Back when I used to troll the dividend growth crowd over in the comments section of Seeking Alpha, a tried and true way to really get somebody’s goat was to just point out how their dividend portfolio didn’t beat some index, usually the S&P 500.
These folks would inevitably respond with how they didn’t care about beating the S&P 500 and how all they worried about was investing in good companies that increased their payments each year. Getting trolled in a comment section was just a bonus, I guess.
Your boy Nelly, meanwhile, was confident his deep value portfolio filled with the trashiest (but cheapest!) companies out there would outperform. Sometimes I did extremely well, like that time I loaded up on Cloud Peak Energy (a coal miner) and tripled my money. I got out right as Trump won, within a dime of the stock’s high. I also made nice gains with trash like Yellow Media, Automodular, Dover Downs Casino, Village Farms, and so on.
But these paled in comparison to some of my losses. I got my ass handed to me on Corus, which is still down more than 50% over my average price. I even averaged down twice on that stock. Winnipeg Free Press lost 90%. Danier Leather at least salvaged something during the bankruptcy process, and I once invested in a Chinese fraud that went to zero. There are more examples but I’ve successfully blocked them from ever entering my consciousness again.
Such a portfolio didn’t have much correlation to the market, which should have made it easier to outperform. At least in theory. But it was also filled with a lot of trash. These were shitty businesses that just needed a small change in sentiment to achieve a satisfactory investment outcome. Except that often didn’t come. Because they were shitty.
This all seems so obvious in hindsight, but younger Nelson actually believed it. Poor guy.
Beating the market
After stubbornly holding on to this trash portfolio for a few years to try and be different from the masses, I finally got smart and switched to owning a diverse selection of blue chips with a bit of a value bias. It’s working much better.
Let’s compare my portfolio to the TSX Composite. My portfolio has one lingering retail stock, exposure to the U.S. tech market (no Canadian names), energy exposure only through pipelines, and not a nickel invested in any mining or materials companies. This avoidance of sectors is quite intentional. I view them all as crummy businesses without any pricing power. It’s exactly what I don’t want to own.
The TSX, meanwhile, has exposure to all these things.
So what happens if gold and oil soar, while the rest of the economy tanks? These two things generally move inversely to each other, remember. If this happens, my portfolio underperforms the market.
You can probably guess what happens if the opposite occurs. If gold and oil continue to be in the toilet, my portfolio kills the TSX Composite. It’s really quite simple.
So my “outperformance” (or lack there of) depends on two sectors I refuse to own. Nice. Real nice.
Should I compare to another index?
Canada has a number of dividend ETFs that focus on delivering plenty of income while minimizing the impact of a dividend cut. Perhaps I should compare my portfolio to one of those.
My favorite dividend ETF has consistently been ZDV, the BMO Canadian dividend fund. It pays a nice yield — the current payout is 6.5 cents per unit each month, good enough for a 4.75% yield — and it comes with a low management fee of 0.35%. I own five of its top ten holdings and 17 of the 50 total holdings (I guess 18 of 51, since we both have a small cash position). It’s probably the better fund to compare my portfolio to.
But at the same time, perhaps this isn’t the best method. Maybe whichever underlying index I choose loads up on some hot new stock that delivers nice gains. Maybe it gets lucky with a takeover or three. Or maybe I get unlucky and one of the biggest positions in my portfolio blows up. This kind of stuff should even itself out over the long-term, but can have a big impact on year-to-year results.
I think the solution is I track my portfolio versus ZDV or one of the equivalents. But I’m not going to be super serious about it. As long as I’m posting consistent gains and my dividend income keeps going up on a year-over-year basis, I’m good. I’m not going to sweat the small stuff.
Wrapping it up
If I do underperform but I still end up being worth $5 or $10 million, does it really matter? I’m already at a point where our family spends about 80% of our passive income and saves 100% of our active income. Can I call that a 120% savings rate? I WILL NOW.
Remember, a high savings rate can cure a lot of other sins.
As long as I go forward each year, I’m good. And I know that by loading up on large blue chips I’m not going to deviate from the market that much. And as much as it pains Nelson of five years ago to admit this, blue chip dividend growers have a history of outperformance. So I suspect I’ll probably do about as well as ZDV, even if I’m not religiously tracking it.
