Achieving Your Financial Freedom, One Quarter At A Time

Dividend Growth Portfolio, June 2014 Update

2014-07-24T09:34:00.003-04:00

Soooo... we're now past the half way point in 2014. It's felt like a really long 6 months. A lot has happened since New Years 2014.

The year started with tiny Latvia officially adopting the Euro, and becoming the 18th member of the Eurozone. We then had the Winter Olympics in Sochi, Russia, which was filled with typical Olympic controversies (judged competition scandals, ballooning costs of hosting). This was immediately followed by civil unrest in Ukraine, and the annexation of Crimea by a belligerent Vladimir Putin. Kind of made you wonder if they were just waiting for the Olympics to finish... And to think... its still only February...

Just as the world was trying to figure out Ukraine, MH370 went missing with 239 onboard, a Korean ferry capsized and killed 290, and 276 women and children were kidnapped and held hostage in Nigeria. We then had a fantastic World Cup, one of the highest scoring ever, which made it incredibly fun to watch. The climax was when Germany embarrassed the hosts 7-1 on home turf. Lucky for Brazil, Argentina did not win on their soil. Now that would have been really embarrassing.

Now, as July is wrapping up, we have Israel and Gaza going at it again, and yet another Malaysia Airlines hull loss. Honestly, I feel really bad for these guys. TWO hull losses in 4 months? I've never heard anything like it...

It is only July and I feel like we've had enough world events to last me half a decade. Fortunately not a lot has happened to my portfolio in this time. Just some minor tinkering here and there. Personally I believe the stock market overall continues to be at or near full valuation. This does not mean there are no good investments out there. It simply means you have to be more selective, and work harder to find the attractive investments.

If all else fails, blue chips are still within their full valuation band. Recall that one of Warren Buffett's most famous quotes is that it is better to buy great companies at fair prices than fair companies at great prices. You could certainly do a lot worse than buying KO at 22x or JNJ at 20x. These are the types of businesses that will provide above average returns even if you are unable to buy them at bargain prices.

That being said, someone who invests in individual stocks is always attempting to find undervalued companies to buy. Especially so if they are a dividend growth investor, because it allows you to pick up a larger income stream for a cheaper price. So here are 5 stocks which I believe are attractively valued, and could be your next potential investment.

Procter & Gamble
Baxter International
Rogers Communications
Enbridge
McDonalds

As always, please do your due diligence and independent research before making any investment decision. Past performance is no guarantee of future returns.

Now that we've gotten the chit chat out of the way, let's take a look at the Dividend Growth Portfolio's Q2 update.

New Purchases

($ amount represents expected dividends in the next 12 months from new shares)

Kinder Morgan: purchased 60 additional shares of $KMI. Currently pays a quarterly dividend of 42 cents, which adds $100.80 to my annual dividend received

Baxter International: purchased 30 additional shares of $BAX. Currently pays a quarterly dividend of 52 cents, which adds $62.40 to my annual dividend received

Southern Company: purchased 40 additional shares of $SO. Currently pays a quarterly dividend of 52.5 cents, which adds $84 to my annual dividend received

Procter & Gamble: purchased 45 shares of $PG in a new position. Currently pays a quarterly dividend of 64.36 cents, which adds $115.85 to my annual dividend received

Enbridge: purchased 65 shares of $ENB.CA in a new position. Currently pays a quarterly dividend of 35 cents, which adds $91 to my annual dividend received

Sales

All three sales this quarter were the result of commencing my semi-annual re-balancing strategy. All of them are core holdings, but simply gained too much and became exceedingly overweight. Funds were shifted into more attractively valued investments.

Johnson & Johnson: sold 20 shares of $JNJ

General Dynamics: sold 15 shares of $GD

Canadian National Railway: sold 30 shares of $CNR.CA

Intrinsic Dividend Changes

Johnson & Johnson: $JNJ raised its quarterly dividend 6.1% from 66 cents to 70 cents
Exxon Mobil: $XOM raised its quarterly dividend 9.5% from 63 cents to 69 cents
Southern Company: $SO raised its quarterly dividend 3.4% from 50.75 cents to 52.5 cents

Summary

December 2013 Annualized Dividend: $5933.73
June 2014 Annualized Dividend: $6557.21
End of 2014 Goal: $6900 to $7300

YTD Dividends Received: $3389
2014 Dividends Received Goal: $6100

YTD Intrinsic Dividend Growth: 5.25%
YTD Dividend Growth from New Funds and/or Re-balancing : 8.33%
2014 Combined Dividend Growth Goal: 20%

That is now 14 consecutive quarters of increasing income since I began tracking in March 2011. I'm on pace to meet all of my 2014 goals!

Dividend Growth Portfolio, March 2014 Update

2014-03-24T21:11:00.003-04:00

2014 has certainly been an interesting year so far. Thus far, as Q1 is coming to an end, TSX has been outperforming the S&P 500 to the tune of 5%. But wait, all performance is not the same. Since January 1, CAD has depreciated some 6% against the USD. Each Canadian Dollar only buys 0.893 US Dollar now. What does this mean for Canadian investors?

higher cost of imported retail goods
higher cost of fuel
higher cost to invest in US equities & other US dollar denominated assets
higher cost of cross-border shopping
paper gains on US dollar assets

Perhaps this is a good time to convert some USD back to our monopoly money (trust me you'll miss having color coded money if you live in the US long enough!)

New Purchases

($ amount represents expected dividends in the next 12 months from new shares)

Philip Morris: purchased 25 additional shares of $PM. Currently pays a quarterly dividend of 94 cents, which adds $94 to my annual dividend received

Rogers Communications: purchased 50 additional shares of $RCI.CA. Currently pays a quarterly dividend of 45.75 cents, which adds $91.50 to my annual dividend received

Sales

Boeing: sold 15 shares of $BA. At current quarterly dividend of 73 cents, this represents a decrease of $43.80 from my annual dividend received

Intrinsic Dividend Changes

CN: $CNR.CA hiked its quarterly dividend 16% from 21.5 cents to 25 cents
Rogers: $RCI.CA raised its quarterly dividend 5.2% from 43.5 cents to 45.75 cents
Coca Cola: $KO boosted its quarterly dividend 8.9% from 28 cents to 30.5 cents
HCP: $HCP raised its quarterly dividend 3.8% from 52.5 cents to 54.5 cents
General Dynamics: $GD hiked its quarterly dividend 10.7% from 56 cents to 62 cents
Bank of Nova Scotia: $BNS.CA raised its quarterly dividend 3.2%* from 62 cents to 64 cents
Toronto Dominion Bank: $TD.CA raised its quarterly dividend 9.3%** from 43 cents to 47 cents (split adjusted)

*Canadian banks typically raise the dividend semi-annually

**TD commented they may not have a 2nd dividend hike this year and instead did one big hike

Summary

December 2013 Annualized Dividend: $5933.73
March 2014 Annualized Dividend: $6251.51
End of 2014 Goal: $6900 to $7300

YTD Dividends Received: $1352
2014 Dividends Received Goal: $6100

YTD Intrinsic Dividend Growth: 3.83%
YTD Dividend Growth from New Funds and/or Re-balancing : 3.30%

This marks the 13th consecutive quarter of increasing income from dividends since I started keeping track in March 2011! It has been a slow process but hard work and persistence really pays off!

McDonalds Analysis

2014-02-15T00:28:00.001-05:00

The McDonald's name and brand needs no introduction. The "golden arches" company is the world's biggest quick serve restaurant operator. In many parts of the world, McDonald's is a symbol of an American way of life. In poorer areas of the world, McDonald's is also a safe bet for a clean washroom and cheap meal.

The world's largest quick serve restaurant
Over half the countries (119) in the world have a McDonald's restaurant
35,000 locations world wide, serving 68 million customers each day
a leader in increasing the standard of service in emerging markets

Unlike Johnson & Johnson which has a myriad of subsidiaries & products, McDonald's concentrates on its core competency, serving delicious food quickly for a reasonable price! McDonald's strength is not just the corporation itself, but owner/operator franchisees. Many of its now famous products were invented by owner/operators, such as Big Mac (1968), Quarter Pounder (1971), Egg McMuffin (1975), and Canadian developed McFlurry (1997).

Past Business Performance

The past 10 years have been nothing short of stellar for McDonalds Corporation, both the business, and the stock. Dramatically outperforming the S&P 500 over the same period. Why?

Restructuring in 2002 after years of sluggish and declining sales, that refocused the company on gaining more sales from existing stores vs its traditional reliance on opening new stores for growth
Refocusing the menu on its core competency of hamburgers
Brand re-imaging, to appeal to younger generation, including new advertising campaigns, remodeling existing restaurants, and a healthier menu

As a result of these efforts, from 2003 to 2012:

Revenue growth from $17.1B to $27.6B, CAGR of 5.0%
Operating Income growth from $2.8B to $8.6B, a staggering CAGR of 11.9%
Adjusted Net Income growth from $1.5B to $5.5B, 14% CAGR
Adjusted EPS growth from $1.15 to $5.36, CAGR of 16.6%
Dividend per share from $0.40 to $2.87, a whopping 21.8% CAGR
ROE increased from mid teens to mid 30s

McDonald's has been a classic example of a brand and business that went through a weak period that fixed itself and boomed again. I believe it will be very hard for the company to replicate this kind "firing on all cylinders" performance over the next 10 years.

