November Dividend Income Report

Dividend Lover NR     Portfolio: $19323      $2,770 increase
Dividend Lover RRSP Portfolio: $$10,478   $122    increase
Dividend Lover TSFA Portfolio: $1932.84   $13.81 increase

The increase in the NR portfolio was due to investing new funds into KMP, RCI,

The increase in the TSFA portfolio was due to 1 month of DRIP

The increase in the RRSP portfolio was due to 1 month of DRIP and reinvesting the accumulated change into SRQ.UN to get the drip on it working again.

This brings us to 31.73% of the 100,000 yearly dividend target a 2.9% increase

How I got a 12.1% GIC from RBC

okay the title sounds like a scam, but it is effectively true.

RBC offers a multi-product discount. the GIC was the last product I was missing. and as I have made the evils of GIC's known in my previous post. buying a GIC from RBC allowed me to get the multi product discount and so my 1000$ was effectively earning a guaranteed 12.1% return.

The products you require from RBC in order to qualify for the multi-product discount are

1. chequing account
2. credit card
3. line of credit
4. mortgage
5. investment ( GIC ) self directed investments do not count

I have the VIP account with them which costs a whopping 30$ a month, I had to get this because it is the only account type that does not charge you when cheques you deposit bounce, (due to deadbeat tenants).

This account type also gives a free safety deposit box, free (annual free credit card) and 3 free chequing accounts and 1 US account

however with the multi product discount the fee is reduced from $30 to $22 a month. on top of that you get an unlimited number of free chequing accounts.

adding that GIC is going to earn $8 x 12 = $96 a year from the fees and $25 a year from interest = $121 a year or a %12.1 GIC

The multi product discount also applies to other account types, so even if you have a regular account it is likely worth trying to get it.

October Dividend Income Report

Dividend Lover NR     Portfolio: $16,553     $3,512 increase
Dividend Lover RRSP Portfolio: $10355.90 $58.9 increase
Dividend Lover TSFA Portfolio: $1919.03   $15.50 increase

The increase in the NR portfolio was due to investing new funds into Encana (ECA), bank of montreal (BMO) and Manulife Finanial (MFC)

The increase in the TSFA portfolio was due to 1 month of DRIP

The increase in the RRSP portfolio was due to 1 month of DRIP

This brings us to 28.83% of the 100,000 yearly dividend target a 3.59% increase

September Dividend Income Report

Dividend Lover NR     Portfolio: $13,041.00  $2 increase
Dividend Lover RRSP Portfolio: $10,297.00   $66 increase
Dividend Lover TSFA Portfolio: $1903.50 $15.50 increase

The increase in the 2$ increase in the main portfolio was due to 1 month of dividends used to deleverage by paying off some of the margin.


The increase in the TSFA portfolio was due to 1 month of DRIP

The increase in the RRSP portfolio was due to 1 month of DRIP

This brings us to 25.24% of the 100,000 yearly dividend target a 0.08% increase

I haven't invested any new money this month.

August Dividend Income Report

I've started my new job, I will make a post about it soon, but it is taking up ALL my time.

Dividend Lover NR Portfolio: $13,039.00 $2173 increase
Dividend Lover TSFA Portfolio: $1,887.14  $18.54 increase
Dividend Lover RRSP Portfolio: $10,230.90 $124 increase
Total Yearly Dividend Income: $25,157.04 $2,315.54 increase

The large increase in the Non Registered portfolio was due increasing the leverage in the account.

The increase in the TSFA portfolio was due to 1 month of DRIP.

The increase in the RRSP portfolio was due to 1 month of DRIP.

This brings us to 25.16% of the 100,000 yearly dividend target.

Consumption Maximization

Saving money is in a way deferring consumption.  Money itself is an IOU from society to consume an amount of goods and services. when you put money aside you are delaying consumption.

You could consume something today, but if you instead save and invest these IOU's you could buy more, bigger and better items to consume later.

Now I'm going to claim that the ultimate goal of saving and investing is to maximize the amount of goods consumed throughout a person's life.

say you have these options,
1. Buy a $100,000 Porsche today in cash.
2. Invest the money and use the dividends to lease a new $600 a month car every 3 years for the rest of your life.
3. Invest the money for 10 years @7% then lease a $1200 a month Porsche every 3 years for the rest of your life.

Choice #1 gives immediate gratification.
while choice number 2 or 3 delay the consumption, there by maximizing the total consumption.

Good things come to those who wait

A disturbing fact in North American culture,
as soon as a kid gets his first job he moves out of the parents house.
when the kid makes more money, possibly cause he is done school or university, he buys a car.
he makes a little more money, he buys a house, or rents a better place, he is no longer a student after all.
the kid gets married, now there are 2 incomes and the 2 can share the house and possibly share one car, and maybe even start paying off student debt? that's great until the babies start coming.

In this sad yet typical story there is no delayed consumption. Any income made is spent right away. And so you are doomed to work for the rest of your life.

I personally think the single most important financially wise decision a young person can make is to live in the parents house for as long as possible at least until  mid 20's in order to build some capital.

The second most important decision is to delay buying a car for as long as possible. take the bus / subway. and build your capital.

If I were to give any advice to a young person it would be build capital first.

Changing Jobs

I recently accepted a new  position at another technology start up company. I gave my current employer my resignation effective July 31st.

I was able to negotiate my compensation from a very strong position.

My first job was at an online advertising company. I joined this company at start up and it is now very successful, a world leader. The founders did not give any stock options, and I was young an naive enough to accept. 5 years later I was tired of making other people rich. I left to join my current position, a consumer electronics start up, a slightly different yet lucrative field.

A month ago I was contacted by a Venture Capitalist who offered my an opportunity to work at a company he was invested in. I was a perfect fit for them because of my prior experience. Something that is impossible for them to find here in Toronto.

I knew I had huge negotiating leverage,
1. They came to me.
2. I had a unique skill that is difficult for them to find in Toronto.
3. They were very much in need for someone with these skills and experience.
4. I already had a great Job.
5. I don't even need a Job.

So I agreed to meet them for lunch. I had lunch with 2 of the VC's and the CEO of the company, I made a good impression.

I got another call and we scheduled a meeting at their offices, where I met more of the company. Then they offered me something. which I turned down regardless of what it was.

The next day I was called again with a better offer, which again I turned down.

The day after that, I was called again with a better offer which I finally accepted.

I have an older cousin who is currently a partner in a private equity firm in Dubai. He works hard.
We had a conversation 5 years ago when I told him I am planning to retire by 30.
His response was, I used to think the same way, but when you get to 30 you realize that you are earning more money than you ever thought possible. and so you don't retire.

Book smarts does not equal buisness smarts

I studied Engineering at school and every now and then I meet some of my nerdier class mates for a game of Settlers of Cattan. Last time we met I saw one of the nerds and I found out that he was working at a company that does not compete with my employer doing something my employer is willing to pay a lot for.

My current employer is a start up rich with venture capital and is stock option grant happy. It is also offering a $3,000 referral bonus to encourage employees to refer people they know. When I brought up the prospect of offering him a job with us, my college refused to even listen to my offer. so I assumed that he must be doing even better than I was at his current job.

After we were done our little game, my college was going to put on his back pack and take the bus to the subway to go home to his parents house. At the time my car was in for service and BMW had given my a 128i loaner car. When i offered him a ride in the car the reaction I got was Wow you can afford a car on your salary. that's amazing I wish I could make enough for a car.

Now we are professional engineers turning 30, and he is still living like a student. This guys is one of the smartest people I know. I used to ask him for help when I didn't understand something at engineering school.

