Triage Investing Blog reader Mark writes,

“Brad, I’m curious to hear your thoughts on how macro events (the mess in Europe) affect your investment outlook and behaviour? Mauldin’s recent article (Business Insider) prompted this for me. Thanks.”

For those of you who first don’t know John Mauldin he publishes a weekly email, titled Thoughts From The Frontline, and is author of Bull’s Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market.

John’s been writing a series of articles related to the Euro Zone Debt Crisis that investors have heard news and discussion on, but not really taken note of the potential impact it may or may not have on your portfolio.

“…Europe’s leaders are committed to keeping both the euro and the eurozone as it is. But for it to do so, everything must change…This is no easy task, as no one wants a change that will impact them negatively; and there is no change that will allow things to stay the same that does not impact all severely…”

John is extremely accurate in that above statement from his column, Staring Into The Abyss. The proof is actually not something that needs to be measured, but instead can be observed.

Humanity either embraces or fears change depending on how it suits our purpose.

The political leaders of Europe, and its citizens, are resisting a change that is both necessary and essential. It is the same issue that we will face in North America, and have been, over the past four years.

Financial debt is a very serious issue and one that in my opinion hasn’t taken the precedence it deserves. The amount of debt owed individually and collectively by many nations will significantly affect their economies. We can see this impact still on the US economy now four years after the credit crisis began.

In Canada we’re not immune either; we have record high debt levels for individuals, a frothy real estate market and extremely low interest rates that encourage more poor financial decisions.

I think the Europe problem, just as any of the other debt stories, is a serious macro event to pay attention to as an investor.

If you’re a diversified long-term investor you have the benefit of time to remain invested in companies, mutual funds or ETF’s with greater exposure to Europe. If you’re a diversified short-term investor (say near retirement) you have no business being invested in risky investments or in guessing where the market will move.

I’m generally a balanced investor keeping my exposure to any one company, sector or country appropriate. Now is the time, for a disciplined long-term investor, to remain mindful of diversification and to not overweight equity or fixed income exposure to one area or another in an attempt to adjust for risk. You may overweight in bonds and miss out on a rally in equities or overweight equities and get burned as losses mount.

For my portfolio, with a 20-30 year investing horizon, I take the same approach I always do. I don’t invest in things I perceive to have too much risk and I focus on capital preservation. I’m maintaining my exposure to Europe through broad market ETF’s and certain companies with European operations, but I am not taking positions in say individual European banks (are you CRAZY!?) because they’re perceived as undervalued.

There will be a time to invest in European stocks. It will be short, uncertain and likely very volatile. I don’t assume I can time the market to know the exact time so I still maintain some exposure and buy when my investing approach (portfolio allocation) says to.

What I’m not foolish enough to do is expose my capital to unnecessary risks in Europe when the leaders themselves can’t be proactive in dealing with the crisis.

Always be proactive versus reactive to any bad situation.

No related posts.

No doubt investors of Research in Motion (RIM) and investors at large have heard the news that co-CEOs Mike Lazaridis and Jim Balsillie have been replaced with Thorsten Heins as the new CEO of RIM.

The market, as of 10:00 am EST, has made its verdict of the move by pushing the price of the common stock down 7.25%.

This shouldn’t come as a surprise to any well informed investor and certainly comes far too late.

When fear and anxiety take hold in a stock or brand investors and the market need the reassurance of a proactive approach and plan.  The move announced today, while trying to be spun by RIM’s PR as a positive development, is a reactive move that should have come 6-12 months ago.

That’s what the market is pricing into RIM today; a lack of confidence in the plan.  The present timing, execution and future timeline from which things will develop.

“The company will immediately set out to hire a chief marketing officer to help repair the BlackBerry’s dented brand…”

Really? Again you don’t think this should have been done 6-12 months ago?

Management is key and at this very moment there is significant doubt that the company has a good handle on the pulse of the business.  RIM is a viable company and may turn out to be a very valuable investment at some point in time (even now).  But the reality is that the current move is more one of damage control than change of the corporate culture at RIM.

There is certainly the possibility that this move will begin the change necessary to create value within the company and long term growth, but completing such a move so late makes an investor wonder who really knows what’s going on within this company.  If the move has been completed to appease investors than this arrogance of the company will reflect in the stock price (which it is so far today).

Even though I don’t view RIM, at this time, as a value trap I don’t view it as a value opportunity.  There is far too much strong competition in the consumer smart phone market for a company to lack the motivation for change when change is necessary.

Disclosure: I do not hold any investments in RIM at the time of this post.

No related posts.

Triage Investing Blog reader Trish writes,

“Love the new blog and format! My question is more about personal finance than investing. When do you feel is the best time or strategy for making an extra mortgage payment?”

Thanks for the feedback on the new site Trish.