Which, of course, begs the question. Why not just buy ZDV and be done with it? But unfortunately we’re out of time.
I’ve been pretty busy over the last couple of months, mostly helping out with a renovation for the grocery chain I work for. It’s pretty fun work, actually. It gives me plenty of opportunity to use my imagination and I get to use my hands. The project will wrap up in about a month and then I’ll take it easy for an undetermined time after that. There’s the possibility for more work, which we’ll explore to see if there’s common ground.
So I haven’t been writing on the FU Machine that much, because as always I value income today at a higher level than potential income tomorrow. But I have been pretty much doing the same stuff behind the scenes, including writing for Motley Fool still and buying stocks at a pretty reasonable clip. And sexying up the joint, of course. IT’S IMPOSSIBLE FOR ME NOT TO DO THAT.
Is that enough preamble? I never know. Let’s just into the stocks I bought.
Nelson’s distressed real estate fund
It seems like all the smart real estate investors dedicate at least a portion of their capital to distressed assets. Brookfield has been doing it for years. Morguard is also usually sniffing around when there’s a bargain to be had. And so on.
It’s easy to see why. Bargains are good for the underlying share price. They’re relatively easy to identify, too. There are potentially limitless opportunities to buy these distressed assets. Once improvements are made they provide succulent income or you can flip them and put the cash to work in other assets.
I’m open to buying physical property with this mindset, but it’s gotta be a hell of a deal. I’m looking for a minimum of a 20% cap rate to consider physical property. Active investing and this lazy guy don’t really mix.
Fortunately, I’m pretty sure I won’t ever have to resort to physical property. That’s because there are usually a dozen or so REITs that are pretty beaten up on both sides of the border.
The first real purchase of my distressed real estate fund is American Hotel Properties REIT (TSX:HOT.UN). I kept the position small, picking up 400 shares at $7.11 each. I’ve written pretty extensively about the company before, so I’m not going to get much into it. I’ll just say the cash flow yield on the stock is pretty spectacular, and with a disciplined capital allocation strategy it could grow pretty nicely. We’ll see on that last part. Oh, and I’m getting a 12% yield to wait. Yes, there’s definitely the risk the dividend gets cut, but I don’t care. This is a value play, not a yield play. The distribution is just a bonus.
The other member of my distressed real estate fund is Morguard REIT (TSX:MRT.UN), which I’ve owned for a few years now. It trades at half of book value, and it also offers a pretty succulent cash flow yield. I’ll continue to collect the dividend while the Alberta economy recovers.
Genworth MI Canada (TSX:MIC) sold off after Trudeau and the feds announced CMHC would take equity positions in first-time homebuyer houses. This seems like a terrible fucking idea, but what do I know. I’m just some semi-literate dope with a blog.
I bought 100 more shares somewhere in the $40 range. My average cost for my 200 share position is now approximately $42. This is a full position for me. I’m not in any hurry to buy more shares.
I now own 130 Scotiabank (TSX:BNS) shares after buying 40 more in the last week. My average cost shrunk slightly to just under $72 per share.
People seem to think the international banking results are bringing the stock down but hot damn those numbers are pretty good. International banking profit grew by 16% in 2018, versus 8% for Canadian operations. And 2019 should be another nice year after the company made some acquisitions down in the region. Is the market anticipating a recession? I dunno. Happy to be picking up shares for less than 10x forward earnings, anyway.
Transcontinental’s (TSX:TCL.A) most recent quarterly results were, to use a technical term, the absolute shits. Disappointing numbers all around. No wonder the stock sank to below $17. I took advantage of the weakness and doubled my position to 400 shares. I took a little confidence in the board of directors increasing the dividend approximately 5%. I’m not 100% sure on this one but it represents a pretty good value here and I like I’m getting 5.3% to wait. Management needs to turn this thing around in a hurry. I think it’s possible, but this stock makes me more nervous than the others on this list.
In the early part of March Laurentian Bank of Canada (TSX:LB) came out with some craptacular earnings, probably because Quebec sucks and poutine. Or some other such nonsense. I’m still a long-term believer so I took the opportunity to average down and buy 100 more shares. I now own 200 shares at an average cost of a little more than $42 each.
