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! Follow this blog to know about passive income through dividend investing.
In September 2017, I 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!
Numbers are as at June 30th 2018:
Canadian portfolio (CAD)
As you can see, there was a lot of movement over there. Yup, I sold my positions in both Canopy Growth (WEED.TO) and Shopify (SHOP). Besides that, I can tell I’m happy about Enbridge which is finally showing a positive return in my portfolio. Last week, the company announced they received approval for their Line 3 project. This means that the $7B project will go ahead and my 10% dividend raise will happen in 2019!
Trades: SELL 40 shares of SHOP.TO @ $200
I previously explained how I use stop sells from time to time. I use this strategy mostly to protect my profit when I make riskier trades. Around 90% of my portfolio is built around my 7 dividend investing principles. However, I use a few dollars as “play money” when I see a good opportunity. This is what happened when I saw Shopify shares falling from the sky after the Citron report back in fall of 2017. Now that the stock has surged by more than 50%, I had no intention of keeping volatile tech stocks that doesn’t pay dividend. This is why I put a stop sell order at $200. If the stock kept going up, I would have just smiled. Now that it has dropped, I’m still smiling!
Trades: SELL 185 shares of WEED.TO @ $40
The same thing happened with my shares of Canopy Growth. This was just a pure play on the cannabis industry hype. This stock went up and down in my portfolio several times. After making 33% within 5 months, I told myself it was good enough. Another reason why I put those two stop sells was that I’m taking time off during summer time, and I didn’t want to follow those two companies.
Numbers are as of June 30th 2018:
U.S. portfolio (USD)
United Parcel Services
Nothing much important happened during the last month with my US portfolio. Disney has entered into a bidding war against Comcast (CMCSA) for the Fox assets. DIS rose its price and passed another step in the process with regulation approval (conditional of selling some FOX sport network assets). It looks like the deal is going through and DIS will become a serious player in the streaming business in a couple of years. That’s exciting news!
Starbucks (SBUX) shares plummeted in June after the company announced the closing of 150 stores. Keep in mind that SBUX is opening 600 new stores per year in China, the 150 closing is just optimizing its presence in US territory. On top of that, management announced a robust dividend raise (again!).
Dividend income: $319.10 CAD
This was another great month with over $300 in dividend payments. After 6 months in 2018, my portfolio generated over $1,400 in dividends. I’m getting closer to an average dividend payment of $250/month. Now that I have $15,000 to invest in dividend paying stocks, I should be able to boost that number! Let’s take a look at which company paid me this month:
Canadian Holdings payouts: $197 CAD
Magna Intl: $29.88
U.S. Holding payouts: $93.21USD
Total payouts: $319.10 CAD
*I used a USD/CAD conversion rate of 1.31.
Since I started this portfolio in September 2017, I have received a total of $1,733.30 in dividend.
Final thoughts – Going on Vacation!
I’m taking 2 weeks off to travel across the Atlantic provinces with Freefall, our beloved RV. I’ll use this time cool off with my family, do some hiking and enjoy lobsters and crabs! I’ll be back mid-July with more stories and dividend plays! Enjoy!
Two weeks ago, I noticed a “flash news” showing the Bitcoin price and I thought “OMG! This thing is going down now!” To be honest, I wrote one piece on Bitcoin back in September 2017. I’m not an expert in blockchain technology and I don’t pretend I know everything. However, when pro-Bitcoin investors get my favorite quote as their main argument, this is where I start to get very cautious. What’s the quote?
“The thing is, we have never experienced anything like this before”
Or if you prefer the shorter version:
“This time, it’s different”
Back in September 2017, the Bitcoin was surging out and was about to reach the sky.
The magical coin was the most interesting investment ever and then… a few months later, interest for the currency faded as new competitors arose and other kinds of technical problems arose…
Now, before you want to hit me with your “you don’t understand what a blockchain is”, I want to make things clear: I’m not discussing the coin as the technology here; I’m discussing the coin as a potential investment. In that regard; a coin is just like a US dollar or an ounce of gold; something that has value only if someone else agrees with its value and with the owner.
This Time is Different, Flashback From 1999
Do you remember what happened before the tech bubble? Yes, people were saying “this time, it’s different”. They were also saying: “it doesn’t matter if there are no sales, it’s the internet, you just don’t get it”.
And then, many tech apostles were telling the world how the internet would change everything.
They were complaining that most people didn’t understand the impact of this new technology.
They were saying that everybody will use internet in the future for things that we can’t even imagine (in 1999).
They were right on all three points… but many techs crashed and never bounced back; why? What happened back then is happening again with cryptocurrencies. Back in 1999, what was different is the internet coming into our life. The “new economy” didn’t mean that pages views and clicks would replace profit. It meant that consumers would make transactions in a different manner. 20 years later, we can get a full grasp of what internet changes (and keep changing) in our daily lives. But the core of the investment proposition wasn’t different; all companies that were showing a “dot com” name with millions of pages views with no sales didn’t live long. All crypto currency showing “coins” names with millions of miners still show no sales or profit… guess what? They will end-up pretty much like the dot coms…
Then again, I’m going to write it again to make sure you get it; I’m not talking about the blockchain technology. This technology will be used by many companies in various sectors for the greater good. The problem in 1999 wasn’t the Internet, it was the fake companies that surfed on the trend.