Previous readers of Triaging My Way To Financial Success will know that I don’t view a residential mortgage as an investment. Instead I like to look at a mortgage as…

• A necessary non-speculative purchase (you have to live somewhere)
• A fixed asset that should appreciate approximately 2%-4% per year
• An asset to be utilized in a Smith Manoeuvre

People need to realize that the behaviour in the real estate market in Canada in the past 10-12 years is not normal, nor sustainable. Housing, historically, has risen fairly close to the increases in real incomes (income adjusted for inflation) during 1950-2000. In the past decade real incomes have moved very little (if at all) while home prices have appreciated to staggering levels increasing the amount of debt individuals and families hold. Housing, just like the stock market, can become speculative very easily because of the emotional aspects of the purchasing process and the vast invested interests of industry to have home prices continually rise. Unsustainable and low interest rates also do not help.

Everyone needs to live somewhere so if a rational person looks to a home as a necessary shelter (with perks) they’re more likely to make a smarter decision, related to their personal finances, than others.

I often tell my friends to think of their home as a “Big Ass Bond”; you should expect the value of that asset to rise approximately 2%-4% per year.

A home can also be an asset used in a very successful investing program known as the Smith Manoeuvre, which I utilize with our mortgage. Basically it is an equity investing program involving tax deduction of mortgage interest and converting your mortgage into a home equity line of credit (HELOC). Million Dollar Journey, a Canadian personal finance blog, does an outstanding job of describing this process and his journey through the program.

To answer Trish directly, I think that paying down your mortgage with extra payments is a smart decision in the long-term, but in the short-term should be examined closely depending on the situation of the individual.

Obviously an individual or couple should pay down higher interest debt first before considering making any additional payments on their mortgage. If you have credit card debt or personal debt in a line of credit (ex: student loan) at a higher interest rate I would advise you to pay that off first before making extra payments on your mortgage. Likewise building savings and investments at the same time as reducing your mortgage is a good idea rather than just doing only one of those things.

I advise friends to plan an extra mortgage payment, if possible, in a few different ways:

When Paid Bi-Weekly Three (3) Times in a Month

If you’re already paid biweekly and make your mortgage payments biweekly this strategy isn’t as beneficial, but for someone who originally set up their mortgage for monthly payments and is now paid biweekly making an additional mortgage payment in months with three pay checks has a similar effect as making biweekly payments. If there is a month in which you receive three pays take your monthly mortgage payment and multiple it by 12 and then divide by 26. This is essentially what you would be paying if you were making biweekly payments. You can make a payment by that amount from your extra pay check to reduce your mortgage.

Example: Monthly Mortgage Payment of $1,000 x 12 = $12,000 divided by 26 = $461.55

This is what I would advise someone to make as a minimum additional payment, if allowed under your mortgage provider, that you can make 2-3 times per year. Most mortgages allow you to pay down 15% of your mortgage each year without penalty and this strategy isn’t a replacement for a biweekly paid mortgage, but does help a little in lessening the interest cost of your mortgage on a yearly basis until you can refinance at the end of your term.

Paid Bonuses or RRSP Refunds

If you receive a year end bonus, gift or a substantial refund from a Registered Retirement Savings Plan (RRSP) making an additional mortgage payment with this money can be an effective method of reducing your mortgage over both the short & long-term. Even $1,000 year paid over the life of a $200,000 mortgage (4.0% paid monthly, 25 year term) helps to reduce the term from 25 years to 23 years. This is likely the most utilized additional payment strategy used.

Save and Set a Date

This seems quite uncomplicated in theory, but anyone who owns a home knows that repairs, life and expenses pop up unexpectedly from time to time to affect your savings. Making extra mortgage payments part of your savings plan is likely the most effective way to reduce your mortgage over the life of its term. What you do is simply allocate a portion of your savings (even $20 week) to making an additional payment on your mortgage once a year to help bring down the interest cost of that mortgage.

Why Make Extra Mortgage Payments?

It simply comes down to interest ($$$)

The most significant long-term cost of a home is not really the principle amount you pay when you purchase the home, but rather the cost of the interest over the lifetime of the mortgage.

If you were to purchase a mortgage for $300,000 at 5.0% for 25 years and made no additional payments the total cost of your mortgage would be $526,131.00. That’s $300,000 in principle and $226,131 in interest!

You would pay 75% of the original value of your mortgage in interest

If you made an extra payment of $200.00 a month ($2,400/year) your total mortgage cost over the same term (25 years) would be reduced to $479,780. A reduction of $46,351 in interest and the mortgage would be paid off in 21 years.

$46,351 in dividend paying stocks yielding 3.5% would be over $1,600 a year in tax efficient income simply by making accelerated payment of your mortgage a priority in your savings plan.

Final Thought

In the end each individual or family will do what is best for them. There may be times when an extra mortgage payment is not a necessity given other circumstances in your life. But reducing the interest cost of your mortgage should be one of the top priorities a home owner has as part of their personal finance strategy.

The question I ask everyone when they ask about their mortgage is, “What could you do with the money you pay to your mortgage every month once your mortgage is gone?”

My answer?