However when it comes to business, he is an Idiot.

July Dividend Income Report

This Time around I was on Vacation in Los Angeles. I spent the Canada day long weekend + 1 day off work. unlike my trip to Jordan this time I did spend a lot :( but it was worth it.

They had a store called Nordstrom Rack it is similar to Winners in the US except it is bigger and the discounts are better.

Dividend Lover NR Portfolio: $$10,866.00 $3,922.00 increase
Dividend Lover TSFA Portfolio: $1,868.60 $18.30 increase
Dividend Lover RRSP Portfolio: $10,106.90 $296.16 increase
Total Yearly Dividend Income: $22,841.50 $4,236.69 increase

The large increase in the Non Registered portfolio was due increasing the leverage in the account, as I wanted to take advantage of the opportunities the market is currently presenting.

The increase in the TSFA portfolio was due to 1 month of DRIP.

The increase in the RRSP income came from a 2,000$ contribution, since I got my NOA I was able to put in the correct amout in there, instead of the conservative estimate I put in on Jan 1st. with this 2,000 I've maxed this years contribution at $22,000

This brings us to 22.84% of the 100,000 yearly dividend target. a respectable increase from the last report

Newtons Laws of Dividends

Newton related Distance, Velocity and Acceleration with each other to revolutionize the physics of the time.

I was putting together some spread sheets to track my dividend portfolio's. I wanted to make a column to show me the monthly increase in dividends. since more shares get added through the DRIP and new funds. when I realized the parallels that exist between newtons laws and dividends.

Distance is your Net Worth.
Velocity is your Dividend Income.
Acceleration is the change in your Dividend Income.

Adding more shares to a portfolio increases the Acceleration. not only is the Velocity increased once, it is continuously increased as dividend income gets reinvested.

Then add Time into the equations as The sooner you start your investment trip the larger the distance travelled.

Then I went further to add a column to calculate the monthly change in Acceleration. ( the change in the change of Dividend Income) This was the most interesting column. It shows how fast you are increasing your Acceleration. I'm going to polish up this spread sheet and post it.

June Dividend Income Report

I've been on vacation in Jordan ( the middle east ) for the past two weeks. Surprisingly I have been saving a lot of money simply by not being in Canada. I should go on Vacations more often.

Dividend Lover Non Registered Portfolio: $6944.00 $5288.00 increase

Dividend Lover TSFA Portfolio: $1850.07 $26.49 increase

Dividend Lover RRSP Portfolio: $9810.74 $91.22 increase

Total Yearly Dividend Income before tax: $18604.81 $5405.71 increase

The large increase in the Non Registered portfolio was due more funds invested.
The increase in the TSFA portfolio was due to 2 months of DRIP
The increase in the RRSP is due to new purchases of stock using dividends accumulated in the account. as I have stopped the DRIP. I stopped the DRIP because I intend to use dividend money to start new positions in the portfolio.

This brings us to 18.6% of the 100,000 yearly dividend target. a respectable increase from the last report

The 3 Essential Elements of Business Partnerships

1. Time
2. Experience
3. Capital

Any business needs all 3 elements in order to function.

A partnership where all the partners have lots of free time on their hands, but no capital or no expertise will not get anywhere. A business will need a sufficient amount of all 3 basic elements in order to succeed.

Therefore these are the ultimate criteria for selecting business partners in any venture.

The reality of it is that we all start out in life with little capital and little expertise. The only thing we have to offer is time. and so in the early stages of life you would look for partners who have capital and expertise but lack the time to manage the ventures.

As you grow older you gain expertise and hopefully some capital. and at the same time, you have less and less time to spare. This is when you start looking for partners who have time but lack capital or expertise.

If the partnership is rich in one of the 3 elements bringing on more partners with more of the same element will dilute the partnership and offer diminishing returns on that element provided.

so the idea is to always strike a balance, a balance that is different depending on the venture.

Day Trading the odds are against you

Since I have got my Interactive brokers account set up. and some free time on my hands, I was going in buy 100 shares of SU (suncor) as a permanent addition to my portfolio, This broker only charges 1$ per trade when your trading 100 share lots. so I thought I would try to day trade those 100 shares a few times just for fun. I was going to buy the shares anyway.

So over the course of the day I did 52 trades of 100 shares of SU. They added up quickly. I netted about 130$ from the trades, but after paying 52$ to the broker I ended up with approximately $80.

Okay I admit it was fun. It is clear to me that this is gambling, and since there is a 1$ fee for every trade, it is equivalent gambling at a casino where the house has an edge.  The higher the commission the broker charges you the higher the house edge.

I used the strategy that there will be resistance at the $32.00 per share price since it is a round number. and the high bid size I saw in the level 2 quotes confirmed my theory. I was buying shares at 32.01 making my break even price 32.03, so I was selling the shares for 32.04 or better.

The only clear winner here was the broker. I can't even imagine how people can day trade with an account like investors edge.  Even with 1 click trades and live streaming quotes and 1$ commissions your still at a disadvantage to an institutional trader.

Will I do this again? yes probably until I end up losing 100$ trying to make $1. then I can go back and read this post and say I should have listened to myself.

GIC's do not make sence

Through out my investing career, I've only used GIC's once. I was a new immigrant to Canada. and my dad had given me some money to use for the university tuition that was due in 3 months.

In that situation I had absolutely no tolerance for risk. I had a short time frame. no income, no work visa, little investing experience and there was no way I was going to risk not being able to pay for my university tuition.

That was the first and last time I've used a GIC.  This was as you can see an extremely conservative situation. and I still think it is okay to use GIC's in extreme situations like that.

Yes the G in GIC stands for guaranteed. but who is guaranteeing this money? it is the bank you are buying the GIC from and the CIDC for the first $100,000.

Now the CIDC insurance is for your total cash in all your accounts at this institution. so if you have more than 100,000 in the bank your GIC's are no longer covered by CIDC.

The good news is that banks also guarantee another type of investment. The banks Corporate bonds. If the bank does not pay you what you are owed you can force them into bankruptcy. In other words both your principal and your interest from corporate bonds are guaranteed by the same entity guaranteeing the GIC.

yet the GIC pays you much less.

Okay still not convinced that corporate bonds from say TD are just as safe as GIC's from TD?

Say you've bought a corporate bond from TD. The only way you will not get all your principal or interest is if TD goes into bankruptcy. All TD common and preferred shareholders are wiped out. TD shares are worth $0. They cannot issue more shares because no one is interested in buying the TD shares. and The government decides not to bail out TD by offering them loan guarantees or by buying mortgage backed securities from them which the bank of canada has done before during the mess of last year just in case.

Now this is unlikely but lets say it does happen. How much better off are you holding a GIC? well we are talking about a situation of total economic chaos. A situation where even holding Canadian cash is risky. A situation where your 100,000$ CDIC insured money that you got many months later from the CDIC is probably worthless. The only asset worth anything today is gold.

GIC's are a great way for banks to make money off of your money.

Put money you need for the next 3-6 months in high interest savings account.

Anything for a longer time frame into a portfolio of stocks and bonds.

Never buy a GIC for a period longer than 1 year.

Bears in Bulls Clothing

Investors like to see the value of their stock appreciate, sure you have made some paper money.

However many of us are still in the accumulation phase of our lives. we are net buyers of stocks. so when stocks appreciate sure our holdings go increase in value. however future investments will be more expensive therefore ultimately less profitable.

As an Investor, the best thing that can happen to you is to have low stock prices during your accumulation phase and high stock prices during your exit phase.