Mike, will you write again when the Bitcoin hits $50,000 in value?
Some will just wait until, maybe one day, the Bitcoin bounce back to a ridiculous number again to call me out. That would be fair and I’ll definitely write again if the Bitcoin even just goes back to its highs of $14K’s USD. It would still be pure speculation.
For those who dream that the Bitcoin (or any other cryptocurrency) becomes the new “gold standard”, I see a few problems I would like you to solve for me.
We all know that there is a finite number of coins that can be “mined”. Therefore, the total amount of money is known and is not controlled by any government. That makes many people wanting to “free the world from government” and use the Bitcoin as a main payment standard.
First, the coin is divisible, therefore, it’s like printing new money. If you can divide a coin to 0,0000001 Bitcoin and this is enough to pay for a bus ticket, it’s pretty much like printing new money. The solution is easy; just increase the bitcoin value and your 0,0000001 Bitcoin now worth enough to pay for a pizza instead of a bus ticket. So how do we solve this problem?
Second, imagine that a company like BlackRock (BLK) with over 6 trillion USD in assets under management decide to control the Bitcoin by buying a bunch of those. How would you stop that? Instead of having the US Government controlling the US dollar, you would have BlackRock, Apple or Microsoft controlling 20% of the currency. This would be enough to create market swings form one side to another. Welcome hyperinflation!
Then again, the blockchain technology might change our life the way internet did 20 years ago, but that doesn’t mean that all coins are worth something! Always invest in something making money, not growing in value based on pure speculation.
*This article is for more beginner investors, but it was inspired by many emails I received.
If you follow this blog from time to time, you have already noticed how much I prefer dividend growth stocks on top of high yielding companies. Some may think that it’s because of my age (36) and that I have about 50 years to invest my money. But the real reason is because I rather focus on my total return than my yield. In the end, if my portfolio yields 7% but has lost 25% of its value over the past 3-4 years, I’m not a winner. When I discus stocks that show great potential but very low yield such as Visa (V) at 0.62% or Microsoft (MSFT) at 1.66%, I often receive comment that they are nice stocks, but not interested. Recently, one of those comments caught my attention;
“A 2-year GIC currently yields about 2.6%. The principal is federally insured. It doesn’t get better than that. If I am going to invest in a company, then I expect a premium for taking that risk.”
Hence my question: Should You Compare GIC Rates with Dividend Yield?
Investing as a source of income
When you look at financial theory, the investment expected return is a combination of the interest paid on a “risk-free” investment (such as a 30-day US T-Bill) and the risk you are taking (e.g. the possibility of not getting your money back). In its most simplistic way, a GIC offers a “risk-free” investment. If we take the example of an fed insured 2 year GIC at 2.6%, the most important risk the investor takes a risk of liquidity (hence the higher rate then a 30-day T-Bill). This means the investor can’t have access to his money before 2 years. Some banks will allow a withdrawal or to break the contract, but there will be penalties. The second risk is obviously inflation. But over 2 years, this is not a big one.
Now, if you invest in dividend-paying stocks and intend to live off those payments, you may be tempted to compare your GIC yield (risk-free) to your portfolio. But I’m not sure it’s fair to compare investing $10,000 in Microsoft (MSFT) at 1.66% vs investing in a GIC for 2 years at 2.60%. On one side, your $10,000 could worth a lot less (or a lot more) in 2 years as the GIC will show the same value. Also, MSFT will pay its dividend quarter, if you hold a GIC, you will need to wait for a least a year (if interests are paid annually) or even 2 years (if you have chosen a compounding interest). Therefore, you can’t really use a GIC as a steady source of income unless you split your money into multiple expiry dates and make a huge GIC ladder out of it.
Even the yield is not safe
The other way around is also true. An investment in a REIT paying 6% yield is not a good base to compare it with a 2-year GIC. Some REITs are incredibly solid (here’s the REIT list you are looking for), but some of them may cut their dividend at one point in time. Keep in mind that it’s not because a company pays a dividend that it is safe. Talk to Cominar (CUF.UN.TO) shareholders for fun…
Why do you separate the yield out of the total return?
There is one concept that I never understood; some investors don’t care about their total return, they just focus on their yield. In other words, they rather have a portfolio paying 6% yield and showing a total return of 7% than having a portfolio paying a 2.85% yield but showing a total return of 10%.
As an investor, my goal is to maximize the return on my investment. I don’t really mind if it’s coming from dividend or if it’s coming from capital appreciation. I just want to make sure I make money on my hard-earned bucks!
Market fluctuations will happen from time to time and be focusing on total return over a short period of time is a mistake. Your portfolio can lag the market for 3-4 years and that’s totally fine. One should not chase returns. However, when you look at a 5-10 years horizon, you should be able to generate more than a dividend yield out of your portfolio. If you can’t, you are wasting lots of time and energy for nothing. It’s like running 5K and eating a burger with fries right after!
