Recently, one of my favorite blogs, Divestor, had a post about the PG&E bankruptcy in California and how this risk is constantly discounted by utility investors.
Essentially, his argument went like this. It turns out that one of the major fires in California this summer was caused by something coming in contact with a PG&E power line. It caused an event hotter than me without a shirt (OOH BABY HE’S STILL GOT IT) and the next thing you know there’s a big-ass fire and houses are being burnt down. And here I am, without marshmallows.
The bastard insurance companies, who just have to blame someone for EVERYTHING, determined PG&E was at fault and are demanding billions in penalties. The company couldn’t afford the payout, so it declared bankruptcy. Which gives me the perfect excuse to use this picture from one of my favorite The Office episodes:
So on the one hand, Divestor has a point, and it doesn’t just apply to power companies either. I own several pipeline companies, and there’s always risk one of those bad boys could go kablammo! TransCanada has nuclear power plants in Ontario, and we all know what can happen if one of those fucks up.
There’s no insuring against these risks, either. It simply costs too much.
If you want to take the pessimist perspective, I have a lot of my capital tied up in these types of risks. Every stock has some sort of risk when you invest in it, but I doubt names like Transcontinental or H&R REIT have the ability to screw up one time and send the stock into bankruptcy protection.
But at the same time I’m not particularly worried about this risk, and I don’t think you should be either. Here’s why, for possibly the first time, I’m disagreeing with Divestor.
Let’s take a closer look at the utility portion of my portfolio. I have four power generators that I own, including:
- Canadian Utilities (TSX:CU)
- Brookfield Renewable Partners (TSX:BEP.UN)
- TransAlta Renewables (TSX:RNW)
- Polaris Infrastructure (TSX:PIF)
Altogether these four stocks represent about 9-10% of my portfolio. Canadian Utilities is by far the largest, with close to a 5% weighting on its own.
Since I’ve diversified my holdings into four different stocks, the worst that can happen is I lose 5% of my portfolio if Canadian Utilities goes to zero. That would be bad. But I’ve already minimized my risk by spreading my utility holdings.
Next is insisting on getting paid dividends. These four stocks combine to offer me more than a 6% yield, and that’s not factoring in my yields on cost (Never factor in yield on cost, by the way. It’s a useless metric.). A 6% yield is no consolation when a stock goes to zero, but at least I’m getting a portion of my money back each year. This also helps mitigate risk.
There’s also a different kind of diversification inside of each of these companies. Canadian Utilities has a lot of operations in Alberta, and so does TransAlta Renewables. But both also have assets outside of Alberta. Brookfield Renewable has assets all over the place. And while Polaris isn’t diversified — it owns one geothermal plant in Nicaragua with plans to build more hydro plants in Peru — there’s no overlap between its operations and my other holdings.
Just how big is this risk, anyway?
I’m just going by memory here, so this list might be woefully incomplete. Still, I think it’s an important exercise.
Just how many utility companies have gone bust from this sort of catastrophic event, anyway?
I can only think of two, at least over the last ten years. There was Tokyo Power in 2011 (which I wrote about on this very blog) after the earthquake/tsunami and then PG&E this year. Note that Tokyo Power didn’t actually go bankrupt, but investors saw a loss of 75% or so, which is close enough to a zero.
If we stretch the definition of a disaster we get a few more names in there. TransAlta (the parent, not Renewables) is in the doghouse because of its dependence on coal. Atlantic Power took on too much debt and was forced to cut its dividend when power prices didn’t cooperate. And so on. There are probably more of these.
But a) those stocks represent a different kind of risk (business execution risk) that doesn’t really apply here. And b) even if one of my stocks falls quite a bit diversification means I’m not screwed.
Besides, there are probably close to a thousand utility stocks around the world, and most just keep on trucking. If one per year screws up and has to declare bankruptcy over it (I think this estimate is still too high, but let’s go with it) then I have a 0.1% chance of disaster. I’d argue probably every stock I could ever invest in has a similar chance of going up in smoke.