What you do not want is surging stock prices during your accumulation phase ending with a crash during your exit phase.

That what makes us bears in bulls clothing. we invest like bulls, by taking long positions in dividend stocks. yet at the same time your hoping the stock will not increase because your still not done buying. often when one of my holdings appreciates I'm unhappy because now can't lower my cost basis, and buying more will increase my average price.

Good debt, bad debt, Tax Deductable debt. The Cost of Capital.

A lot of articles try to classify debt as good and bad,
If you borrow to invest it is good debt,
If you borrow to spend it is bad debt.
If you can tax deduct it, it is good debt.
If you can't tax deduct it, it is bad debt.

But I am posting this to say that the way i see it money is money the source and purpose are irrelevant. and the only number that matters is the cost of capital.

Finance the deal at hand with the cheapest source of funds.

The source is irrelevant, it could be cash or it could be a loan. The item being purchased is irrelevant, it could be a consumer item or an investment.

If you are at Home Depot and you are buying some construction materials, The brick buying a big screen TV or sears buying whatever it is people buy from sears. It does not matter what you are buying, it could be for consumption, it could be a vacation or it could be for investment. regardless of what you are purchasing you must use the cheapest source of funds to finance the purchase. In this case it will be the 0% don't pay for a year retail credit card these places offer.

If you are buying a car and the dealer is offering 0% financing, you take it.

Using your own cash for these situation will cost you the opportunity cost of that cash which is more than 0%.

Normalize Interest on debt then prioritize for borrowing / repayment according to cost.

Say you borrowed some money from your line of credit to invest. now the line of credit is a tax deductible 6% loan. good for you.  now say your in the 35% tax bracket that would be equivalent 4.45% non deductible loan.  so even though this loan is tax deductible you should still pay it off before any non deductible loan costing less than 4.45% regardless of which loan was used for what purpose.

I see capital as a stack of cards, where the cheapest sources are at the top, you use the cheapest sources first. and as you deploy more capital, you deplete the cheapest sources and so the cost of new capital gradually rises, until you reach a point where it is not worth the risk to deploy the more expensive capital.

Need money for an investment or consumption, take the top card on the stack, which is the cheapest way to pay for it.

Got some new source of funds, add it into the stack at the appropriate spot according to its cost.

Then optimize the stack as needed, moving funds from cheaper sources to pay off more expensive sources.

Good debt or bad debt is meaningless, only the cost of capital matters.

Consumption Propensity

You want to splurge on a 1,000$ all inclusive vacation to Cuba for yourself and your girlfriend.

Will you take 1,000$ out of your savings account and buy the tickets? That would make you feel guilty the entire trip now wouldn't it.

What if you have an extra 1,000$ a month from your salary that is not going to essentials? you can use it for a vacation this time instead of saving / other purchases? will you go now?

What if you collected your tax refund for 5,000$ today?  yes pack your bags babe were off to Varadero.

Consumers have a different propensity to consume depending on the source of the funds.

Total Consumption = X * savings + Y * income + Z * bonus
where X < Y < Z

It is easy to spend away a bonus, more difficult to spend from income, and the most difficult to dip into savings.

But money is money. It should not matter where it came from. The vacation is going to cost the same no matter what.

Capitalism is the Evolution of Slavery

This is not a capitalism bashing hippie post. on the contrary I am very much a Capitalist.

In the old days of slavery, The Egyptians had to use whips and chains to make sure workers did their jobs. First you have to capture the slaves somehow, hire supervisors to whip the slaves, you need a place to lock them up so they don't escape and hire guards to make sure they don't turn on you. etc etc, as you can see there is a lot of overhead associated with slavery. so in order to advance we need a more efficient system.

In the new revised system instead of a whip, there is a clock. The alarm clock wakes up the slaves from their beds, the slaves get to work on time. and do not leave until the clock lets them leave.

Instead of the slave driver slaves have their bills and mortgage, slaves work because slaves need money to pay their bills. There is no need to hire someone to whip the slaves.

There is no need for a camp to lock the slaves up, they don't try to escape because they don't even realize they are slaves. There is no place to for the slaves to escape to anyway.

The Egyptian Pharohs would be very impressed with efficiencies achieved with this updated system of slavery.

In a capitalist society it is up to you if you want to become the slave or the master. Build your capital and you become the master, don't and you become a slave.

Which role do you want to play? slave or master.

Where to Hold What

It makes my blood boil whenever I see someone holding the wrong kind of instrument for the account type.
As Canadian Investors the government gives us three types of investment accounts to stash away our money.

The RRSP, The TSFA, and the Non Registered Account.

In this post I would like to give my point of view on which type of investment is best suited for each account. I'm not going to discuss which account type is better. I personally Max both my TSFA and RRSP on the first trading day of the year. so my opinon on RRSP and TSFA max them both asap all the time.

The RRSP:
- This is the only place to hold bonds. (if you are going to be holding bonds at all) 100% of your bonds should go into your RRSP.
- REIT's
- Income Trusts
- International dividend paying corporations ( not canadian eligible dividend paying corporations)

The TSFA:
- no bonds, okay you can hold a Junk bond ETF, the point is not to be conservative. put investment grade bonds in your RRSP.
- REIT's
- Income Trusts

Non Registered Accounts:
- CANADIAN ELIGIBLE DIVIDEND PAYING CORPORATIONS.
- Preferred shares paying eligible dividends.
- Non dividend paying corporations where your income will be comming from capital gains.
- Stock options you intend to generate capital gains with.
- Never ever ever hold bonds in here.

In general you want your RRSP to be more conservative than your TSFA. This is because more risk in the TSFA will likely generate higher tax free earnings. You can manage your overall risk by lowering the risk in the RRSP. Thats why I think its okay to hold a Junk bond ETF in a TSFA, because it will likely pay more than a government of canada bond and so you will likely pay less tax.

As for the Non Registered Account,  This is where you want to realize your capital gains, since they are taxed most favourably and then earn your eligible dividends. do not hold bonds in here you might as well fill in box 465 to donate your tax refund to the Ontario Opportunities fund.

Avoid Management Fees Like the Plague

When I walked into RBC today there was a poster advertising their RBC Monthly Income Fund. It said a $100,000 investment can provide you with $375 a month in Income.  I can see how this Interests some people especially seniors.
Canadian asset management companies make a kings ransom off management fees. I understand that some people do not have the time nor skill to manage their own investments. Lets say you don't want to manage your money yourself, because you don't have the time, experience, scared to screw it up or whatever excuse that is fine. But what I can not understand is holding a high MER mutual fund when there most certainly is an equivalent ETF that will charge a fraction of the management fees.

I don't want to hear the an excuse like I'm waiting for my mutual funds to recover before I switch to ETF's.  When your mutual fund recovers so will the ETF. The two move together. In fact funds compare themselves to the index they follow and ETF competitors to see how well they achieved their stated objectives which is to track their benchmark as closely as possible.

I do not own any mutual funds or ETF's myself,  but I do hold shares in Canadian asset managers (AGF and GS) the poeple who manage mutual funds. Because I think asset management is a good business with outrages fees that people seem to be happy to pay.