Upon further inspection, I turns out I bought 200 RioCan REIT (TSX:REI.UN) shares back in the early part of March too. I barely remember this. Is this what it’s like to turn old? I meant to ask my grandma but I forgot.
I bought RioCan because of its redevelopment program. It’s in the beginning stages of taking some of its lower density property (mostly in Toronto) and turning it into larger complexes that feature a combination of retail, office space, or apartments. Most of the projects feature retail space in the bottom and 10-15 stories of condos. The company will then keep these condos and rent them out.
In the meantime, I’m collecting nearly a 6% dividend on my cost. This is well covered by earnings. I plan to sit back, relax, and promptly forget about owning this position for the next five years. My average cost is $25.39.
Preview for next month
Between my two jobs (remember, one is temporary), the wife’s job, and all our passive income, things look good on the savings front. We should be able to save some pretty serious cash over the next few months. Look for the next few monthly updates to be full of activity. And then we’ll go away this summer and the July one will be “uh, we bought 4 shares of some company I’ve never heard of while drunk.” Should be fun!
Back in my deep value days, I bought a big position in Reitmans (TSX:RET.A), the women’s clothing retailer. It’s been five years of a lackluster performance and I still own my 2,000 shares.
I liked Reitmans because of the solid balance sheet, its cost cutting program, the turnaround potential, and the two crusty old Reitman brothers in charge. I used to be a big fan of management that stayed with the same company for about five decades.
The stock has bounced around a bit, including reaching a high of above $8 in 2015 and briefly surpassing $7 in 2016. But for the most part it’s been a long, slow decline. Shares are currently a little below $3.50, which represents just over a 40% loss for your favorite reformed deep value investor. At least dividends have helped bring that loss up a little.
I’ve tried being patient with the stock and it just hasn’t worked. But you know what my biggest frustration is?
Reitmans just doesn’t care
It’s clear Reitmans’ management team just doesn’t care about bringing the stock price up. There’s an easy path the company can take to create value, yet management just doesn’t bother. This suggests to me that either a) they don’t care or b) they think the company is ultimately doomed.
That easy path is stock buybacks, of course, and they make all sorts of sense at today’s price. The company trades for 40% under its stated book value, a metric that doesn’t include very many intangible assets. In fact, most of its market cap is actually cash in the bank.
Why wouldn’t management be buying back these shares as fast as they can get their hands on them? It makes zero sense to me. They’d immediately be generating value while putting non-productive cash to work.
It’s not like Reitmans needs $166 million (or a little over $3 per share) in cash, either. The company generates a little free cash flow each year, basically enough to pay the dividend. I’d immediately cut the dividend and use a big bunch of the cash to do a share buyback. Or, if I’m the Reitman family, I offer a small premium and take the company private.
I want to sell my shares because Reitmans is a trash company in an even worse industry. But something like a share buyback or taking the company private makes too much sense to ignore. I envision selling my shares and then next week waking up to some big news that sends the stock 20% higher.
On the one hand, it’s silly to wait for an acquisition or other big event, since those things aren’t that likely to happen. Especially with a family-controlled company like Reitmans. My part-time grocery store gig is for a family-owned company, and these folks are typically a little crazy. Their whole identity is wrapped up in the company. So I doubt the brothers are going to sell.
But on the other it’s obvious some such move will create shareholder value. And the Reitman brothers own a shitload of shares. What exactly are these guys waiting for?
Value investing 101 is being patient and waiting for the catalyst, so I’m more inclined to hold today and collect my dividend while I wait for good news. But I promise you guys this: if shares move up 15-20%, I’d take my loss and get the hell out. I just don’t have confidence in the management team any longer.
No time for preamble, since I’m due somewhere in about an hour. Let’s just get to it.
After months of calling Genworth MI Canada (TSX:MIC) a terrific business and telling people I don’t see a massive U.S.-style housing crash in this country, I put my money where my mouth is and bought 100 shares. I paid a little over $43 each.
