Thursday, August 27, 2015

Portfolio up almost a percent from value before correction

The market stumble the other day was a test. Did you panic, did you cheer, did you hold or did your buy? I bought. I increased my exposure to U.S. equities by buying a little more of a TD e-Fund (TD US Index: TDB902).

Today my retirement portfolio is up almost a full percent from where I sat about eight days ago or just before the correction.

If this grandfather hadn't been babysitting on the day of the huge and oh-so-sudden correction, I'd have bought a lot. Damn. I've been moving into cash for some time and waiting for the moment. The correction came and went so quickly. One had to move fast. There are still stocks going at reduced prices but the fire sale is over.

Oh well. Corrections, even sudden major corrections, are a part of investing in equities. Keep your powder dry. There will be another equity sale in the future. Be patient. Sometimes these recoveries are simply a bounce that will run out of energy and the stocks will begin sliding downhill again. I may get a second kick at the can.

I should mention that I am up almost five percent from the portfolio low reached at the worst of the quick correction. Leave the panic talk to the newspaper reporters and television talking heads.

Wednesday, August 26, 2015

TFSAs are a godsend to many retirees

I have a friend who despises Stephen Harper and his Conservative government. (My friend is a bright guy.) He will not be voting for our boy from the West or the party he leads in the upcoming election. My friend considers himself and his wife as middle class. He feels forgotten by Harper as our PM piles the goodies onto Canada's wealthy. In this vein, my friend has a great hatred for the increased TFSA contribution limit.

This is another tax break for the wealthy, he says. Is he right? As a senior stuck firmly in the middle class, I have my doubts. My wife and I both have TFSAs and we both believe that these may prove to be financial godsends, especially for my wife as she gets older. And we are firmly anchored in the middle class.

According to the Conservatives:

By the end of 2013, almost 2.7 million Canadian seniors had TFSAs.  Of those, nearly 60% had annual incomes of less than $40,000. And of the people who contribute the maximum amount to their TFSAs, almost half are seniors.

Yes, the source of the above is biased. I'm sure my friend would insist on seeing these claims backed-up by someone not part of the Conservative establishment. I believe he would give more credence to information supplied by the CBC. Well, let's see what Canada's broadcaster has to say, "Who benefits seems to be more tied to age than income, although both are obviously factors. Fully one in five people over the age of 75 maximized their TFSAs . . . "

According to the blog Life on Credit:

Finance and tax experts say the new contribution limit offers more flexibility, whether you are in the middle income bracket or have a more limited income. Even an income of $50,000 or lower makes the tax-free savings account a better alternative to the RRSP because TFSAs help save on taxes. . . .

The new limit is designed to benefit middle class couples. . . .

The federal government believes retirees will be the major beneficiaries of the new contribution limit. Seniors may want to move cash from their RRIF to a TFSA. There are multiple benefits to doing this but a big driver is that less cash in an RRIF means less money to which the minimum withdrawal applies.

The Liberals, under Justin Trudeau, have announced that if elected they would reduce the TFSA contribution limit back to $5,500. Trudeau argues the new, higher limit disproportionately benefits the wealthy and he finds support from left-leaning think tanks such as the Broadbent Institute. I beg to differ.

My wife and I are retired. My health is poor but my wife's is not. She might well live into her nineties. Buying an annuity today is a fine option for me but a fixed annual annuity payout could easily prove to be a disaster for my wife. Even a modest three percent inflation rate would destroy the value of the buying power of her annuity in the 20 some years it will take for my wife get into her 90s.

We have opted to put our money in the market rather than in annuities. Today, $100,000 will buy 1400 Royal Bank shares. Those share will pump out a dividend income of $4424 annually. With those shares sitting in a TFSA, that income would be more like $5000 in taxable income, for many retired Canadians. This is almost, but not quite, the income to be expected from a $100,000 annuity.

The annuity payout is fixed. The Royal bank dividend is not. My gut feeling is that the money we have sitting in stocks will, over the next two or more decades, prove to be a better source of income than an annuity.

