The Passive Income Investor

March 2015 - The Quarter that Was

2015-04-20T12:58:00.001-07:00

The TSX had an OK start to the year, with a 1.8% return over the quarter. Of course, energy was down another 1.9%. Declining crude prices continued to put pressure on energy stocks, but technically stocks are behaving well having put in what may be their low in December with higher highs and higher lows since then. The US S&P 500 was up just 0.4% in the quarter. But currencies added 9.1% for Canadian investors!!

As this is my first blog of 2015, I thought it would be useful to share how I think about Investing and my long-term goals for my portfolio. My long-term goal is to compound capital at a high rate of return while minimizing the risk of permanent loss of capital in any individual security or holding. In other words don’t lose money but outperformed the major market indexes. So far so good!!

I expect to continue to hold a 60/40 (60 % equity, 40% cash) allocation in about 40 to 50 investments, and estimate that my typical holding period will be long-term, typically ten or more years.

Recently I was approarch by a fellow investor and his advice was to sell equities because of technical indicators he seen on another blog which could cause a market crash. Personally I have no time for technical indicators or reacting to other people investment advice when managing my portfolio. I tried to keep in mind of some famous quotes by Warren Buffett on Investing ;

“A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.”

“We have long felt that the only value of stock forecasters is to make fortune-tellers look good.”

I couldn’t agree more and as a matter of fact “time arbitrage” can be an investor advantage. For example by taking advantage of the opportunity for long-term profit offered when short term investors sell due to disappointing short-term macro or business progress – this has always been a major source of profitability for my portfolio. In my experience, stock prices are often much more volatile than the underlying value of the business they represent.

I believe it is self-evident that the value of a business is the present value of the cash that it will generate for distribution to its owners over its lifetime. For the high quality, simple, predictable, low-leverage businesses in which I prefer to invest, their discounted expected lifetime cash flows generally do not change meaningfully due to events in Greece, greater Europe, or technical indicators in the markets.

As always for my quarterly blog I like to profile one of my holdings;

Portfolio Update - Agrium

I began taking a position in Agrium last year when the stock was in the low 80s.

Agrium is a well-diversified crop input company. The company’s Retail division operates North America’s largest agricultural retail network and has significant operations in Australia. Agrium Wholesale has significant operations that produce nitrogen fertilizers, along with sizable operations that produce phosphate and potash fertilizers. Agrium’s nitrogen operations are primarily located in Western Canada with access to low cost natural gas and located near higher netback regions – Western Canada and Western US nitrogen prices are typically priced at a premium.

EPS estimates have increase with the start of many positive trends for Agrium's operations in 2015. The increase was primarily attributable to lower nat gas input costs and a more favourable CAD/USD exchange rate. While not immune to agricultural headwinds, I continue to argue the longer term outlook for Agrium retail segment remains underappreciated. I base my argument on (i.) further cost reductions (incl. asset rationalization) and working capital improvements, (ii.) global growth in private label initiatives, (iii.) additional improvements in Australian Retail (an emerging theme), (iv.) Viterra results continuing to surprise to the upside.

I expect Agrium to focus capital on the following (i.) maintaining its core asset base , (ii.) growth investments with minimal returns of ~12% (in excess of AGU's 8% WACC), (iii.) sustainable dividend growth, (iv.) opportunistic share repurchases.

Capital Allocation- Show Me the Divy!

Agrium free cash flow inflection in 2016 can support much higher dividends: I forecast significant free cash flow starting in 2016 based on sustained Retail cash generation, improved nitrogen earnings due to Borger expansion start-up, and continued ramp-up of the Vanscoy potash mine. Additionally, I expect capital expenditures will decline from approximately $2B in 2014, to $1B in 2015, and then $600M in 2016. I believe this oncoming free cash flow inflection will allow management to significantly increase its dividend while remaining confident that the company can support its dividend payout even in a downside scenario. I think a $5/share dividend by 2016 is not unreasonable, and even extreme downside scenario would support dividend payments well in excess of $4/share.

Fiscal 2014 Update - OPEC Didn't Blink - Will US & Canadian Producers?

2015-01-26T10:42:00.001-08:00

On a average to low risk adjusted basis my 60/40 (60 % equity, 40% cash) portfolio grew 12% in the 2014 calendar year. Positioning the portfolio to be underweight the two poorest-performing sectors (Energy and Materials) and overweight some of the best-performing sectors (Consumer Staples, Utilities) and U.S. Equity all worked to my advantage.

Canadian equity markets were mired in negative territory given their relatively large exposure to the besieged Energy sector. In 2014, the S&P Global Energy Sector decline 11% and recent data by RBC Global Energy suggests continued challenging energy market conditions well into 2015.

· The oil market is roughly 800,000 Bopd oversupplied.

· The overwhelming issue is continued hyper US production growth.

· There has been steady growth out of Canada as well and this is likely to be a little sticky as oil sands projects have a longer-term horizon.

· OPEC is currently producing roughly 30.5 MMBopd. There may be modest upside to this over time due to potential growth in Iraq and the potential resumption of offline barrels.

· For the last 16 years, OPEC has defended price as opposed to market share. This changed on November 27.

· If and when oil prices move a fair bit higher, we will start to see a production response from the

, which could re-accelerate global production.

· The last six bear markets for oil have averaged 141 days with oil dropping 39% over that time (139 days, 32% ex. global financial crisis).

· The current bear market has persisted for 172 days with oil dropping 36% since June 13. If recent patterns hold, we could be nearing the bottom for oil.

Over the past 16 years (1998-2014), the global oil market has witnessed three major episodes of pricing collapse, each of which coincided with a dramatic macro economic or political event which either caused or was associated with a severe drop in oil demand growth. These include;

1997-98 (Asian Currency Crisis),
2001-02 (9/11 Terrorist Attacks), and
2008-09 (Global Financial Crisis).

On average, the aforementioned episodes displayed depressed or negative global oil demand growth for 2–4 quarters before staging a sustained demand growth recovery, which supported an oil price rebound. The Brent price pullback of late has not been associated with a major financial crisis at this juncture, but Saudi Arabia’s policy uncertainty has exacerbated the situation.

Canadian benchmark oil prices have fared relatively well by comparison to US oil prices, in part due to the insulation afforded by a softening Canadian dollar. Indeed, Canadian benchmark oil prices are based not only upon US benchmarks, but also the foreign exchange rate. As such, a softer Canadian dollar is favourable for Canadian oil prices. This stabilizer is often overlooked, but important in our eyes because an investor is buying a cash flow stream. As a simple illustration – holding all other factors constant, a US$0.01 depreciation in the Canadian dollar would largely off-set a US$1/b fall in WTI as it relates to Canadian light and heavy oil prices.

