A couple of weeks ago, I wrote some words about borrowing to invest. And like all my
crap high quality bloggenin’, I’m sure all of you were literally on the edges of your seat in anticipation.
I promised a model portfolio if enough people (>0) were interested, so here we go.
(Note: if you signed up for the Financial Uproar weekly newsletter, you got a special peek at this article a day before everyone else did. That’s kind of a neat feature, right? The sign-up form is on the right if you just can’t wait to get your thrice-weekly serving of bad jokes)
A few things about this model portfolio before we start:
- Unlike the Uproar Fund, this portfolio is much more… conventional. No weird small-caps.
- The stocks chosen for this portfolio will pay dividends. As you’ll remember I’m dividend agnostic, but I think it’s important you get paid to wait when you’re paying interest on a HELOC.
- We’re going to assume the total portfolio is worth $75,000. Like I mentioned in the original post, I’d only recommend a 50/50 split between borrowed and your own assets. So you put up $37,500 and the bank puts up $37,500
- The assumed interest rate will float at Prime, which is currently 3%.
That’s about it. I’m going to go with approximately 15 different positions with a small cash component, because math is hard. First, a list of the companies chosen. These aren’t in any particular order, and we’ll use Friday’s closing prices.
Extendicare — The company operates assisted living facilities, also known as the place where Grandma fills her Depends for 5 years before she kicks it. They’re in the process of getting out of the U.S. business, which is crummy. Think lawsuits and whatnot, probably after everyone laughed at Grandma crapped herself.
Cenovus Energy — One of the largest oil sands operators, where it regularly rapes the environment. This pisses off James Cameron, for… some reason. Go back to making Avatar not suck, you knob. Anyway, Cenovus has some big growth projects planned, but they’re in jeopardy if oil craters any further. The expansion projects, that is. Not the stock. It’s a fine operator.
TransCanada Corporation — One of Canada’s largest pipelines. It got the nod over Enbridge because of the upside potential from Keystone XL, the power assets, and the activist investors looking to break up the company.
Calloway REIT — I like the idea of having retail exposure, but there aren’t many that I’d find appropriate for somebody looking for steady dividends. So let’s go with Calloway, a retail REIT which almost exclusively has Wal-Mart as their anchor tenant.
Wells Fargo — There needs to be some financial exposure, and the U.S. seems to be doing pretty well. So let’s take the advantage of adding some U.S. exposure to the portfolio.
Power Financial — Power Financial has a nice dividend, has exposure to insurance and wealth management, and trades at a discount to the sum of its parts. Plus, I’m pretty sure the CEO is named Max Power.
IBM — It’s hard for me to like technology as an investment, but the stock is still a cash flow machine. Buffett is long the stock, and it’s literally been around forever.
Rogers Communications — I think the whole telco sector is a little overvalued, but hey, it’ll do well if the market goes down. Well, compared to everything else, at least. Plus, you get to own a small slice of the Blue Jays, which will undoubtedly disappoint us all come April.
Pizza Pizza — Everyone likes pizza, right?
TransAlta — TransAlta is probably the cheapest power generator in North America. It’s trading at a decade low, easily has enough free cash flow to cover the bonerific yield, and should benefit from electricity rates going up in Alberta.
Saputo — Because you’ve gotta have at least one growth stock with a low yield. Saputo has good expansion potential since the dairy business across the world is pretty fragmented. Insert your own ‘milk comes from boobs’ joke here.
Rogers Sugar — I am irrationally attracted to the sugar business. What’s not to love? It has steady revenues, government protection from imports, and there’s only two players of scale in the whole country.
Bank of Nova Scotia — I’m not a huge fan of the Canadian banks, but I’ve been known to be wrong about this kind of stuff, so you’ll want to own at least one. I picked BNS because of its large international exposure.
General Motors — The portfolio needs a little industrial action. GM is cheap because of the recalls, and low gas prices should also help. Plus, more U.S. exposure.
Bombardier — This one is a bit of a high-flyer. Get it? High flyer? It makes planes. Its fortunes pretty much rest on the CSeries program, which is scheduled to begin deliveries in 2015. The market, however, is a little skeptical.
And that’s it. Remember, the portfolio is worth $75,000. Let’s see how it looks in table form.
A couple of notes. First of all, I took the U.S. stocks and converted both the amount invested and expected dividends into Canadian Dollars, using an exchange rate of $1.13. But the share price remains in U.S. Dollars. When I update this fund, I’ll convert the amounts again, keeping it consistent with exchange rates. But only to the nearest penny. I’m not a masochist.
There’s a few hundred bucks in cash laying around which isn’t really accounted for. I’ll use it, plus the proceeds from dividends, to reinvest into something new come March 1st, when I’ll update this next.
The IBM outsized position is on purpose. I’m bullish on IBM.
Keep in mind that the portfolio is designed for income first, and capital appreciation second. Yes, I realize the danger of doing this during a zero interest rate world, but leverage 101 says we want to get the loan paid off quickly. Ideally our imaginary borrower is able to service this loan on their own while reinvesting the dividends, but we’ll give them the option of withdrawal.
And that’s about it. Feel free to critique or to tell me how awesome I am in the comments.
*Disclosure: I own Rogers Sugar. Family members own Power Financial preferred shares and Bombardier preferred shares.