The Kings of Dividends, Rental Properties

Owning Rental Property pays.

I have to admit, rental properties has been the real source of my personal wealth and primary means to financial freedom. Despite all the success I've had investing in stocks over the years. Rental Properties has been the hands down central pillar of my wealth.

I was lucky enough to get started in 2003 back then I was a fresh graduate from engineering school, living at home with my parents with literally no expenses. I was save more than 90% of my after tax salary into real estate deals requiring as little up front capital as possible.

I know the margins these days are not as fat. And yes unfortunately everyone is into buying real estate now. So the golden era is over, but there is still some good deals to be had. I'm writing this today as I close my 14th rental building.

Real estate is the cash cow that keeps on giving. The tax breaks, the leverage available to you. The eventual appreciation as fiat money inflates away. The negative real (inflation adjusted) interest rate on the mortgage melts it away. The cash flow that grows with every acquisition. Soon making your highly taxed salary insignificant. It is the ultimate dividend paying investment.

Are we in a Dividend Bubble ?

There has been a lot of buzz around dividends lately, everybody is talking about yield, income funds, dividend ETFs have been popping up CDZ, CYH, HAL, HAZ, XTR, XDV. Every body is into dividends. People are more concerned about % yield than P/E ratios.

I am a big fan of REITs and I used to give them an over weight allocation in my portfolios even up to 50% These days are over. I cannot justify holding REITs anymore because the valuation is so high. Everything from REITs, Utilities, Telecoms, are trading at rich valuations. Everyone and his grandmother is chasing yield.

Today the only REIT I hold is DI.UN just because I think nobody has heard of it yet, that's why the valuation is still sane. Today my REIT allocation is at around 5% of my portfolios. I switched some of my REIT holdings to Convertible Debentures because the risk reward of REITs compared with their own debentures is becoming disconnected and your way better off holding the Conv Debt.

History has shown again and again that extreme bullishness is a contrary indicator.
Joseph P. Kennedy, Sr., father of President Kennedy, famously said that he knew it was time to get out of the stock market before the 1929 crash when he was getting stock tips from the shoeshine boy.

Am I saying we are in a dividend bubble? probably not, these companies are usually well run blue chips. They are not tulips or cash burning .coms with no business plan. However I do believe dividend stocks are set to under perform simply because the valuation is so high today.

Convertible Debentures

As some of you may have noticed I am a big fan of dividend stocks. However I have reached a stage where I feel the need to diversify into some fixed income instruments. It is a shame to earn eligible dividends inside and RRSP, Then get taxed as income when I ultimately melt down the RRSP. I figured might as well make my RRSP portfolio more conservative and in the mean time stick it to the man by forgoing the double taxation.

Reasoning

I want to reduce my volatility, at the same time I get the feeling that REITS are over priced. How much more can they appreciate, when REI.UN is paying 5.2% what is the point of holding it when you can buy a safer corporate bond instead. The returns are getting too thin, too many people are chasing yield with REITS and dividends stocks.

Basics
A Convertible debentures is basically an unsecured bond, meaning bond holders get paid first, then Convertible Debentures, then stock holders. You might be wondering what the word Convertible stands for. well good question. It means you can convert your bonds into shares at a pre determined price. Similar to an option call. you can trade in your bonds for shares at a pre determined strike price.
lets look in detail at one of my picks.

Example

INN.DB.E

INNVEST REAL ESTATE INVST TRUST SUB UNSEC CONV DEBENTURE Maturity Sep 30 2017 Coupon 6.0000-CAD
This Debenture INN.DB.E pays you 6.27% in interest (today it is trading at $98.75 per $100) so it is at a slight discount. and is convertible at $8 a share.

Now consider this.
You could buy the common shares of INN.UN today at $5.44 and earn %7.35 yield.

But think is it worth it? will you risk your capital for an extra %1.08 a year? when you can get %6.27 with these debentures, your capital is safer, you will not lose a cent unless the company is bankrupt. your dividend is safe, because it is not dividend it is interest, The company cannot cut it otherwise they would be in default.

In this case the debenture makes a better investment in my opinion. Now the good stuff is not over yet. lets say the stock rises back to its pre-recession level of  $10 well, you can convert your debenture at $8 a share and sell the shares. you get to participate in the upside too.

The financial post has a good list of convertible debentures.

Convertible Debentures are sold by face value, so you would buy say $25,000 face value of INN.DB.E for $98.75 per $100 you would pay $24687.5 for it plus commission plus accrued interest to the seller.