But you still need to be careful when looking at Canadian Oil & E&P, my Least Favourite Stock – is Canadian Oil Sands because it is;

Oil Sands Pure Play - 100% light sweet un-hedged crude oil production (Syncrude)

Operating Performance Challenged - Recurring unplanned maintenance = lower volumes + higher operating costs

Dividend Cutter - Dividend recently cut by 43%, Further cut possible given low oil prices

Keep in mind that in most countries, the fall in oil prices is generally seen as a positive development as it relates to future GDP growth. Moreover, most central bankers have been quick to emphasize that they will look through the “one-off” effect of lower oil prices and, instead, focus on movement in core consumer prices as they set policy. The IMF looked at a supply-side exercise in last October’s World Economic Outlook— albeit in reverse—using its own macro model. They examined the likely impact of a reduction in Iraqi oil supply that would increase the price of crude by roughly 20%. Their work suggests the net GDP impact from a 20% decline in oil prices could be in the range of +0.4% to +0.7% after two years for countries such as the US, Japan and China as well as the Eurozone.

Portfolio Update - Alaris Royalty Corp.

Alaris Royalty Corp is a Calgary-based provider of capital to well managed and profitable private companies seeking alternative avenues of financing. Its strategy is unique in the sense that unlike most private-equity firms, it provides alternative financing to private companies without seeking a controlling stake. Alaris’s long-term goal as a company is to create the optimal dividend stream available for its investors. With that goal in mind, it seeks private companies that generate predictable, low volatility, and low cyclicality cash flows for monthly cash returns.

Early in 2014 I began accumulating shares in Alaris Royalty, over the past 12 months, Alaris Royalty shares returned 36% in total returns, and they hit 52-week highs, grossly outpacing the 6% from the TSX. Alaris Royalty generates 40% of revenues from the US. I forecast this should rise well above 50% in the next two years as Alaris capitalizes on its US-focused investment pipeline. Given the rise in the USD, I expect positive tailwinds to revenues and earnings including sizeable unrealized gains on its US holdings. Alaris continues to benefit from having little to no exposure to oil and the Western Canadian economy.

2014 Mid Year Update

2014-08-15T12:22:00.000-07:00

My June quarterly blog is a little bit later than usual as I am always willing to defer the writing of the quarterly blog in favor of spending the time required for an existing investment in the portfolio or for the analysis of a promising new investment.

The summer heat is upon us, after the first 6 months of the year, where overall returns have been strong – especially in Canada – recent history suggests that the summer is a quieter time for the markets – although July has seen strong volatility with Argentina defaulting and the Ukraine situation. The recent string of 1%+ return months may just come to an end. The key is not to overreact to the ‘interesting’ items like seasonality or external events, but to remain focused on earnings, interest rates, and your asset allocation.

Allocating Your Assets: How Much Stock Is Too Much?

Don't go overboard when deciding how much of your portfolio to put into stocks.. This advice is particularly timely now, as memories fade of the 2007-09 bear market and many investors find themselves with swollen stock allocations—either consciously, or unwittingly through failing to rebalance their holdings. Recently I took some profits in a few positions to rebalance my non registered holdings to 60% in stocks and the other 40% in mostly cash.

Most people recognize they need to lean heavily on stocks to fund retirement, etc. Yet the extra return you earn for going with an all-equity portfolio is small relative to a traditional balanced portfolio that puts just 60% in stocks and the other 40% in bonds.

Since Jan. 1, 1926, according to Ibbotson Associates, an index fund benchmarked to the S&P 500 or its predecessor would have produced a 10% average annual return, assuming dividends were reinvested. A portfolio that allocated just 60% to this S&P index fund and the remainder to intermediate-term U.S. Treasurys (which are considered risk-free) would have gained 8.7% annualized, or 1.4 percentage points a year less, on average.

That certainly appears to be a rather modest price to pay for cutting your portfolio's risk nearly in half, as measured by volatility of returns.

Furthermore, many all-stock investors who at some point bail out do so at the worst possible times—near the bottom of a bear market—and don't get back in until a bull-market recovery is well under way. As a result of this counterproductive behavior, it is extremely rare for an investor's real-world return to be anywhere close to an all-stock index fund's theoretical potential.

You are much less likely to engage in this destructive behavior with a 60/40 portfolio, and therefore odds are good that you will perform just as well over time—if not better—than if you were to invest 100% in stocks.

The non registered and registered portfolio performance was particularly strong given that over 17% of the above portfolios is invested outside of Canada and was hurt by the strengthening Canadian dollar.

It is important to remember that with investing 17%+ of stocks outside of Canada, the US dollar is the biggest investment in your portfolio. As such, I pay close attention to currencies, and look for opportunities to add value to overall returns

The Dow's top four stocks (Caterpillar Inc., Intel Corp., Merck, Johnson & Johnson) by share-price performance so far this year, all have dividend yields, or the ratio of annual payouts to share prices, that are higher than average for the blue-chip index. Currently the portfolio owns three of the following Caterpillar Inc., Merck and Johnson & Johnson.

Positioning for the potential for higher interest rates

Canadian equities (particularly interest-sensitive equities) have benefitted from an extended period of falling interest rates, which begs the question: “What happens as interest rates rise?”.

Canada

, the last inflation rate announcement showed an inflation rate of 2.3%, the first time in 2 years the rate was above 2%. In general, this would lead to a push towards nearer term interest rate hikes. However, volatile energy prices pushed inflation up in the past couple of months, but could just as easily bring inflation down with a late summer decline in oil prices.

Regardless, we believe it is important to understand the potential shifts in market leadership, which are likely to impact portfolios when interest rates do rise. Sectors at risk – Share prices in some sectors appear to have benefitted significantly from falling interest rates, most notably, Energy Infrastructure and Real Estate/REITs.

How about a raise!

I continue to pay close attention to dividend growing stocks because who doesn’t like getting raises each quarter. I believe that this is a strong part of long term, lower volatile investment success.

I am pleased to say that there were no dividend declines in this year, and the list of 2014 dividend growers year to date included 22 of my 45 positions!

I look forward to even more dividend increases in the second half of 2014

Portfolio Update

SNC-Lavalin

In APRIL, 2012 given ongoing investigations and shareholder uncertainty re outcome and potential impact to firm reputation and future contract awards SNC-Lavalin stock drop from the mid 50s to the mid 30s – this is when I initiated a position in - SNC Lavalin. The corruption news has abated, and we believe that the initiatives by the new CEO are more than veneer.

SNC Lavalin is

Canada

's largest engineering and construction company with a global office network reaching over 35 countries employing ~24,000 employees. SNC engages in engineering, project and construction management, project financing, construction and operations and maintenance. SNC was founded in 1911 and has been public since 1986 on the TSX.

The Infrastructure (ICI) portfolio is in the sweet spot. Infrastructure assets are in demand and valuations appear attractive for vendors. .Even at a price in the mid $50s the stock looks attractive. There could be upside to the ICI portfolio that is value at book, that have been growing in value, but at this point I am comfortable valuing the ICI portfolio at $30/SNC share after tax. This implies that the engineering business is trading at 8.5x our 2015 engineering EPS estimate of $1.70. I believe that this valuation is attractive enough to provide investors with enough of a return to be compensated for the volatility that they are likely to encounter in the next few quarters.