Saturday, July 25, 2015

Norbord back (in my portfolio) with 50% more stock

My TFSA is blue line mostly at top.
Recently I sold all my Norbord (NBD) -- all being 400 shares. I did O.K. with NBD. It helped propel my TFSA to heights that often bested the TSX. But when NBD passed the $28 mark, I bailed.

Last Friday NBD dropped to $24.10. I bought 600 shares. This means I have about $14,470 in NBD. My limit is $15,000. I'm now fully invested. It is time to sit quietly and watch the action.

And just what is this action that I expect? There isn't anything, to tell the truth, at least not in the short term. I'm not a fortune teller. The economy may weaken and drag NBD down or the sale of new homes in the States may strengthen and drive NBD's value north of $30. (Some analysts have set a target of $27 for the stock in the coming 12 months.)

After chopping the all-too-generous dividend to a more reasonable yield, I was surprised to see a second cut dropping the dividend from a dollar a year to 40-cents. Oh well, the dividend may not have been safe but I believe the company is. Norboard is a good company making a good product -- OSB or oriented strand board. Many claim that OSB is as good as plywood but less expensive. Home builders love it.

If home building in the U.S. continues to recover, the price of OSB should climb, sales of the large sheets should grow and Norbord, a big supplier of OSB, should prosper. Home building in the States may stall in the short-term but eventually the pent-up demand will benefit OSB producers like Norbord. Sooner or later I believe I will be holding a winner.

This is not advice, I don't give advice -- and a good thing too. I have been wrong on this stock in the past. I thought the 4 percent dividend was safe. It wasn't. I thought OSD would have rebounded by now. It hasn't. In fact, it has taken another dip. Two big disappointments. Still, I have confidence that I will do just find with this investment but patience is the now the name of the game.

The best think I can say for NBD today is that the stock adds diversity to my portfolio and in this sense enriches it.

Tuesday, July 7, 2015

RRIFs and in-kind withdrawals

My TFSA portfolio beats the TSX index while pumping out income (yield).
 
As a retired fellow I am concerned with managing my RRSPs. Recently I've been wondering, should I convert them now to RRIFs or should I leave them be as long as possible as RRSPs? At age 71 the problem solves itself. One must wind up one's RRSPs by the end of the year in which one turns 71 unless one's spouse is younger and then one has the option of choosing instead to base the wind up on their spouse's age.

Some advisers with whom I have talked have told me to leave my retirement funds sitting in RRSPs as long as possible. Convert at the last possible moment, they say. Others have advised me to convert my retirement savings to RRIFs as soon as possible. When you hit 65 and retirement, convert they say.

There are, of course, at least two other options. One can use the RRSP funds to buy an annuity of some type or one can simply close the RRSP account and take the money. With interest rates at historic lows, annuities are not the attractive option they once were. Very few advisers have suggested I should buy an annuity at this time. I believe the annuity option remains on the table even after one makes the switch from a RRSP account to a RRIF.  (For another take on Which is better, a RRIF or an annuity?, read the linked article in The Globe and Mail.)

Taking the money itself is not much of an option for most of us. The full amount of the withdrawal would be treated as income, as I understand it. The tax hit would be enormous. Very few people take this route for obvious reasons.

So far, I have steered clear of converting. In the great scheme of things, and in my case in particular, it seems the only gain would be saving the $56.50 withdrawal fee applied to RRSP funds. There are no fees for making the annual withdrawal demanded by an RRIF.

So what are the advantages of an RRIF over an RRSP? As best as I can figure, the advantages are:

  • There are no charges for making the mandatory annual withdrawal from a RRIF. This offers a savings of from $28.25 to $56.50, in my experience. You'd be wise to check the charges with the financial institution at which you have your RRSP.
  • If you deduct only the minimum amount from a RRIF, you will not be hit with a withholding tax. You will receive all the funds withdrawn - no withholding. But be aware, the withdrawal is treated as income and will be treated as taxable income at tax time. You must pay the tax piper at some point. You must have the money to pay the tax available. Any amount withdrawn over the minimum will have taxes levied at the time of withdrawal similar to the withholding taxes on RRSP withdrawals.
  • A RRIF withdrawal is treated like pension income by Revenue Canada. This means if you don't already have pension income, the RRIF payments will allow you to take advantage of the $2000 pension income tax credit. This can be a nice perk if you have no other pension income, but for those who already have enough qualifying pension income to take advantage of this deduction, this benefit offers no extra tax savings.

