Nelson’s Stock Watch List: February Edition

Nelson’s Stock Watch List: February Edition

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.

Cineplex

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.

SNC-Lavalin

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.

Honorable mentions

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?

Help Me Build a Portfolio From Scratch

Help Me Build a Portfolio From Scratch

I’ve been entrusted with building a portfolio for an older couple in their early 60s. Yeah, I’m not sure why they picked me either. Maybe literally everyone else was busy that day? I dunno.

Anyhoo, here’s what we’re looking at. The portfolio goals are as follows:

  • A decent amount of assets spread out semi-evenly between taxable, RRSP, and TFSA accounts
  • An expectation of 3-5% returns, with anything above that being gravy
  • A mix of capital gains and dividends. “I like dividends. I like capital gains.”
  • A relatively simple portfolio mix with minimal short-term trading
  • Very little real estate exposure because the portfolio outside of these accounts is heavily into real estate
  • Ample enough liquidity to access the account quickly if needed

Note that the age here isn’t really a factor. A normal financial planner might put them into a conservative portfolio with plenty of bonds but I’m not going to because the intent is to pass on these assets to the next generation. We’re looking at a 50 year investment horizon, not a 20 year one.

Ideally I want 20-25 positions, with the largest positions coming in at approximately 5% of assets and gradually narrowing down to the smaller names being 2-3% of assets.

The choices

Let’s start with the kinds of companies I think should make up the top 10:

  • Smart REIT
  • Scotiabank
  • BMO
  • CIBC
  • Enbridge
  • TransCanada
  • BCE
  • Telus
  • Fortis
  • A&W

And now for the rest of the portfolio:

  • Algonquin Power
  • Canadian Utilities
  • Genworth MI Canada
  • Royal Bank
  • TD Bank
  • Inter Pipeline
  • Boston Pizza/Pizza Pizza/The Keg/Diversified Royalty Corp (1% each)
  • Sienna Senior Living/Chartwell (1.5% each)
  • National Bank of Canada
  • Canadian National Railway
  • Canadian Pacific
  • Rogers Sugar

Let’s call that 22 names even though I’ve spread some of the crummier royalty trusts into one position and the seniors living stocks into one. That leaves me with 3 wild card choices. It will be as exciting as baseball’s wild card, a sport that isn’t very exciting at all.

Now to answer some of your pointless bitching questions in advance:

Where’s the U.S. exposure?

Not interested in buying U.S. stocks right now because I’m pretty sure I’ll get my ass kicked on the currency. The U.S. Dollar is strong right now, kids. Now’s the time to be selling U.S. assets, not buying them.

These folks also live in Canada and have zero use for U.S. Dollars.

If the U.S. Dollar cooperates I will look into adding a foreign component to the portfolio over time with new contributions.

Why’d you split the royalty trusts and seniors living stocks into groups?

These are sectors I quite like but I’m not smart enough to know which one is going to end up on top. I talked about this a bit when I took an oversized position in Pizza Pizza. In hindsight I wish I would have kept the stock a little more manageable.

You’ll note A&W on the top there. They continue to kill it. I’m quite comfortable turning that one into a full position. It’ll likely be in the 5% of assets range. Check out its long-term chart.

Remember, it has paid a ~5% dividend the whole time, too.

Why do you suck so much?

Lack of confidence, I suppose

No ETFs?

Nah. I’m a stock picker. It’s what I do. I will judge this portfolio’s performance versus the TSX Composite each year, though.

I’ve taken steps to make this portfolio a little different than the average. The two largest banks will only get about 5% of assets split between them while I load up on the smaller ones. I’m avoiding a couple of the telecoms I’m not entirely bullish on and I have a much lower real estate component than the index. I’m also avoiding precious metals and energy completely, with the exception of the pipelines.

Genworth, huh? I guess you enjoy losing money

I’m willing to bet about $15k the Toronto and Vancouver real estate markets aren’t screwed. That should answer your question. The second part wasn’t even a question.

This blog post is over.

Oh wait it’s not!

I want to hear your opinions. Please put your suggestions in the comment section. 

Should I Switch Brokerages?

Should I Switch Brokerages?

Like a lot of things in my life, my brokerage situation is a little strange. No, I’m not going to elaborate on that first part.

I started out as a Tradefreedom customer back in about 2004 (remember them? Of course not), which was the place for active traders to go back then. It offered $9.99 trades. That was a very big deal in 2004. Other online brokerages were at $29.99.

You kids don’t have any idea how good you have it today.

I didn’t last long at Tradefreedom because they made up for the cheap trades with aggressive account inactivity fees. They also charged annual RRSP management fees just for having the assets with them. So I consolidated all my assets with Qtrade a couple of years later.