Let us take a look at a few mutual funds offered by RBC and compare them to their equivalent ETF's

RBC Canadian Short-Term Income Fund     MER: 1.16%
iShares DEX Short Term Bond Index Fund (XSB)     MER: 0.25%

RBC Canadian Dividend Fund     MER: 1.70%
iShares Dow Jones Canada Select Dividend Index Fund (XDV)  MER: 0.5%

RBC Jantzi Canadian Equity Fund MER: 2.04%
iShares Jantzi Social Index Fund (XEN) MER: 0.50%

If I were to tell you, How would you like to make a guaranteed 1% more on your portfolio without taking on more risk. Its going to sound like a scam. That is because you are being scammed.
RBC's mutual funds MER's are actually decent for the mutual fund industry. Mutual funds have more costs than ETF's since they have to deal with deposits and withdrawls. ETF don't since you and sell the units on the market.

go sell your mutual funds right now and buy some ETF's.

How Much Do You Sell Your Time For

Employment is a contract between you and another entity where you sell your time in return for some sort of compensation.

Take your after tax income from employment and deduct any work related costs, divide it by the number of days worked. and you will come up with what price you are selling your days for.  I use days of work not hours worked, because most of the day is spent either at work, preparing for work or recovering from work.

I am a full time employee, my annual salary here is $93,000 sounds decent sure, but after deducting Tax, EI and CPP my job nets $61,980.00

However to get to work and back, i have to include my monthly transportation costs which include
$200 gas, $250 ETR407 (toll route) and $250 depreciation for the extra mileage on my car. This adds up to $700 a month. I will still keep my car if i didn't work. however these extra costs are only to get to work and back.

This brings my net employment income to $53,580

I get 3 weeks of paid vacation. so that 53,580 gets divided by 49 weeks x 6 days = $182.24 a day.
I used 6 day a week because I usually sleep in on Sundays this is included as " time recovering from work"

I am selling my time for $182.24 is it worth it?  definitely not. But welcome to the real world my friends, no job is worth it. your time is priceless and no amount of money can be worth it. but this is a good reminder of the value of money.

Now whenever you consider a purchase, instead of thinking of it in terms of dollars and cents. think of it in terms of days.  Is this new shiny IPAD for $599 + tax really worth 4 days of work?  would you rather have this toy or have 4 days off?

An even more disturbing yet realistic way to evaluate the opportunity cost of this purchase assuming 7% compounded returns these 4 days of work off now would be worth 8 days of work 10 years later. or 16 days of work 20 years later. or 32 days 30 years later. purchasing an IPAD today will delay your retirement by 1 month !

looking at it in terms of an income stream, the opportunity cost for this IPAD, purchasing a dividend stock yielding 4% a year comes up to 9.5 cents a work day.  This single purchase could have replaced 0.05% (1/2000) of your income perpetually and inflation adjusted. your salary is not perpetual and is not inflation adjusted. in other words this purchase could have provided for 1/2000 of your needs for the rest of your life and then leave it for your kids to inherit.

Now before you run back to the apple store to return your IPAD.  Life is not about money. Life is about enjoyment, if you enjoy your IPAD keep it. The whole point of personal finance is to maximize enjoyment.  but first you must build your assets then start spending. otherwise you will be doomed to the rat race forever.

Fixed Rate Mortgages are Scams

I went to TD today to get a new mortgage discharge statement because their mortgage rates have gone up. so the penalty for breaking the mortgage on that property has dropped by $3,000 so I am happy about that.

however the TD branch mortgage lady kept telling me how great fixed rate mortgages are and that the rates are rising and how it is much safer to get a fixed rate.

I think that the mortgage lady at TD is just doing her best to giving advice that she thinks is correct. The same advice she hears around the bank and gives to everyone getting a variable mortgage. however in my mind this sounded a lot like FUD.

let us look at the numbers

the best 5 year fixed rate mortgage around is 4.3 %
the best variable rate mortgage around is prime - 0.5 % = 1.75%

to simplify the calculation,  we are going to pretend the best variable rate is 2% and the best fixed rate is 4% giving an artificial advantage to fixed rates, and we will also ignore the fact that the mortgage balance is smaller at year 5 than it is at year 1 making the fixed rate deal even sweeter.

In order to win with the fixed rate deal you need the variable rates to look like this:

year 1: 2%
year 2: 3%
year 3: 4%
year 4: 5%
year 5: 6%

just to break even.

prime at 6.5% 5 years from now will make half the country unemployed and homeless.

so even after the sweetener assumptions and favourable adjustments to the fixed rate mortgages it is still a clear loser.

on top of that you will have to hold this mortgage to maturity or suffer paying the IRD penalty as I am. while the penalty on a variable rate would be 3 months interest.

and not to mention the significantly worse cash flow profile a fixed rate mortgage will create.

I don't understand why anyone would get a fixed rate mortgage.  I don't understand why there is even a debate about which is better !

never go for a fixed rate mortgage.

Refinancing Deal in the Works

I am refinancing one of my rental properties which I have a 50/50 partner with to take advantage of the lower rates and the bubble era high valuations that have been going around.  I'm going to write about my options and the reason behind the madness.

The Property has been appraised at 900,000 the bank has only approved this refinancing to 75% loan to value so the maximum mortgage I can take is 675,000.

The current mortgage owing is 538,000 and unfortunately it is on a 5 year fixed 5.25% interest rate with 19 months left of the term.  If I want to break this term the penalty interest rate differential (IRD) is a whopping 18,000.

I could blend and extend the mortgage to a new 5 year fixed term. and so not pay any penalties. however I have decided to pay the penalty and get a new 5 year closed variable rate.

It is hard to stomach an $18,000 penalty, however you have to look at it as if this cost was already incurred 3.5 years ago when the old mortgage was put together. Holding onto this mortgage till maturity will result in paying higher interest costs that more than offset the penalty. you may feel better that your not paying the penalty. but it is not a wise choice since it will cost more overall.

The option I will go with is a new 5 year closed variable rate which is going to result in the best cash flow profile for this property. The new mortgage payments are 1,000$ per month less than before and will remain constant for the next 5 years. on top of that I will get a cheque for the $117,000 half of which will be mine.

I have been in the rental property business for 7 years now, and from my experience getting a fixed rate mortgage is a costly mistake that i will never make again. when you buy a fixed rate mortgage you are saying that you know more about interest rates than the bank does. you know rates better than the market. in effect you are swimming with the sharks betting against them and you are thinking that you can win.

April Dividend Income Report

Dividend Lover Non Registered Portfolio:   $1,656.00

Dividend Lover TSFA Portfolio:                       $1,823.58

Dividend Lover RRSP Portfolio:                       $9,719.52

Total Yearly Dividend Income before tax:  $13,199.10

Since this is the first Report, there isn't much to compare to.  but the idea is to continue to track and grow this number as time goes by.

REITS a Poor Man's Way to Invest in Real Estate

REITS are corporations that invest most of their assets in real estate. Some REITS specialize in a certain type of property like apartment, commercial, industrial, hotel, hospital, retirement residence etc. Most REITS invest in different provinces to provide some kind of regional diversification.

I personally own a lot of REITS, my TSFA is 100% invested in REITS and my RRSP is about 80% REITS. However the Dividend Lover non registered portfolio does not hold any REITS.
First off, REITS do not pay an eligible dividend. Therefore your dividends are 100% taxable. So REITS should not be held in a non registered account.

They are good in TSFA/RRSP because the REIT Corporation itself does not pay tax. Then since you are holding it in a TSFA/RRSP you do not pay tax either. So the result is a win win win. And whenever you have a win win win it usually means that government is losing.

I'm not going to go into too much detail explaining what REITS are you can find 100 other blogs to explain that. What I'd like to do here is to voice my opinion on investing in REITS vs. straight out investing in real-estate.

Now REITS are corporations, so they have cheaper access to capital than you personally would when you buy real-estate. However these savings are offset by the salaries payed to management. On top of that this is only true for owning commercial or industrial properties.