2013-12-29T15:08:00.000-08:00

December 29, 2013

What a year! 2013 was the best performing year for the portfolio since its inception. The last two quarterly blogs were delayed as I am always willing to defer the writing of quarterly blogs in favor of spending the time required for an existing investment in the portfolio or for the analysis of a promising new investment. As a result, these blogs occasionally get delayed, particularly, as one might expect, in a year as interesting as 2013. The Spotlight have change to the Potential Move in Long-Term Interest Rates as opposed to the Eurozone crisis and

China

’s hard landing.

On risk adjusted basis the portfolio outperformed all its benchmark for 2013, even more satisfying the portfolio has never experienced a down quarter since inception and has adequate hedging in place for any black swan events.

Portfolio Update

During July 2013, I established and added to positions in all of the major Canadian Banks. Canadian Banks hit a 52 week low during the beginning of July as increases in longer-term bond yields have led to many questions around the potential impact of higher interest rates on financial services companies. I believe that the profitability of both banks and lifecos would benefit from a higher interest rate environment for reasons that are both direct and indirect, assuming that higher interest rates are experienced across the term structure and reflect an improved economic outlook.

Higher interest rates impact on Banks and Lifecos

I added to Canadian Banks as I do not believe that either sector is positioned to benefit materially more than the other from such a scenario. Lifecos used to be much more exposed than banks to movements in macro factors, but have greatly reduced their exposures, to the benefit of their earnings volatility. I do not believe that the larger banks are positioned materially differently from one another, but banks will continue to increase their dividends annually as opposed to Lifecos.

Banks would benefit from a higher interest rate environment for reasons that are both direct and indirect, assuming that higher interest rates are the result of a stronger economic outlook. Direct positive impacts would include improved net interest income margins and reduced defined benefit liabilities. Indirect impacts would include higher wealth management and capital markets revenues, loan growth and credit quality. Banks are most exposed to short-term to medium-term (i.e. 5 years) interest rates, and an increase in the interest rates they are exposed to, if it materialized, would impact net interest income margins over a multi-year period rather than immediately.

While it is difficult to determine how much margin upside there might be to a higher interest rate environment, I believe that the banks that would see the largest increase in net income from higher net interest income margins (i.e.ignoring indirect impacts) are those with more exposure to retail banking and weaker efficiency ratios. The two smaller banks (Canadian Western Bank and Laurentian Bank) would benefit more than the larger banks.

Paychex

The top performer for the portfolio this year was Paychex, up over 50% year to date. Paychex provides payroll and integrated human resource and employee benefits solutions predominantly for small and mid-sized businesses almost entirely in the United States. The firm has 12,500 employees and is based in Rochester, N.Y. and was formed through the consolidation of 17 payroll processing companies in 1979. It has been one of the most successful human resources outsourcing firms in the United States. The minimal amount of capital required for operations and the firm's significant competitive advantages have allowed it to produce returns on invested capital that have averaged 70% over the past 10 years.

Switching from one payroll processing vendor to another is a very difficult task, and customers' unwillingness to do so has allowed Paychex to build a relatively sticky client base. This inelasticity has enabled the firm to raise prices annually and expand profits. Strong scalability has also allowed the firm to be price competitive without feeling significant margin pressure.

Upside scenario

Upside potential assumes acceleration in revenue growth driven by 1) improving US labor markets, 2) a higher interest rate environment, both of which are well underway in the

United States

Outlook 2014:

It seems like we’ve been talking about the low-return world forever, but it keeps getting delayed. Low returns didn’t materialize in 2013, and U.S. equity markets are trading at fairly full valuations. I still think risk will be rewarded and well-structured portfolios can achieve realistic investment goals. 2014 will begin as 2013 did with the added twist that the Fed seems set to begin the process of withdrawing from money printing during the year. We can’t be sure of the consequences, but extra volatility seems a good bet.

The signs of economic healing in Europe and Japan along with the improved growth outlook for the U.S. should keep equity markets moving slightly higher with some fits and starts over significant tax policy changes in Japan and still a less than perfectly unified Europe which will create occasional tension.

First Quarter 2013 Update!

2013-05-21T12:06:00.001-07:00

The quarterly blog is a little bit later than usual as I am always willing to defer the writing of the quarterly blog in favor of spending the time required for an existing investment in the portfolio or for the analysis of a promising new investment. As a result, these blogs occasionally get delayed, particularly, as one might expect, in the first quarter of 2013.

On risk adjusted basis the portfolio outperformed the major market indexes including the S&P/TSX COMPOSITE INDEX, A Wealth Preservation Index, and a North American Balanced Index for the first quarter of 2013. The relative outperformance versus the Index can be attributed to asset allocation and security selection. Asset allocation contributed mainly to the outperformance, I decided to overweight US stocks since 2012, current positions include COCA COLA CO, PAYCHEX INC, MCDONALDS , ELI LILLY & CO, PROCTER GAMBLE CO, Johnson & Johnson and MERCK & CO INC to name a few. From an asset allocation perspective, I am maintaining a significant underweight in bonds.

Eli Lilly and Co

Eli Lilly and Co. is a leading maker of prescription drugs, offering a wide range of treatments for neurological disorders, diabetes, cancer and other conditions. Animal health products are also sold. Foreign drug sales accounted for about 46% of total revenues in 2012. Based on positive clinical developments in several important pipeline assets targeting diabetes, cancer and Alzheimer's disease, the stock has outperformed the S&P 500 Index and most of the Big Pharma stocks over the last year. Lilly recently filed ramucirumab for stomach cancer, and empagliflozin for type 2 diabetes, with three more Phase 3 assets to be submitted later this year. Relative to its size, Lilly holds a disproportionately high amount of potential blockbusters in Phase III development. I continue to like the stock due to a robust catalysts profile relative to peers, pipeline optionality , and reasonable valuation.

Portfolio Update

During the quarter, I eliminated the portfolio position in Chorus Aviation and added to the portfolio position in Enbridge Income Fund Holdings Inc.

Chorus Aviation

Chorus Aviation is Air Canada's regional carrier providing domestic and transborder flights to Canadian and U.S. destinations. Chorus Aviation was formed in January 2001 when Air Canada combined its four regional carriers into one. Chorus Aviation operates as a separate business with its own management and union contracts..

I eliminated the portfolio position in Chorus Aviation in early January and took some modest profits including reinvested dividends. Even though Chorus continues to generate healthy cash generation and sufficient free cash flow to more than adequately fund the $0.15 quarterly dividend, I became concern about the upcoming decision in the arbitration relating to the benchmarking provisions within its Capacity Purchase Agreement with Air Canada and decided to take a modest profit after a run up in the stock in January 2013.