So let’s wrap it up
Just diversify and you don’t have to spend much time worrying about this stuff. There’s also the argument that maybe you should sell a utility as soon as it cuts the dividend, a move that would have avoided some of the PG&E pain.
Either way, I’m not losing much sleep over this. The only thing I’m losing sleep over is my damn cat deciding she’d like attention at 6am.
So last week I treated y’all with a post about a real-life portfolio I’m going to be building for some people. I asked for your help deciding on investments and, for the most part, everyone delivered. I got some really good ideas from the peanut gallery. Yeah, that’s right. Peanut gallery. It’s not an insult. I like peanuts.
Some people suggested I go the ETF route, which I’m not going to do for a number of reasons. I’m confident in my ability to pick good stocks. It’s an intellectual exercise for me to try and beat the market. Besides, I have problems with the way many Canadian ETFs are set up and I’m not the biggest fan of U.S. stocks right now.
Still, some of y’all suggested it, even though I outlined why in the actual post.
One commenter even went as far as suggesting various ETFs I should buy. One choice was XBAL, an ishares product that uses ETFs to create its own balanced fund.
Now I really have nothing against XBAL or any other ETF for passive investors, folks who have no interest in learning about the ins and outs of investing. It comes with a very reasonable 0.18% management fee, which is a hell of a lot less than what an equivalent mutual fund charges.
But it’s also a hell of a lot more expensive than setting up a buy, hold, and forget portfolio. How much more? Let’s take a closer look.
ETF costs can add up
(Edit: I originally got the math wrong on this. The numbers have been corrected)
Let’s run the numbers based on a $250,000 portfolio, a $500,000 portfolio, and a $1 million portfolio.
We’ll start with $250k. That much cash invested in XBAL would cost an investor
$45 $450 in fees each year.
$500,000 would mean double the fees, at
$90 $900 per year. And $1 million would double the fees again, to $180 $1,800 per year.
Now let’s look at a portfolio with 25 names in it. Qtrade charges $6.95 per trade, meaning it would cost $173.75 to get the portfolio in place. Then we’d have to reinvest dividends, say 4 times a year. That’s an additonal $27.80 in fees, which puts us at $201.55 in fees for year one.
We’ve already crushed the ETF route at fees even at only $250,000 invested.
But what about year two? The buy and hold portfolio would only have $27.80 in fees while the $500,000 portfolio in ETFs would charge an additional $900. You’re looking at about $230 in fees over two years for the buy-and-hold portfolio versus $1,800 for XBAL.
Even at $250,000 invested you’ve beaten ETF fees by the end of year one, and that’s not even counting the cost needed to buy these ETFs in the first place. Some online brokerages don’t charge for ETFs. Others charge for specific ETFs. It’s all very confusing, just like my gender.
The point is this. Say in 10 years your ETF portfolio doubles in size from $500,000 to $1 million. You’re looking at well over
$1,000 $10,000 in fees versus a buy and hold investor who just reinvests dividends four times a year, who would pay about $400.
Okay Nelson this doesn’t actually matter, does it?
Look, I’m the first to admit none of this really matters. $900/year for a balanced portfolio of $500,000 is a damn reasonable fee.
But a simple buy-and-hold portfolio with minimal turnover will always beat an ETF on fees, especially over a few decades. The secret is not fucking it up by making constant adjustments. This will be tricky for me, since I sometimes uncover great companies in my research. And I do want to add a U.S. component to the portfolio in a few years.
I also, foolishly perhaps, think my portfolio might be able to beat the underlying indexes. Especially the TSX Composite, which has a big mining and energy weighting.
What I’m saying is I think a portfolio of ETFs is a pretty good choice. And when it comes to investing, doing pretty good can still get you rich. I’m going to try and do a little better, and hopefully I can do more than save a few fees in the process.
I love that picture. I’m going to start sexting it to
people my wife, obvs.
“What are you wearing?”
(Sexts Simpsons character)
“You’re still a virgin, aren’t you?”
January was a busy month for the ol’ FU stock portfolio, which is like other portfolios but faster. It makes a lot of SLASHING and CUTTING moves as it DASHES through the markets and into all your hearts. Awww. A happy ending.