That being said, I also believe a continued strategic focus on menu innovation, restaurant improvements, operational efficiency, and moderate international growth, should deliver above average shareholder returns.

Current Valuations

A key determinant to future returns is the price paid. Overpaying for even the best company in the world will surely lead to mediocre returns.

Unlike JNJ which was overvalued a decade ago, even relative to its premium normal valuation, McDonald's was fair to undervalued during the 03-04 time period. One of many reasons for its outsized returns since then. Here is an updated F.A.S.T graph from 2013 with an updated "normal" valuation

What kind of conclusions can we make?

At 17x earnings, MCD is currently reasonably valued
Investing in MCD at or below 17x (blue line) has produced decent returns
Best times to invest are when stock touches orange line (15x)
sometimes that does not happen for years though
EPS completely oblivious to recession during 08 and 09
Trades at lower PE and higher dividend yield vs its peers (Wendy's BK, Yum!)

An interesting thought is the difference in "normal" valuation in the 2 charts. Could the overall flat market in the past decade have depressed MCD's normal PE ratio? My conclusion is that 17x is a very reasonable price to pay for MCD in any macro market condition, bull or bear. 15x would be a gift.

Analysts are expecting MCD to earn $5.84 in FY2014
Applying 17x multiple leads to a $99 fair value target, not much above its current price of $95
MCD currently going through a tough period of comps, revenues and earnings

Forward Business Outlook

There are a few questions I ask when looking forward:

Will the company be able to address its current issues
What reasonable dividend growth rate can I expect

Here is a quote from a Fortune magazine article on McDonald's, titled "Can McDonald's cook again? The great American icon ain't what it use to be"

"McDonald's missteps seem to have eroded its position, at least in the U.S., as an American icon. For a number of reasons--from increased fast-food competition to a lack of innovation to poor marketing-- McDonald's seems to have lost a sense of itself."

The above quote is from 2003, but it could have very well been written in 2013. Commentary from a recent analyst meeting indicates executives are well aware of the recent issues plaguing MCD, and were taking action to address them

Continued renovation of restaurants. Renovated restaurants show 6-7% increased sales
Opening new restaurants, particularly in Asia
dual drive-thru lanes to speed up ordering
a 3rd drive-thru window for larger complex orders
expansion of drive-thru in foreign markets
continued expansion of McCafe brand
continued promotion of breakfast items overseas, where its only 12% & 5% of sales in Asia and Europe, vs 25% in the US
kitchen renovations in the US, to help speed up food prep

As for the dividend, I strongly believe MCD has lots of room to grow. How much? Well that depends on a few things, all of which are within its control (which is more than what I can say about certain high flying stocks of late *cough* airlines)

Continued brand building: MCD remains by far the most valuable brand in the restaurants space
Healthy eating: MCD has traditionally been associated with unhealthy foods, and with so many consumers chasing the latest health craze these days, MCD needs its menu to remain dynamic and innovative to keep existing customers who grew up on Big Mac & Cokes, and attract the new generation of customers who may prefer a McWrap & juice. The brand strength will certainly help here too
Pricing Power & Cost Savings: another benefit of a strong brand & global size, even if MCD was able to squeeze an extra 5 cents out of each customer per visit, that would translate into $3.5 million per day, $1.3 billion per year. Can be done either via price hikes, or operational improvements, or a combination of both.
Emerging Markets: plenty of room to open new stores, particularly in Latin America and Asia. 35,000 restaurants today, opening 1500 per year in 2013, 2014, and 2015. In China alone, expects to open 300 restaurants per year for many years to come.
Share Buybacks: MCD consistently gobbles up shares. Shares outstanding down from 1.2 billion in 2007 to just under 1 billion in 2014, an average of 33 million shares per year, or ~3% of its float per year.

Just looking at the last 2 items, it seems like the base case for McDonald's is EPS & dividends growth of at least 5%. If it begins to fix some of its temporary issues, I believe we could see a return to 8-12% bottom line growth. It's not the past decade, but its not too shabby either.

Every once in a while, McDonalds goes thru a weak patch. I think we may be at the early or middle innings of such a period now. I do not doubt the company will eventually get out of the funk, but the question of when, will depend on strategy & execution.

Just like JNJ, McDonald's is a true blue chip that has all the properties of a core investment holding. Growing business, strong cash flow generation, consistent share buyback, and an annually increasing dividend.

Johnson & Johnson Analysis

2014-01-18T02:17:00.000-05:00

Johnson & Johnson is the world's biggest diversified health care company. Its roots can be traced back to a surgical dressing company founded in 1886 by brothers Robert, James, and Edward Johnson. Nearly 130 years later, the Johnson & Johnson (JNJ) family of companies includes:

The world's 6th largest consumer health company
The world's largest medical devices & diagnostics company
The world's 5th largest biologics company
The world's 8th largest pharmaceuticals company

The company is organized into 3 segments: Consumer, Pharmaceutical, and Medical Devices & Diagnostics, representing 20%, 40%, and 40% of total revenues. JNJ is a S&P500 dividend aristocrat, has paid an uninterrupted dividend since 1944, and has increased it for 51 consecutive years. Only 15 companies in the entire world have managed to raise dividends for more than 50 years each. JNJ is truly among the elite companies of the world.

Past Business Performance

I love to look at 10 year numbers, as I believe it smooths out much of the economic cycle. While JNJ's past decade has certainly had its ups and downs, particularly the recalls of the last few years, it has still managed to deliver an annual total return of 8.4%, beating its peer group by nearly 1.8% and the S&P500 by nearly 1.3%

Here are some other 10 year numbers (2003 to 2012, as 2013 FY results are not out yet)

Revenue growth from 41.9B to 67.2B, representing CAGR of 4.8%
Operating Income growth from 9.9B to 15.9B, representing CAGR of 4.9%
Adjusted Net Income growth from 7.2B to 14.3B, CAGR of 7.1%
Adjusted EPS growth from $2.40 to $5.10, CAGR of 7.8%
Dividend growth from $0.93 to $2.40, CAGR of 9.9%

What makes all of this even more amazing is that there were 2 recessions spanning a total of 32 months during this decade. During the most recent recession, JNJ's businesses barely saw a blip:

Revenues grew 4.3% from 07 to 08, and fell just 2.9% from 08 to 09
Net Income grew 22.4% from 07 to 08, and fell just 5.3% from 08 to 09
FCF per share grew from 07 thru 09

Return on Equity has averaged between 25 and 30% for much of the decade, only dipping into the high teens in 2011 and 2012 due to a large number of recalls. A similar story can be seen in the net (17-21%), operating (23-27%), and gross margins (70-72%). Simply put, JNJ's not only consistently makes profits, they do it in a consistent fashion.

JNJ's performance is the result of several things:

diversified product line, making JNJ relatively immune from economic cycles
strong competitive advantages from scale
stable financial position (only $15B of debt vs $17B of cash on hand)

Current Valuations

A key determinant to future returns is the price paid. Overpaying for even the best company in the world will surely lead to mediocre returns. To illustrate this, using JNJ itself as an example, take a look at an old 2012 F.A.S.T Graph of JNJ since 1993.

The stock clearly went through a period of overvaluation during the late 90s, and as a result has done very little for the next decade (sounds like most equities actually...).
Since 2009, the stock has been cheap even when compared against the orange 15x line.
Historically stock of premium businesses like JNJ have commanded a premium price, and we do see this in the blue line, which shows JNJ typically is priced at 20-21x PE.

Given the above, and that FY 2012 adjusted earnings were $5.10, we saw that JNJ's fair value should have been closer to $100 than its price of $60-70 in 2012. We also see that in a bull market like the 90s, buying JNJ any time it dips close to 20x PE (tagging the blue line) was a pretty good buy.

Analysts on average expect JNJ to earn ~$5.50 for FY2013. This looks like a pretty safe bet given the first 9 months of 2013 have generated $4.28 in earnings, and that Q4 2012 generated $1.19.
Equity is currently priced at 17x 2013 earnings
Applying 20x leads to a $110 premium business fair value target

Forward Business Outlook

There are a few questions I ask when looking forward:

Where will the growth in revenues come from
What reasonable dividend growth rate can I expect
How much room for error do I have

While Johnson & Johnson's size and diversity helps make the company incredibly insensitive to economic cycles, it also makes it incredibly difficult to move the revenue needle. So where will the growth come from?

Global growth of the middle class: Health & personal care are big issues across the world. When people move into the middle class, one of the first things they want to secure is quality and trustworthy health & personal care products. JNJ's diverse product portfolio & strong brands will ensure it will make its ways into the bathrooms and medicine cabinets of citizens around the world. One example is China, where domestic products often contain harmful materials. This has led to rapid growth in demand for foreign products. JNJ has capitalized on this by building a reputable brand in China. On a recent trip back, I observed prominent retail displays for Johnson's baby products as well as Acuvue contact lenses.