Anything I want!!!

Related Posts:

1. A Need for Stricter Mortgage Lending?
2. Mortgage Rates are Rising
3. Outcomes of the Subprime Mortgage:

I’m happy to welcome readers to the third Dividend Investor Interview on the new Triage Investing Blog.

In 2008 I featured two of my investing peers who shared their thoughts on dividends, successes, failures and investing approach in order to allow readers to gain different perspectives from investors.

Even though many investors concentrate on dividends, each of us has habits and practices that differ from others. Insight into the thoughts of other investors can provide valuable information, a new perspective, initiate a debate or simply reaffirm what good habits we already have.

Dividend Investor Interview III:
Roger (aka: Sensei)

Thanks for doing the interview Roger. Can you tell readers a bit about yourself as an investor (investor profile) with some background information?

Thank you for interviewing me. It is always gratifying to be recognized as someone worth interviewing. I’d have to say, though, that in the domain of stock investing, my knowledge is intermediate at best and I still have so much more to learn. Although my methodology borrows much from value investing, I’d describe myself mainly as a dividend investor.

I’m investing for retirement and I expect to remain in the accumulation phase for the next 8 to 12 years. After that I expect to live on the dividends or other income stream from my investments. You could also say that I’m a buy-and-hold investor in so far as my strategy has nothing in writing about selling the stock for a capital gain and capital gains are not what I intend to live on until absolutely necessary. I do sell on rare exceptions, which include selling on a dividend cut or the expectation of a dividend cut and very occasional selling but re-buying opportunistically.

As a non-resident Canadian (I live in Japan) with no formal plans to return to Canada I take an international, multi-currency approach. My investment plan is to buy undervalued dividend paying stocks in Canada, the US and the UK with overvalued yen. Thus, aside from the day-to-day business of finding suitable stocks to buy or add to, there is a constant interplay between various currencies and countries.

I’d add that I’m still an active mutual fund investor. I have significant mutual fund holdings outside of Canada representing 34% of my net worth at the time of writing (January 2012).

Your Demographics?

I’ll be 58 in March of this year. I was born in Winnipeg and lived there for 25 years. I moved to the West Coast and lived on ‘The Island’ for several years (mainly in Victoria). I also lived briefly in Vancouver before moving to Japan in 1992. I have lived in Japan for 19 years and Tokyo for the last 12 years. During this time I’ve been continuously employed as an English instructor, although I’ve done other work in the educational field such as writing textbooks and teacher training. I’m married with no dependent children.

Can you tell readers a little bit about when you first started investing?

I’ve always been a saver and I consider that to be a fundamental quality for successful investing. I started my first bank account at the Royal (RBC) when I was 12. Investing came much later and in three stages.

In the 1980s I was smitten with gold fever. I bought some gold certificates from CIBC, but became disillusioned when gold came back down to earth. I actually didn’t lose that much, but enough to turn me off speculating for some time. GICs (Guaranteed Investment Certificates) were paying very lucrative interest at the time, so I was able to build risk-free GIC ladders and create a supplementary monthly income. I also dabbled in real estate in a very small way. I owned half a duplex in Victoria and collected rent from roommates.

The 90s were pretty much a long hiatus from investment activities. I was deeply in debt when I arrived in Japan and spent four years digging myself out.

Did you have any special strategies to help get you out of your debt burden?

I’m afraid I wasn’t that savvy then. I was on more of a personal fulfillment track at the time; living and teaching in Japan and learning a new language. However, there were several circumstances that made it possible to pay down debt quickly. One was that

I didn’t have to pay rent. I was housed by the school that I worked at. Secondly, I was living alone. Thirdly, I lived in the countryside with no car. Besides that, I did what came naturally. I lived frugally (and still do). I paid off my debt in order of interest rates. I started with a charge card debt ($5,000) and paid that off quickly. I also settled accounts on a lease car that I had used in Canada (also $5,000). Finally, I paid off my students loans totalling some $15,000. By 1995 I was debt free and able to afford a car and attend graduate school at night in Tokyo. The latter was the best investment I ever made, come to think of it.

When did you start investing seriously?

Serious investing started in 1997. In that year I began to take a longer term view of my finances. By that time I had actually saved as much money as I had in my peak years of the 1980s. However, I realized that if I did nothing my prospects for retirement were pretty grim. I could not look forward to any significant pension from either Canada or Japan, and, as a contract worker, no juicy company pension either.

So in 1997, what was your style?

I started with offshore portfolios of mutual funds. This is a relatively convenient, although expensive, option available to expatriates. Early on, I simply bought a portfolio of funds suggested by an advisor. However, I started to feel frustrated by just going at it blindly with no real knowledge of what I was doing. I started reading a lot on the subject. My favourite authors were Gordon Pape and Garth Turner at the time. Using strategies like dollar cost averaging, allocation formulas and rebalancing I built a second, then a third, offshore portfolio with different companies. These strategies worked, given time, so later I scraped together $25,000 in Canada and placed it with PHN (Phillips, Hager & North). I also built up significant fund exposure with TD. I would probably be doing the same thing today had it not been for the vagaries of the Canadian mutual fund industry. Around 2005 my mutual fund activities were stopped at TD and a year later at PHN. As I write, non-residents are not allowed to hold Canadian mutual funds.