2012 Yearend Update!

2013-03-04T12:02:00.000-08:00

On a risk adjusted basis the portfolio outperformed the major market indexes for 2012, even more satisflying the portfolio has never experienced a down quarter since inception and has adequate hedging in place as uncertainty regarding the fiscal cliff, the Eurozone crisis and China’s growth potential move back into focus.

Portfolio Update

During the quarter, I established positions in McDonald’s Corporation and Caterpillar both at or near its 52 week low.

McDonald’s Corporation

McDonald’s Corporation is now 1.83% of the overall portfolio. McDonald’s makes money in principally two ways: first, by collecting an approximate 14%+ share of its franchisees’ revenues for the use of McDonald’s brand, a business coined “Brand McDonald’s” and second, by generating operating profits from a portfolio of company-operated stores.

McDonald’s brand royalty business is one of the greatest businesses in the world because it generates an annuity-like revenue stream which can grow without the requirement for meaningful investment of capital from the company. Because the company’s revenue share comes from more than 32,000 different stores spread around the globe, it is an inherently stable, currency-hedged, inflation-protected stream of cash flow.

Another underlying strength is McDonald's cohesive franchisee and affiliate system, which collectively operates 80% of the chain. This structure provides the firm an annuity like stream of rent and royalties even during challenging economic times with minimal corresponding capital needs. As a result, McDonald's generates excellent free cash flow and returns on invested capital in the mid- to high teens. These results are even more impressive when considering that the firm owns 45% of the land for its restaurants (more than $5 billion in land assets), meaning that the returns are generated on a higher invested capital base than most franchised restaurant chains.

Caterpillar Inc.

Caterpillar Inc. is now 1% of the overall portfolio and is the world's dominant maker of construction and mining equipment, as well as a leading producer of diesel and gas engines, industrial turbines (essentially jet engines that power equipment and generate electricity), and locomotives. No competitor can match the breadth of Caterpillar's product line. Cat’s goal is simple: Ensure that customers make more money using Cat equipment than using competitors' equipment. Though Cat equipment generally costs more than anyone else's, the model requires it to be the least expensive over its lifetime, factoring in purchase price, maintenance costs, operating costs, uptime, life expectancy, and resale value. Dealers are key to these economics. A machine that breaks down can halt an entire job, and getting back under way in two hours rather than 48 hours means big money. Large, successful dealers that carry lots of parts, maintain skilled technicians, and move fast are thus a major selling point, and Cat's dealer network is the undisputed best in the business. Big, strong dealers help Cat sell the most machines; all those machines in the field bring dealers lots of revenue from parts and service, so much that they can survive in years when they don't sell any new machines at all; and that financial stability enables dealers to grow bigger, attracting even more customers, and build a larger base of machines that need to be serviced.

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Equities, while volatile, have marched higher over the past three-year recovery. Bonds, on the other hand, are almost pricing in a recession with 10-year yields at 1.73% in the US and 1.80% in Canada. Fed buying, deleveraging and a lack of investor confidence continue to put downward pressure on yields. While this disconnect between equities and bonds can be resolved in either of two ways, we believe there is greater risk owning bonds at these yields. From an asset allocation perspective, I am maintaining a significant underweight in bonds.

I decided to reduce my Canadian equity exposure in 2012 to source the cash. The European recession, slowdown in China and softness in many other emerging markets does not stack up well for commodity-focused markets like ours. Easy monetary policy has kept commodity prices elevated, but this does not substitute for real end-demand growth.

Third Quarter 2012 Update!

2012-10-14T14:59:00.001-07:00

Third Quarter 2012 Update!

The portfolio for the third quarter was up 2.56%, on a risk adjusted basis the equity position was 39.6% and the cash position in the portfolio was a very low risk adjusted level of 49.5%. The portfolio has outperformed all indexes ( A Wealth Preservation Hedge Fund, The S&P/TSX COMPOSITE INDEX and a Canadian Monthly Income Fund) it tracks and has never lost money since inception in 2010!

I continue to underweight the energy sector which is approximately 4.85% of the overall portfolio compare to a weight of 26% for the S&P/TSX index. As poorly as energy underlying equities have performed lately, the underlying equities may fared even worse in the next year with the global slowdown!

I initiated a position in Great-West Lifeco. Generally I am enthused by the low valuation, paying 0.9x to 1.0x book value for expected ROEs of 11% to 12%, make the lifecos cheap. Positively, Great-West is above Canadian lifeco peers given lower expected earnings volatility and higher expected ROE (16.3% in 2013) and is less exposed to movements in equity markets and interest rates than its lifeco peers.

Lifecos’ shares exhibit greater volatility (up and down) than banks’ as their earnings and capital positions are affected more materially by movements in equity markets and interest rates, particularly for Manulife, Sun Life,

and Industrial Alliance. Those potential impacts dwarf the impact of sales or near-term management actions on earnings and capital, and as such we continue to expect moves in interest rates and equities to be the primary drivers of share prices. The near-term overweight/underweight call comes down to individual investors’ views on equity markets and interest rates.

Lifecos trade at low P/B valuations, which we believe is appropriate rather than making lifecos cheap given ROE expectations of 11% to 12% for three of the lifecos (Sun Life, Industrial Alliance, and Manulife). For us to be more positive on those three lifecos, we would have to look for reasons to believe that core ROE will exceed 11% to 12% or that equities and/or bond yields are about to rally significantly. Investing in those three lifecos as a play on higher interest rates and equities only makes sense, for investors looking for annual equity market returns in excess of 8% and annual interest rate increases in excess of 40 to 75 basis points. I have a Above Average Risk rating on Sun Life, Industrial Alliance, and Manulife due to sensitivity to interest rates and we believe that a prolonged period of low interest rates, or a decline in interest rates, could cause reserve additions as part of future annual reserve reviews.

On the other hand Great-West remains less exposed to movements in equity markets and long-term interest rates than its peers. Great-West’s sensitivity to equity market movements is lower and mostly fee-driven. The decline in bond yields since Q3/12 began, is also not as potentially negative for Great-West’s near-term net income outlook as it would be for its peers. We are less concerned about movements in macro factors—particularly interest rates and equity markets—having a major impact on our earnings estimates for Great-West. The lower exposure to interest rate movements is driven by tighter asset/liability duration management, which has kept the company less exposed to longer duration products. The lower exposure to movements in equity markets is a reflection of the company having introduced GMWB variable annuities later than peers and therefore being exposed to a much more conservative segregated fund/variable annuity portfolio.

Great-West has a more highly rated investment portfolio than its peers but more exposed to Europe, given the company’s business mix, although the majority of that exposure is in the UK. Isolating the peripheral European countries, exposure to banks and other financial institutions’ bonds (Ireland, Italy, and Spain) is 0.4% of invested assets. Additionally, approximately 0.2% of the company’s invested assets are in bonds issued by the Governments of Portugal, Ireland, Italy, and Spain. The company has no exposure left to the Greek Government or Greek banks, and no exposure to Portuguese banks.