R&D Pipeline: With any pharma company, upcoming patent cliffs and the drug pipeline are big focal points. JNJ has one of the best pipelines in the industry. JNJ's pipeline is separated into: Neuroscience, Cardiovascular and Metabolism, Immunology, Oncology, and Infectious Diseases & Vaccines.

Zytiga, a prostate cancer drug from the oncology pipeline, sales grew over 300% to $961 million in 2012
Olysio, a hepatitis C drug from the Infectious Diseases & Vaccines pipeline is a potential cash cow in the $20B hep C drug market
Invokana, recently approved Type 2 diabetes therapy drug from the Cardio & Metabolism pipeline is projected to generate $2.5B in sales per year.
Imbruvica, a potential blockbuster treatment for Mantle Cell Lymphoma, with estimates of up to $9.2B in annual sales
Sirukumab, a promising rheumatoid arthritis drug in the immunology pipeline

Acquisitions: smart acquisitions in both developed and emerging markets will help bolster JNJ's brand portfolio and drug pipelines. In the past, JNJ has not been shy about making large acquisitions. The $20B acquisition of devices maker Synthes in 2012, and the $16.6B acquisition of Pfizer's consumer healthcare division in 2006 are two of the biggest in recent history. Smaller ones include a €1.75B purchase of Dutch vaccine maker Crucell and a $1B purchase of oncology drug research company Aragon Pharmaceuticals

As JNJ's past has shown us, we can reasonably expect 4-5% revenue growth + buybacks to translate into 7-8% EPS growth. I believe based on the above, that this is a reasonable base case for the next 5-10 years as well. This should translate into a dividend growth rate of 8% or better. This gives JNJ a combined yield + DGR score of 11. This is a very solid value for a core holding.

The potential downside for JNJ is clear. 2 of the 3 business segments are relatively stable and predictable. Pharma is the big question mark. Thus, potential growth may not materialize if some of the drugs in the pipeline do not pan out as expected. I believe in this worst case scenario, we would see flat to 2% revenue growth, which coupled with buybacks could still translate into 2-4% EPS growth. Given JNJ's current low dividend payout ratio of 47%, we could still see 5% dividend growth. That gives it a yield + DGR of 8, which is just barely okay.

While JNJ stock certainly isnt as dirt cheap as it was in 2012, during the recall scandals, it is not extremely expensive either. One could say that currently there is no premium priced into JNJ. Its like you are getting a business class seat for the price of an economy seat. I think that makes JNJ a moderate buy.

Disclosure: Long JNJ since 2007

Dividend Growth Portfolio, December 2013, Annual Summary

2014-01-15T00:50:00.002-05:00

Its been a while since I posted anything on here. I feel I've been neglecting to update the status of my portfolio. 2013 has been a whirlwind year! I bet not many people predicted S&P 500 would be up over 30% with dividends reinvested. Its definitely been a good year if you were invested in the stock market. The sad part is, many people missed out, either by being too heavy in the Canadian market, or staying on the sidelines.

You know that saying, that your relative performance takes a heavy beating if you miss just the best 10 days of the last 10 years? Well.. imagine what happens if you miss the best year in the past 10 years... (best year since 1997 to be exact)

But all is not lost! After all, its a new year, and a new year means everyone starts fresh! Equities are not expensive. They are not cheap either, but there can still be value to be had, if you know where to look.

Some blue chip names that I consider to be currently attractively valued are: McDonalds, UnitedHealth Group, Rogers Communications, Southern Company, Philip Morris and Royal Dutch Shell.

Two additional names that are attractively valued but have a bit more clouds hanging over them are: Kinder Morgan and HCP.

Since it has been a while since I last updated this portfolio, I will list all the changes that have been made in the second half of 2013.

Most of them are just extensions of what I was doing for most of 2013, namely, going after blue chips getting sold due to the taper talk. One big move that I made was the liquidation of my entire Intel (INTC) position. In some ways, it was a very easy decision. I simply stuck to my rules. But in other ways, it was a very difficult decision to stomach.

New Purchases
($ amount represents forward estimated yearly dividends of new shares)
Rogers - added 50 shares
Philip Morris - initiated new position of 90 shares
HCP - added 130 shares
Kinder Morgan - added 80 shares

Sales
Intel - sold entire position of 505 shares
Boeing - sold 12 shares

Intrinsic Dividend Changes
($ amount represents change in forward estimated yearly dividends based on dividend increase)
McDonalds - increased dividend from 77 to 81 cents per share
TD - increased dividend from 81 to 85 cents per share
TD - announced 2 for 1 stock split and increased dividend from 85 to 86 cents per share
CN Rail - announced 2 for 1 stock split
Emerson Electric - increased dividend from 41 to 43 cents per share
Boeing - increased dividend from 48.5 cents to 73 cents per share

Summary
December 2013 Annualized Dividend: $5933.73

End of 2013 Goal: $4700 to $5000
Whisper Goal: $5500

YTD Dividends Received: $5003

2013 Dividends Received Goal: $4200
Whisper Goal: $4600

2013 Performance Review

Dividends received grew 29.8% over dividends received in 2012 from $3853 to $5003
Forward 12 month dividends at the end of 2013 (amount of dividends I expect to receive in the next 12 months with my current portfolio) grew 33.1% from $4458 to $5934
Of the 33.1%, 12.6% was intrinsic dividend growth, and 20.5% was growth from new funds, or re-balancing
Yield on cost grew from 3.33% to 3.84% as I added higher yielding names this year
My portfolio beat my hybrid benchmark for the 3rd straight year, returning 36.7% in 2013, vs 29.9% for the benchmark.
$10,000 invested with me in 2008 would have grew to $18,831, while the benchmark would have grew to $15,419, an annual out-performance of 3.4%
All of the above is done with zero leverage.

2014 Goals & Expectations

An adjustment of my goals will occur in 2014. All goals will be shifted higher from previously established trend lines, which will make meeting them more challenging, and interesting. Setting goals is important. Setting challenging yet reasonable goals is even more important
The goal for dividends received is $6100, a 21.9% increase from 2013 actuals
The goal for forward 12 month divs at the end of 2014 will be between $6900 and $7300, an increase of 16.3% to 23% from 2013 actual
I expect intrinsic dividend growth to run at a low double digit (10-12%) clip again for 2014
I expect dividend growth from new funds to be more subdued, perhaps in the mid to high teens (15-18%).
One major assumption is the expectations that Citigroup will finally reinstate a meaningful dividend. I expect 15-20 cents per share per quarter, which would contribute 1.3-1.7% to the 10-12% intrinsic dividend growth I'm expecting for 2014.

Pockets of Value

As mentioned above, I see some remaining pockets of value that are attractive at current prices. Here are a few to ponder about
UNH: 14x earnings, benefits from Obamacare, very low payout + steady cash flows = very strong 3-5 year dividend growth potential
MCD: 17x earnings, bluest of blue chips, did not have great years in either 2012 or 2013 while consolidating after giant runs in '10 and '11, very defensive should stand up well if market corrects
RCI.B: 13x earnings for Canada's premiere telecom provider, kept low due to potential Verizon entry in 2012. pretty good dividend growth potential to boot
SO: 15x normalized earnings for the cream of the crop in utility sector, battered in 2012 due to interest rates rising + cost overruns. Morningstar study show long term utilities' annual return in past 20 years has no correlation with rising or declining interest rate environment

As always, please do your own due diligence before investing in any assets.

Dividend Growth Portfolio, June 2013

2013-07-03T00:12:00.001-04:00

Past couple of months have been volatile for many dividend growth areas of the stock market. First we got huge corrections, sell offs (whatever you want to call it) in REITs and utilities. That was followed up with a large slide in Canadian telecoms as news broke that Verizon had made an offer to buy Wind Mobile, 1 of 3 failing small Canadian telecom players, and was exploring the possibility of acquiring Mobilicty, another of the 3 failing small players.

A picture is worth a thousand words, so here's 3

The first depicts the massive slide in VNQ, the Vanguard REIT ETF, a 5% one day drubbing followed by a 20 slide before temporarily bottoming in late June.

Next one is XLU, the Utilities SPDR ETF, victim of a 13% sell off, quite a large move for a normally quiet sector.

The last one is Rogers stock, which experienced a 15% slide, before the Verizon news came out, and delivered another 10% walloping in a single day

These 3 charts show you what can happen when there is too much froth in certain areas of the market. At the same time, they also show you that opportunities arise in the markets for those who are patient.

In June, I took advantage of the drubbing to add to my blue chip holdings in 2 sectors (utilities and telecoms) and initiate a position in a blue chip REIT. The purchases were funded with idle capital plus minor profit taking in Boeing.