The debentures pay interest twice a year. on the same day-month of the maturity date and 6 months after. eg The debenture I mentioned would pay on sept 30 and march 30.

These were my picks
NAL is an energy company, it was my top pick The NAV (value of oil per share) is higher than the conversion price of the debenture so collect 6.25% interest don't risk your capital and hope for the stock market to let you convert the debenture for some extra profit.
INN.UN and SRQ.UN and RMM.UN are REITS, they are smaller ones, so they pay more interest. The principal is safe because it is backed by real estate. and if the REIT craze continues they will pay off.
I added STB in there because the interest rate was good and it came at a good discount. I wanted to get something non energy and non REIT and not economy related so I added it. Also the CIBC analysts 18 month price target was above the conversion price so there is potential for gains there too.

Fixed Income
Description		Quantity	Market Price per $100	Total Market Value	Market Mix %
SCOTT'S REIT CONV UNSEC SUB DEB Maturity Dec 31 2014 Coupon 7.7500-CAD		25000	$99.97	$24,992.50
NAL ENERGY CORPORATION SUB DEB CONV UNSECURED Maturity Mar 31 2017 Coupon 6.2500-CAD		25000	$100.00	$25,000.00
INNVEST REAL ESTATE INVST TRUST SUB UNSEC CONV DEBENTURE Maturity Sep 30 2017 Coupon 6.0000-CAD		25000	$98.75	$24,687.50
RETROCOM MID-MKT REAL EST INVEST TR. CONV UNSEC SUB DEB Maturity Jun 30 2018 Coupon 5.4500-CAD		25000	$98.00	$24,500.00
STUDENT TRANSPORTATION INC CONV SUB UNSEC DEBENTURE Maturity Jun 30 2018 Coupon 6.2500-CAD		25000	$95.7875	$23,946.88
Total (CAD)				$123,126.88

Now this part of my RRSP portfolio is less volatile. and I believe the ~6% interest it earns will beat inflation.

Nuvista Energy, Opportunity or Value Trap

Okay This one does not pay a dividend, I have taken a rather big position in NVA, and I am very excited about it.

It is trading at a serious discount to its assets. and there is nothing wrong with it as far as I can tell.

The price is now $6.25
The CIBC analyst said this about the stock when it was trading at $9.15

NuVista trades at 63% of Risked NAV and 4.2x 2011E EV/DACF versus its peers at 75% and 5.5x, respectively. We believe investors are not paying much for significant upside that NuVista has in its asset portfolio, hence our Sector Outperformer rating

According to their math, the stock is trading now at 43% of risked NAV and %72 or core NAV.
This means if you value all their unexplored (probable) and undeveloped (proven) reserves at $0 then take the assets that are currently producing discount them by 28% you'll get $6.25 a share

RBC Analyst also thinks this stock is undervalued, it is rated as Outperform, and given a price target of $9.00

Ontario Teachers is invested in this company. They own 18% of the stock. They last bought shares at $9.50 in March 2011 so we are getting a 35% discount to what Teachers paid. Those guys have done their research and invested 8 months ago. This gives me more confidence in this stock.

Daylight energy
These guys operate in roughly the same areas daylight energy is operating, which gives more confidence to the NAV numbers, The Chinese bought Daylight at 1.2x risked NAV here we have a chance to buy at 0.43x risked NAV.

Management Team
The CEO who recently joined comes from Talisman Energy an oil major and has many years of experience and seems like a very qualified guy for the job. I've read good praise about the management team from CIBC and RBC.

Earnings are coming out on Nov 10th, The company gave an operational update in August saying everything is on track to meet the projections.

It is clear that this stock is undervalued, when will it appreciate is a different story. The only risk I see to owning this is that you could miss out on the other oil and gas stocks that are cheap right now while waiting for this one to appreciate.