I was mostly happy with Qtrade over the years. I’ve never had to wait on hold for any longer than a minute or two and the website works well. Fees used to be a bit excessive but they got the message and are now inline with competitors. Eventually I qualified for $6.95 trades, which I thought was reasonable enough.

Then I opened a TFSA account with Questrade, something I did because fees were cheaper and I wanted to try out their platform. I’ve had nothing but good experiences with Questrade as well, which is why I I’ll often recommend them to newbie investors. The free ETF trades is a big perk too, especially for those of you who prefer more passive methods of investing.

Okay, what’s the problem?

Last week I went to try and calculate my overall investment return for 2018 and realized I couldn’t do it. Questrade had the info available and easy to find, while Qtrade didn’t. I have to wait for my December statement to be ready, which won’t happen until closer to the end of January.

Then I have to go ahead and do some manual calculations to figure out exactly how my investments did in 2018. (Spoiler alert: the answer is down approximately 0.8%). I can do this, but it’s a pain to have investments in two different spots. I just want to log into one spot and get a total portfolio snapshot.

There are some other smaller reasons why I want to make the switch too, including Questrade’s far better app and the lower fees. I figure I’ll save between $30 and $40 a year by having all my investments with Questrade. That’s not enough to justify a switch on its own, but it’s not a terrible tertiary reason.

What say you?

There’s part of me that thinks these are kinda poor reasons to switch brokerages and I’m making a mountain out of a molehill here. It’s not that hard to track my total portfolio return on my net worth spreadsheet. It took about five minutes to figure out what my total return was in 2018 versus one minute finding it on a statement somewhere. This isn’t hard.

So I’m going to ask you guys. Is wanting all my stock market assets in one place smart, or does none of this really matter? Weigh in plz.

Nelson’s 2019 Dividend Goals

Nelson’s 2019 Dividend Goals

Ah, dividends. I sure do love me that sweet passive income. It’s enough to get me a little hard.

You know Jim Gaffigan is funny without resorting to low brow sex jokes. Maybe you should try that.

Nah.

Of course not. That would be actual work, and we all know you’re barely capable of that.

I used to think tracking my dividend income was kinda dumb, but now I’m 100% on board. I love seeing just how much I can expect to get in passive income during the year. I even have a little spreadsheet and everything. I’d have a big spreadsheet but my Excel skillz aren’t exactly on par with the rest of y’all. It makes me feel a little inadequate.

I didn’t really have a goal in 2018 regarding dividend income. I just focused on putting cash to work in good opportunities. I wanted to buy fantastic companies at decent prices, and for the most part I think I succeeded. I loaded up on pipeline stocks and Canada’s largest banks. I bought a REIT trading at 70% of book value that owns some of the world’s best real estate. I also bought Starbucks and a Mexican airport operator.

But I also can’t fully shake my value investor roots. I bought cheap names like a mutual fund provider and some of the beaten-up restaurant trusts. I think these are decent businesses trading at rock-bottom prices.

These stocks were bought throughout 2018, so they won’t give me the full potential of their income until this year. I’ll then add stocks throughout 2019 and repeat this exercise next year at this point.

So we’re going to look at two separate goals for 2019. The first is the amount of dividend income I’d like to physically collect this year. The second will be the forward income I can look forward to on December 31st, 2019.

2019 income

As it stands right now, I’ll collect a few dollars under $12,000 this year in dividend income. This assumes zero dividend growth throughout the year.

Let’s address dividend increases first. I’m going to be conservative and predict my portfolio will generate a 3% dividend growth rate. I’m doing this for a couple of reasons:

  1. While my portfolio has a lot of dividend-growth names in it (BMO, BNS, CM, CU, ENB, BCE, IPL, BEP.UN, and more), it also has many no-growth names that I think are a good value today.
  2. I want to be pleasantly surprised on the upside rather than counting on a 5%+ internal growth rate

I’m looking at $360 in annual dividend growth from a 3% growth rate alone, which puts me up to $12,350 in expected dividend income.

Next is the capital I’ll put to work this year. I’ve just made my TFSA contribution for 2019 and I have some cash in that account. I also have a RRSP sitting in a GIC that comes due near the end of February. This will get put back to work. And I had a little cash in my RRSP account that was just recently invested.

In total, this will add up to approximately $50,000 I’ll put to work in dividend-paying stocks in the next two months. If these stocks pay me a 4% yield I’m looking at another $1,500 in dividend income in 2019. Note I’m being conservative here and assuming I’ll miss one dividend payment from each stock I buy over the next two months.

Next I have to assume the amount of capital I’ll put to work over the course of 2019. This depends on a number of factors so I really can’t guess very accurately. I’d like to be conservative and assume I’m not going to invest another nickel, but that’s probably not realistic. So let’s say another $10,000 will be put to work this year.

But wait. There’s more. I’m not spending dividends yet. Therefore I’ll have $12,000 in dividends that I’ll be able to reinvest this year. At a 4% yield that’s an extra $480 in income.