New Purchases
($ amount represents forward estimated yearly dividends of new shares)
Southern - $81.20
HCP - $126.00
Rogers - $74.82

Sales
Boeing - $29.10

Intrinsic Dividend Changes
($ amount represents change in forward estimated yearly dividends based on dividend increase)
UnitedHealth Group - $27.81
Fidelity Spartan 500 Index Fund Adjustment - $0.55

Summary
May 2013 Annualized Dividend: $5017.54

+ $282.02 (from new purchases)
- $29.10 (from sales)
+ $28.36 (from intrinsic changes)

June 2013 Annualized Dividend: $5298.82

End of 2013 Goal: $4700 to $5000
Whisper Goal: $5500

YTD Dividends Received: $2185

2013 Dividends Received Goal: $4200
Whisper Goal: $4600

Here is a graph of my dividend growth over the last 2.5 years (I didn't track values before 2011), tracked quarterly. I use an exponential trend line because compounding dividend growth follows an exponential model (a stock that raises its dividend 10% per year has a dividend that goes from x, to 1.1 * x, to 1.1 * 1.1 * x, and so on)

Take a Deep Breath

2013-06-28T08:27:00.003-04:00

Take a deep breath, and think things through before you take any actions.

No seriously, before you take any action on stock market news, step back, inhale deeply, and clear your mind. It will help you see the big picture, and enable you to make better decisions about your investments.

It is very easy to get caught up in what's on TV, or what is in the newspaper.

The Last Month

May 22, 2013: S&P closes down 35 handles from intraday peak. -14 points from previous day's close

May 28, 2013: S&P 500 rallies 25 pts intraday before closing up only 11 pts

May 31, 2013: S&P 500 closes down 24 pts, with most of that (13 pts) coming in the last 30 minutes of trading

June 4 - June 7, 2013: S&P goes from intraday high of 1647 early on June 4, to close at 1609 on June 5, then makes a intraday low of 1598 early morning of June 6, and close at 1643 on June 7. All told, 50 points down in 2 days, then 50 points up, ending the 4 day period almost unchanged

June 19 - June 22, 2013: Markets get clobbered as S&P drops from 1652 to 1584 in 2 days, a 68 point move, paused for a 3rd day, only to resume sliding on the 4th day down to 1560. In total, a 92 point move.

What To Do?

What's an investor to do, as the market gyrates wildly from day to day? What does the future hold? How about a couple of quotes from the wise Yoda?

"Patience you must have"

"Difficult to see. Always in motion is the future"

I bet Yoda would have made a great investor. He is patient, wise, full of optimism, aware of his limitations in predicting the future, and sees the big picture.

Looking back at this volatile period of stocks, things could have gone very badly for investors had they sold out during the panic. Today, the S&P 500 is back to 1613, only a few percent off the peak. Where it goes from here, even Yoda would have trouble figuring it out.

Lesson to be learned here?
Whenever the stock market panics, take a deep breath, step away from your desk, go eat something before you act. Look at the big picture, calm down, and analyze your investments not from how it is trading for the day, but how the business is doing.

Some ideas after the recent clobber? How about digging deeper in utilities, REITs, MLPs, and now, Canadian telecoms? All 4 areas are presenting attractive valuations again.

Dividend Growth Portfolio, May 2013

2013-06-10T20:52:00.001-04:00

A bit delayed, but better late than never right?

Every time I go on vacation, I get reminded of how my brain seems to be wired to think about investing. Even when I'm vacationing, I can't help but think of things I observe in a financial sense. I guess the phrase 'Money never sleeps' really is true.

Here is a couple of sample pictures from my trip. The first is part way through my 6 hour hike down the South Kaibab Trail into the Grand Canyon.

The second picture is a tail shot of the Space Shuttle Endeavor at the California Science Center.

A few things I noticed or thought about on this trip:

Americans love American cars: Here in the Greater Toronto Area, German and Japanese import cars like Benz, BMW, Audi, Toyota/Lexus, Honda/Acura, Nissan/Infiniti are everywhere. During my 2000+ mile drive thru Las Vegas, Grand Canyon, Death Valley, and Los Angeles, these import car brands were extremely rare. I almost want to say I see more of them in 1 day in Toronto/Markham, than I did in my entire 10 day 2000+ miles trip. What did I see a lot of? Dodge, Chevy, Ford, Cadillac, Lincoln, etc.
South Korean cars are really poorly made, American cars are not bad: The crappy quality of both Hyundai cars I got as rentals (Santa Fe and Elantra) astounded me. Poor sound proofing, inconvenient placement of controls, and weak engine were 3 of many things that I did not like on the Hyundai vehicles. The Dodge Charger I drove from Vegas to LA via Death Valley was much more enjoyable, and not to mention very fuel efficient!! This reinforces my belief that Hyundai cars are overrated.
Freeways in LA really suck: I couldn't believe how TERRIBLE the freeways in LA were in terms of road quality. I felt like I was driving over speed bumps at 75mph! I still can't get the ka-thump ka-thump ka-thump out of my head. Infrastructure investment is truly important. America needs to repair its roads and bridges!
US McDonalds has a lot more variety than Canadian McDonalds: Egg White McMuffin! I hope they bring it to Canada. It was delicious, the same price as normal McMuffin, and in theory healthier for you. McDonalds is truly an innovation leader when it comes to quick serve food. They also have more burger selections (Deluxe, BLT, etc) than we do up here. I saw a lot of customers having breakfast and coffee at the various McD I visited throughout the trip. It looks like McDonalds is really having a lot of success at getting into the breakfast and coffee markets
Americans really do eat A LOT: I swear American sized portions are even too big for me. No wonder I saw so many obese (not just mildly, but to the point their tummies flop on the tables) people on this trip. Made me think of investing more in healthcare businesses.

now, onto regular business :)

New Purchases
($ amount represents forward estimated yearly dividends of new shares)
Exxon Mobil - $63.00
Kinder Morgan - $76.00

Sales

Intrinsic Dividend Changes
($ amount represents change in forward estimated yearly dividends based on dividend increase)

Summary
April 2013 Annualized Dividend: $4878.54

+ $139.00 (from new purchases)
- $0 (from sales)
+ $0

May 2013 Annualized Dividend: $5017.54

End of 2013 Goal: $4700 to $5000
Whisper Goal: $5500

YTD Dividends Received: $1389

2013 Dividends Received Goal: $4200
Whisper Goal: $4600

Summary
With that, I've actually reached my 2013 annualized dividend goal before the half way point of the year. That being said, my dividend goals are like Apple's guidance. There is a more realistic whisper goal that is the real goal I hope to achieve.

Dividend Growth Portfolio, April 2013

2013-05-02T20:08:00.000-04:00

The stock market is soaring to new highs. Chasing yield is the new fad, like dotcoms around the turn of the century, and housing in 2005-2007. People are buying dividend paying equities without adequate research, believing that getting paid 10% somehow is a good return for low risk. On top of this, good securities are getting bid up, thus driving yields broadly lower. REITs are yielding where utilities used to be. Utilities are yielding where out-of-favor stocks used to be, etc.

As a dividend growth investor, I do invest in higher yielding assets, but my strategy does not revolve around absolute yield. Historical data shows the highest yielding equities do not even have average performance, let alone best. At best, yield chasing yields mediocre returns. At worst, its odds are not much better than roulette.

Where do I see the best value at the moment? I've mentioned these in the past, but I still continue to see good value in the defense and health care insurance industries. To add to those, now I also see attractive value propositions in energy and financials.

At these levels, be careful when committing new money. Buy in increments, and keep some cash on hand, continue to look for opportunities.

New Purchases
($ amount represents forward estimated yearly dividends of new shares)
Scotiabank - $4.80 (DRIP reinvested shares)
Toronto Dominion Bank - $71.28
Fidelity Spartan 500 Index Fund - $0.44 (DRIP reinvested units)

Sales

Intrinsic Dividend Changes
($ amount represents change in forward estimated yearly dividends based on dividend increase)
Kinder Morgan Inc - $2.00 (quarterly div +2.7% from 37 to 38 cents)
Johnson & Johnson - $36.00 (quarterly div +8.2% from 61 to 66 cents)
Exxon Mobil - $30.00 (quarterly div +10.5% from 57 to 63 cents)
Southern Company - $4.90 (quarterly div +3.6% from 49 to 50.75 cents)
Fidelity Spartan 500 Index Fund - $6.73 (quarterly div +7.9% from 27 to 29 cents)

Summary
March 2013 Annualized Dividend: $4722.83

+ $76.08 (from new purchases)
- $0 (from sales)
+ $79.63 (from intrinsic changes)

April 2013 Annualized Dividend: $4878.54

End of 2013 Goal: $4700 to $5000
Whisper Goal: $5500

YTD Dividends Received: $1389

2013 Dividends Received Goal: $4200
Whisper Goal: $4600

Portfolio for Beginners

2013-04-28T01:13:00.002-04:00

The hardest step of doing anything is getting started.

