Do you remember what happened when Americans started using their house like an ATM machine? Yeah… 2008 happened. As you can see from the chart above it took them until 2014 before reaching 2008 levels. What about us? We flew like Canadian goose flying wild toward their Florida party during winter time. Our market just ignored the warnings. As Canada was proclaimed the country with the “world’s best banking system”, many foreign investors shifted their money toward our Real Estate market. It’s nice to get some positive attention, but with a household debt level hovering around 170%, new mortgage rules requiring a “stress test” for all new borrowers, I don’t see how we will go through this situation without a housing correction.
What I plan to do about it
I plan on keeping my house. I’m comfortable here and I don’t plan to move for the next 5 years. I secretly hope that my children grant me the permission to sell everything and travel the world but I know their friends matter to them and I know I will be “stuck” in this winter country for a while.
As far as my investments, I have a reasonable position in the Canadian banking industry with Royal Bank (RY.TO) and National Bank (NA.TO). Both banks show strong positions in the capital and wealth management markets while leaving the classic mortgage business to TD (TD) and CIBC (CM). In the event of a market crash, National Bank should not be affected too much as the bulk of its mortgage portfolio is in Quebec, one of the provinces that has not been affected by the housing bubble.
I already wrote about why I decided to ignore bitcoins and other cryptocurrencies. I don’t deny their technology is a game changer in the financial industry but investing in a stupid coin in the hope that another stupid investor would buy it at a higher price is not a risk I’m prepared to take. If this doesn’t sound like the techno bubble, I don’t know what is:
If you are a bitcoin fan, I’m urging you to explain to me what the value is behind a bitcoin. Which gives bitcoin its value? Please tell me your rationale behind a bitcoin at $10 or $10,000 or $50,000? Here’s a hint; if you can’t tell me what your value of a bitcoin is, then don’t have an investment in your portfolio, you have speculation. Unfortunately, we all know where speculation leads. “Not this time, it’s different”… yeah… keep drinking the Kool Aid!
What I plan to do about it
Not much. In fact, I stay away from cryptocurrencies. My play was to invest in Visa (V) as it will benefit from the blockchain technology. Another play could be to look at CME Group as I discussed in a previous article about the bitcoin frenzy. But there is no way I’m buying any coins. If you leave a coin in your virtual shelf for 10 years, what that coin will produce? Nothing. This is the reason it has only value if someone else is ready to pay more for it. And the reason why someone is ready to pay more for it is only because they believe someone else is ready to pay more. Does this scream a pyramid scheme? I’ll let you decide.
03 Remember Greece?
Do you remember what happened in 2012 when we all thought the world would collapse because of the Greek debt? Let me remind you of the important parts.
Most (if not all) countries owe money to someone else.
A good part of this money is lent among countries, another part among banks.
If a country fails to pay its debt, banks will fall.
Do you remember the last time banks fell? Yeah…
The graph above shows some countries government debt as a percentage of their GPD. As you can see, besides Germany, everybody keeps borrowing more. My question is simple, where does this all end? As an individual, we all know that we have a limited amount of money we can borrow. This limit is set by banks and other financial institutions. While the limit isn’t 100% clear, we all know that if we keep borrowing, one day, no bank will loan us more money to keep going. The next step the banks will take is to start asking for their money back. Thus, this is how we can go bankrupt.
Government debt isn’t that easy. It’s a complex beast and not many people are able to explain it. In fact, I’m humble enough to tell you that I’m not sure how to figure it out myself. However, there is one thing I understand, borrowing indefinitely can’t be the answer. One day, somebody, will have to pay their due. But nobody wants to hear about paying down their debts, austerity or about being responsible. This has no political value. This is boring stuff. Unfortunately, one day, we will have to all sit at the big table and have an adult conversation about what is going on.
What I do about it
I personally did a stricter budget and started to focus on paying down my debts in a more proactive way. In 2018, my company should generate enough extra cash flow that I will be able to reduce my debt while not pursuing any new purchases.
As for my investment, I’ve pick solid dividend growers. The idea is to pick companies that have a strong business model that will go through the next recession with more dividend increases. Since there isn’t much I can do about the government’s debts, I rather focus on building a strong portfolio and take care of my own stuff!
What worries you about 2018?
What about you? Is there anything that doesn’t make sense in the stock market or the economy? What do you think will go wrong in the upcoming months?