I just can’t get over what a great business mortgage default insurance is. You charge people up to 4% of the value of the house and then immediately get to put that money to work. Default rates have peaked at a hair over 1% but usually sit under 0.5%. It doesn’t take a genius to like those numbers.
Genworth has been operating long enough that it has build up massive reserves, which protect it from an inevitable correction. And even if houses fall 10-20% across the board, who cares? Most people will continue to pay their mortgages, bitching about the downturn the whole time.
I went off the board a little on this one, paying a little over $30 each for 120 Great-West Lifeco (TSX:GWO) shares.
I like a few things about the company. The valuation is compelling, with shares trading at just a hair over 10x earnings. I wanted exposure to the life insurance industry, which I didn’t really have in my portfolio before the purchase. And the yield was 5.6% with a recent history of increasing the dividend.
Management agrees with me that shares are undervalued. They recently announced a $2 billion share buyback that Power Financial (the largest shareholder with a ~65% stake) was quick to say they’d take advantage of. I’m sure Power Financial will take that capital and squander it on some more robo-advisor acquisitions.
The Great-West Life purchase added $198 to my annual dividend income, while the Genworth purchase added $204. That extra $400 will be spent on delicious Subway steak and cheese subs. Hot damn I love those things.
You can take the value investor out of the trailer park but you can’t take the trailer park out of the value investor.
Wait. That’s not how that goes. Oh well.
I went dumpster diving a little this month (last month?) by picking up 120 Kraft Heinz (NASDAQ:KHC) shares, buying for a little under $32 each after the big decline.
If anyone understands Kraft’s problems, it’s me. I do moonlight at a grocery store, and I can see we’re ordering fewer Kraft Heinz products. In fact, the whole center of the store is basically a very slowly melting ice cube. Folks are shopping the fresh departments and avoiding processed foods.
Despite this I went ahead and bought shares. Volumes can slowly shrink for a long time and Kraft Heinz will still be fine. The company has a dominant position and great brands. People are still buying Kraft Dinner and Heinz ketchup, and will continue to do so for decades. And the company has really only scratched the surface with discounting. Generic brands are the big competition these days, so look for better deals at your local store.
Oh, and the stock is trading at about 10x forward earnings, which I thought was pretty cheap.
The Kraft Heinz purchase added about $255 to my annual dividend income once converted back to Canadian Dollars. That buys a lot of Kraft Dinner, although I’ll stick with the store brand for $0.59.
Slate Retail REIT
I just bought Slate Retail REIT (TSX:SRT.UN) the other day, spending $12.68 each for 275 shares. The odd share count was to use up the remaining cash in my RRSP account. I’m not quite fully invested yet, I’ve still got some cash in my TFSA and I’ll make a new contribution to my accounts relatively soon.
I like Slate for a few different reasons. It owns grocery-anchored property in what it calls secondary U.S. markets, cities with under 1 million people. There’s plenty of growth potential there, and I like grocery in an Amazon world.
The valuation is compelling, The company figures they’ll do about US$1.30 in funds from operations per share in 2019, which converts to $1.74 per share in local currency. I bought shares at just 7.3 times FFO. It also trades a little under book value and the dividend — which is paid is U.S. Dollars — is approaching 9%.
There are a couple of red flags, including a high AFFO dividend payout ratio (which should be going down after a relatively big share repurchase, but will still exceed 90%) and the balance sheet has too much debt. Getting debt under control should be the company’s next step.
My 275 shares should provide me with approximately $312 in annual income once converted back to Canadian Dollars.
Let’s do this thaaaaaang.
Not only do I look like Matthew McConaughey but I sound like him too! What are the odds?
Genworth Mortgage Insurance
Genworth MI Canada (TSX:MIC) is in the mortgage default insurance business. You know how Buffett is always telling y’all to buy wonderful businesses? This fits the bill.
The borrower pays up to 4% for the insurance that protects the bank in case they default on their mortgage. Default rates nationally have historically been well under 1% (more like 0.2%) and Genworth gets to invest the premium in the meantime. Genworth regularly does 50% net profit margins. It’s an amazing business.