When I talk to various people (friends, co-workers, people on the internet), they often say 'I would love to invest and grow my wealth, but I have no idea how or where to start!'. Its true. While the concept of investing or why you should invest, is not a hard one to grasp, or a hard one to accept, many people get stuck on how to begin doing it. To an outsider, the world of investments often looks at best confusing, and at worst, scary. So many investments to choose from, where do I start? What makes the process of getting started even more difficult, is that beginner investors often have a fear of seeing paper losses.

Today's your lucky day. I'm going to help you get started with a portfolio for beginners. I will even track it over time to see how you would have done, had you actually followed through on it.

First, let's set some rules, or guidelines, regarding portfolio management.

How the portfolio will be set up:

The portfolio will have an initial investment of CAD$24,000 in total. If you have more, or less, simply scale the shares purchased up or down. Very simple
The $24,000 will be divided up evenly into 6 blocks of CAD$4,000 each
Each $4,000 will then be used to purchase shares in the following companies at the April 9 closing price: KO, JNJ, XOM, CNR, BNS, RCI.B
For US companies (KO, JNJ, XOM), we will exchange the CAD$4,000 to USD first using April 9 noon USD/CAD exchange rates provided by Bank of Canada (1 CAD = 0.9841 USD) leaving USD $3,936.40 to purchase shares with
To keep things realistic, I'll use brokerage transaction fees of $9.95 per trade.
New funds of $400 per month will be added to the portfolio.

After making the purchases, and paying the trading fees, we have the following:

Holding	Symbol	Purchase Price	Shares	Total
Coca Cola	US: KO	U$40.71	96	U$3908.16
Johnson & Johnson	US: JNJ	U$81.52	48	U$3912.96
Exxon Mobil	US: XOM	U$88.77	44	U$3905.88
USD Cash	-	-	-	U$52.35
Sub Total USD				U$11779.35
CN Railway	Canada: CNR	C$98.11	40	C$3924.40
Scotiabank	Canada: BNS	C$57.37	69	C$3958.53
Rogers	Canada: RCI.B	C$51.73	77	C$3983.21
CAD Cash	-	-	-	C$104.04
Sub Total CAD				C$11970.18

Now, we also need to determine how we're going to reinvested dividends, as well as how to invest new funds as they get added.

New funds of $400 per month will be added to the CAD cash pile per month.
Take dividends in cash as well
Buy some more stocks each time total CAD cash pile gets to $1000
Alternate between buying USD stocks and CAD stocks to maintain 50/50 weighting of currencies
Gradually add more to each original investment until $10,000 each, then consider diversification

Overall, our portfolio is pretty diversified already. We have a bank, a telecom, a railway, an energy, a consumer staple, and a healthcare. Among these, we have 3 blue chip businesses whose earnings are resilient and not very economically sensitive (KO, JNJ, RCI.B) and 3 businesses whose earnings are more sensitive to economic conditions (XOM, CNR, BNS). Each of these are best in breed, and their brand is very well known.

Let's take a look at what our investments give us for the moment in terms of cash flow, cost basis (rounded to nearest dollar, going forwards):

Holding	Cost Basis	Div/Year	Div Yield
US: KO	U$3908	U$107.52	2.8%
US: JNJ	U$3913	U$117.12	3.0%
US: XOM	U$3906	U$100.32	2.6%
Canada: CNR	C$3924	C$68.80	1.8%
Canada: BNS	C$3959	C$165.60	4.2%
Canada: RCI.B	C$3983	C$133.98	3.4%

Overall, this gives us ~$325 USD and ~$368 CAD per year of dividend income, or about $700 CAD annually, on $24k of invested capital, or average portfolio dividend yield of about 2.9%

New Pages!

2013-04-05T01:48:00.001-04:00

decided to add more content to the blog

First up, an section about us/me
About

Next, a section of various interesting things I've come across on the web, that may have some practical use for you
Around the Web

To come, a section for investors, detailing my historical returns vs various benchmarks
Open to more ideas, both investing related and non-investing related.

thanks for reading!

Dividend Growth Portfolio, March 2013

2013-03-29T00:50:00.001-04:00

Well after all that excitement in the first 2 months, March was certainly boring. No new purchases, no sales. I did receive a bigger than expected dividend hike from JP Morgan, although I was disappointed Citigroup did not move its dividend at all. The share buyback announcement was good, considering how far below tangible book the shares are trading at, even vs its peers, but I wanted a dividend hike!

How cheap are Citigroup (assuming economy continues to recover) and Bank of America vs its peers and Canada's big 3?

P/B ratios (courtesy of Morningstar.com)
Bank of America: 0.6
Citigroup: 0.7
JP Morgan: 0.9
Wells Fargo: 1.3
US Bancorp: 1.8
Toronto Dominion: 1.7
Scotiabank: 1.9
Royal Bank: 2.2

wow...

Now, of course, P/B is only one aspect to value banks, but the differential is quite significant here.

Be careful when investing in banks though. Their stock prices tend to be very volatile because their earnings are very cyclical. The usual rule when investing applies here as well. Stick to best of breed. JP Morgan, TD, Scotiabank (in no particular order) are my favorites in the group.

New Purchases

Sales

Intrinsic Dividend Changes
Scotiabank - $27.72 (quarterly div +5.3% from 57 to 60 cents)
JP Morgan - $64.00 (quarterly div +26.7% from 30 to 38 cents)
General Dynamics - $18.00 (quarterly div +9.8% from 51 to 56 cents)

Summary
February 2013 Annualized Dividend: $4613.11

+ $0 (from new purchases)
- $0 (from sales)
+ $109.72 (from intrinsic changes)

March 2013 Annualized Dividend: $4722.83

End of 2013 Goal: $4700 to $5000
Whisper Goal: $5500

YTD Dividends Received: $959

2013 Dividends Received Goal: $4200
Whisper Goal: $4600

Yield on Cost, the Big Picture

2013-03-25T01:01:00.002-04:00

Sometimes, it's easy to feel after so much hard work each year, our investment portfolios are barely going anywhere. This feeling is amplified when you look forwards and back and see how far you are from your goals.

Yield on cost is a good way for dividend growth investors to see meaningful fruits from their labor, as well as track their progress.

If you're unfamiliar with the term 'yield on cost', it simply means the current dividend yield based on your original cost of investment. It is simply the annual dividend divided by your original per share cost.

Here are some yield on costs for investments from several years ago:

Scotiabank: 5.7%
CN Rail: 2.4%
Rogers: 5.0%
Johnson & Johnson: 4.5%
McDonalds: 3.9%
Coca Cola: 4.3%
JP Morgan: 4.5%

many of these also include recent / newer purchases, so the yield on cost on the original tranches are even higher.

A word of caution. Its important to not get overly attached with yield on cost. It is also important not to view the yield on cost as how much you are making per year. A simple example will show you why.

Suppose initially you buy 1 share of a stock at $100, paying a dividend of $1 per quarter, $4 per year (4% yield at the time). In 3 years this stock is worth $200, and is paying a dividend of $2 per quarter, $8 per year (still 4% yield). Your yield on cost would be $8 / $100, or 8%. Now suppose the stock has no capital appreciation in year 3, so your only return is the $8 in dividends. Is your return 8%? Of course not. Any person can see your return is $8 in dividends on $200 at the beginning of the year, or 4%.

Dividend Growth Portfolio, February 2013

2013-03-03T10:57:00.003-05:00

Wow what a year 2013 has been so far. January and February have delivered solid returns for investors. To some degree, it actually scares me how well the stock market has performed. I fear that the exuberance may be too much too soon, perhaps even... irrational?

Nonetheless, it is very difficult, if not impossible, to determine where the market is headed in the short to medium term. What is clear, however, is that we are at or nearing levels unseen since 2007. Levels that also marked a market top in 2000. That should worry you, at least a little bit. Below is a 40 year chart of the S&P 500, and the triple top forming from 1999 to 2013 is quite obvious in the graph.

Thus, I want to protect myself somewhat against a correction that is overdue. Instead of selling and moving to cash, I'm attempting a strategy where I simply rotate into a mix of more defensive oriented investments. As you can see below, my dividends received is similar, but I've sold out of riskier investments, locked in profits, and moved to what I believe are fair or undervalued defensive businesses.

As you'll also see below, there were 3 companies that raised their dividend in February 2013. All 3 were increased around 10% (Canadian banks like TD typically raise their dividend every 6 months).

New Purchases
Southern Company - $137.20
Toronto Dominion Bank - $97.20
UnitedHealth Group - $87.55

Sales
Becton Dickinson - $108.90
Pason Systems - $96.00
CSX - $70.00
Cummins - $66.00

Intrinsic Dividend Changes
Rogers Communications - $29.12 (quarterly div +10.1% from 39.5 to 43.5 cents)
Coca Cola - $31.50 (quarterly div +9.8% from 25.5 to 28 cents)
Toronto Dominion Bank - $4.00 (quarterly div +5.2% from 77 to 81 cents)

Summary
January 2013 Annualized Dividend: $4567.44

+ $321.95 (from new purchases)
- $340.90 (from sales)
+ $64.62 (from intrinsic changes)

February 2013 Annualized Dividend: $4613.11

End of 2013 Goal: $4700 to $5000
Whisper Goal: $5500

YTD Dividends Received: $449

2013 Dividends Received Goal: $4200
Whisper Goal: $4600

Comments
After 2 months, my portfolio has received intrinsic dividend growth of just over 2.5% vs Dec 31 2012, keeping me on target for an annual intrinsic dividend growth rate of 10-12% ex Citigroup. The return of Citigroup's normalized dividend is expected to add anywhere between 2% to 3.5% to the 10-12% target.