Midyear June 2012 Update!

2012-07-19T13:48:00.000-07:00

Midyear 2012 has drawn to a close as one of the more difficult years for natural resource investing in recent

memory. The main drivers of this commodity sell-off were slowing growth in both China and the U.S.

and, even more critically, an accelerating deterioration in Europe.

As of June 30, 2012 the S&P/TSX index is down 1.5% with the Energy sector down over 8% continuing the underperformance of resource equities. As poorly as gold and oil have performed lately, the underlying equities have fared even worse!

For the Period Ending June 30, 2012 the portfolio I managed has outperformed and has shown positive returns mainly due to my underweight in the energy sector which is approximately 6 % of my overall portfolio compare to a weight of 26% for the S&P/TSX index.

To put this into perspective the top two largest holdings of my portfolio are Coca-Cola (4.3 % weighting) and Merck (3.4 % weighting) is greater than my total energy weighting and both have outperformed . Coca-Cola is up 73.09 % and Merck is up 23.22 % since I added both to the portfolio. Last week the shares of Merck jumped 4% in early trading Thursday, the day after it said it was ending a key Phase III clinical trial for its osteoporosis drug candidate odanacatib ahead of schedule because the drug had been shown to be highly effective.

The Focus Stock for the month is Coca-Cola, which carries S&P Capital IQ’s highest investment recommendation of 5-STARS, or strong buy. Coca-Cola, based in Atlanta, GA, is the world’s largest producer of soft drink concentrates and syrups, as well as the world’s biggest producer of juice and juice-related products. The company also owns or has majority stakes in 97 beverage bottling or canning plants located around the world, which are consolidated into the Bottling Investments operating segment. Coca Cola operates in more than 200 different countries, I see that providing a steady runway for future growth as well as strong opportunities to increase per capita consumption.

According to data from the company, 2011 global per capita consumption averaged 92 servings per year, with the United States coming in at over 400. This compares to the developed world average of 267, the developing average of 251 (including Brazil at 230 and Turkey at 173) and an emerging market average of just 31 (including Russia at 73, China at 38 and India at 12). Moreover, I think the company’s global infrastructure positions it well to grow its both carbonated and non-carbonated beverage brands. Today, the company licenses and markets more than 500 different brands. In 1997, it had only five brands exceeding $1 billion in retail sales. By 2011, that number had grown to 15, and I expect more brands, particularly in the non-carbonated arena, to join that group as the company expands distribution of its newer brands into more countries.

Moreover, I still find the valuation of the shares compelling, trading in the lower half of KO’s historical average with a dividend yield approaching 3%

WEALTH PRESERVATION IS A PRIORITY !

2012-06-09T13:39:00.000-07:00

May was one of the more difficult months for natural resource investing in recent memory ! Crude oil (WTI) finished the month down 18% to a seven-month low – one has to go back to October 2008 to see a drop of similar magnitude. The main drivers of this commodity sell-off were slowing growth in both China and the U.S. and, even more critically, an accelerating deterioration in Europe.

In an environment where we would have expected the world to increasingly gravitate towards gold as a safe haven, investors have instead continued to rush into U.S. Treasuries and Japanese Government Bonds, where 10-year maturities are now offering record low yields of 1.559% and 0.819% respectively, despite considerable new issuance.

What to do?

My fund remains heavily weighted towards cash and dividend-paying companies. I believe that North American interest rates are likely to remain low for a surprisingly long time. As such, good quality high-yielding equities should remain an attractive investment – providing investors with regular income.

The Opportunity

Central banks are facing rising political pressure to step up money printing efforts in Europe, China, Japan, and the U.S. The accelerating European bank run in particular is increasing the odds of a massive ECB response at any moment. Given the scope of the threat, we would not rule out an announcement of a globally coordinated initiative.

The obvious direct beneficiary from increased money printing is gold, which effectively acts as a fixed supply “currency” (store of value) relative to depreciating paper currencies.

At a time when massive money printing by the world’s central banks is not only inevitable, but potentially imminent, we believe that gold should be viewed in its traditional role as a store of value rather than just one more “risk-on” trade.

In order to mitigate downside risk and generate income (above 10% currently), I have exposure to a covered call option strategy on 33% of the securities of my Gold Portfolio. The level of covered call option writing and income vary based on market volatility and other factors.

Sell Encana Corporation

2012-05-09T12:14:00.003-07:00

I attended the Encana AGM a few weeks ago. I have attended the Encana AGMs the last couple of years and my first impression is that they have made it very difficult to attend their AGMs with security screening exceeding any other company AGMs I have attended.

They also schedule the AGM at the exact same time and date as Cenovus which made it difficult as a shareholder to attend - most shareholders owns shares of both Encana and Cenovus since the split and the Encana AGM was not well attended by shareholders.

On September 10, 2009, Encana reignited plans to proceed with the split of the corporation into two independent energy companies. An integrated oil company Cenovus Energy was created, which split off EnCana's oil sands and downstream assets. Post its corporate split, Encana's estimated upstream production is roughly 100% natural gas focused - a very bad move with gas prices below $2!

In my view with the lack of any concrete plan, Encana’s success with material liquids growth is not optional given its dry gas weighting, time is not a luxury the company can necessarily afford for gas prices to recover. Encana may need to consider an oil or liquids weighted acquisition that would augment its organic prospects with a more immediate and concentrated development fairway which plays to its execution strength. My rating is a Sell!

The Future of Investing: Alternative Hedging Investing!

2011-12-31T13:46:00.000-08:00

Driving the change and demand for accessible alternative investments was the 2008 market crash and the three years of ensuing volatility. It became obvious that relying solely on the wait-for-growth approach, also known as a long-only approach, was a mistake. Even with a well-rounded stock portfolio, analysts realized long-only investing placed investors’ wealth at too much risk.

Today, while the market volatility is not near the levels of 2008/2009, returns remain depressed and alternative investments provide a new vehicle for higher returns not tied to traditional equity markets.

Do You Need A Covered Call ETF?

Investors are taking a renewed interest in a strategy abandoned during the recent recovery; the covered call. A covered call consists of going long on an underlying security while selling call options on the same underlying security. This has the effect of generating additional income (the premiums received from selling options), which helps to offset some losses when markets are falling. When markets are rising, however, the call options sold can come “in-the-money,” offsetting gains generated by the long position in the underlying security. ETFs employing the covered call strategy have lagged behind traditional beta funds as markets headed higher, but have sharply outperformed the broad market during the recent period volatility and declining equity prices.

Covered call strategies can also pair a long position with a short call option on the same security. The combination of the two positions can often result in higher returns and lower volatility than the underlying index itself.