On February 12, 2007, I bought my first stock, ADP (Automatic Data Processing), which also happened to be a dividend paying stock. From that point I rapidly moved towards dividend investing.

What would you consider to be your risk profile?

Speaking mainly as a dividend investor, my risk tolerance is low; especially after the subprime mortgage mess and because of my age. I’m not prepared to take big risks for big gains. I buy shares in mainly conservative companies if I believe they will continue to grow and/or payout a fair part of the profit to me as the shareholder. I don’t really consider capital gains to be an attractive goal for me.

To realize a capital gain, one has to make decisions on when to sell. These are decisions I don’t want to make; at least not in the pursuit of building retirement income. If I learned anything from the subprime mortgage mess about myself, it is that. On the other hand, dividends are relatively stable and predictable and therefore a low or lower risk way to build wealth in my opinion.

How would you define risk to a reader or investor on this site?

Traditional measures of unsystematic risk don’t directly apply to dividend investors. The typical stock buyer of the last 30 years, led by the financial media, has fixated on the idea of probability of gain or loss on the principal amount of his/her stock. The risk for a dividend investor is most often the probability of a dividend cut or a stagnant dividend rate (no dividend increases). These seem less risky when you consider that stock prices fluctuate almost by the minute whereas dividend rates change once or twice a year and that is on the whole to the upside. This is something that I noticed even during the subprime crash.

However, systematic risk keeps me awake at night. The chief risk for me (and millions of other boomers) is running out of money in retirement. Another related risk is inflation which in turn reduces the spending power of your investment income down the road.

So given that risk profile what would you consider to be risky investments?

Again this has to be considered on two levels. On a straight forward unsystematic risk basis, I consider any company that doesn’t pay a dividend to be an inherently riskier investment than one that does.

Companies with no apparent moat, while they might be successful for a time, are also high-risk investments.
In the broader systematic-risk context, investments that don’t keep up with inflation are very risky. Many fixed income investments certainly fall into that category at the time of writing.

So what are some of your tactics for minimizing risk(s)?

That’s an easy question to answer. Buying high quality companies that pay a sustainable and rising dividend is certainly my No. 1 risk minimization strategy.

Finding companies with an identifiable moat is another important risk reducer.

Portfolio management is also important. Although the dividend-paying stock universe is limited (and extremely limited in Canada), diversification across sectors makes sense. My US and Canadian portfolios cover 8-12 sectors although both are lumpy, and my Canadian portfolio extremely so. Neither the dollar value of my stocks or sectors is particularly even. Ideally, I’d like to have at least two stocks in each sector, although this has not always been possible because of lack of funds or opportunity.

I also have non-correlated investments within my mutual fund portfolios.

What’s your definition of quality when investing?

Not to sound like a broken record, but again dividend stocks have been shown to lead the market on many levels. These companies have reached a stage where they have sufficient earnings to pay some out to investors on a regular basis and also, perhaps, increase the payouts as the company continues to grow.

What specific criteria do you use to invest in dividend paying stocks?

That depends a lot on the company or sector. There are several metrics to look at, but to put it simply for a short interview like this, I consider these criteria and ask myself (or others) these questions before I buy a stock:

• Is the stock trading well below my or a published fair market value or target value? (In other words, is there a margin of safety?)
• Yield: Is it in a realistic yield range of 3%-7%?
• Dividend growth: Has it been consistent over a number of years?
• Earnings growth: Allowing for occasional bad years, is the company generally increasing earnings year after year?
• Dividend sustainability: Is the payout ratio consistent with the industry or objectives set out by the company?
• Debt: Is it low or non-existent or is it consistent with other companies within that industry?
• Easy to understand business: Can I explain what the business does?
• Moat: Can I explain what the moat is?
• Sensible acquisition policy: Do acquisitions add shareholder value and support the dividend?
• Share buybacks: Do share buybacks support the dividend?
• Management: Has it been a well-managed company over a number of years?

And objectives?

My investment objectives remain the same. I need to support myself and my wife in retirement. We have no great expectation of income from either the Canadian or Japanese governments.

Any significant influences over the years you’ve invested? (media, mentors, family, experiences, etc)

While I could name various people that I respect and listen to, many from Financial Web Ring (Brad911 included), experience has been the best and toughest teacher.

What was it about dividend investing that caught your interest?

There are so many cliché expressions that apply here, but certainly the title of Geraldine Weiss’ book, Dividends Don’t Lie, comes to mind. Also, in a historical framework, dividends make so much more sense (to me) than the buy-and-sell hubbub promulgated by the media of the last 30 years or so.