Conclusion; the GIC rate has nothing to do with the dividend yield
There are so many differences between a stock and a GIC that I’m shocked one investor would make a direct comparison. We are talking about investing return, fluctuation, liquidity, etc. But if you really insist on comparing both, you should compare the total expected return. Therefore, while the GIC expected return is quite obvious, you should also try to determine at which pace the company would grow in the next 2 years (not that hard) and apply the same PE ratio. You would get a better idea of where you should invest.
I think the biggest retirees’ concern regarding their portfolio is probably the fear of losing money. During all those years, you have worked very hard and saved every penny you could. Then, you turned around and invested this hard-earned money in the hope of building a comfy nest egg for the day you will finally stop working. You finally hit your magical number and say “goodbye” to your boss for the very last time. Your coworkers throw a retirement party, you have a few renovations planned on your house and your airplane tickets are already bought for the destination you dreamed about for many years.
After a few months having fun and enjoying life, you open your portfolio statement; there is a number between parentheses. Panic. You go white. For the first time in your life; you lose money while you have no ways to generate more. You depend on your nest egg and you realize it is not as solid as you thought it was. In fact, you realize your retirement portfolio could melt. What can you do?
This is the final article of a 3 parts series on factors hurting your portfolio at retirement. This article is all about how withdrawing money at the wrong timing could affect the rest of your retirement. You can read about the other 2 factors crucial to your retirement with part I here and part II here.
When do you withdraw your money?
In an ideal world, you have saved millions and you only live off your dividends. But this only happens if you managed to saved over 1M$ and all your holdings meet 3 criterions. For others, chances are your retirement income will be a combination of dividend payments and shares sold. If it’s your case, the last thing you want to do is a big withdrawal right in the middle of a market crash.
During my financial planning years, we used to make lots of simulations. One that particularly struck my mind was the difference between an investor retiring right before a bear market vs one that would retire at the bottom of the bear market. The impact of withdrawing money at the same time your portfolio is free falling is catastrophic on your retirement plan. Just imagine if you had retired in July 2008…
I bet that looking at this graph gives you chills considering we have been running a bull market for 10 years and we all know that one day (probably sooner than later), we will get hit by another bear market.
Don’t be desperate just yet; I have good news! If you look closely on the graph above, you will notice that the stock market recuperated most of its’ lost money by January 1st. Statistically speaking, most bear markets will last about 18 to 24 months. Therefore, if you get enough money on the side (e.g. in cash or close to cash), you will not have to sell shares at a loss.
The year before I retire, I intend to make sure I have the equivalent of a full year budget in cash. For example, if I need 50K per year and my portfolio generates 30K in dividend per year, I will cash sell for 50K of shares before day 1 of my retirement. Then, if the market drops, I have a full year where I can withdraw money from my “cash account” without being worried by the market.
During that year, I still have an extra 30K deposited in that cash account. Therefore, at the beginning of year 2 of my retirement, my “cash account” will still show 30K (dividend paid by my portfolio during the first year). If the market hasn’t recuperated yet, I still can use my cash account for another 6 months without being worried. And guess what’s the best part? After 6 months, I will have spent 25K (remember, my yearly budget is 50K/year). Then, my cash account would show a remaining 5K (30K in dividend – 25k withdrawn). I would also add an extra 15K to this amount since my portfolio kept paying the same 30K in dividend. Therefore, I would have enough money to wait until the end of year 2 before I need to share my first share.
As most bear markets don’t last over 24 months, I’m 90% sure of not selling shares at a loss due to a bear market using this method!
Honestly, if you are retired or about to retire, I think you should make an investment of $1,000 to $2,000 outside your portfolio. These two grands may very well be the most important investment of your life. Here’s what you should do: find a fee-based financial planner and pay him to write down a full retirement plan.
He will not only take care of those three factors, but he will also be able to integrate tax optimization in your asset allocation! While you can’t control the stock market and guess how much return you will make next year, you can certainly control how much you will pay on taxes in regards to your withdrawals!
In my latest post, I started a 3 parts series on factors making a big difference in your retirement portfolio. If you don’t consider them, your retirement plan could go bust faster than the plane you are taking to travel Europe this summer.
The first article was about the infamous inflation. This post will explore another problem many retirees face when building their portfolio; asset allocation. There are a handful of sectors offering what retirees want: high yield and a solid business.
Retirees want both high income and safe return when they invest. Unfortunately, financial theory has decided that this combination isn’t possible. At best there is an anomaly in the market that will quickly be found and corrected. When a company is offering a high yield and there are no important risks attached to it; it’s probably because you have missed something doing your research.
But buying one high yielding stock isn’t the end of the world. In a well diversified portfolio, having one or two “bet” representing less than 10% of your portfolio isn’t that bad. The problem happens when you have a concentration of high yielding stocks coming from the same sector. If you have most of your portfolio invested in REITs, BDCs, MLPs and utilities, this article is for you!
Where do you invest your money?