Interest charged by banks on residential properties is much lower than that charged for owning commercial properties. you can personally get a residential mortgage for a lower rate that the largest reit can.

The REITS themselves are leveraged because they issue debentures and have mortgages. However you could personally achieve higher leverage, either by using CMHC financing, or by putting together a creative deal. The most leveraged Reit white rock (WRK.UN) is equivalent to getting 75% mortgage financing.

The REITS are diversified, more liquid than any real property you can buy. That is true.
However REITS do not pass on to you many of the benefits of owning real-estate. Such as being able to write off expenses against the properties income from your car lease, cell phone, etc. The more properties you own the more you expenses you can get away with.

Real property also allows you to take CCA (capital cost allowance) i.e. Depreciation. You could depreciate the property and you the depreciation to offset income, and so defer taxes for years and years. Unlike REITS where you will be paying taxes on your distributions without any deferral.

Therefore it is better to buy properties than to buy REITs. I call them the poor man’s real-estate. Because you do not need much capital to get started. But much of the benefits of owning real-estate are missing.

The bottom line is, only buy REITS in and RRSP/TSFA. Never own them in a non registered portfolio. If you want exposure to real-estate in a non registered portfolio you can buy corporations that invest in real-estate such as killam (KMP) or first capital realty (FCR). Which are not operating as REITs.

My Take of Preferred Shares

Fixed Income instruments are an important part of a portfolio. however holding bonds in a non registered account is a bad idea.  It is also a bad idea to be 100% invested in equities. This is where preferred shares can fill a void.

Most Canadian Preferred shares pay an eligible dividend unlike bonds which pay interest income you get to take home more of your money and stop the government from reallocating it to seniors and welfare drug junkies.

Preferred shares add a new asset class to your portfolio, therefore reducing volatility ( though as a dividend investor volatility shouldn't bother you too much ), provide dividend income that is even more reliable than common share dividends, provide more security to your principal investment and depending on the type of preferred share usually offer higher dividends than common shares.

Now all these are great points, but what’s the catch? We all know there is no free lunch. The catch here is that you are forgoing any capital appreciation. Yes they are shares, but in reality they are fixed income instruments. Your dividends do not increase, and the share price does not significantly increase / decrease.

Preferred shares also expose your portfolio to interest rate risk, similar to bonds. If rates rise, these fixed dividend paying non appreciating shares, There value will drop with higher interest and rise with lower interest.

Preferred shares come in different shapes and sizes I'm not going to go over it here. But Google "guide to preferred shares" for a good pdf from Scotia bank that explains preferreds and provides some commentary.

50% of the Dividend Lover non registered portfolio is in preferred shares. But do as I say not as I do. Depending on your age and risk tolerance treat preferred shares as you would fixed income instruments to come up with the right asset mix.

My allocation in Preferreds in outsized making the portfolio more conservative because I do not own any other fixed income instruments anywhere else, and because I am using excessive leverage, therefore must lower the risk in the portfolio to balance the risk added by leverage.

Now you might be thinking that intrest rates are rising why would I buy these preferred shares?  well Prepetual Preferred shares follow the 30 year government of canada bond interest rate + some kind of premium related to the issuer and other details. Changes in the short term interest rate is tempered because of the shape yield curve and long term interest rate. That and the expectation of higher interest rates down the road are already factored into the price. Your not the first person to figure out rates are rising.

CIBC Investors Edge Unadvertized Deal

CIBC is now offering 6.95 Trades for accounts above $100,000 without buying the edge advantage package.

I recently opened an RRSP account with RBC Direct Investing with the intention of transferring my RRSP from CIBC Investors edge to RBC.

RBC is offering $9.99 trades if you have more than 100,000 in total in all your accounts. I did not want to buy the CIBC edge advantage package, because I did not trade much in my RRSP. I did about 2 or 3 trades a year, Therefore CIBC was charging an outragous $24.95 per trade.

After initiating the transfer I got a call from CIBC, and they offered me $6.95 trades without buying the edge advantage package for all my accounts with them and any accounts with the same mailing address.

so I asked CIBC to stop the transfer to RBC.

A few days later RBC called me and asked why did i want to transfer out. They could not match the 6.95 trades, but they did offer me to join their "royal circle" which gave some extra features, most notably was access to Dominion Securities analyst reports, And for you leverage Lovers, they have a tiered system for margin intrest rates going down to prime for borrowing $100,000+ unlike CIBC which offer prime +1.25%The rest of the features i didn't care for.

For now my RRSP is staying with CIBC. However for you high rollers with accounts totalling $250,000+ and are using $100,000+ in margin the RBC royal circle deal is better assuming the 1.25% lower interest covers your $2.03 extra expense per trade.

Your Money Working For You

You are a CEO building a Corporation from the ground up. This Corporation is going to fund your retirement, pay for your house, kids, and whatever other comforts life comforts you desire.

The employees of this corporation are hard workers. I would even go as far as to call them slaves. These workers do exactly as you say without any complaints. Do not require a salary, do not require health insurance, can be redeployed to do different jobs no training required, and will outlive you and continue working after you are long gone.

No I'm not talking about Robots. I'm talking about Dollars. Every Dollar you own is an employee in your corporation. You can put him to work doing various tasks, and he will produce more Dollars.

This Corporation once big enough will support and eventually replace your need to produce income through employment.

When you get your pay check and spend all of it. You have sold away some of you employees in return for whatever goods/services you spend normally spend you pay check on. These employees are gone and are now working for someone else.

However if you can retain part of your pay check, you can deploy these employees do work for your corporation and grow your corporation.

Your Money, Your Employees, Your Corporation.

Cash Flow is King

We all heard Robert Kiyosaki rhetoric. I generally dislike the guy’s methods, predatory seminars and the entire network marketing crowd. Though I must agree with him when it comes to his opinions on cash flow.

Say you are putting together a deal. Rental real-estate, a business plan or whatever your are trying to put together. It is important to take a good look at the cash flow projections.

Yes it’s great that you can make money later, off some kind of capital gain. But good cash flow makes a deal even sweeter.

Say you have project A that will give you a decent capital gain 5 years from now. The deal will set you back $100 a month. I.e. project A has $100 negative cash flow. How many of these projects can you maintain at the same time? 1, 2, 10?

On the other hand take project B, it will produce no capital gains at all in 5 years, however it does generate $100 a month in cash flow. Now I'm going to ask. How many of these projects can you maintain? Of course the answer is as many as you can get your hands on.

The point I'm trying to make is that even though some endeavours have a big payoff later. As long as they carry a negative cash flow there will be a limit on how many you can have going at the same time.

A deal that generates a positive cash flow does not limit the number of deals you can simultaneously make. In fact it opens doors to bigger and better deals. With the excess cash flow providing more flexibility for the next deal you make.

Now I'm not saying positive cash flow is easy to come by. In fact the truth is, the benefits of positive cash flow are not a secret, and in fact it is highly sought after. You have to put on your creative deal making hat.

When to use Leverage

The effect of leverage is to amplify gains (or losses). You need be aware of leverage, respect it, and use it properly in order to build wealth.

Every other well off rich guy got there by borrowing as much money as possible, starting a company, then have the company borrow as much as possible.

Leverage is an essential part of wealth building especially in the early stages where you need outsized gains and can afford the risk. You have less on the line. You can fall down, get up and walk again with much less consequences than later in life.

The news keeps saying how banks were leveraged at 30 to 1, and how insane it is. However consider this. When you buy a rental property with a conservative 20% down payment, you are leveraging 5 to 1. Put 5% down and you are already at 20 to 1 leverage. Is that risky? Yes. But there is nothing wrong with it, especially when whatever you are leveraging has decent interest coverage, i.e. produces enough income to cover interest and more.