Do you have a dividend threshold or minimum yield for your portfolio?

In order to get to where I want to be in 10-12 years, I look for yields in the 3%-7% range. As a qualification, I’d be looking for a total return of 10% based on a simplified interpretation of the Gordon Growth model. Dividend yield + average dividend growth (5 years) = 10%. Therefore a stock with a lower initial yield should be growing the dividend faster.

As investors we’ve all made mistakes; biggest regret?

My biggest regret is not starting early enough. As things are now, it is a race to the finish line and I may have to make some hard decisions if health becomes an issue.

Your biggest mistake?

Not necessarily a mistake, but I’m still working through the psychology of when to sell. I’ve made some huge mistakes by not selling when it was clear the dividend was all but eliminated.

Your biggest success?

With the help of Morningstar and various other resources, I have had great success at building dividends in the US and I’m proud of my US stock portfolio as it stands today.

Why dividends?

Besides the fact mentioned above that it is clear where they come from, I also like the way they are paid. There are no direct decisions to be made by me. A dividend portfolio is also cheap. My MER for 2011 was 0.2% and it will be significantly less in 2012. That includes a subscription to Morningstar’s Dividend Newsletter.

Where do you see yourself in the medium to long-term? (10-20 years)

10 years from now I hope to be still working although less than now. Geographically, I’ll still be in Tokyo. I wouldn’t want to live anywhere else, although I’d like to spend more time with relatives in Canada.
15 years from now I’d still like to be working, but full retirement is the most likely scenario.

What advice would you give to a novice investor struggling with the markets?

Start early and be consistent in the long term no matter what your investing strategy is.

Would you be interested in giving five of your favourite stocks and a few reasons why?

Sure (these are not recommendations to buy)

BCE Inc. (TSE: BCE)
• Best of the telcos in Canada
• Great dividend
• Growing the business

A&W Royalties Income Fund (TSE: AW.UN)
• I like the business model of collecting royalties
• Not directly related to the success of the restaurants
• Sentimental value; A&W is as old as I am
• Very wide moat brand business in my opinion
• Very well managed

Realty Income (NYSE: O)
• Wonderful US REIT that pays monthly income
• Excellently managed, almost like the crash never happened
• They live to pay distributions to people like me
• Solid business model
• Intelligent acquisitions

Intel (NASDAQ: INTC)
• I admire Andy Grove and identify with him as an immigrant.
• The company has a huge competitive advantage in that their products are in more than half of all personal computers worldwide.
• Intel has had the guts to introduce a dividend in a highly competitive business.
• Intel, despite fierce competition, continues to stay ahead of the research curve.

Keyera Corp (TSE: KEY)
• My best performing stock of all time, pays a good dividend and has tripled in value
• Has made a successful transition to a corporation and maintained the same dividend
• It is in one of my favourites spaces: midstream energy. These are wide moat businesses. Difficult to replicate the facilities.

Any additions?

Among four offshore portfolios, I still make regular monthly contributions to one. The others, I’ve held for 10 years or more. These are tax-sheltered investments with no taxable event until the proceeds are brought back into Japan (or Canada if I am there). I use these to cover geographic areas where I have no specific competence and/or no desire to invest directly in the stock market. That would include emerging markets; Asia (ex Japan), Latin America and Europe. From a sector point of view, international small caps figure in these portfolios as well as various bond funds.

Thanks for doing the interview Roger.

Related Posts:

1. Dividend Investor Interview II:
2. Dividend Investor Interview I:

In retrospect and review 2011 can be summed up, in terms of my own investing activities, as one of the most boring I can remember. That’s not to say that 2011 was short on news, continued credit crisises and uncertainty, but nothing changed substantially in my approach or activities from what I had done in 2010.

Since beginning my investment journey in 2002 (at the age of 21) I’ve had ten years to accumulate an extensive knowledge of investing, practice a number of different approaches, develop an investing discipline and reflect on what I’ve learnt, gained and lost due to those experiences.

My basic investment discipline can be summed up in a few very short points:

• Invest only in companies you know, understand & research
• Concentrate on cashflow, dividends and Enduring Value^TM
• Diversify appropriately along different assets, sectors, regions & currencies
• Focus on capital preservation (never lose money)
• Don’t tinker with a portfolio that doesn’t require adjustments
• Avoid unnecessary risks
• Be consistent, never comfortable

Those seven basic principles are what I review each and every time I contemplate a new or continued move within my portfolios. They are simple, straight forward and most of all involve common sense.

Far too many investors fail to follow each and all of those principles appropriately and can end up harming their actual or potential returns. Successful investing never involves complacency. An investor should always be thinking ahead of the market (if they can) to protect against risk and the direction of their portfolio. As much as I admire my dividend growth portfolio (DivG) at present, I am prepared to make dramatic and drastic changes to its holdings if necessary. Those changes could be in response to a change in an individual company’s internal fundamentals, a change in external factors of the market or the need for something different to compliment the portfolio.