No matter what your age and your risk tolerance is, I think you should never concentrate your portfolio in 2-3 sectors. In my opinion, showing more than 20% of your money in the same sector is looking for trouble. Oh please, don’t tell me that you have done it in the past 10 years and you show great results; my 12 yr old could have shown great returns just by picking stocks according to companies’ logos!
The problem with the current bull market is that everybody looks like Buffett. Pretty much all sectors, even those with higher level of risks, did well in the past 10 years. Therefore, many investors see “no risks” with their strategy as they kept receiving strong dividend payments for several years. But let me show you what it looks like when you concentrate your money into a sector that eventually hits a brick wall:
As you can see, any dividend investors thinking investing in banks was a smart move to finance its’ retirement got a serious paycheck cut during the latest financial crisis. Just because I know how many retirees love REITs, I’ve done a quick check over the past 3 years. Using Ycharts, I’ve tracked 400 REITs showing a dividend growth over the past 3 years from -100% to increase to +282%. Here’s what I found:
192 (48% of them) shows a dividend increase stronger than 2% (beating inflation).
This numbers drops to 46 (so 11.5%) if I select REITs paying a 6% yield and over.
183 (45.75%) of them cut their divided in the past 3 years.
In other words; when you pick a REIT paying a high yield (6%+), you have a higher chance to pick one that will cut its dividend in the next 3 years to raise it to match inflation afterwards. Imagine the result if you would pick 10 REITs paying over 6% yield… Yeah, I’m pretty sure you would show a few divided cuts in your portfolio!
Do not underestimate the power of your asset allocation
When I look at the current stock market, I like saying that everybody looks great on the prom night. Pretty much all companies paying high yield are at their best right now. They have enjoyed low interest rates, they benefited from an enthusiastic market that is eager to buy new bonds and a strong economy. Pretty much any bozo with a decent accountant could run a company with those conditions.
This circus reminds me of the tech bubbles. At one point, all you needed was a cool office with wide windows and “dot com” in your name. That was enough to raise hundred of millions in capital. Everybody was on their Prom night – they all looked good until they wake up the next morning once the party was over.
While I was at school during the tech bubble, I lived through the 2008 market crash as both an investor and a financial adviser to my clients. I noticed that the ones with a well diversified portfolio weren’t hurt much. Many of my clients ended 2008 with -15% to -18% and worst performing portfolios (more aggressive) were down -26 to -30% at the bottom. As an investor with a portfolio 100% invested in stocks, I’ve finished the year at -27%. That wasn’t too bad when you considered that concentrated portfolio could have went all the way down to -80% to -90%!
Your asset allocation is your ultimate shield to protect you from any catastrophe. Those who had too many tech stocks back in 1999, paid the price the same way Canadian investors did when rushed toward the oil sand industries in the 2000’s and when the world trusted big banks in 2008. During each crisis, there were sectors that went through the storm and kept raising their dividend. Sure, their stock prices were down, but their business wasn’t.
Therefore, patient investors cashed their juicy dividend and just had to wait until the storm was over to take a walk. Each time, they walked by weeping investors cursing their advisor, the market or God for having so many stocks in the same sector. Don’t be a “weeper”, be a “winner”.
Since I received the commuted value of my pension plan last year, I’ve given lots of thoughts about building a retirement portfolio. In that optic, lots of retirees ask me to write a more detailed approach about a higher yielding portfolio. Since I’ve received lots of demands coming from my Dividend Stocks Rock members to build a “retiree ready” portfolio, I will be launching such portfolio models this month. I thought of detailing my process on this blog to help you understand the difference between my current portfolio showing strong dividend growth and how I would build an income portfolio. But before we start picking stocks, there are three factors to keep in mind at all time. Like the three stooges, they could really crash your retirement party and this won’t be funny.
01 Have you thought of inflation?
When I read about all those amazing 8% yielders on the market ensuring a comfortable and safe retirement to several investors, I always smirk. The first thing I do is looking at the past 5 and 10 years dividend growth rate of those retirees’ best friends. Most of the time, the number I see is ZERO.
Then, many investors tell me: “Mike, I don’t mind if the company “Old Retiree’s Buddy (ticker ORB)” doesn’t increase its payment; the 8% covers the inflation”. Wrong. I know, many of you know exactly what I’m going to explain, but because I’ve received some questions and similar comments, I must take a moment to draw a line in the sand and tell you to cross it.
There is a big difference between the dividend yield and inflation. Imagine you invest $1,000,000 in “ORB” at 8% with no dividend increases. Therefore, year after year, you receive a solid pension of $80,000 per year. Let’s assume you are 60 today and you will live until 85. Your portfolio will pay you $80K/year for the next 25 years.
Now, imagine your $80K budget is subject to a 2% inflation. This means that each year, your budget (utility bills, food, gasoline, household maintenance, health and personal care, restaurants, travel, etc) cost a little bit more. 2% is nothing, right? You won’t even feel it, huh? Let’s see what will happen in your next 25 years:
Budget with Inflation
As you can see, your retiree’s budget starts at $80,000, but ends at $128,674! The last column refers to the amount you must find each year to compensate for the lack of dividend growth. Your portfolio generates $80K, but you spend more year after year. After 25 years, you had to find over half a million just to pay inflation on your lifestyle!