It’s not all sunshine and blow jobs though. Mortgage growth is expected to be pretty tepid in 2019, and there’s always the risk of the Toronto/Vancouver housing markets blowing up. I don’t believe such a thing happens, but the risk is there. The good news is Genworth is well protected if certain markets go down the toilet. And even after the recent run-up it’s still attractively priced at less than 9x forward earnings and right around book value.
This is one of these stocks I avoided for years because I was worried about housing. I could have bought it five years ago and compounded my money at 9-11% (depending on whether I reinvested dividends). So I’ll do the next best thing and buy some in February.
Northwest Healthcare REIT
Northwest Healthcare REIT (TSX:NWH.UN) owns medical office buildings, hospitals, and seniors living facilities in Canada, Germany, the Netherlands, Brazil, and Australia/New Zealand.
There are a few things I like about this company. It basically has limitless growth potential, including the potential to crack the U.S. market at some point. Management is doing a good job expanding in a way that actually increases the bottom line, something a lot of REITs aren’t very good at. And it can get higher cap rates by focusing on different markets. The Brazil hospital division is a good example.
But I’m not a big fan of the latest Australian acquisition, which saw it acquire 11 properties at a 5% cap rate. And the stock already trades at a premium to book value, which is never something you really want to see for a REIT.
Shares pay a 7.4% yield.
I already own this one and I’m down a little bit from my purchase price.
Cineplex Inc. (TSX:CGX) has a dominant position in Canada’s movie theater market, owning about 80% of the sector. Despite Netflix and other streaming services gaining in popularity, Canadians are still going to the movies and they’re still stuffing their faces with that delicious popcorn. Oh baby. If I had one of those popcorn machines I would be 400 pounds and die a happy man.
There are some negatives. Cineplex is in the process of installing those recliner seats in its theaters, which will cost a significant chunk of money. And it’s dependent on Hollywood continuing to put out good movies. 2017 was a terrible year, but the traditional movie industry redeemed itself last year. And 2019 will have the latest Star Wars movie, which will put some asses in seats.
Cineplex has consistently grown by 5-10% a year, and I think it keeps that up.
Canadian National Railway
Canadian National Railway (TSX:CNR) is one of those businesses I wish I understood better five years ago. I missed out back then but I don’t think I will again.
CNR transports most of the stuff that feeds our economy. It has tracks through every major Canadian city and even through Minneapolis and Chicago in the United States, all the way down to the gulf coast. When you have that kind of network it’s super easy to pass on price increases to your customers.
And CNR has a very comfortable duopoly position with CP Rail here in Canada, which should ensure steady profits for each.
CNR shares aren’t exactly cheap today (17x forward earnings) but I like the business enough to look past that. And with the big recent dividend increase shares are close to a 2% yield. I’m going to expect big dividend increases going forward, too. And the company also has a nice share buyback program.
I have to add SNC-Lavalin (TSX:SNC) to the watch list. After all, it’s down 20% in the last month alone.
One analyst says its ownership in Highway 407 (that’s a toll road going through the middle of Toronto) is worth about $30 per share with the rest of the business making up a measly $6 a share. But there’s a lot to not like about the engineering/construction business, never mind the fact SNC always seems to get into trouble with various governments.
The good news is the business is growing, albeit at a lumpy pace. The company has a robust pipeline of both domestic and international work. It has a nice current yield (3.1%) and more than a decade of consistent dividend growth behind it. And a toll road going through Canada’s largest city is a hell of an asset. And if you look over the last decade the $35 level has been a great time to buy. It turns out SNC fucks up a lot.
Royal Bank (TSX:RY) and Toronto-Dominion (TSX:TD): I feel like I gotta own these things, y’know?
Inter Pipeline (TSX:IPL): It’s still pretty cheap and I like its diversification into polypropelyne (not sure if that’s the right spelling but screw it). I already own a couple hundred shares.
TransCanada (TSX:TRP): Still relatively cheap and yields 5%. And I like the pipeline business a lot here. Fine, don’t build any pipelines. I’ll just enjoy the profits from the existing infrastructure.
Molson Coors (TSX:TPX.B): Beer is a fantastic business and I can buy this stock for a big discount versus its peers.
And that’s about it, kids. Any stocks you’re looking at this month?