Examples of these types of moves were my sale of Research in Motion (RIM) shares back in May in response to the markets thrashing of its valuation and questionable changes in its operating fundamentals. Even with an established margin of safety in each of my valuation models, there are times when I will be wrong as an investor. What I’ve learnt from my mistakes is that when a stock becomes too cheap there’s often a reason you need to pay more attention to, rather than being arrogant and ignoring what the market is discounting.

What I failed to recognize in my fundamental analysis was that I needed to evaluate RIM on its two business units separately; business enterprise software & consumer products. Each time I priced RIM out on its future earnings and forward P/E I failed to recognize the weight the market would place on the performance of its consumer segment. Even though I feel that RIM has value, losing my margin of safety was not something I was comfortable with and I moved out of the position to protect my downside. I may be right or wrong in my pricing model, but there are other investments with less volatility and that pay a positive cashflow (dividend) I would rather place my capital with.

My Canadian Dividend Growth Portfolio (DivG) returned 10.1% in 2011 (including dividends). I’ve written many times before that I don’t benchmark my portfolio against any broad market indices because my portfolio isn’t representative of the broader market; instead its representative of my investing approach. Regardless the return of the S&P/TSX60 and broader S&P/TSX Composite indices were roughly -11.5% & -11.1% respectively in 2011.

Index investing is likely the most cost-effective and disciplined investing approach because investors concentrate on keeping costs to a minimum and performing as good as the overall market. Index investing exclusively doesn’t interest me because of the potential for negative returns. I believe, strongly, that I can protect my capital better with a concentrated, yet balanced, portfolio following the seven basic principles above then to simply leave my capital in the markets overall to perform on par. Positive returns are what really count. My focus isn’t on returning 20% or greater year after year, but to remain positive on a consistent basis. In 2010 I returned 23.52% on my DivG portfolio which was a respectable accomplishment, but in a year when the main indices lose by double digits I’m happy with my 10% return even if approximately 4.0% came from dividends.

The validation of this investing approach is examining my dividend cashflow year over year (YoY). From 2009 to 2010 my yearly dividends increased by 8.7% meaning in 2010 I was receiving 8.7% more in dividends than I did the year before. With $100 in dividends that only means $8.70 more, but on $10,000 in dividends I could receive $870 in additional funds. From 2010 to 2011 my yearly dividends increased another 11.1% (19.4% over the past 24 months!!!).

The true beauty of this investing approach is that I’ve been able to accomplish this feat by almost exclusively re-investing the dividends I receive each month back into more shares of dividend paying stocks.

Moves:

Other than dropping RIM from the portfolio the only minor change I made in 2011 was my venture into the common shares of Enbridge (ENB).

In October of 2008 I purchased a decent set of Enbridge preferred shares (ENB.PR.A) for a few reasons: investors were shedding Canadian preferred shares at capitulation prices simply to preserve capital, the shares paid a dividend of $2.75 per share and it was a far more cost effective investment in Enbridge than the common shares which were trading at a premium to the pipeline group.

I’ve rarely seen ENB common shares as either cheap or affordable, but at times you pay for quality and I wasn’t comfortable waiting for an opportunistic entry point that might not happen for another few years.

My higher allocation to AltaGas (ALA) in my energy segment worked out very well (up 47% YTD), Saputo (SAP) continues to perform at my expectations and I continue to stalk the preferred share market in Canada for opportunities as I would like to bulk up my preferred allocation to 15.0% from its current 10.7% of the portfolio.

Happy and successful investing in 2012!

Related Posts:

1. Investment Review – 2010
2. Investment Review – 2008:
3. DivG Purchases – January 2011

Over the next 10-14 days readers will notice that when you try to access the investment blog Triaging My Way To Financial Success at www.nurseb911.com you end up landing here.

This is not a trick!

I have decided to update the previous blog with a new template, new url and I will have a renewed emphasis on writing posts on a regular basis again with the launch of Triage Investing Blog.

The site will be faster, more condensed and contains all the previous content from www.nurseb911.com.

My RSS Readers should be able to receive new posts, but if you would like to add the new feed it is http://feeds.feedburner.com/TriageInvestingBlog

Any questions or comments please let me know!

Brad.

No related posts.

In response to my post yesterday, Hey Brad; Where You Been?, Karim asks the following question,

“Do you think Industrial Alliance (IAG) and Sunlife (SLF) are value traps at the beginning of their incessant failure or that they are potential good investments on dips?”

I’ll first disclose that I have only ever quickly examined Industrial Alliance (IAG) and never held an equity position in the company. I have always preferred to hold Manulife Financial (MFC), Great-West Life (GWO) and Sunlife Financial (SLF). Holding an additional insurer, in my opinion, is a little too much exposure in my portfolio to insurance even though I really like their business model.