You can replace the budget numbers and the yield by anything, if companies in your portfolio don’t increase their dividend by at least 2% per year, you will be digging your own hole. In fact, spending $80,000 in 25 years from now is like spending $48,762 today. And this is only considering a 2% inflation!
But Mike, the inflation rate has been lower than 2% for the past 10 years
You may argue with me that the inflation rate is a lot lower since the 2008 crash, but we have entered into a low interest rate environment and things have started to magically cost cheaper than ever. You can see that both the US and Canada show a very low inflation rate over the past 10 years:
Then why not use a 1.5% inflation rate as demonstrated in the above graph? The problem with the inflation number is that it’s just a statistic. Your personal inflation rate is probably a lot higher than the one calculated by your country.
If you have some time, I’d suggest you read the CPI definition of your country to understand. Mine (Canada), can be found here. Here’s how the basket of good was composed in 2015:
Household operations, furnishings and equipment: 13.01%
Clothing and footwear: 5.68%
Health and personal care: 4.98%
Recreation, education and reading: 11.02%
Alcoholic beverages and tobacco products: 2.58%
If you compare this pie chart to your budget, I’m sure you will not have 2 similar pie charts. As a retiree, you will most likely spend a lot more money on healthcare than 5% of your budget for example. Therefore, if your healthcare costs rises faster than inflation (hint; this will happen), your own inflation rate will grow faster than 2%. I wasn’t able to find statistic value on how much food inflation increases year after year, but I’m pretty sure it rises a lot faster than 2% according to my grocery bill!
Another problem I see with the CPI is the way some items are calculated. For example, shelter cost calculation could lead to several misunderstandings. Does it take into consideration mortgage payments in a super low interest rate environment? Does it include how housing prices have skyrocketed in major cities such as Toronto over the past decade? While municipal and school taxes may have risen following a small yield, if housing prices jumped, you’d end-up paying a lot more.
Since I’m not a stats guy, I can’t give you answers to those questions. But one thing is certain; the shelter cost calculation is complex and will not likely consider all factors.
In other words; do not take the 1.5%-2% inflation number for granted. If companies in your portfolio don’t increase their dividend year after year, living off your dividend will mean spending less and less year after year. For all those Split Corp fans, I’d suggest you do your calculations.
Inflation is a retirement serious killer. It lurks inside your budget and hide for a very long time until you realize it’s too late. When you select a high yielding stock, make sure the company has enough room to increase its payout and at least match the inflation. If you are wondering where to start, you can check how I built my “retirement ready” stocks list here.
In September 2017, I 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 rather cash out on some juicy dividends!
Numbers are as of June 1st 2018:
Canadian portfolio (CAD)
Canopy Growth Corp
As of June 1st, both portfolios show strong returns. My Canadian portfolio shows a ytd total return of 9.4% and my US shows +9.6%. This is quite a performance for the Canadian portfolio, as the ETF I use for benchmark, iShares Canadian Select Dividend ETF (XDV.TO), is showing a totalnegative return of -5.66%. Hum… maybe I should charge for portfolio management… oh wait! I actually have portfolio models! Haha!
While my positions in Alimentation Couche-Tard, Fortis, and Enbridge continue to drag behind, I have several winners doing well.
Canopy Growth, continues its crazy roller coaster trajectory, and is now up by 25% in my portfolio. I find it very interesting to have such a holding in my portfolio, to show you what you can expect when you make a “bet trade”. Those are highly volatile. All you can hope for is that the company finally unlocks value to shareholders with real numbers at one point. In the meantime, it’s a sit and don’t watch game!
Lassonde posted strong earnings growth, but sales were affected by unfavorable currency impact. Still, LAS shows a revenue decrease of -0.9% in neutral currency. As the juice market is slowing down on both sides of the border, Lassonde focuses on low-calorie products to boost sales in 2018. In April, management announced it will acquire Old Orchard Brands, LLC (“OOB”) for a total cash consideration of US $146.0 million
Magna reported another strong quarter beating of both revenue and earnings expectations. Those results were achieved even if Magna saw a small decrease, for light vehicle (-2%), in North America. Once again, Europe is the best performing market with +14% growth. The raise of steel prices shouldn’t affect Magna’s overall performance, as most of the increase will be relayed to customers by automakers.
Numbers are as of June 1st 2018:
U.S. portfolio (USD)
United Parcel Services
I like to compare my performances with the Vanguard Dividend Appreciation ETF (VIG). It gives me a good idea of how well, or not so well, I’m doing vs ETF coach potato investors. As of June 1st, VIG shows a total return (including dividend) of 1.026%. My portfolio shows a total return of 9.6%. Not bad. Here are a few comments on some of my holdings;
UPS posted a solid quarter with double-digit growth everywhere (EPS, revenue and dividend!). A strong economy supported UPS growth as both US (+7% revenue) and international (+15%) contributed to UPS success. The company also invested $1.5B in capital expenditure to support its growth strategy. Shares on the market are getting better lately.