Bearish about market prospects for 2012

2011-12-31T13:22:00.000-08:00

Welcome to my last post of 2011. Unhealthy global government balance sheets and structural economic problems as a result of years of excess and financial engineering have created a dangerous negative feedback loop in 2011 which I expect to cause recessions around the globe in 2012. This December post outlines this negative feedback loop and explains why I expect a difficult market environment in 2012.

In summary global governments are carrying more debt than ever and raising question as to whether or not a second — and perhaps even more dangerous credit crisis — is inevitable. The clock is ticking and every second, the world takes on more debt. In 2001, global government debt totaled $18.2 trillion. Fast-forward a decade, and the figure now totals nearly $44 trillion, an increase of 140 percent (more than 9.0% a year).
According to The Economist, global sovereign debt is forecasted to grow an additional 7% in 2012 reaching a historical high of $47 trillion

One of the problems with economic crises is that mainstream economists and financial experts
don’t see them coming. That’s exactly what happened in the fall of 2008, when the financial crisis kicked off in the United States. Since that time, governments have continued to spend, all while production has slowed and unemployment has skyrocketed. As we enter the fourth year of the post-crisis environment, there is no sign of growth that is impressive enough to get us out of the negative feedback loop in which governments have continued to operate. A negative feedback loop takes hold when massive government debt loads, a weakening financial system and a slowing economy feed off each other, interrupted by Federal Reserve and other central bank reflationary attempts. The result of this rising debt means more government interference, a further slowdown in the already debilitated economic environment and the possibility of further citizen uprisings in some countries.

As noted, I am very bearish about market prospects for 2012 and I will be adding more non correlated alternative investments to my portfolio. See my next post The Future of Investing: Alternative Hedging Investing!

TransAlta still Underperforming!

2011-11-06T14:04:00.000-08:00

Although 2011Q3/11 results seem decent, the numbers was driven by earnings from energy trading, rather than the company’s core business of electricity production. In addition, during a conference call TransAlta noted that maintenance costs are likely to increase in 2012E, as the company positions its fleet for the eventual retirement of its legacy coal fired assets. Continuing a trend that began at the 2010 Investor Day, TransAlta is now providing cash flow guidance rather than EPS guidanceand now also appear to be focused on cash flow as opposed to

earnings growth targets.

Also TransAlta did not provide an update on the pending arbitration regarding its decision to remove the Sundance 1 and 2 units from service. At current levels, the shares are fully valued and my rating is Underperform.

Annaly Capital one of the best risk/return plays in the financial sector.!

2011-08-01T11:48:00.000-07:00

Annaly Capital has performed remarkably well through the entire financial crisis of the last several years and has consistently paid quarterly dividends yielding above 15% per annum!

During last week U.S debt crisis I added to my holdings in NLY!

Annaly (NYSE: NLY) manages real estate related investment securities:

mortgage pass-through certificates
collateralized mortgage obligations
agency callable debentures
other interest earning securities backed by mortgage loans

NLY Principal business objective is todistribute income to stockholders from earnings on real estate securities. NLY is taxed as a real estate investment trust (REIT), so has no federal income tax on taxable income that is distributed to stockholders.

NLY should continue to perform well in a low interest rate, low inflation environment.

My Conclusion

•Very low probability of the Fed raising short-term rates
•The gov’t will do everything in their power to prevent another meltdown of MBS market-> good for NLY’s portfolio
•Very high dividends with low interest rate risk

NLY remains one of our favorite risk/return stories for 2011 - particularly given recent macroeconomic
weakness. Shares are attractively valued at 1.05x current book value, relative to the forward dividend yield of roughly 16% we expect in the year ahead.

Proposed changes related to the taxation of SIFTs and REITs.

2011-07-26T12:52:00.000-07:00

This follows on the heels of announced changes only 7 months ago and continues along in a series that first began with the Oct-31-06 "Halloween Surprise".

Interest And Rent Paid Within A Stapled Structure Will No Longer Be Deductible For Tax Purposes – Broadly speaking, a stapled security involves two separate securities that are “stapled” together such that the securities are not freely transferable (tradable) independent of each other. Stapled structures in-place on or before July 19, 2011 will have a one-year transition period to July 19, 2012 before the amendments apply. During this transitory period, interest and rent payments between legal entities within the stapled structure will continue to be deductible expenses.

The proposals include changes in respect of:

· publicly-traded stapled securities of SIFTs, REITs and corporations;

· excluded subsidiary entities under the SIFT regime;

· non-portfolio property of a corporation under the SIFT regime; and,

· tax installments for SIFTs.

Depending upon the circumstances, eliminating these deductions could materially increase taxable income and cash taxes payable, thus diminishing the tax efficiency of the entire stapled structure.

For example , InnVest REIT is likely to face a growing cash tax expense, beginning in Q3/12. I expect the rate of growth in cash taxes to outstrip the rate of pre- and post-tax AFFO for a number of consecutive years. In the near-to-medium term, the effective cash tax rate (measured as a percentage of pre-tax AFFO) appears unlikely to exceed 20%, although over the long-term, I believe it could break above this level.

Time to Sell Cineplex Inc. (CGX-T)

2011-07-09T14:26:00.000-07:00

Cineplex Inc. (CGX-T) has had a good run for me (up over 60% in two years) and now I believe it is due for a correction!

Despite hits such as The Hangover Part II and Kung Fu Panda 2, second-quarter industry box office sales fell short of high expectations. As a result, I am scaling back my financial forecasts for Cineplex Inc.

I purchased the stock when it's dividend yield was close to 8% - currently it is paying 5%. While Cineplex remains good core media holding for investors, other companies with higher yields serve up a better bang for a investor's buck.

Canadian industry box office for the final week of Q2/11 was released. The reported YoY increase for Q2/11 was +1.7%, which compares to revised Q2/11 box office revenue estimate for Cineplex of +2.1% on a “same-store” basis, or +3.1% on a total basis. Despite the modest YoY increase, industry box office performance in Q2/11 was disappointing considering high initial expectations for a more meaningful YoY increase, perhaps in the “low-teens”. Exhibit 1 provides a summary of weekly Canadian industry box office for Q2/11 as well as recent YoY quarterly box office trends for Canada and the “same-store” box office growth and “same-store” forecast for Cineplex through 2012E.

I see better returns elsewhere in the other sectors because;

(i) relative returns within the coverage universe; is at 9.1x FTM EV/EBITDA, a valuation premium to the U.S. peers that is at the high end of the historical range;

(ii) little room for further box office disappointment in H2/11 at current valuation levels; and

(iii) potential negative news flow related to premium VOD.

Questions About Dividend Have Spook New Flyer Investors. Why I'm Holding!

2011-06-29T12:51:00.000-07:00

The Payout

The New Flyer income deposit security (“IDS”) consists of one common share and a C$5.53 principal 14% subordinated note. The monthly distribution currently consists of a C$0.03298 cash dividend and a C$0.06453 interest payment on the note, for a total monthly distribution of C$0.0975. At the closing share price $7.79 on June 10th, that's a 15% yield.