That’s probably enough preamble. Let’s take a closer look at what I bought this month, existing positions I added to, and the one stock I punted from the portfolio.
I’ll be honest. Even though I try to focus on high quality businesses, I’m not entirely convinced Magna International (TSX:MG) fits the bill. Auto parts are really competitive and they don’t really have fantastic margins. It seems a little bit like a commodity business, which I try to avoid.
But management is really doing a lot of things right. They continue to make the odd acquisition, which helps grow the top line nicely. We’re talking 5-7% a year here, just enough to get me excited. The dividend is a very reasonable 2.5% and there’s plenty of room to grow the payout. And the company is gobbling up its own shares with the enthusiasm of my cat eating her beef and liver pate. Yeah, that’s right. I feed my cat fancy shit. I’m one of those guys now.
I get all that for about 7x earnings? Sign. Me. Up. But I just didn’t have the balls to make it a full-sized position. I bought 50 shares at $63 each. Shares are just below $69 as I write this, so it’s been a good result.
I just cannot help it. I love me some deep value and I cannot lie.
Altagas (TSX:ALA) might be the cheapest stock on the Toronto Stock Exchange. Let’s look at price-to-book first, which stands at 0.7x. Now about half of the company is newly-acquired WGL Holdings assets, which should trade at right around book value. Yes, Altagas paid more than book, but it created goodwill to get that inline. If the whole company trades at 0.7x book then it implies we are getting the legacy assets between 30% and 40% of book. But those should be worth a multiple of book value since they’ve been slowly wrote off over the years.
Management told investors the company would generate between $850 and $950 in funds from operations in 2019. And nobody paid attention because they cut the dividend at the same time. The equity has a market cap of $3.6 billion. You can do the math. Altagas is daaaaaaaaaamn cheap right now.
Yeah, they cut the dividend. So what? I’m still getting a 7.1% yield. I think the stock could easily double in the next 3-5 years and I’ll get a slightly higher dividend to boot.
I bought 400 shares at $13.83 per share. This qualifies as a medium-sized position.
I’ve had my eye on Smart REIT (TSX:SRU.UN) for a while now and it just won’t get cheap. In hindsight I should have picked some up when everything was going to hell in December but I was too distracted by shiny things. Ooh, piece of candy.
I think this company has the finest management team of any REIT in Canada, and they’re almost at the top, period. Mitch Goldhar and his team are grade-A developers with the added bonus of always getting the first call when Wal-Mart wants to expand. Something like 33% of all Smart’s rents come from Wal-Mart.
After conquering retail Smart has big plans. It wants to redevelop existing shopping centers into mixed-use facilities. And it plans an expansion into self-storage and senior living through partnerships.
I paid $32.53 each for 100 Smart shares. I’ll average down on an periods of weakness. Oh, and I’m getting a 5%+ yield too, a payout that has grown each of the last few years.
Positions I added to
Brookfield Renewable Partners
I’m not exactly sure why Brookfield Renewable Partners (TSX:BEP.UN) keeps languishing around the $37/share mark, but I took advantage to add to my position. I now own 130 shares.
Not really much to add here. I like the asset mix and the worldwide exposure. And I love the dividend, which currently yields 6.7% with growth expectations of between 5-7% annually. I’ll nibble on more during any periods of weakness.
Brookfield Property Partners
If you forced me to come up with a top pick for the next 12 months, I’d say Brookfield Property Partners (TSX:BPY.UN) would be it. It trades at about 70% of book value and has a pretty attractive price-to-funds from operations ratio. It owns some of the world’s finest real estate and the recently-acquired shopping mall portfolio should perform well since it owns the best malls. And I’m getting 7.1% to wait, another payout I think grows by about 5% a year.
I now own 350 Brookfield Property Partners shares, which is about as high as I’ll go. The average purchase price is right around today’s levels.
Had some dividends sitting in my RRSP account that needed to be put back to work, so I bought a few more CIBC shares for around $109. Still think Canadian banks are a decent buy today.