It was another quarter with the same growth story for TXN. Revenue was driven by the automotive markets. I expect this trend to continue for a few more years. The stock hasn’t been a top performer on the market recently, if you can pick shares below $100, that’s a steal. Management uses only 45% of its cash flow for dividend payment, leaving plenty of resources for R&D and sales growth, through their important marketing team. Free cash flow for the past 12 months is up by 17%, leading the way for more dividend hikes!
When I listen to Visa earnings call, the CEO had me at “terrific.” This company looks like a rocket launched at the end of the galaxy. Don’t get fooled by the DDM valuation, showing a lower value for V. This valuation method has its limits when it comes down to look at a low yielding stock. As payment volume grows by 11% with 12% more transactions, management expects to keep-up with low double-digit revenue growth for the rest of the year. There will definitely be another double-digit dividend raise waiting for you around December.
Dividend income: $253.76 CAD
As this portfolio is going through its first year of existence, I have no clue what to expect for my monthly dividend report. After a weak month in April (I received little under $60), I’m back with a solid month at over $250. The bulk of those payments are coming from my US holdings.
Canadian Holdings payouts: $56.40 CAD
Royal Bank: $56.40
U.S. Holding payouts: $152.99 USD
Lazard: $17.14 + $27.74
Texas Instruments: $31
Total payouts: $253.76 CAD
*I used a USD/CAD conversion rate of 1.29.
Since I started this portfolio in September 2017, I have received a total of $1,414.19 in dividend.
This quarter was particularly promising as I’ve shown many companies announcing solid dividend raises:
AAPL + 16%
While my portfolio average yield is somewhat low for a “classic” dividend investors, I have plenty of time in front of me to double and triple those payments before I retire. With so many double-digit dividend raises, I don’t have to worry about inflation!
On June 4th 2017, I crossed the border of Canada around 7pm to come back home from a 1 year RV trip. I spent the most amazing year of my life with my wife and three children. For 12 months, I drove for over 35,000 km visiting 9 countries. We started our adventure in Quebec and went all the way down to Costa Rica. Unfortunately, we had to come back to Canada. I use the word “unfortunately” because all I wanted back then was to sell everything and keep travelling the world. The freedom, the adrenaline, the beauty of the world; I wanted to make them part of my daily life forever. After a year being back home, did I change my mind? What was I able to bring back from this trip? Here are my thoughts on this crazy trip one year later.
First, money wasn’t, is not and will not be an issue
One of the first question people ask me about when I tell them I left for a year is “How much did it cost? You must be broke now?” or they ask me if I’m rich! Haha!
The trip cost roughly under $100,000 when I include the loss in value on my RV. I did a recap of my spending after 8 months here. I know, some of you will be ready to scream that I am an idiot. Just hit the “pause button” for a second. Most of those expense is money that would have been spent anyway. My monthly budget home is about $6,000/month.
Therefore, the real cost of taking a year off with my family and travel the world (and let’s be honest, feel like a millionaire many times!) was about $25,000. That’s the price of a small car! Wouldn’t you trade 365 days of pure happiness and adrenaline for a small $25K?
A year later, I can tell you I don’t feel the financial weight of my decisions. The main difference is I’m temporarily stuck with my RV payment. Freefall’s value is down compared to what I owe on my loan, therefore I must keep it for a year or two before I can sell it. On the good side of things, I’m going in the Maritimes for 2 weeks and it will cost me almost nothing for 2 great weeks of vacations!
As for my financial independence plan and retiring plan, I’m far from losing anything on this side. I’ve recently discussed my retirement plan C and D which include having over $1M at the age of 59 (plan C) or 65 (plan D). Those are the worst case scenarios. To be honest, I retired at 35 to do my trip and I still consider myself a retiree today. One of the most important impact of my trip was to make me invincible. This is how I could quit my job upon my return and continue living an exciting life day after day now.
So for those who think they have to starve to death and live an ultra boring life without any luxury to finally “make it” and reach financial independence, I have a secret for you; you can achieve a lot more than financial independence and you can do it a lot faster than you think. I’m not talking about being content or happy here; I’m thinking about going to sleep and tell yourself “OH Man, Today was AMAZING”. How many times did it happened to you last week? I can easily count 4 days out of 7 you?
Do something amazing with your life
One of the most important piece of wisdom I got from this trip is to get out of my comfort zone all the time and do amazing things. We have this stupid reflex to create fences in our own mind. Those barriers look like 10 feet tall military walls, but they are as solid as a Popsicle stick. When we let them down and cross the “line” we have in our mind, we can achieve incredible things. I’ve experienced it myself, but my kids did the same thing:
At the age of 4, Caleb hiked mountains like a pro. He did many 4-5 hours (10Km+) hikes, learned to swim (in the ocean) and, to this date, is the youngest kid ever to have climbed the Cerro Negro and did volcano boarding in Nicaragua. He’s now willing to try anything and he understands English (we are French) better than most adults in Quebec.