Unfortunately, the increasingly competitive environment means the company will need to cut payments to IDS holders. Investor worries surrounding the upcoming decision seem to have driven the recent price drop from the C$11.50-12.00 range to the current price below C$8.

Strategic Options

New Flyer's board is in the process of evaluating a number of strategic options, both to better cope with the cyclical nature of the industry and the unsustainable distributions.

No matter what the structure, New Flyer is an excellent value company at the current price. I like the income security nature of the current structure, and would be happy to hold the New Flyer IDS at current prices even if the dividend is reduced to zero, but I'd also be comfortable if New Flyer converts to a more traditional equity structure.

If the current IDS were somehow converted into straight equity trading at the same price (C$7.79), the P/E ratio would be about 8, after taking into account the reduced earnings due to the loss of the interest tax shelter!

The Q1 2011 book value per share was US$2.36 or C$2.32, so the combined book and principal value of an IDS is C$7.85, above the current stock price. For a company that will almost certainly continue to pay the interest on the subordinated note until the notes are called, this seems like a bargain. The interest payment alone amounts to a 10% yield at C$7.79!

Cover yourself with call options on the Canadian banks!

2011-06-25T15:16:00.000-07:00

The stocks of the Big Six Canadian banks as a whole have experienced a good run after recently posting solid quarterly earnings. The S&P/TSX Canadian Banks Index, an Index that tracks the Canadian banks, recently broke above its pre-crisis high. While this could be bullish for the group, a failure to hold above this level could potentially send the index lower. Its Relative Strength Index (RSI), a technical indicator, has moved slightly beyond a 70 reading, which tends to indicate that, near-term, it’s overbought.

A Canadian bank covered call strategy can protect some of the downside protection, while still maintaining exposure to the Big-Six Canadian banks!

For hedging purpose in flat and down markets I purchased the BMO Covered Call Canadian Banks ETF (ZWB/TSX), which carries a management fee of 0.65% and an annualized yield of about 10 %. A covered call is generally attractive to investors bullish on an equity or sector but who expect the security to trade within a narrow range while the covered call is in place. Utilizing a covered-call strategy on the Canadian banks allows investors to retain exposure to Canadian banks while also maintaining some downside protection. Potential weakness in the performance of the stocks of Canadian banks will be partially offset by the premium earned selling call options. In addition to the underlying dividend yield of the banks, call option premiums collected will also enhance the overall yield of the strategy.

The BMO Covered Call Canadian Banks ETF (ZWB) is an actively managed fund that holds Canadian bank stocks or units of the BMO S&P/TSX Equal Weight Banks Index ETF (ZEB) and writes covered call options on the underlying securities depending on market conditions. The call options written are slightly out of the money and are rolled forward every month upon expiry. The underlying portfolio is rebalanced twice annually.

Since its inception in January 2011, the fund has made monthly distributions totalling $0.512. Tax advantaged distributions are a mixture of dividends from the underlying portfolio and option premiums, which are taxed as capital gains.

I expect Canadian banks to stay rangebound. Valuations and returns for the next year or so will be driven by dividend increases because the underlying valuations have largely returned to pre-crisis levels. Therefore I would expect ZWB to outperform in flat and down markets and ZEB to outperform when bank shares are advancing sharply.

Time to eliminate my position in TransAlta !

2011-05-22T16:49:00.000-07:00

I eliminated my position in TransAlta because I am concerned that investors in the stock were more bullish lately on Alberta power prices, and not on the force majeure/PPA termination proceeding. The stock had appreciated considerably and I felt that this was a good time to exit the remainder of my position. The dividend yield of 5.5%, which is below some of the former income trusts/high dividend-paying corporations that I cover, I feel there is better prospects available for near-term dividend growth for my portfolio.

Company Description

TransAlta is a non-regulated electric generation and marketing company with operations in Canada, Australia, and the U.S. Net generating capacity is approximately 8,700 MW. About 55% of the company's generating capacity is coal-fired, with about 20% gas-fired, and 25% from renewables (wind, hydro, biomass and geothermal).

Westshore Terminals is my favorite name in the industrial sector!

2011-05-21T13:52:00.000-07:00

Westshore Terminals is my favorite name in the industrial sector because of:

1. Steady cash flow: Westshore's loading rate has moved substantially from a variable to a fixed rate, resulting in a significant increase in cash flow stability. Estimate of 2011 free cash flow of $1.30/unit (post-conversion) -which represents a very attractive 8.6% free cash flow yield.

2. Virtually no competition: Westshore's main competitor, Neptune, is capacity constrained at 6MMt (2009 shipments were 4.3MMt). Accordingly, Westshore benefits from a very attractive competitive dynamic.

3. Captive customer with long-lived asset: Teck plans to eventually increase tonnage to eventually 30MMt. Given the scarcity of port capacity, Teck will be motivated to use capacity at Westshore and not risk having that capacity allocated to other potential customers.

4. Clean balance sheet: Due to very strong cash flow historically, Westshore is in a very strong financial position. Westshore has paid out $479MM ($6.57/unit) in cash over the past 5 years, has zero debt and $94MM ($1.27/unit) in cash.

5. Take-out candidate: Westshore is an ideal candidate for a pension fund – as Westshore's long-term cash flow profile match well with a pension fund's long-term liabilities. I consider a joint bid between a pension fund, infrastructure player and a strategic player (i.e. Teck or CP) as highly likely.

Company Profile

Westshore Terminals Ltd. has been in business since 1970 and operates the largest coal loading facility on the west coast of North and South America, located at Roberts Bank, British Columbia. Westshore generates revenues on a throughput basis and receives a handling charge from customers based on volumes of coal exported through the Terminal. Westshore does not assume ownership of the coal and is therefore not directly exposed to the price of the commodity.

Recently Westshore Terminals released Q1 results that were below m yestimates as known issues, including harsh winter weather and equipment failures, impacted coal shipments more than expected. Coal shipments were 5.9MM tonnes in the quarter vs. our 6.5MM tonnes estimate leading to EBITDAR of $23MM vs. our $30MM estimate and revenue of $50MM vs. our $55MM.

Maintaining distributions. Westshore’s distribution of $0.27/unit was as expected and I note that the Board tends to make Q1 on the low side and ramp distributions through the year. Therefore maintaining the full year distribution estimates which reflects this seasonality. I also note that the $43MM double dumper project and $10MM chute refurbishment project will be funded out of cash on hand and term bank debt and will not impact distributions.

No change in outlook. Although there is a fair amount of room to exceed the provided guidance, I note that management did not change their outlook despite the difficult Q1 operating environment. Management continues to expect 2011 volumes to exceed 2010 levels which came in at 24.7MM tonnes. I also note that Teck Resources reiterated their FY11 sales guidance for 24.5-25.5MM tonnes after revising Q1 sales lower giving us further confidence in our expected full year shipping volumes.