I punted a straggler from my deep value days, Advent-AWI Holdings (TSXV:AWI). I lost about 1% a year on this one after accounting for dividends.
When I bought the company it was a successful cell phone retailer operating under the Rogers banner. It then sold its Vancouver-area stores and was forced to sell its Ontario stores after Rogers announced it wasn’t renewing their agreement. The company has expanded into unsecured loans for dirtbags, a new division which has yet to make a profit.
The longer I owned this one the less I liked it. I can’t really point out any one thing that caused me to sell, but a bunch of little things all just came together to make me uncomfortable enough to pull the trigger.
That was it for sales. I will likely do a similar amount of buying in February before things really quiet down in March. I still have some cash to put to work.
Let’s talk a little about your own personal experiences clouding your investment decisions.
I’ll start with one, which probably wasn’t what Peter Lynch had in mind when he was urging housewives to use their personal experiences to shape their stock picks. My local Tim Hortons is 14 different kinds of terrible and I refuse to buy Restaurant Brands (TSX:QSR) stock because it’s so damn bad.
Highlights of the my trip last night include:
- The cook looking up from the kitchen, making eye contact with me, and then going back to work without telling someone there was a customer waiting
- Watching the person responsible for serving customers come around the corner, see people waiting, and then grabbing a cloth to clean down a counter before coming over to serve us
- The restaurant only having 2 out of a possible 5 soup choices in stock (3 if you count chili)
- Half the eating area was closed down for “cleaning” despite there being nobody over there with anything
- A terrible donut selection
- Taking four minutes to grab a hot chocolate despite only having one person ahead of me in line
It’s like this every time I go, btw. The worst is when I used to go for lunch. I’d show up, wait five minutes in line because drive-thru gets 90% of the labor, and then have to wait an additional ten minutes while the one cook took his time making 14 sandwiches before my chili. It’s right there! Just serve it!
And then they give you the world’s worst bun to go with it. It’s all crust. It isn’t heated up or toasted or anything. It’s just thrown in with as much care as the napkins. You take two bites and it slices open the top of your mouth. Oh yeah. That’s what I’m talking about.
Now they have chicken strips. Have you seen those things? They are the worst fucking chicken strips I’ve ever seen in my life. I could pull better food out of the garbage at any other fast food place. They come in frozen, get heated up in the microwave, and cost $5.49 for the three of them. I can go to Dairy Queen and get superior chicken strips, fries, a drink, and a g.d. mini blizzard for $1.51 more.
I want to know who at Tim Hortons authorized this decision. I’ll promote them so I can immediately fire their sorry ass. That way the dismissal will be even more embarrassing.
Links I liked
1. Let’s start things off with one of the best investments you can make. No, it’s not stocks. Or real estate. Or giving a child money so you can see their eyes light up with anticipation of all the potential they have. Especially not that last one. No, I’m talking about Lego, which has beaten bonds, large stocks, and gold over the last three decades.
Lego. How awesome is that. BUT YOU MUST NEVER TOUCH IT.
2. Apparently Charlie Munger, at age 95, still skims most every book that mentions Berkshire Hathaway and will randomly call up authors to give them tips on how to improve. I’m equal parts impressed and horrified by this — doesn’t Charlie Munger have better things to do? — but it does allow me to segue into the story when Jim Rogers emailed me to correct a story I wrote about him. (I called him a billionaire. It turns out he’s a mere one-hundred millionaire.) It was a thrill to hear from someone that famous.
3. Let’s pivot over to Ian Bezek, who wrote out his investment strategy statement over at Seeking Alpha. It’s good stuff. And after approximately 93 weeks of promising the same thing, Ian’s piece will finally inspire me to write my own. It will not be whatever I throw against the wall, like at least four of you think it is.
That joke is funny because like hell I have four readers. My wife, dad, and mom are the only three and my cat can’t read.
4. I don’t normally post book reviews (if it sounds good I’ll just go read the underlying book), but this review post by My Own Advisor is pretty much perfect. It introduces the concept of pensionizing your nest egg and explains the easy way you can turn a lump sum into a monthly income stream.