Oil Stocks are Undervalued

I Have been loading up on oil stocks lately because of record low valuations. Oil companies are a screaming buy right now. so cheap that the Chinese are willing to pay more than double the share price for Daylight Energy. 

from CIBC  analyst 

We view the sector's risk/reward as extremely compelling. The large caps

are only 13% off their lows reached in the 2008/09 financial crisis and the

sector is discounting only ~US$70/Bbl oil LT. Our top large-cap picks are

SU, TLM, NXY, & CNQ

Summary on Suncor: 

 Suncor Energy Inc. (SO–$46.00 Target): Our top pick remains Suncor, which we believe is one of the best-positioned companies against downside commodity risk. We believe the stock has far more defensive elements than the market gives it credit for (most FCF generation and one of the best balance sheets at US$70/Bbl) yet it has been among the worst performers during the recent downturn. Even with the sell-off in oil prices, Suncor is being well supported by high Brent and SCO premiums and exceptionally strong downstream results. Given the company’s operational momentum throughout Q3, we should see record CFPS from the company this quarter. Furthermore, following the recent completion of its major turnaround in the oil sands in Q2, we believe the company is now poised for ~18 months of relatively uninterrupted operations.

Summary on Talisman

Talisman Energy Inc. (SO–US$23.00 Target): In our view, Talisman is better situated now than at any time in the past five-plus years, as the company can lay claim to a well-defined unconventional gas portfolio and is demonstrating substantial and sustainable growth. Additionally, Talisman brings a compelling mix of highimpact exploration that could further extend those five-plus years of international growth visibility. Although Talisman does not have the same defensive characteristics as Suncor in the US$70/Bbl case, we note that even if it did have to cut capex by ~$500 million from our current forecasts, we would still expect ~9% of growth next year – one of the highest growth rates in our group. Additionally, we note that its balance sheet remains very strong even at the US$70/Bbl level. Talisman is also one of the least expensive on P/NAV metric – trading at only 42% of risked NAV. Furthermore, Talisman offers more exploration catalyst potential than any other Canadian large cap, in our opinion, which will be the defining factor for the stock’s performance in Q4/11. The company has high-impact wells planned for offshore Indonesia (South Makassar Strait) and Kurdistan but it is Colombia that most interests us given the lower risk, large size and relatively short cycle times.

Worlds First Fiat Currency

Fiat Money is Not New

The first time fiat money was ever used was in 11th century china, during the Yuan and Ming dynasties. Surprisingly this ended with hyper-inflation and the notes were discontinued in 1455.

That's a nice little fact, but then after more research it seems that every fiat currency ever used throughout history has ended in devaluation and eventual collapse. 

Fiat Money Never Worked

From Louis IV to Napoleon to Post-World War I Weimar Germany .The Treaty of Versailles was essentially a financial punishment placed on Germany to make reparations. The sums of money to be paid by Germany were enormous. (Huge unpayable debt, sounds familiar?)

Can you look at this graph that shows gold in USD and tell me that inflation is around 2% and that we need looser monetary policy because we are at risk of deflation. All that while keeping a straight face?

How does one profit from this eventual collapse?

The general idea is to own leveraged hard assets. of course the best hard asset to fit this bill is real estate. If you don't own your own home go buy one. It is possible that the gold bullion ship has already sailed but you can still find some gold miners trading at some good valuations.

The US dollar is a fiat currency like many before it throughout history, why would it be different this time?

How to profit from the eventuality peak oil using dividend stocks.

I was reading about the peak oil theory over at The Oil Drum and I came to the conclusion that peak oil ( the world reaching it's maximum oil production  as in the highest production amount possible in barrels per day ) will likely happen in our lifetime. ( oil will never run out only become more and more expensive to increase / maintain production levels )

So how does one profit from peak oil ?
Simply put, by investing in oil companies, especially ones with large oil reserves and long life assets.

What does that mean ?

It means oil Juniors like BMO Junior Oil Index ETF If you like the conservative hands off approach and don't mind paying 0.50% in management fees. Investing in Junior producers or exploration companies is a risky business that is why an ETF is a good idea.

What about unconventional oil ?
Yes Oil sands, Cardium, Bakken, etc are all good investments because of the large reserves and long production life.

Do you have any picks ?
My top pick is SUNCOR ( SU ) with 50 year plus reserve life, and a nav of 54$ a share it is trading at a huge discounted valuation. my other picks are DAYLIGHT ENERGY ( DAY ), PENN WEST PETROLUIM ( PWE ) and PETROBAKKEN (PBN) all of which pay dividends.

What if peak oil does not happen ?

Even If peak oil does not happen, some other energy crisis or oil bubble will happen sooner or later. Either escalation of the situation in Syria, Yemen, Iran, The middle east will have another crisis sooner or later.

Disclamer I am long SU, DAY, PWE and PBN. I am often invested in the companies I mention. I believe they are good investments otherwise I would not mention it.