Sowing the Seeds For Your Dividend Growth Portfolio

2013-03-01T15:44:00.001-05:00

A dividend growth portfolio is a lot like an orchard. First you have to plant the seeds.

Then you have to be patient, and take good care of your saplings & young trees.
Eventually the mature trees will bear fruit for you for many years.

You'll still need to take care of them though, to keep them healthy and productive.

So get started today, and plant the seeds for your future orchard.
Here are 5 ideas which are reasonably valued (less than 20x) for your orchard.

Coca Cola tree, KO
Mcdonalds tree, MCD
Johnson & Johnson tree, JNJ
Scotiabank tree, BNS
Rogers tree, RCI.B

Happy investing

PS: one of my tweets made it on CNBC's Fast Money show!! I'm on live TV!!... well, my tweet is :P. start at 0:35 http://bit.ly/YLtYrf

Dividend Growth Portfolio, January 2013

2013-02-05T11:17:00.001-05:00

New year! New beginnings! Time to re-evaluate the portfolio. One of my goals in 2013 is to drive more dividend growth while maintaining current yield levels.

Dividend growth investment opportunities are essentially split into 4 categories.
1. Low current yield + low dividend growth
2. High current yield + low dividend growth
3. Low current yield + high dividend growth
4. High current yield + high dividend growth

I've ordered these from least preferable to most preferable in terms of long term total returns. This basically means I need to reduce investments that fall into first two categories, in favor of ones that fall into categories 3 and 4. These kind of investments are truly the gems.

By following me as I update my portfolio activity and dividend status each month, you can see how I execute my strategy to achieve that goal. In 2012, my portfolio had intrinsic dividend growth of 12%. I aim to beat that in 2013.

New Purchases
General Dynamics - $183.60
Scotiabank - $4.56 (DRIP reinvested shares)

Sales
3M - $106.20

Intrinsic Dividend Changes
CN Rail - $25.30 (quarterly dividend increased 14.7% from 37.5 cents to 43 cents)
Kinder Morgan - $2.00 (quarterly dividend increased 2.8% from 36 cents to 37 cents)

Summary
December 2012 Annualized Dividend: $4458.18

+ $188.16 (from new purchases)
- $106.20 (from sales)
+ $27.30 (from intrinsic changes)

January 2013 Annualized Dividend: $4567.44
End of 2013 Goal: $4700 to $5000
Whisper Goal: $5500

YTD Dividends Received: $310
2013 Dividends Received Goal: $4200
Whisper Goal: $4600

S&P 500 Rallies to Levels Unseen Since 2007

2013-01-26T16:27:00.002-05:00

Its now been more than 5 years since we've seen these levels in the Dow and S&P 500 indices. Not coincidentally, bond yields and the VIX have also reached 5 year highs and 5 year lows, respectively.

Recent data shows bond funds are experiencing the highest outflows, and equity funds experiencing the highest inflows, in years. Is this the beginning of a shift to equities, or is this another case of the retail investor getting back in near market tops?

Looking at valuations, it is clear the market is not overvalued, but it is also clear the market is not undervalued either. Stocks can definitely go higher, but likely only if earnings continue to grow. Attractive investments in the equity space dwindle with each passing day, week, and month. I feel there is too much good news in the market these days, too much exuberance. S&P 500 is up 5.4% in January alone, and I would be very cautious going into February, because markets rarely make their lowest yearly levels in the first day, or month, of the year.

At times like these, it is important for investors to be reminded that the biggest determinant of future returns of an investment, is the price paid for said investment. It would not be foolish to get a little more defensive as January comes to an end.

Dividend Growth Portfolio, December and FY2012

2013-01-13T18:15:00.004-05:00

We're well into the 2013 year now, and I've been neglecting my blog... Hopefully as January rolls by I will have more time to dedicate towards informative or update posts.

December (and early January) brought a flurry of activity for me. Some of it was fiscal cliff risk driven, and some of it was simple top ups or just taking advantage of dwindling market opportunities. Let me list my transactions for the month, then I'll go over them.

New Purchases
Coca Cola - $56.10
Kinder Morgan Inc - $72
CSX - $70

New Transfers In
Fidelity Spartan 500 Index Fund - $84.82

Sales
Western Union - $87.50

Intrinsic Dividend Changes
Boeing - $25.56 (quarterly dividend increase 10.2% from 44 cents to 48.5 cents)

November 2012 Annualized Dividend: $4237.20

+ $198.10 (from new purchases)
+ $84.82 (from new transfers in)
- $87.50 (from sales)
+ $25.56 (from intrinsic changes)

December 2012 Annualized Dividend: $4458.18
End of 2012 Goal: $3800 to $4000
Whisper Goal: $4400

Index Fund
Now, the thing you're probably wondering about is the transfer in of the Fidelity Spartan 500 Index Fund, so let me go over that first.

Fidelity Spartan 500 Index Fund is an index mutual fund offered by Fidelity. This means its goal is to simply mirror the S&P 500, both by movement, and performance. This is accomplished by essentially having the fund invest in the components of the S&P 500, down to the exact weightings. For more on index funds, you can go here

Now, I've actually had the 401K account that currently holds the Fidelity Spartan 500 for some time, but in the past, with Vanguard, it was quite troublesome to keep tabs on what was being paid, when, how much per unit, etc. 2012 marked the first year with Fidelity, which allowed me to quantify this additional dividend source.

Fiscal Cliff
My lone sell this month was a fiscal cliff move. I was looking to trim risk ahead of year end fiscal cliff issues, and decided to sell a risky but profitable position in Western Union. I had originally bought it 2 months ago when it dropped below $12. It was sold just shy of $13.50 for a 12% gain in 2 months. This was purely a trade on my part, as the stock does not fit into my strategy at the moment (I'm already overweight financials)

The interesting thing was I was able to redeploy cash right before New Years as others sold stocks down in fear of fiscal cliff issues. I kept to my strategy of looking for dividend growth at a reasonable price, and this led me to add to my existing position in Coca Cola, as well as initiate a new positions in Kinder Morgan Inc (KMI) (the general partner of KMP, a pipeline MLP), and CSX, an eastern US class I railroad.

2012 Wrap Up
2012 turned out to be a pretty good year for investors. S&P 500 returned 16% with dividends reinvested. Dow provided 10.2%. Even the lowly TSX gave 7.2% gains with dividends. These were all substantially more than what you would have gotten with GICs.

My personal portfolio rose 13.7% in 2012. This beat my currency adjusted benchmark by ~4% (it rose 9.7%). My performance was particularly good in my TFSA, which rose 17.5%, and my non-registered CAD account, which was up 17%. My non-registered USD account was up 13.1%, and my RRSP was up 6.7%. All in all, a pretty good year.

By dividend metrics, the year was quite good as well. I started the year with a portfolio yield on cost of ~3.1%, and forward annualized dividend income of $3510. I ended the year with a yield on cost of 3.3%, and forward annualized dividend of $4458, an increase of 27%. Of the 27%, about 12% was intrinsic growth, and 15% was new funds. I received $3853 of actual dividend income in 2012. This was up 27% as well from $3030 in 2011, in line with my forward dividend growth.

2012 Goals, Results, and Comments

2012 Annualized Forward Dividend (AFD) Goal: $3800 to $4000, Met and exceeded: $4458
2012 Actual Dividends Received Goal: $3450, Met and exceeded: $3853
2012 Net Worth Y/Y Change Goal: +$37956, Met and exceeded: +$61693

For those unfamiliar with net worth calculations. It is the result of taking assets (stocks, funds, real estate, etc), and subtracting debts (mortgage, margin, loans, etc). For me, since I do not employ leverage in investing and do not own rental real estate, it is simply all my investments plus my equity in my primary residence.

I fully expect numbers to continue beating expectations so long as the economy doesn't tank. My projections are based on consistent long term growth rates, regardless of economic boom or malaise. I do expect Canadian real estate prices to be flat to down going forward, which will bring my annual net worth gains back into in line with long term trajectories.

2013 Goals
Here are my 2013 dividend growth portfolio goals

Annualized Forward Dividend Goal: $4700 to $5000, 23-25% higher than 2012 goals of $3800-4000
Actual Dividends Received Goal: $4200, 22% higher than 2012 goal of $3450
Net Worth Increase Goal: $41751, 10% higher than 2012 goal of $37956

Keep in mind, these are non-leveraged income growth goals, which will differ wildly from growth experienced by someone who is leveraging up (either via mortgage/rental property, or margin/stock).