Annuities don’t get a lot of positive press in the personal finance world, but there are millions of Canadians who should probably embrace them over a portfolio of dividend paying stocks or GICs. They might give up a little money but in exchange don’t have to worry about their investments.
5. For whatever reason I’m fascinated with retail arbitrage, which is buying stuff at a regular retailer with the plan of reselling it on Amazon and Ebay. People actually make a living doing this. I’m constantly amazed and want to try it if I wasn’t so lazy. This article interviews a couple of guys who not only do it but also make videos about it on Youtube. I’m guessing the videos are the main part of the business plan. That business scales forever. Flipping stuff from local Wal-Marts doesn’t.
6. Want to become a great real estate investor? This older piece from The Private Investment Brief lays out the keys with a story about a displaced orphan in post-World War 2 Europe. Like a lot of things in life it seems simple but it’s not easy to pull off.
OH BABY THIS IS SHAPING UP TO BE THE BEST ONE OF THESE IN WEEKS. AND THEY’RE USUALLY PRETTY GOOD TOO.
7. Let’s keep the party going with Rob from Passive Canadian Income who reveals how lucrative his solar panel investment has been over the last year. I won’t spoil the result; you’ll have to click and check it out for yourself. I just love it when people use their brains and make unorthodox investing choices.
8. I liked this post by Tawcan, reminding folks that after a certain point you don’t need more money to enjoy your life. There comes a point where it doesn’t make sense to keep pushing forward just for the money.
9. Freedom 35 Blog tackled that same debt survey that got me so pissed off the other day and came to pretty much the same conclusion. I’m glad we fought back against that b.s., even just a little bit.
10. Jordan over at Money Maaster is a far better investor than speller. I think we view a lot of investments the same way, so if you enjoy my stuff on investing you’ll love his latest on an interesting small-cap name.
11. Time to sully up this linkfest with some of my own writing. Here’s a post outlining some of the big mistakes Canadian investors (including this guy, at least before) make, and this one highlights a couple good REITs I’d look at buying if I was looking to start a nice real estate income stream today.
12. And finally, let’s wrap this up with a needed message from My Money Wizard. If you’re a U.S. federal government employee who is one missed paycheque away from hitting the food bank, the problem isn’t the GUBMINT. It’s you.
Stay tuned for next week when I tackle my investment plan, reveal the stocks I bought in January, and much more!
The exclamation mark was a little much, wasn’t it?
Have a great weekend, everyone.
Let’s talk a little about Canada’s real estate market. We might as well start with Toronto and Vancouver, AKA Bubble Central.
What’s that? I’m being told 2014 Nelson would like to chime in. This is highly irregular, but I guess we’ll allow it.
GODDAMN YOU GUYS THE BUBBLE IS GOING TO BURST AND IT’S GOING TO BE BAAAAAAAAAAAD.
Wait, Nelson. One thing before you go. How’d you get access to a time machine?
YOU READ MY ARCHIVES YOU DOPE.
You’ll have to forgive the all-caps. 2014 Nelson was a little bit angrier than today’s version, who is all about calmness and cute kittens.
After many hours of research and some critical thought about my long-held assumptions, I began to realize about a year ago how wrong 2014 Nelson was about Canadian housing. The fact is places like Toronto and Vancouver have expensive housing because everyone wants to live there.
Say you’re an immigrant who’s won the right to come to Canada. Where are you going to go — Nelson’s hometown of 10,000 people in rural Alberta or a place filled with all other nationalities? Sure, the potential to be my friend is pretty strong, but I’m betting you’d pick the city.
I’m the first to admit a large city has all sorts of amenities my small-ass town just can’t offer. Our airport doesn’t even have a full-time employee. Our local hospital sends anything more complex than a runny nose to Calgary. Hell, our Wal-Mart isn’t even a Supercentre.
It’s basically a third-world country is what I’m saying. I’m going to push to get that on the next tourism poster. Wish me luck!
Now don’t get me wrong. I still wouldn’t be caught buying a place in Toronto or Vancouver. I just couldn’t bring myself to pay the premium. But I totally understand why someone would. And have you seen the rental market lately? Hot diggity damn.
