Have you kids made your RRSP contributions yet? Don’t sweat it, you’ve got hours left until you miss the deadline.
God, you people and your procrastinating make me sick. I got my contribution in more than a week before the deadline. There’s no need to say it; I am a better person than you are.
I used to be very patient when putting money to work, waiting for an outrageously good opportunity to pile into some obscure value stock. While I still follow such a strategy in my TFSA, I’ve started to take a different approach in my other accounts. I’m looking for high quality businesses trading at half decent prices. Yes, kids, I’ve turned into one of those guys.
In fact, as you’ll see, not only do my new investments pay a dividend, but they also have a history of consistently upping their payouts over the years. That sound you just heard? It was Dividend Growth Investor getting a bit of a chubb.
Let’s not delay any longer. Here’s what I bought with my latest RRSP contribution.
The Keg (18.2%)
I touched on the logic behind buying The Keg Royalty Fund (TSX:KEG.UN) when revisiting my Pizza Pizza shares.
There’s a lot to like about the restaurant royalty business. The cash comes directly off the top line, which insulates it from a lot of the challenges that keep down operators. The bad news about this arrangement is it stymies hardcore dividend growth since there’s virtually no operating leverage. If a restaurant can grow sales by 5% while keeping costs the same, it has a huge impact to the bottom line. A royalty trust would see profits go up by about 5%. Big whoop.
I chose The Keg over some of its competitors for one important reason. Cara Operations just announced it would be acquiring the restaurant operations. Cara, which owns brands like Swiss Chalet, Harvey’s, New York Fries, and many others, is a hell of an operator. It’s capable of taking The Keg to the next level, which will likely include further expansion into the United States.
In the meantime, I’m paid 6.3% to wait. If same store sales go up 2% a year and the company expands operations by 2% a year, I’m looking at a 10%+ return over time. I think 2% expansion is a pretty achievable goal, since the company only has 106 locations today.
Essentially, I’m buying a 6% yield that I believe has the ability to grow slightly above inflation for a long time. I expect capital appreciation to be somewhat minimal, although keep in mind that shares are up 53% in the last decade.
I think Canada’s so-called Big 3 telecoms are pretty much like legalized crack dealers. Have you seen how often the average person checks their phone? It’s bananas.
While I do prefer Telus over BCE (TSX:BCE)(NYSE:BCE) because the former is a pure-play telecom, there’s a lot to like about BCE too. It boasts nearly 14 million customers between its wireless, internet, and television divisions. Management continues to grow the company by making smart acquisitions, including picking up a former member of my borrow to invest portfolio, Manitoba Telecom. And thanks to a recent sell-off, shares are down nearly 10%. This has boosted the yield to a succulent 5.4%.
BCE isn’t necessarily cheap, but companies like it never really enter value territory. It did approximately $3.5 billion in free cash flow in 2017, putting shares at just over 14 times that metric. Or, if you’re a traditional P/E guy, shares trade at about 17 times earnings. Again, not really cheap, but hardly expensive.
Canadian Utilities (33.5%)
Fun fact: Canadian Utilities (TSX:CU) shares are down approximately 13% over the last five years despite:
- Increasing revenue from $3.0 billion in 2012 to $4 billion in 2017
- Investing nearly $9 billion in capital expenditures from 2013 to 2017
- Hiking the dividend nearly 40%
Of course, it’s not all sunshine and blowjobs for Canada’s second-largest utility. 2017’s results were weighed down by a charge associated with one of the company’s big new growth projects. But normalized earnings were $2.23 per share, putting the company at just 15 times earnings.
Free cash flow was even better. CU generated $1.3 billion in cash from operations. It spent $1.2 billion on capital expenditures, but the vast majority of those expenses were for growth projects. I estimate true free cash flow (which would be cash from operations minus maintenance capex) to be approximately $1 billion. Shares today have a current market cap of $9.1 billion.
Oh, and shares yield 4.7% today. They haven’t yielded this much since Nortel was very much a thing.
Let’s wrap this up
There you have it, kids. These are the three stocks I bought with this year’s RRSP contribution. All are expected to be core holdings for a long period of time. As dividends accumulate in my account I’ll put those back to work. It’s all pretty simple.
Let me know what you think of these buys. Am I a genius? A maroon? Or something in between? The comment section awaits. I might even respond.