At the age of 10, Amy has developed its taste for entrepreneurship. She sees me building my business and asks so many clever questions. She doesn’t have a project yet, but it will happen soon. Upon her return, she made more friends and jumped 3 levels at her hip-hop dance school (it’s not like she learned that from latinos! Haha!). Oh! And she became a paddle surf pro too (no jokes!).
At the age of 12, William has learned to become a man before becoming a teenager. Throughout the trip, he was the “second man” in charge. He helped me and took care of other family members. I will always remember when he walked with me through the village in Guatemala when I was having a nervous breakdown (my brakes were fuming and I drove 10km downhill doing slalom in crazy curves…). He recently ran 45km in 2 days during Le Grand Defi Pierre Lavoie and won a prize for his academic grades. Not bad for a kid who didn’t want to study at the beginning of the year!
Finally, Josee, my wife, has discovered her passions and gained confidence during this trip. She is the one who had this crazy idea to quit everything and jump into the rabbit’s hole. She inspired us and is now working on inspiring others to change their life. She was the girl behind the camera, behind the scene for so long, I know that she will take the place she deserves in the upcoming years.
We all changed, we became better humans and we all found an unlimited source of happiness. This is something money can’t buy and FI or FIRE can’t do. When I think about it, I rather be in fire than FIRE…
So what’s next?
If there is one certainty, you can’t travel through Wonderland and come back like nothing happened, because “now you know”. I can say that we all had a hard time adapting to this comfortable life we have in North America. We all ran into our challenges and in the end, it takes a full year to “come back”.
I would have sold everything I own a thousand times this year. But I didn’t. I didn’t because my children were happy to get back to their friends, going back to their schools and living this life. My family’s happiness is more important than anything else. But this doesn’t mean we won’t travel anymore.
I still have my eyes on Vietnam for next year. Money is not always easy to earn when you build a business, but I know I’ll find a way to make it happen. I made a promise to myself to never feel comfortable anymore. The only way I’m going to respect that promise is to always get out of my comfort zone. I found how I want to live my days on this earth and for that, I’ll be forever grateful.
What about you? What makes you smile when you go to sleep?
With such an overvalued market, I bet you thought about that old saying, didn’t you? After all, finding value in a stock market that has been running higher and higher for the past 9 years is called “mission impossible” by many investors. You might as well sell and go away until the market cools off. But just don’t go yet…
There is lots of value to be found
For all the sceptics in this room, I’ll start by showing you several of my picks from my 100K portfolio created between September and December 2017. I’ve compared those picks against the S&P 500 total return. Since October 1st 2017, the S&P 500 total return (including dividend) shows +8.25%. I’ve picked 7 holdings showing double, triple and even 5 times this return.
Andrew Peller (ADW.A.TO): +45.83%
Microsoft (MSFT): +31.35%
Lazard (LAZ): +27.68%
Visa (V): +25.51%
Apple (AAPL): +22.59%
Texas Instruments (TNX): +22.14%
Gentex (GNTX): +17.36%
The idea here is not to brag about my best picks (I wold sound like an old fisherman, right?). After all, I also picked shares of Enbridge (ENB.TO) (-7.20%), Hasbro (HAS) (-10.95%) and Alimentation Couche-Tard (ATD.B.TO) (-7.66%). The point here is to show you that I picked those 7 stocks when investors were screaming on rooftops that there was no more value in this overhyped market.
Now, where do you find value in this crazy market?
First, I accepted a long time ago that I wasn’t a day trader. I accepted that I will not be chasing short-term gain. Finally, I accepted the price I pay doesn’t really matter, it’s what I buy that does. I wish I had bought shares of Johnson & Johnson (JNJ) back in the $70’s when I could have paid $2 a share. But I had to buy them in the 2010’s while it was around $65. Did I pay the right price back then?
I don’t really care.
You know why? Johnson & Johnson has always shown the same incredible value: it is a company with a strong power of innovation. The JNJ I bought at $65 in 2012 is the same JNJ in 2018 that is trading almost double this price.
JNJ Operations are divided into 3 segments: Consumer, Pharmaceuticals and Medical Devices & Diagnostics. Pharmaceuticals represent about 40% of its revenue and is concentrated around immunology, oncology & psoriasis drugs. JNJ has an impressive brand portfolio of personal care goods. Most brands are #1 or #2 in their markets, and products are being sold worldwide. The fact that JNJ develops speciality drugs makes it harder for generic drugs to compete.
JNJ is a powerful engine that is continuously being fueled to turn even faster. An investment in JNJ is an investment in a world class company. You buy a complete brand portfolio with only winning products. The company is well diversified among its product offerings, its pharmaceutical division along with its world diversification. Despite its relatively low yield, the company will not only reward you with constant and increasing dividend, but also with a steady capital appreciation.
With so many income streams from various segments, cash flow creation is never an issue. I would not count on the same dividend growth rate JNJ has shown over the past 10 years, but it will keep its place among the strongest Dividend Kings. With a 56th consecutive increase, shareholders can sleep well at night.
What did I just do with JNJ? I just wrote down the essential of my investment thesis. This was an excerpt of what you can find in my 200+ stock cards library.