In fact leverage is one of the most attractive features of real-estate. A rental property that yields 6%, financed with 3% debt and 20% downpayment, gives an 18% yield. If it wasn't for leverage why would you go through all the trouble? You could go buy some discount perpetual preferreds that yield 6% and be done with it.

What to leverage

What is being leveraged is also an important factor. If that rental property is legal, insured, fire retrofit, has AAA tenants and produces a decent interest coverage, and the interest rate on your loan is somewhat fixed. Then you should leverage as much as possible. If you can even pull off 100%+ leverage good for you go for it.

On the other hand, if what you are buying is a single family home converted into a low income rooming house, the fire department and the city are calling you all the time about zoning and fire safety issues, half the tenants are on welfare and the place is falling appart. even though you could be generating a thoeretical 12% yield. do not even think about leveraging something like that.

I used real-estate here as an example, this also applies to stocks, its is dangerous to leverage a technology stock trading at 40x+ PE, however it is perfectly fine in my books to leverage a utility or pdf1 preferred stock or other high investment grade instruments.

When you use leverage you are adding risk, interest rate risk, amplifying gains/losses. You need to balance this out by using a safer investment.

The other factor to consider is your own risk tollerence. If you are getting ready for retirement part of your portfolio should be in cash equivalents, forget about leverage. If you are still in your early 20's then you should probably not leverage either because of your lack of experience in whatever you are investing in. add leverage as you gain experience. so probably in your mid 20's until you start having those little dependants we call kids. then its time to adjust your risk tollerance.

The banks who were leveraged at 30 to 1 thought their investments were AAA rated; meaning the risk to their principal involved was close to nil. Even though they were wrong. The lesson is only leverage safer investments.

The 3% rule

Financial Freedom is as simple as this one line equation. If it were teaching a class in finance this would be the first thing I would tell my students on the first day.

Expenses =< Net Assets * 0.03

Now you read all these retirement experts touting that with a 4% withdrawal rate you will not likely outlive your money. However these models are built with assumptions. Many assumptions. Such only needing to sustain that withdrawal rate for 30 years, because you’re retiring at 65 and dyeing penniless at 95.
If you can live off 3% of your net worth annually, then you are set. 3% is a low number, and you need a lot of assets to be able to live off of 3% a year but that’s the cold hard truth. Anyone telling you otherwise is misguided.

Now if your thinking "I have portfolio of dividend stocks that are already paying me X% dividends, can't I simply live off the dividends?" the answer sadly is no.

First you have to pay tax on your dividend income. You are smart enough to buy Canadian corporations paying an eligible dividend, so you've reduced your tax burden good job. But unfortunately you still have to pay some tax.

Second inflation is eating away at your income stream. Your dividends need to increase as time goes by. Sure companies increase their dividends. That’s good. But if the yield on your portfolio is more than 3% it means you have stocks that are giving out a high payout ratio, and so have less retained earnings to reinvest in capital expenditures and so grow their earnings. Therefore you must reinvest some of the dividends earned to keep the dividend income increasing to fight off inflation. Same goes if you have any fixed income instruments, whatever yield you get above 3% must be reinvested in order to keep up with inflation.

Thirdly your assets need to last more than 30 years. You’re not 65 years old. If your income stream dies out after 30 years you are in trouble. I am 30 years old; I need my income stream to last for at least 65 years. Therefore one must model for a perpetual inflation adjusted income stream. Not a broke in 30 years model.

A 3% withdrawal rate would allow your assets to support an inflation adjusted income stream in perpetuity.

Are we there yet? Dividend Lover Finacial Freedom Self Test

We all dream of the day when we can finally quit the rat race, so here is my universal test for are you there yet or not.

Say you quit your day job. That means your salary will stop. You are claiming that you would be able to live a certain life style using a standard you see as acceptable for the rest of your life.
Before you go around the office and tell it like it is to everyone from the ceo to the janitor. I suggest going through the Dividend Lover Financial Freedom Self Test.

For the next 6 months, you are going to pretend your salary does not exist. You are claiming you can live without it. Okay then let’s see you live without it. Take you salary all of it. Not 75% not 90% of it, all of it, and deposit it into a savings account for the next 6 months.

If you can live off whatever alternate income streams you have put together for 6 months, then you have earned your financial freedom, and have build up a nice emergency cash cushion to set you off on your way. Congratulations you have crossed the finish line and beat the rat race.

If you can't pull off 6 months of 100% saving your salary, then my friend you are not ready yet. Get back to building alternate income streams; dividend investing etc. you still need your salary. Try again next year.

Some of you may not agree with the 100% savings rate because of claims that for example my transportation costs will be less, I will spend less on clothes, I don't have to buy those expensive lunches at the office cafeteria, well I disagree, you have to save 100% because you will drive your car around when you quit, you will wear clothes, you can't be naked all the entire time. And you will eat out in restaurants instead of a cafeteria.  That and you need the extra safety margin for unexpected expenses ( or expenses you forgot to budget for )

Even if you fail the test don't be discouraged. you now know how close you are to your target. Say after 6 months you managed to save 50% of that salary, guess what you are half way there.

Yield on Cost, A Misleading and Meaningless Term

Companies paying a sustainable and consistently growing dividend are considered the holy grail of dividend investing. This has led some bloggers to coin the term yield on cost as a method to keep track of their dividend returns.

Yield on cost is calculated by dividing current dividend income by the dollar amount originally paid to purchase the stock. As corporations grow their dividends the yield on your original investment grows.

Say for example you purchase 100 shares of a stock at $10 a share, yielding $10 every quarter, and so you’re getting a 4% yield. And your yield on cost is 4%
5 years later after some dividend increases the shares are paying $16 every quarter so you are getting a 6.4% yield on cost

However this term fails to take inflation into account. This makes yield on cost totally meaningless. Worse it makes it misleading.

The above example used 5 years, but what if you do not know how many years have passed for this yield on cost calculation, doesn't that make it meaningless?

Say we bought one Enbridge share for a split adjusted $1.72 in 1981, our yield on cost today would be a whopping 100%. Big number, but what does it tell you.... nothing. The shares were bought using 1981 dollars. The yield on cost does not care to take this into account.  In today’s dollars your investment is worth $50 and your current yield is 4%.

Yield on cost is a useless feel good number because it ignores inflation. a more useful number would be yield on real cost.

RBC Skip a payment Mortgage Option

RBC mortgages offer a feature called "skip a payment" where you don't make a mortgage payment that month, and the interest is added to the principle. RBC allows you to do this once per anniversary year, starting from the second year of your mortgage.

This will increase your mortgage amortization, and cause you to pay more interest over the life of your mortgage. But on the other hand you will have cheap more money in your hands to invest.
One of my rental properties is financed through RBC, and I tend to call them up every year and ask them to skip a payment. It’s easy to find a place to deploy this new found capital to earn more than the prime -0.4 of tax deductable debt it is costing. So in my books skipping a mortgage payment is a win win situation.

However this year I was presented with the opportunity to reamortize this mortgage, since when I first got it prime has dropped significantly, and the mortgage amortization had dropped to about 15 years.
My goal here is to increase the cash flow, so I had to figure out what to do:

1. skip a payment this month then re-amortize the mortgage.
2. re-amortize the mortgage then skip a payment next month.

I had to sleep on this one, for the longest time I thought that both were equivalent. In both cases you’re not paying anything next month. So the amount you pay is the same. The amount you owe the bank is the same.