Market Gyrations Creating Value and Opportunity

2012-12-12T00:43:00.002-05:00

The last few months of the stock market has been very interesting. The S&P 500 is basically right back where it was in August, 3-4 months ago, around 1400. It's gone as high as 1470s, and fallen as low as 1340s during this period. That is about 130 points, or roughly 10%, around its mid point. It's been one heck of a roller coaster ride

A quick glance at the market might not reveal any interesting opportunities, as we're basically 5% from the highs, and we've been taught to wait for pull backs to buy, right? But it is important to remember the market index is made up of many sectors, and each sector contains many stocks, and all together they make up the index. What have the underlying components of the S&P 500 been doing lately? Let's take a look.

XLF - Financial Sector SPDR ETF

August 1, 2012: 14.72
December 3, 2012: 15.70
High: 16.43
Low: 14.72
Range: 11%
% Off Highs: 4.4%
Performance Since August 1, 2012: +6.66%

best performing sector since Aug 1. moderate pull back from highs.

XLI - Industrial Sector SPDR ETF

August 1, 2012: 35.81
December 3, 2012: 36.73
High: 38.07
Low: 35.19
Range: 7.9%
% Off Highs: 3.5%
Performance Since August 1, 2012: +2.57%

a very China dependent sector, showing signs of a coiled spring (triple top, ascending wedge, formation dating back to 2011) getting ready to pop. could be the biggest winner of fiscal cliff resolution.

XLP - Consumer Staples Sector SPDR ETF

August 1, 2012: 35.63
December 3, 2012: 35.91
High: 36.59
Low: 33.97
Range: 7.3%
% Off Highs: 1.9%
Performance Since August 1, 2012: +0.8%

well, looks like we found the sector the S&P has been closely mirroring last 4 months. low volatility sector and not much off its highs.

XLU - Utilities Sector SPDR ETF

August 1, 2012: 37.92
December 3, 2012: 35.10
High: 38.54
Low: 33.85
Range: 13%
% Off Highs: 8.9%
Performance Since August 1, 2012: -7.4%

wow! for a low volatility regulated sector, utilities sure moved a lot since late summer... biggest losers since Aug 1

XLK - Technology Sector SPDR ETF

August 1, 2012: 29.45
December 3, 2012: 29.09
High: 31.74
Low: 27.21
Range: 15.4%
% Off Highs: 8.3%
Performance Since August 1, 2012: -1.2%

technology has been the most volatile since August, and is nearing correction territory as a whole, down 8.3%

XLB - Materials Sector SPDR ETF

August 1, 2012: 35.02
December 3, 2012: 36.04
High: 38.57
Low: 34.44
Range: 11.3%
% Off Highs: 6.6%
Performance Since August 1, 2012: +2.9%

average volatility and good performance for a typically volatile sector. could be seeing some support from China bottom.

XLV - Health Care Sector SPDR ETF

August 1, 2012: 38.61
December 3, 2012: 40.16
High: 41.40
Low: 38.49
Range: 7.3%
% Off Highs: 3%
Performance Since August 1, 2012: +4.0%

another low volatility sector, this one living up to its name. second best performer since Aug 1.

Analysis

What we can clearly see is a sector rotation. Utilities, which by far were the hottest sector for a while, clearly fell out of favor. People have been rotating into health care, financials, industrials, and materials.

This is actually very interesting, because 3 of the 4 are very offensive, risk on sectors, and the 4th (healthcare) is very defensive. The market is clearly sending us mixed signals here. What does it all mean??

Well, let's take the XLB and XLI, materials and industrials ETFs. They seem to be telling us that China is bottoming. This could be a huge opportunity to get into industrial names like Caterpillar, Cummins, or Deere. Keep an eye on these going forwards. I think any sell off due to fiscal cliff is an opportunity to buy large cap industrials.

XLF is interesting, because financials are the most levered to the economy's performance, but could this move have something to do with housing? Look at Home Depot! It isn't even aware there is a fiscal cliff looming. On the flip side, if you look at Wells Fargo, it's actually down during the reference period. JP Morgan and Citigroup, however, tell a different story, being up 15% and 25% respectively. However, upon closer analysis, we see all of the run up occurred during the 3 months prior to election day, and the stocks have been trending down since mid October. My opinion on the XLF is it is inconclusive. The data is all over the place.

This break down also doesn't reveal stock specific swoons, like AT&T's 15% decline since its peak in September, or Apple's nearly 30% decline in the same time period. Both these have created opportunity for long term investors. AT&T is approaching a level where I will seriously look at it again, after selling it in the $38 range earlier in the year.

Dividend Growth Portfolio, November 2012 Update

2012-12-02T23:53:00.001-05:00

Holidays are comin'. Holiday are comin'
Holidays are comin'. Holiday are comin'
Holidays are comin'. Holiday are comin'
Tis the season
Watch out, look around, somethin's comin', comin' to town (coming to your town)
Doo doo doo doo doo, doo doo doo doo
Doo doo doo doo doo, Always Coca Cola (coming to your town)
Something magic, in the light, can you see it, shining bright (shining bright)
Fa la la la la, la la la, la la
Fa la la la la, la la la, la la (It's always Coca Cola)
Holidays refreshments is what we bring
Tis the season, its always the real thing.

It's only fitting that one of the most iconic brands in the history of mankind always is the creator of one of the Christmas time commercial classics.

The Coca Cola story is one of incredible brand value and awareness. This is the kind of stock long term investors love to own. These investments form the core of your portfolio, and you almost never sell them. They're also the investments you buy when shit hits the fan. They won't be the best values (riskier stocks will fall more) but they will be at valuations typically seen once in a generation (like Coca Cola at a split-adjusted $20-$22 back in 2009)

Anyway, onto business! Here's this month's Dividend Growth Portfolio update.

As communicated in a 2 blog post earlier this month,

1. I divested my Exelon Corp holdings due to the executive team bringing up the potential of a dividend cut should power prices not rebound, and

2. these dividend hikes were forseen well in advance. Emerson's was a little lower than I was hoping for, but not entirely surprising given their very cautious outlook. Becton fell right into the range I was expecting. Just 1 dividend adjustment remains now for this year, which is Boeing.

I still remain on target to meet the goals set.

New Purchases
Western Union - $87.50

Sales
Exelon Corp - $136.50

Intrinsic Dividend Changes

Scotiabank - $4.56 (DRIP reinvested shares)

Pason Systems - $8.00 (semi-annual dividend increase of 9% from 22 cents to 24 cents, will start paying dividend quarterly in 2013)
Becton Dickison - $9.90 (quarterly dividend increase 10% of from 45 cents to 49.5 cents)
Emerson Electric - $5.00 (quarterly dividend increase 2.5% from 40 cents to 41 cents)

October 2012 Annualized Dividend: $4258.74

+ $87.50 (from new purchases)
- $136.50 (from sales)
+ $27.46 (from intrinsic changes)

November 2012 Annualized Dividend: $4237.20
End of 2012 Goal: $3800 to $4000
Whisper Goal: $4400

Aside

A small side note, unrelated to my DGP. 5 months after my car purchase, I've managed to return my savings to positive value. I had a negative balance of almost 7k in my theoretical savings account. Its since been completely negated and has returned to positive value finally in November. It was approximately +22k before I bought my car, which cost 29k (including 1st year insurance).

You can find details about this theoretical savings account here, in a previous blog I wrote

The next step in my plan is to pay back the amount I 'borrowed' out of my MCA. I've got an extra $6k to go for that. I haven't been in a rush, because as much as Mr. Flaherty and Mr. Carney have been warning Canadians about debt, I'd much rather have a balanced approach and continue to invest while slowly paying back the 'borrowed' amount.

Happy American Thanksgiving

2012-11-22T09:21:00.004-05:00

We've had ours already but its the Americans' turn now. Wishing all the Americans a Happy Thanksgiving. Unfortunately many will have to eat quickly and go to work as many retailers are opening Thanksgiving eve for Black Friday sales.

There are many problems in this world that need to be worked on, but Thanksgiving is a time to reflect on things you are thankful for. It is a time to reflect on the fact that if you live in north america, your life is pretty darn good compared with the rest of the world, even if you are one of the poorest.

When thinking of what I am thankful for, I like to take all the things going on I may not be happy about, and think about how it could be worse if I was in a different place, with a different situation.

What am I thankful for?

1. I'm thankful I live in a democracy, even if it means once in a while people we dont like get elected.

2. I'm thankful of the confidence present that allows us to invest in companies without fears of rampant fraud like in China, even if it sometimes means over-regulation

3. I'm thankful that I feel like I pay too much taxes, because that means I at least earned money, and am not poor at the moment. At least I don't live in Europe

4. I'm thankful of the ability to choose what I want to invest in, because in many countries in the world, investors do not have this choice, and are limited to certain types of investments

5. I'm thankful I live in Canada. You get many of the benefits of America, without many bad things about America. It is truly a nice place to live.