The question that the reader asks is a loaded question in my opinion. By definition a Value Trap is an investment or company that has depreciated significantly and is mistaken to be of greater or significant value. Often this value is perceived from a number of categories such as company fundamentals, stock price, internal valuation or external factors. The problem is that a true Value Trap can only be determined after the fact; if value was perceived and no actual or increased value exists.

The reason that the question is difficult to answer is that in this current economic climate there are a lot of value traps if investors are looking solely at internal aspects of a company.

In 2007 I presented a post titled, The Situational Analysis, which was an introduction to a fundamental lesson presented to students in business schools around the world. A textbook situational analysis (SA) includes four categories that compromise a SWOT: Strengths, Weaknesses, Opportunities & Threats. A more detailed SA may include a PEST: Political, Economical, Social & Technological. While a SWOT examines internal factors a PEST examines external factors that affect a business or industry. In my SA I do a thorough examination of a company & industry by completing a SWOT, PEST, Competitive Analysis & Customer Analysis to gauge the environment a company is operating within and against.

To examine a brief but detailed analysis of how I conduct a Situational Analysis see my post Taking Stock in IGM from 2008.

Currently and historically most investors have ignored external factors that impact business directly. Most of us learnt this in 2008-2009 as we saw external factors (such as the economy & political) have a massive impact on fundamentals and valuations.

The business model of insurance companies isn’t broken; they’ve simply decided to seek profitability in new directions away from their core competencies. I believe that Sunlife has done a better job of managing risk than say Manulife, but Sunlife is also a much smaller company (only 55% of MFC’s Market Capitalization) and mistakes are magnified across the profitability of the company much quicker and more significantly.

Sunlife closed yesterday (November 3rd, 2011) at $20.42 and based on that price I get a Dividend Discount Cashflow valuation of $29.61 (25% discount & 17.0% growth rate) based on the company’s recent financial information. That presents a 30% discount to current valuation based on that metric alone (DDCF).

If you look at Sunlife’s historical P/E (16.2), Book Value Growth (8.1%), Dividend Growth (13.3%) & P/B (2.1) you find a very compelling buy in my opinion. What is lost on these internal valuations though is the company’s exposure to external factors such as economic factors, interest rates, regulation & the competitive landscape.

If you can afford to build a position in Sunlife, collect your dividends and hold for the long-term despite short-term (1-5 year) volatility I think Sunlife is an excellent investment such as the other insurers are for a long-term investor. The valuation of the company in the market’s perspective may go nowhere in the next 3-5 years (as the dividend has) but for each investor you have to make an educated and informed decision on what is best for you. Sunlife for me comprises 3.4% of my entire Dividend Growth Portfolio. Each investment is important, but I’m diversified across many fronts that will minimize the impact of any one company doing poorly or expiring. I certainly don’t perceive Sunlife expiring and the company, even in the face of a catastrophe, would be a prime acquisition for MFC, GWO or any of the 5 large Canadian Banks. It depends on what price you paid, what price it was purchased for but the decision to buy or sell is an individual decision.

Value Traps, in my opinion, often have a glaring fundamental flaw that most investors ignore as something of insignificance. I’ve learnt this lesson with my previous investments that have turned out to be Value Traps and protect myself now with more detailed analysis and a strategy of risk reduction. If I were creating a portfolio of only 5 Canadian companies and capital preservation was my top priority I would likely hold only Great-West Life (GWO) rather than MFC or SLF. That’s my personal opinion of course, but from a risk perspective GWO would likely hold the lowest risk and possibly the lowest reward. Time will tell whether that is true or not, but investing is not risk-free.

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An Anonymous reader asked today,

“Dude, where have you been, hiding under a rock?”

I haven’t been hiding…I’ve just been pre-occupied with life!

In a lot of my postings I’ve eluded to the fact that there is more to life than investing and I’m an individual who practices that approach.

What have I been doing? Enjoying my marriage, enjoying my career choice as a nurse & business manager and continuing to invest, albeit, under the radar of most of my peers.

The lack of new posts isn’t a reflection of my disinterest in investing; simply the fact that my investing approach is outlined extensively on this blog, I’ve discussed a wide array of topics in over four years (this is my 325th post) and that nothing new has really been discussed in the investment world.

It’s my personal and professional opinion that we’re economically in the very similar situations as we were when we entered into 2008. The economy, globally, is just as vulnerable as it was then and I think the debt issues that were present in 2008/2009 are still present; just in a different form. The fact that governments are dragging their feet and not taking these issues seriously is alarming and very telling in my opinion of the seriousness of the situation. There may be, in fact, no resolution that allows individual economies, and the global economy, to emerge from this unscathed and unaffected.

Go back to November 2006 (5 years) and we’re basically at the exact same point. A buy & hold investor (assuming no new contributions) wouldn’t even have a 2% gain before taxes, dividends & expenses. A lot has happened in those five years but certainly not enough to change the fundamentals of the problems we currently face. In five years consumers haven’t dramatically changed their spending habits, the housing market (in Canada) hasn’t softened significantly, governments haven’t improved their financial positions in any meaningful way and debt levels (everywhere) are still above any reasonably sustainable level.