Now you get it; the value is found in your investment thesis
Next week, I’ll get back to you about a full article on stock valuation and I’ll tell you why you shouldn’t be spending too many hours playing around with your model. But for now, let’s focus on what’s matter: a company’s real value.
The true value of a business is not found in its books or in its share price. The true value is found inside the company through its growth vectors, through its ability to innovate, through its competitive advantages.
The price of a great company goes up and down all the time. It doesn’t mean the company is better or worse from time to time. This is just a perception we get from the market. In the meantime, if you focus on picking the right company based on a strong investment thesis, you will be right 100% of the time… you’ll just have to wait a few years to prove your point.
Today is not different than the previous 100 years
I just wrote that I wish I had the opportunity to buy JNJ at $2 back in the 70’s. Many investors think that the only way to get rich is to go back in time and buy those solid companies 40-50 years ago. They think that it was the only way to buy stocks at a ridiculously low price. But today isn’t different than what happened on the market since its inception.
Do you remember how we thought Google (GOOG) IPO was expensive back in 2004? The stock opened at $85 and closed its first day of trading at $100.34. ONE HUNDRED dollars for a single share??? That was “too much” for me. It “wasn’t worth it”.
In 2014, GOOG did a 100% stock spinoff and created GOOGL. Therefore, for your $85 investment, you would show a total share value (GOOG + GOOGL) of $2,189. That’s nearly 26 times your investment and that value was created only in 14 years.
Today is no different than what happened in the stock market back in the 70’s or the 80’s. Great companies will continue to grow and reward you as a shareholder. The point is only to pick the right companies, not the right price.
Disclaimer: long all the above except GOOG and GOOGL
One thing I enjoy the most about running an investing platform is that I get the opportunity to connect with thousands of investors. We can share ideas and their questions often leads to great article ideas. This is exactly what happened the other day when a member asked me my opinion on an article from Market Watch asking a solid question to all investors:
Will there ever be a time to buy in at lower levels?
In this article, Market Watch highlights the possibility of buying shares at a much lower price if we could just wait for the next market crash to happen. The author mentions a few past opportunities:
After the March 2000 dotcom bubble high, investors could have bought the S&P more cheaply for seven years.
After the October 2007 housing bubble high, investors could have bought the S&P more cheaply for six years.
And at the S&P low of 666 in March 2009, weren’t much higher prices a virtual certainty in the years to come?
When I read the article, I had a smile on my face. This reminded me some quotes I found from other well-known financial information sites:
“Of course, with stocks at all-time highs, some seem to have nowhere to go but down.”
“At ValuEngine.com we show that 77.8% of all stocks are overvalued, 45.2% by 20% or more. All 16 sectors are overvalued; consumer staples by 17.6%, retail-wholesale by 26.4% and utilities by 9.8%.”
“The market has jumped nearly 30%. This means the stock market’s rally has been based solely on people paying more money for the same amount of earnings — this is known as “P/E multiple expansion.”
~ Motley Fool.
Interesting enough, those quotes are from 2013 and 2014! Since 2012, the countdown for the bear market has started. It will happen at one point in time. When? That’s a multi-billion-dollar question. If one knows the answer, he should sell everything he has, short sell the market and he will be the next market multimillionaire :-). For example, if you would have sold on May 1st, 2017 and bought back on October 1st, 2017, you would have missed 6.43%. If you waited until the end of the year, that’s 13.50% left on the table. The worst part is that you would be filled with doubt and would not even know if October 1st would be the right time to enter in an all-time high market, right?
What I Did Last Year
Those who follow this blog for a while remember that I invested 100K in the stock market between September 2017 and January 2018. It took me a month to invest 76K and I completed my portfolio with a few transaction afterward.
Was I afraid the market would crash the following month? Nope.
Did I consider waiting to see what would happen next on the market? Nope.
Did I think I could buy those shares at a cheaper price after a market crash? Nope.
Instead of patiently waiting to get a bargain, I’ve used tools I’ve developed for investors and built my own portfolio. I followed my investing rules and built a well-diversified portfolio showing strong dividend growth perspectives.
As of May 18th, 2018, my Canadian portion was up by 17.9% and my US portion up by 21.1%. This is how much money I would have been left on the table if I had decided to wait. But the worst part is not the virtual money you leave on the table, the worst part is the doubt filling up your mind. Each time you try to time the market; you wonder if you are making the right decision. You wait and you don’t know when it’s the right time to dive in. Once you did, you don’t know when it’s the right time to get out of the water before sharks arrive. And once you get out… Well… you wonder when it’s the right time to come back!
No one likes to lose money. We wall wish we could invest the bulk of our portfolio during a market crash. But this is called being lucky, not being an investor. I can’t tell you what you do (obviously), but as the article asks a question, I’ll answer with another one:
If now is the time to sell and wait, what will tell you the time to buy back?
At which point it will be a good timing? After a 20% drop? or 30%? or 50%? The more you try to time the market, the more doubt you will have around your investing strategy. In the meantime, I rather gather dividend payments in my account than doubts in my mind!