Costs set to decline. I note that it took Westshore approximately two weeks to replace a damaged gearbox and complete repairs in order to resume regular operations. Coupled with increasing levels of trained employees on automation and higher overtime costs to combat the harsh winter weather, I expect these costs to decline in the coming quarters leading to margin improvements.

Volume locked-in with long-term contract. Westshore announced at the end of Q1 an agreement with Grande Cache Coal to exclusively handle its annual coal tonnages that it ships through West Coast ports through to 2022. Although little detail was provided, I believe that the 1.3MM tonnes that Grande Cache Coal shipped in 2010 will likely expand as there are positive indications that they will look to increase their coal production to over 3MM tonnes in the next few years.

Capacity set to increase. In an indication of overwhelming demand, WTE will be proceeding with the capital upgrades involving the change out of the existing single dumper with a double dumper. The anticipated costs for this project will be approximately $43MM (to be financed by term bank debt) and will take until the end of 2012 to complete. Once complete, it is anticipated that the rated terminal throughput capacity will be approximately 33MM tonnes, up from the current capacity levels of approximately 28-29MM tonnes. Ensuring sufficient liquidity, management noted that there will be no large principle repayments required until maturity on the anticipated term bank debt.

Another Look at New Flyer Industries

2011-05-19T12:56:00.000-07:00

New Flyer Industries (NFI-UN - Dividend Yield 12.97%) is one of my largest single clean energy investments. The company describes itself as the "leader in the heavy-duty bus market for the US and Canada. New Flyer Industries is a company likely to benefit from peak oil. Both a trend towards urbanization, and unaffordable suburban commutes should favor bus transit. While rail transit is more efficient and more pleasant, it takes years to build out rail transit. Bus transit only requires the purchase of busses, and perhaps some repainting of roads and other minor changes to improve bus speed by giving them preferential right-of way. Since the company pays a large combined dividend/interest payment, I've been happy with the overall results of my investment. The Payout Ratio since the IPO have average less than 80% and distributions have been paid for 66 consecutive months.

New Flyer's structure is unusual, with cash flows and payments to holders of "Income Deposit Securities" or IDSs. Each IDSs is composed of a common share of New Flyer Industries, Inc., an Ontario Corporation, and C$5.53 principal amount of subordinated notes of "NFI ULC" an Alberta unlimited liability corporation. All dividends paid by NFI to Canadian residents on the common shares after December 31, 2005 are designated as "eligible dividends" for purposes of the enhanced dividend tax credit rules contained in the Income Tax Act (Canada) and any corresponding provincial and territorial tax legislation.

Creating a Passive Income gives you more time and money to spend on living your life.

2011-05-17T15:57:00.000-07:00

Passive income is generated when you are making an income without having to work for it. For example if you own a business, that you have setup to run completely on its own, or if you own shares in a company that pays you annual dividends, or perhaps a piece of real estate that generates capital or rental returns.

All these investment techniques earn you passive income. because you are not limited by the amount of hours you can spend per day working on them. Instead of working for money, you now have money working for you. This is the true essence of any effective wealth creation strategy. Maximum return for minimum effort.

Medical Facilities Corporation

2011-05-15T14:38:00.000-07:00

TSX: DR.UN

Market Cap (MM): 363

Yield: 8.6%

Medical Facilities is a provider of surgical services at four specialty hospitals located in the states of South Dakota and Oklahoma andtwo ASCs (Ambulatory Surgery Centers) recently purchased in California.

It is my favorite holding for a high yield and a growth oriented investment!

The specialty hospitals perform scheduled procedures which include surgeries, medical imaging and diagnostics. These hospitals focus on a number of clinical specialties, including orthopedic, neurosurgery, ear nose and throat (ENT) and other surgical procedures. The ASCs complete less complex procedures that do not require overnight stays. Medical Facilities generates almost all of its income from the majority interests in the six facilities and distributes the bulk of its free cash flow to unit holders. The company went public in March 2004 and has consistently increased revenue and EBITDA since 1999. A distribution of $1.10 has been paid annually since it went public.

Outlook: Steady Improvements Expected for Remainder of Year. MFC reported solid Q1 results with YoY increases in surgical & pain cases largely offsetting a negative shift in payors. The company continues to perform well despite headwinds (US economic weakness & HC reforms) as cost containment measures have been effective in improving margins. Shareholders also passed the conversion proposal at the AGM today which provides the company with greater financial flexibility in the future to assist with acquisition opportunities.

Although demand for the units has increased since high-yielding trusts became taxed at the beginning of 2011, MFC's distribution is still attractive at a ~9% yield especially as the US market stabilizes.

Cineplex Inc. - Diversification Paying Dividends

2011-05-14T13:45:00.000-07:00

Cineplex is the largest film exhibition company in Canada with approximately 67% of the market share of Canadian box office revenues. The company owns, operates or has an interest in approximately 130 theaters with 1,350 screens. The company operates the following brands: Cineplex Odeon, Galaxy, Famous Players, Colossus, Coliseum, SilverCity, Cinema City and Scotiabank Theatres.

Last week Cineplex reported Q1/11 results that were largely in line with expectations. Investors widely expected Q1/11 box office results to be weak on the back of tough YoY comps versus Avatar. Looking forward, we see the following diversification benefits: (i) the continued build out of higher-priced 3D, UltraAVX and D-BOX; (ii) a ramp-up in 3D sports alternative programming; (iii) continued growth in high-margin media revenues given a still strong national advertising market; (iv) growth in interactive media, particularly from the new DTO and VOD services once Ultraviolet becomes available in 6-8 months; and (v) continued increases in SCENE membership with positive implications for box office attendance, concession revenue and advertising rates.

The company increased the dividend +2.4% from $1.26 to 1.29 representing a dividend yield of 5.1% and a payout ratio (% of FCF) of 73% in 2011E and 64% in 2012E versus a target payout ratio of 65%-80%. Management indicated that the size of the dividend increase reflects a degree of conservatism as well as the desire to finalize the CDCP agreement,
which is expected by the end of Q2/11. I suspect the company also wants to maintain a certain degree of financial flexibility in the event acquisition
opportunities arise.

I seems like even billionaire hedge-fund managers prefer passive income when managing their portfolios

2011-03-11T13:55:00.000-08:00

Billionaire hedge-fund manager Carl Icahn is returning capital to outside investors, marking the end of an era as he joins other prominent stock pickers who no longer want the headaches of handling other people's money.

Icahn, known for a knack of picking winners and his ability to face off with the captains of industry, says he has grown weary of managing outside money as markets become more unpredictable and investors more demanding.

By taking this step, Icahn joins a number of other well-known hedge-fund managers, including George Soros' protege Stanley Druckenmiller and Julian Robertson's former employee Chris Shumway, who recently returned their investors' money.