But…I am a Value Investor who loves his dividends. For me this market presents opportunities for an investor who is in the accumulation phase of his investment timeframe. My Dividend Growth Portfolio is only up 3.5% in 2011 (including dividends) but in comparison to the S&P/TSX 60 Index (down 5% including dividends) I’m content with limiting my downside risk by being paid (well) to invest my capital.

Companies have begun to increase dividends, which are GREAT, but in my opinion this is because first their financial positions have allowed it and second because investors are still demanding yield in order to invest their capital.

Moves:

I have been active in my portfolio. I sold Research In Motion (RIM) for tax-loss purposes, have added to a number of holdings and finally completed my long desired buy of Enbridge (ENB) common shares to compliment/offset my preferred share position of ENB.PR.A in the portfolio. I continue to hold all my core holdings (ACO.X, ALA, BNS, CNR, CP, CTC.A, CWT.UN, CUF.UN, EMP.A, ENB, FTS, HSE, IGM, IPL.UN, MFC, MRU.A, PWF, RCI.B, RUS, RY, SAP, SC, SJR.B, SLF, TD, TRI & X) as well as my five preferred shares from October 2008.

My yield on the portfolio remains just under 4% (3.93%) and I’ve fortunately experienced a number of dividend increases (including one today from Inter Pipeline) that have increased my yield on cost to 5.1%

Topics:

Certainly if there’s anything readers want me to write about I’m more than happy to take suggestions, but at this point I’m pretty much sitting with a good amount of cash (roughly 21%) to deploy when necessary or when opportunities present themselves over the next few months.

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I’ve been spending a lot of my investing time recently helping friends and family set up various personal finance strategies focused on saving, investing and improving their financial situation.

One key focus I’ve recommended in each instance is implementing a tracking tool in order for each family to track, analyze and interpret where their spending is occurring each month to help implement a budget. Far too often individuals and families don’t adequately track their spending and saving money successfully can be just as difficult as investing successfully.

In my own household my wife and I are very diligent on tracking our spending and staying on our budget. Including discretionary spending (which we actually budget for) our budgeted monthly household expenses currently come to $4,033. Often we spend less by finding discounts, opportunities for following our spending closely, but understanding where expected expenses come from helps us to budget for savings and not overspend.

Our spreadsheet is actually quite simple; we track our mortgage, property taxes, insurance (car, home & life), utilities (natural gas, hydro, phones, internet, satellite & water heater), car payment (1), gasoline, groceries and gym memberships as well as a budgeted discretionary spending.

I then created a separate tab in Microsoft Excel for each month and enter the values for each category. We have a dedicated amount of our income that goes into savings automatically, but any extra savings are moved to appropriate items at the end of the year such as an extra mortgage payment, RSP contribution or investment in our non-registered portfolios.

Finding your average monthly cost for things such utilities is actually quite easy. If you make payments online through your bank you can often view payees for up to 12 months. Simply tracking that spending online or through your credit card receipts helps you to understand what you’ve spent and likely what you’ll spend in the future considering things such as inflation.

The savings schedule in the last tab is helpful for those interested in tracking their debt and saving priorities.  By simply entering pieces of information you can get an idea of how your savings can be broken up each month in order to see how much you’ll save for various items in a 12 month period. You can then commit to a saving plan that allows you to achieve a number of objectives easily by committing those funds outside of your budget without overspending.

Tracking each and every receipt may seem obsessive, but once you become accustomed to tracking what you are spending you have a better understanding of where you money is going each month.

Example of Budget Spreadsheet

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Once every month I sit down for an hour or two to review my portfolio holdings; to gauge relative value of each stock, recent trends, news, quarterly reports and position in the portfolio.

Last week I did this and took note of one of the longest held position in my portfolio, Saputo (SAP), with some interest.  I rarely hold a stock in more favour than I do with Saputo.  Despite the pricing of the stock over any period of time I enjoy watching this company execute on its strategy, grow its business and reward its shareholders for believing in the process.

I’ve tracked Saputo since around 1997 and have been impressed with the consistency that the company operates at.  Despite pricing pressures on food and food products, changes in consumer activity and the credit crisis of 2008/2009 the company has continued to perform well both in its underlying fundamentals and financial performance.  The stock is up over 100% in the past 24 months but they consistently raise their dividend at a historical rate of over 20% each year (12.3% in the past 5 years) and have integrated acquisitions into their operations with minimal difficulty.

Now I do expect the stock to pull back shortly as its trading at a book value 18% higher than its historical average but for a dividend growth stock that isn’t in the financials, insurance or energy/resources sector Saputo is an excellent addition, at the right price, for a dividend growth investor.
Some interesting stats I’ve collected on the company…
Historical: P/E (20.6), ROE (20.0), Payout Ratio (20.0%), P/B (3.5), Dividend Growth Rate (21.6%) & BV Growth Rate (14.9%)

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