However now that I am older (yes) and wiser (not really) I realized that option 2, re-amortize then skip would produce better cash flow. The reason being is that the re-amortization would occur over a longer period of time. (The new amortization will include the skipped month) while in option 1 the new amortization will not include the skipped month. Therefore the monthly payments therefore the cash flow in option 2 will be slightly better.

Say no to Bonds ( unless its in you RRSP/TSFA )

Whenever someone tells me they are holding bonds as part of their fixed income allocation in a non registered account I sit them down and explain to them why they should have told me sooner.
In short, bonds are evil.  they generate interest income.  Interest income that is taxed at a prohibitive 46.41% rate, unlike dividends. when the tax man is done with you, you only get to keep $53.59 out of $100.00  unlike eligible dividends where you get to keep $73.43 from $100.00 hence the 1.37022 money factor used to compare dividend income with interest income.

Dividends received by Canadian residents from Canadian corporations are taxed at a lower rate than interest income due to the dividend tax credit, which recognizes that a dividend is paid from the after-tax earnings of the corporation. Using the most recent proposed 2010 Ontario tax rates, an investor in the highest income tax bracket pays 46.41% tax on interest income and 26.57% on dividend income. Hence, the lower tax rate applied to dividends provides a significant advantage. After tax, an investor would retain $73.43 from $100.00 in dividends, but only $53.59 from interest income. Therefore, an investor would need approximately $1.37 ($73.43/$53.59) of interest income to equal $1.00 of dividend income before taxes are paid. This difference in the amount of income required before taxes is described as a “pre-tax interest equivalent” amount. This can be calculated by multiplying the amount of dividend income by a factor (1.37022 in the case of Ontario) that takes into account the different tax rates for dividends and interest.

No one under any circumstances should own bonds in a non tax advantaged portfolio. It is ludicrous to do so.

It is even more ludicrous if you have a non tax deductible mortgage on your primary residence. go sell your bonds immediately, and pay off the mortgage. a mortgage in essence is a short bond position. if you own both bonds and a mortgage. you essentially have a bond spread position, and the spread is not in your favor.

The correct way to invest in fixed income securites in an non tax advantaged portfolio is to invest in preferred shares. ( a topic for a future post ).  These provide you with eligible dividend income, and much of the security of pricipal that comes with bonds.

TransCanada Corporation Added

No Dividend Portfolio is complete without a utility distribution company. such as TransCanada.
I've considered Fortis, and TransAlta, before selecting TransCanada because it looks like the best deal at the moment. though Fortis and TransAlta could be added later for diversification when the price is right.

CIBC Analyst:

Our price target remains at $42, and is based upon a 17.5x 2011E target multiple (unchanged). At 14.5x 2011E EPS, we view current levels as an attractive entry point ahead of what is expected to be very strong growth in 2011+. We maintain our Sector Outperformer rating.

12-18 mo. Price Target $42.00
52-week Range $28.86-$36.49
Market Capitalization $23,892.1M
Dividend/Div Yield $1.60 / 4.6%

Earnings Per Share
2009 $2.03A
2010 $2.10E
2011 $2.41E

P/E
2009  17.2x
2010 16.6x
2011 14.5x

Dividend Per Share
2009 $1.52A
2010 $1.60E
2011 $1.70E

TransCanada pays an eligible divided.

Compounding, The Most Powerful Force In The Universe

We get bombarded with advice on how important it is to begin investing when you are young. To truely apprciate the awsome power of compounding we will go through this eye opening example.

The first person A starts saving $5,000 (like you should be in your TSFA) at age 21, and stops saving after his last contribution at age 30 (you shouldn't stop). making 10 x $5,000 investments in total.

The second person B does not invest anything until age 30 however he invests $5,000 a year from age 30 until age 64.  making 34 x $5,000 investments in total.

Now both have turned 65 and want to start living off their savings. who do you think has a bigger nest egg. person A who hasn't saved a dime in 34 years, or person B, who started saving a bit late, but has worked hard and put lots of money away.

well, take a look at the spread sheet using a 7% intrest rate:
http://spreadsheets.google.com/pub?key=tkLjLjuOVO9wiDKUP6NoPSw&output=html

At age 64 Person B has not yet caught up with person A.

so is starting early important? yes
Critical? ABSOLUTELY.
I would go so far as to say compounding is one the most fundemental wealth building tool.
The most powerful force in the universe.

Loblaw Companies added

The Dividend Lover portfolio needs some exposure to a retail. my pick here was Loblaws.

whenever I shop at loblaws I notice how everything is overpriced. at the same time i notice how poeple don't seem to mind. and still shop there anyway. either unwilling or unaware that they can get the same groceries for less.

Company Description:

Loblaw Companies, majority owned by George Weston, has more than $30 billion in sales and is the largest food retailer in Canada, with operations in every province.

CIBC:

The idea that deflation always kills earnings, or that there is intense price competition in Canada, are myths.

And of course L pays an eligible dividend.

AGF Management and Gluskin Sheff Added

I added these two Canadian Asset Managers to the dividend lovers portfolio. Canadians love their mutual funds. while it makes me shiver at the thought of paying someone 2% a year to (miss)manage my money. The average Canadian is happy to do it.

These companies make their money off management fees they collect off of mutual funds they manage.

These two were the best value picks in the sector. This addition will also increase the diversification of the dividend lover portolio by adding new sector exposure to the portfolio.

CIBC had this to say about Gluskin:

Alternative strategies represent a large source of potential performance fees and should reduce performance fee volatility compared to equity investment strategies.
We estimate performance fee EPS of $0.87 in F2010 and $0.60 in F2011, which will likely be paid out as special dividends. Dividend growth remains a priority for management, as the company would like to build a long-term track record of annual dividend increases.
Gluskin Sheff currently yields 2.4% based on current regular quarterly dividends. We expect dividends will be able to grow by at least 5% in F2011 Our sum of the parts approach to valuing Gluskin Sheff results in a valuation of $26.25. Accordingly, we believe the shares are undervalued and rate Gluskin Sheff Sector Outperformer.

CIBC had this to say about AGF

AGF Management is the least expensive Canadian asset manager in our coverage universe at 10.2x our 2011E EPS, versus an average of 14.0x for the sector and a historical average of 14.4x. AGF is also the asset manager that provides the most earnings torque Loan loss provisions at AGF Trust resulted in greater earnings contraction vs asset manager peers during the economic downturn, and a return to more normal loss
ratios as the economy recovers should result in a material improvement in earnings.

And of course AGF.B and GS pay an eligible dividend, which is what the dividend lover portfolio is all aboooooout.

Thompson Reuters Added

Thomson Reuters is an e-information and solutions company in the business and professional marketplace.

The company has a relatively stable revenue stream, with more than 85% of revenues realized on a recurring basis, and TRI's has a track record for generating significant free cash flow.

I am also excited about the fact that TRI will provide good diversification to the Dividend Lover Portfolio since it is highly unlikely that I will add another name in the Printing & Publishing sector.

And of course Thompson pays an eligible dividend, which is what the dividend lover portfolio is all about

Killam Properties added

I added  Killam Properties to the divident lover portfolio.  I know I said no Reits, however this reit is not a reit lol. it pays an eligible dividend. and so is tax efficient for me to hold it in a non registered account.

Company Description:

Killam Properties is the largest apartment landlord in Atlantic Canada with over 8,900 apartments and also owns more than 9,200 manufactured home lots across Canada.