Add all these sources together and I think a $15,000 goal for dividends collected this year is reasonable.

Forward income at the end of 2019

The forward income goal isn’t going to be much different than the actual income collected, since I plan to put the majority of my investment dollars to work in the first quarter.

Here’s what I think I’ll be looking at come 2020:

  • $12,000 in dividend income today
  • Plus $2,000 from fresh capital put to work in the first quarter
  • Plus $400 from capital put to work in quarters 2-4
  • Plus $500 annually from reinvested dividends
  • Plus $400 in dividend increases

That comes to $15,400 in forward income just from what I plan to do. I’ll need to come up with additional money to increase this.

I’m going to set my goal at $16,500 in forward dividend income at the end of 2019. I’m not sure I’ll be able to do it at this point, but it’s good to stretch a little.

The extra wrinkle

These results are just my dividend income. We’re not including my wife’s contribution here.

Her dividend income is much smaller than mine, a gap we’re looking to close over time. We’re going to start doing this in a big way in 2019 and then I’ll include both in 2020 and years beyond. This is why I’m not anticipating much in the way of additional contributions to my accounts in 2019.

The Power of Dividend Growth (vs. GICs)

The Power of Dividend Growth (vs. GICs)

Are some of you actually investing in GICs?

I actually have a small portion of my net worth in a GIC. Back in 2014 I had a RRSP GIC come due. Rather than put it to work in what I viewed as an overvalued stock market, I told my bank to put it back into a five-year GIC. Even if it did worse than the underlying market, I still didn’t hate the idea of having a little fixed income exposure.

I’m too lazy to look it up, but that GIC didn’t pay me a whole bunch of interest. It was probably locked in for just over 2% annually.

Say it was worth $10,000. After five years it would be worth just a hair over $11,000. That’s about as exciting as my favorite ride at the amusement park.

(It’s a bench, okay? The teacups make my tummy hurt :()

Let’s take a minute to compare that to one of the lamest (read: safest) stocks out there, Fortis (TSX:FTS).

The power of dividend growth

I could look back and compare Fortis shares to my potential GIC investment five years ago, but I don’t think that would be entirely accurate. After all, I know Fortis has done well. So instead we’ll look forward.

Interest rates have gone up a bit, so I’d be able to lock in my $11,000 investment into a five-year GIC paying 3.25%. Oh baby! I’ll be rich in no time!

Blog genies, insert a gif of somebody making it rain 20s at the club.

Blog genies?

Guys?

Okay, never mind.

THERE IT IS GUYS. I DID A .GIF.

Anyhoo, that GIC investment would be worth about $12,950 at the end of the next five years with zero chance of additional capital gains. If I was able to reinvest it at 3.25% it would generate $420.69 in annual income, which is pretty much the perfect number.

It’s actually $420.87, but like I’d want the truth to stand in the way of a good joke.

Now let’s compare that to an investment in Fortis, which currently yields 3.9%. After five years of dividend investment — which assumes no capital gain on the underlying price of the stock or dividend growth — I’d have $13,367. This investment would then spin off $521.31 in annual income.

It’s already better than a GIC. But it’s about to get a whole lot better.

Fortis has already told investors it plans to increase the dividend by 6% annually over the next five years. So we’re looking at payments of:

  • Year 1: 3.9%
  • Year 2 : 4.13%
  • Year 3: 4.38%
  • Year 4: 4.64%
  • Year 5: 4.92%

You’re looking at about 27% more income in year five versus year one. That means that after five years you’d have an  investment worth $13,638 and that spins off annual income of $711.

Remember, the GIC’s annual income stream is worth $420 after five years. You’d have 69% more income (GIGGITY) by sticking with the dividend growth path.

The other way

You don’t have to invest in dividend growth stocks to accomplish this. Any old dividend stock will do.

Let’s take a look at a stock I actually own, H&R REIT (TSX:HR.UN). It currently pays a 6.7% dividend with with very little dividend growth.

If I invest $11,000 into H&R REIT and automatically reinvest my dividends, after five years I’ll have an investment worth $15,268 assuming no capital gains on the stock. This investment would spit out passive income worth $1,022.95 on an annual basis.

Fortis pays a 3.9% dividend that should grow at 6% a year. H&R pays a 6.7% dividend that might not grow at all. But as long as I reinvest those H&R dividends I can create the same compounding effect. And since H&R’s current income starts out much higher than Fortis’s I can ensure it always stays ahead.

Remember, I don’t have to keep the investment in H&R (or Fortis), either. I can further diversify it into different stocks.

Conclusion

Basically, it comes down to this. Dividend growth is good. You should strive for it.

But remember, you don’t need to reinvest your dividends into the same stock to get the full impact. As long as they’re invested into something on a regular basis you’ll create the same compounding effect.