Mistakes Will Be Made

2012-11-10T00:39:00.001-05:00

Mistakes happen. A good investor knows when he or she has made a mistake, and understands what to do immediately to correct the mistake.

There are many different types of mistakes that can be made when investing. Here are three of the most common:

1. Deviating from 'the plan'
2. Not enough research
3. Ignoring red flags

I had the fortune (or bad fortune...) of experiencing a bout of the first one recently, when I purchased Exelon Corp for my RRSP portfolio. Now you're probably wondering, why is that deviating from 'the plan'? You're a dividend investor, and Exelon pays a handsome 5-6% dividend. Well... that's exactly where the problem lies.

Recently, Exelon announced that should power prices not trend favorably, they will be forced to cut the dividend to maintain their credit ratings. This was an about face from their previous statement that the dividend is safe. As a result of this announcement, I immediately sold my EXC shares. The result was a loss of about $440 on a basis of $2500, offset by dividends received of ~$70, over a period of approximately 9 months.

Welp, that is a loss of 15% in 9 months. What did I do wrong? And how did I fall into making mistake number one?

As with most investor mistakes, they start with a snowball that does not appear like it will become a mistake, and before you know it, you're knee deep in the mistake without even knowing it. Luckily, I was able muster enough resolve to just bail on Exelon.

My snowball was that I saw Exelon's then 5% yield as attractive, decently supported (albeit payout levels were quite high in the 70-80% range), and even though it was not increasing, I felt if I started with a high yield, I could take a few years of no increases and still come out ahead.

While this does not seem particularly bad, it was the first step to deviating from my plan of dividend growth investing. Yes I do hold investments that haven't raised their dividend for some time, but none were as borderline as Exelon when it came to payout ratio. For example, a good chunk of my portfolio is Boeing, which had frozen its dividend for a long time, but its payout ratio was well below 40%, and recently resumed raising its dividend again. Through good management, and diversification, Boeing's dividend was successful in surviving the trough of its business cycle. Exelon is another story and whether the dividend is safe or not remains to be seen. The US economy continues to be weak to mediocre. I would not count on power prices rebounding in the next year.

Looking back, I should not have chased Exelon's 5% yield and 70% payout ratio, because the result after further decline in earnings is a payout ratio above 100%, 6% yield, and announced potential cut to the dividend. The last factor triggered my self imposed automatic sell. I will sell a stock if there is any hint of a dividend cut, regardless of price.

Fortunately for me, my Exelon position was quite small, about 1.5% of my total portfolio. Double fortunately, I didn't follow thru on a recent thought to add to the position. How unfortunate that would have been... Triple fortunately, the stock didnt drop too much before I could unload it.

Let this be a lesson learned. Stick to dividend growth names, and stick to the sweet spot of yield, between 1.5% and 4.5%. This example is exactly why chasing high yielding equities is dangerous like running with scissors. You never know what will make you stumble.

Dividend Growth Portfolio, October 2012 Update

2012-11-02T00:06:00.002-04:00

The wheels on my investments go round and round, round and round, round and round.

Finally sold some investments to rotate into ones I felt had better valuation in October. I reinvested part of the proceeds from the sale of Abbott Laboratories back into McDonalds, which promptly got clocked by its earnings call. Although the fact Abbott also got nailed makes me feel a bit better, at least for the 40% that I didnt re-deploy, and left as cash.

My other move was to take some profits in a TFSA investment, Honeywell. I didn't re-deploy this cash and it's actually still sitting there as of today. I mainly just wanted to lock in gains for the TFSA, as I had a goal of having $27,000 in there by end of this year, representing a 7k profit from base of $20,000 (4 years). I did find some more USD, and add to Boeing, a company I like a lot at these valuations.

So wrapping up October, I'm sitting on ~5% cash, which is above average for me, and looking for opportunities to deploy some of that. I don't feel obligated to meet my whisper goal immediately, because I'm still waiting on dividend increases from BA, BDX, and EMR.

Happy Halloween, and allow me to leave you with Top 5 funniest pranks courtesy of Toronto Star. Zombie Drive Thru! LOL

New Purchases
McDonalds - $77.00
Boeing - $47.52

Sales
Abbott Laboratories - $142.80
Honeywell - $59.60

Intrinsic Dividend Changes
There were no intrinsic dividend changes this month

September 2012 Annualized Dividend: $4336.62

+ $124.52 (from new purchases)
- $202.40 (from sales)
+ $00.00 (from intrinsic changes)

October 2012 Annualized Dividend: $4258.74
End of 2012 Goal: $3800 to $4000
Whisper Goal: $4400

Hurricane Sandy! Go Away!

2012-10-30T00:35:00.002-04:00

Day 1 of closed markets has come and gone.

Pros:
- lack of open market = very productive at work
- no need to watch Fast Money = 1 hour freed up to catch up on TV shows. I watched latest Homeland and Walking Dead. both very good!!
- less business tweets flooding my twitter from various news sources, but mostly replaced by just as many Sandy tweets ... hahaha

Cons:
- somewhat boring day. is it sad I get my Mon to Fri entertainment from watching investor shows?
- potentially increased volatility down the road. I'm not looking forward to Wednesday, when markets re-open, coinciding with quarter end. We could be getting a lot of pent up volatility
- lack of earnings driven reaction. From the sounds of it, tomorrow earnings will continue to be released, with or without the open market. Some companies have said they will push back earnings, but not all have.

Sandy has made everyone realize how vulnerable humans really are to mother nature. I started thinking about my food supply, and quickly realized if I lost power, there wouldn't be much I could eat, except fruit, instant noodles (uncooked) and some candy. Maybe its time to buy some emergency food supplies like jerky, granola bars, and such...

To all the east coast readers, stay safe, wherever you may be in the storm's path.

To Sandy, go away already, so life can go back to normal.

Canadian Government Intervention in M&A Activity

2012-10-21T16:19:00.001-04:00

This week we saw 2 major deals blocked by the Canadian government. Is this an ominous sign for the CNOOC Nexen deal?

First, we saw the CRTC block the takeover of Astral Media by Bell, and its parent, BCE. It was a deal that would have, by estimates, resulted in Bell controlling 33-45% of all English speaking content in Canada. The deal was widely expected to be approved by industry watchers, as evidenced by the 16% drop in Astral Media shares when the rejection was announced (ouch...).

In a decision broadly reminiscent of the late 90s actions by the government to block 2 major bank mergers (anyone still remember Paul Martin? lol), the Canadian government has put its foot down yet again to ensure adequate levels of competition and prevent a concentration of market power. Personally I believe the CRTC made the correct call here, as the Herfindahl Index, a measure of competitiveness within an industry, would increase significantly if a single company controlled nearly 50% of the market.

The Herfindahl Index is calculated by summing the squares of the market share of each company in the industry. In a monopoly scenario, where one company controls nearly the entire market, the index is ~1. In a very competitive market filled with many small players, the index is ~0.

Here are two examples of how the index is calculated.

Company A has 30% market share. Company B has 40% market share. Company C has 30% market share.

Herfindahl Index = 0.3 ^ 2 + 0.4 ^ 2 + 0.3 ^ 2 = 0.34

Company A has 85% market share. Company B has 10% market share. Company C has 5% market share.

Herfindahl Index = 0.85 ^ 2 + 0.1 ^ 2 + 0.05 ^ 2 = 0.735

How does the government decision regarding BCE and Astral Media affect our investment decisions? In a research note provided by Jeff Fan, a telecom sector analyst at Scotiabank, BCE's forward dividend strategy could be threatened by this decision. Jeff believes that without Astral, BCE will no longer be able to grow its dividend at its current pace. This mirrors what I've been saying for some time, that BCE's high dividend yield is a result of its higher dividend to FCF ratio, and should be a yellow flag for investors, because forward growth is severely limited with such a high payout ratio.

In another decision, the government blocked Malaysian integrated oil major Petronas' takeover of Progress Energy Resources. Petronas, short for Petrolium Nasional Berhad, is a state owned enterprise (SOE). If the name sounds familiar, it's probably because of these:

Petronas Towers, once the tallest buildings in the world, stand at over 450m tall and consist of 88 floors, 78 elevators. Petronas the company occupies all of tower 1.

This deal probably would have actually gone thru had Petronas not demanded the government make an immediate decision when asked to extend the deadline to allow more considerations. The government is taking a hard stance here regarding the 'net benefit' test on foreign takeovers.

Personally I don't like the concept of letting SOEs buy our natural resource assets, and it seems like our federal government may be signalling it is also uncomfortable with it. This spells trouble for CNOOC's Nexen deal, which is 2.5x bigger than the Petronas deal, and with a government that is arguably way more sketchy and untrustworthy.

What will happen? and how will this affect investors? It is hard to say now, but events like this could very well play into US major integrated oil company's hands. Bottom line is some level of expertise is needed to help Canadian companies extract maximum value out of their assets. Whether that expertise comes from SOEs like CNOOC or Petronas, or from US companies like Exxon (which just bought Celtic Exploration this week and rumors are flying it may target Encana!) or Chevron, remains to be seen.