I am a firm believer that realestate is the path to riches. I am a fan of Reits but only when they are trading below NAV, as this one currently is:

CIBC:

At $8.27, Killam trades at 10.5x 2010E FFO, a 13% discount to our NAV estimate of $9.50 (at a 7.00% cap rate), and yields 6.8%. Our 12- to 18- month price target is $9.50 (from $9.00) or approximately 12.0x 2010E FFO. We continue to rate Killam Properties Sector Outperformer.

Picking up realesate below NAV has always been a no brainer so long as you've done your due dilligence. The payout ratio is a respectable 72% of FFO which is respectable for a reit.

Reits are also known as poor mans strategy for investing in realesate. Reits pass on to their owners some of the rewards of owning realesate however reits do not provide their owners with  phantom income (from depriciation), tax defferals, and tax deductions. On the other hand, reits are more liquid and less hands on.

And of course Killam pays an eligible dividend, which is what the dividend lover portfolio is all about


Stock Rating: Sector Outperformer
Sector Weighting: Overweight

12-18 mo. Price Target $9.50
KMP-TSX (3/3/10) $8.27
Avg. Daily Trading Vol. 70,600
Market Capitalization $318.4M
Dividend/Div Yield $0.56 / 6.8%
Net Asset Value $9.50 per Shr

FFO per Share Prev Current
2009 $0.73E $0.73A
2010 $0.80E $0.79E
2011 $0.82E

P/FFO
2009 11.3x 11.3x
2010 10.3x 10.5x
2011 10.1x

The Widow Portfolio

The widow portfolio is a conservative, income producing portfolio a financial planner would put together for a widow when a husbands dies after years of work and his work sponsored term life insurance pays off. The goal of this portfolio is to provide income to the widow and kids to be able to live without the husbands wages. The social realities up until the mid 80's would not allow women to earn any income and so the widow portfolio phenomenon was born.

Incidently the Dividend Lover portfolio we are building here would fit this bill.

First Trade Enbridge Inc.

I've added 100 shares of Enbridge as the first holding in this portfolio. I believe a utility pipeline company is a one of the most basic building block of a dividend portfolio.

Enbridge has a gas distribution network, and some power generation assets. I use enbridge gas at my home and my rental properties. the residential distribution network component is a natural monopoly.

The most hilarious thing I find about them is the equal billing plan where they offer to even out your bill for you over the year. and is the default setting for new accounts. so customers are forced to save month with them at 0% intrest, then if they are late to pay a bill then get charged 1% intrest a month, even though enbridge has money saved up for you. in your plan.

I believe enbridge is a good solid company in any canadian dividend portfolio and so I have added it as my first stock. it has low risk and highly visible earnings and capital investment plans.

and of course Enbridge pays an eligible dividend, which is what the dividend lover portfolio is all about


The CIBC analyst had this to say:
Enbridge continues to offer the strongest, most visible and lowest risk earnings growth, with 10% EPS growth expected to continue into the middle of the decade and beyond. We maintain our SO rating.

- Enbridge represents one of the best risk/reward situations in the Pipelines and Utilities sector.
- We expect 10%+ EPS growth through 2013, with comparatively low risk, driven largely by fully contracted pipelines already under construction, with negligible volume risk, and substantially mitigated capital cost risk. Growth is likely to continue thereafter as 2012+ project portfolio fills.
- Net free cash + dividends is expected to grow from $3.40/share in 2009 to $6.35 in 2013, which suggests that this stock could double over the next three years.
 
Sector:        Pipelines, Utilities, Power
Company:   Enbridge Inc.

CIBC:
Stock Rating: Sector Outperformer
Sector Weighting: Overweight
12-18 mo. Price Target $58.00
Dividend/Div Yield $1.70 / 3.6%
Book Value $18.86 per Shr

Earnings Per Share
2009 $2.34E $2.35A
2010 $2.59E $2.60E
2011 $2.89E $2.92E

P/E
2009 20.4x 20.3x
2010 18.4x 18.3x
2011 16.5x 16.3x

Dividend Per Share
2009 $1.48A
2010 $1.70E
2011 $1.88E

Yield
2009 3.1%
2010 3.6%
2011 4.0%

Blogger Introduction

Okay so now that I've completed the Introduction post of this blog I will disclose a limited amount of information about myself.

I am an Engineer with a technology Job. but I do it for the love of it.  let me explain.
I entered the work force in 2003 I worked long and hard with my end goal was to be able to stop working, and live of the fruits of my labour when I turn 30.

Today I am 30 years and 2 months old. I still work. though admittedly not as much as I once did. As I am older and wiser. I came to the realization that I enjoy the drive to work and back ( thank you 407 ) I enjoy going to the gym during the lunch break, and I enjoy programming and problem solving in general. and I enjoy chatting with co workers.

My outlook on work has changed from wanting to retire ASAP. to wanting to work in an environment I enjoy, and to work for the love of work, not for the money though the money still has to be good.

I am a firm believer in moderation. I advocate a strategy of increasing one's income, rather than reducing ones standard of living. which admittedly is more difficult because higher income pays more tax and spending less is spending after tax money. but that is where good tax planning can help you.

my experience in the stock market is extensive. I've been trading for 10 years, watch BNN, I read all the bloomberg articles, any tsx analyst report published by CIBC WM or RBC CM. and I read many finance blogs

I hope to share some of my expertise with my readers, and hopefully provide some useful information and opinions as I build this portfolio.

Blog Introduction

The purpose of this blog is to track my progress of putting together a non registered investment portfolio with 150% allocation of eligible dividend paying canadian stocks listed on the TSX.  Thats right the 150% is not a typo. I'm plannig to use 50% margin in this portfolio.

I'm going to justify the use of margin by stating that
1. I am 30 years old.
2. I have a stable job.
3. I am single with no dependents.
4. I have no other debts and the cost of capital (intrest rate) on the margin is low and is tax deductable.
5. This portfolio is going to be a very long term buy an hold. I intend to leave it for my kids and widow(s).
6. 50% leverage will stil leave significant margin in the account. it will be unlikely for me to get a margin call.
7. The holdings in this account are be fairly conservative.
8. I already hold significant non leveraged RRSP portfolio and TSFA.
9. I intend to let the portfolio deleverage itself as it grows older.

and conclude that my risk tolerance supports the use of this much margin.

now that I have justified the margin, I'm going to justify the reasons behind creating this portfolio.

1. I am 30 years old. It is time to start investing more conservatively.
2. I have been maxing out my RRSP and TSFA the first trading day every January.
3. I don't own any eligable dividend paying stocks in my RRSP or TSFA. since they don't belong there.
4. I am currently very poor in this major asset class with less than 1% of my net worth
5. My employment salary puts me in a high tax bracket. the dividend tax credit is going to help me reduce my tax burden and keep more of these earnings.

Portfolio Strategy:

1. I will invest only in eligible dividend producing instruments. no Reits no Income trust and no bonds. those belong in a tax advantaged account, not here.
2. I will not be using drips. The reason being is that the dividends comming in are going to be used to deleverage the portfolio by paying down the margin.
3. Low turnover, stocks will be bought and held forever.
4. I will be allocating about most of my free cash flow into this account. plus any special one time piles of cash that come along. for the next 2 years
5. In 2 years when I turn 32  I plan to redirect my free cash flow to another project I have in mind which i will reveal 2 years from now. so cash flow into this portfolio will stop.
6. Once the cash inflows have stopped this portfolio will be left to deleverage.
7. When the margin is mostly paid off to 5% margin I will turn on the drip. since this broker doesn't offer a synthetic drip, the change left over from the drip will finish off the remaining margin.