Read this and weep if you’re a Toronto renter. The best cleavage in the world isn’t getting you that apartment. FINALLY, A CLEAVAGE REFERENCE ON FINANCIAL UPROAR. So you’d buy, because spending a lot to live in the city is preferable to being Nelson’s neighbor even though I promise I’ll totally throw all my trash into the other neighbor’s yard.
The rest of Canada
One of the most-cited affordability metrics for real estate is a simple as it is powerful. You take the average house price and divide it by average household income. Generally, a market that sits between 3-4 times earnings is considered reasonably affordable, at least historically.
Let’s take a look at national price-to-income ratios in Canada, at least until 2014. You’ll notice Toronto is on there. That’s on purpose.
Sorry about including Hamilton. What a cesspool.
Toronto — and many of its suburbs — are insanely unaffordable right now. Vancouver is even worse. Both of these cities are clearly skewing the average higher. Approximately a quarter of Canadians live in these two metro areas. This is a big deal.
Say the rest of Canada has a price-to-income ratio of 4x. As you’ll see, that’s not unrealistic. With interest rates as low as they are today, I’d argue carrying costs today are only a little more than they were in the 1990s and early 2000s when prices were 3x income.
Say you bought a $100,000 house in the 1990s. You made $33,333 per year and signed up for a standard 25-year mortgage. You paid 6%, because that’s what mortgages cost back then. It cost you $639 per month, or $7,668 per year. That works out to 23% of your gross income.
Note we’re excluding all sorts of home ownership expenses here.
Now it’s 25 years later and you’re buying a $200,000 home. You make $50,000 a year and again get standard 25-year mortgage. You pay 3.5%, which you can get from most mortgage brokers as long as your credit isn’t trash. You’re looking at a $998/month payment, or $11,976 per year. That works out to 23.9% of your gross income.
There are plenty of cities where the average home costs approximately 4x median family income. Here’s a small sample:
- Calgary: Average price $449k; median income $97k; P/I ratio 4.6
- Edmonton: Average price $362k; median income $87k; P/I ratio 4.2
- Ottawa: Average price $393k; median income $85k; P/I ratio 4.6
- Winnipeg: Average price $303k; median income $68k; P/I ratio 4.5
- Saskatoon: Average price $330k; median income $79k; P/I ratio 4.2
- Regina: Average price $277k; median income $81k; P/I ratio 3.4
There are more as you get smaller, but you get the idea.
Naysayers will be quick to say I’m missing a lot of cities, not just Toronto or Vancouver. Montreal is a big one. The average price of a house there is close to $500k, while the typical family earns about $50k. Damn, Montreal. You gotta get your earning game up. Even Laval, the big suburb, hardly has cheap real estate when compared to average incomes. Quebec City, which has held a reputation for affordable real estate for years now, has a price-to-income ratio of close to 5x. Victoria’s P/I ratio is much higher than average as well. Anything remotely close to Canada’s three largest metro areas is expensive, too. And so on. There are lots of exceptions here.
Is Canada’s real estate really that cheap?
Canada is filled with many regional real estate markets. Some are not affordable, while others are surprisingly so. These metrics ultimately affect rents too, so your strategy should be simple — avoid markets with a high cost of living for ones that allow you to make a similar wage while paying less for housing.
Ultimately, it comes down to this. If you make the average family income and buy an average house in Ottawa, which has a 4.6 price-to-income ratio, you’re looking at a mortgage payment that equals 26% of your gross income (assuming a 5% down payment and a 3.5% mortgage rate). This is not terrible. Most people can afford this.
Toronto, Vancouver, and now Montreal are increasingly unaffordable. The rest of the country isn’t bad. It might even be affordable. And, as always, if you want really cheap real estate, check out Canada’s medium sized cities. If you can scratch together $100k family income in Medicine Hat, Lethbridge, Halifax, St. John’s, Moncton. or numerous other places, you’ll live like a king. Some sort of royalty, anyway.
To truly live like a king you’d need Nelson as your neighbor. I’d totally rub my balls up against whatever window pointed to your house.