And what are the disadvantages of a RRIF over an RRSP?

  • I think the big drawback to RRIFs are the minimum withdrawals demanded by the government. For instance, when I retired the government at the time insisted on a minimum withdrawal of 7.38% upon reaching the age of 71. This withdrawal rate increases with each passing year. A recent budget lowered the mandatory withdrawal to 5.28% at age 71. The rates are progressively lower for those under 71. Withdrawal rates still increase annually but now one must hit 95 before maxing out at the 20% withdrawal ceiling. 
  • Another drawback is that unlike my company pension, a RRIF or registered retirement income fund, carries some risk. The income is not guaranteed. I'm comfortable with the risk today but if I had to face a repeat of 2008 would I still be so sanguine? I doubt it.

Yet after some thought, I've decided to merge my RRSPs and convert my retirement portfolio into a RRIF. I see an immediate advantage to the no withholding tax on the minimum withdrawal rule. My true tax rate is much lower than the withholding tax rate. This offers a small advantage but still an advantage.

On the other hand, there is no doubt in my mind that anyone with a locked in RRSP should consider the transfer to a locked in RRIF. Getting money out of a locked in RRSP is difficult in retirement. There are forms to fill out and then taken to the bank. Plus, there are the withdrawal charges to consider and the withholding tax.

Want to know more? Here's a link to Financial Hardship Unlocking Forms for 2015. These forms are important if you have a LRSP and desperately need money in retirement. Converting a LRSP to a LIF puts an end to the need for these forms.

Now that I have converted my RRSPs to a RRIF, the biggest question for me is this: What is the best way to remove my money?  If one has a sheltered portfolio of equities, getting the money out demands some thought. If the market is down, you don't want to find yourself forced to sell shares into a sagging market.

I decided that, as much as possible, I'm going to remove funds using the "in kind" approach. The government allows retirees to transfer stock and other holdings from one's RIF to say a TFSA, if one has the headroom in the TFSA. When moving equities, the FMV (fair market value) is calculated on the equities when they leave the protection of the RIF.This value will be important when income tax time rolls around. Because of the manner in which this transfer is done, the FMV for the withdrawal is the same as the FMV for the deposit.

I found this surprising but my bank claimed there was one wrinkle in the "in kind" transfer. The equity transfer, the bank rep said, cannot be carried out directly from the RRIF to the TFSA. The equities must be parked in a non-registered cash account first and then moved from there to the TFSA. In order to complete in kind transfers, I was asked to open a new account to be used only when moving equities, etc., from my RIF to my TFSA. I thought this was weird to say the least.

According to an article that ran in the Toronto Star, the expert consulted by the newspaper agrees:

"most institutions will allow you to transfer your investments 'in kind' to a non-registered account or TFSA account. . . . So if you have 100 shares of BCE in your RRIF priced at $32 a share, you can transfer these shares directly to your TFSA account as a $3,200 contribution. Because there is no withholding tax required when the minimum amount is withdrawn from a RRIF, you won’t have to sell RRIF assets to generate the cash to cover the tax. For withdrawals in excess of the minimum amount, RRSP withholding tax rates apply . . . "

Rather than do battle with the folk at the bank, I moved my self-directed accounts to another bank. I moved my portfolio to TD Canada Trust. The online support was especially quick and oh-so-polite. I sent my first e-mail on a Sunday and immediately got back a reply. The TD has online staff answering client questions on Sundays. I found this amazing as my original bank didn't answer the e-mail I sent to them for four full days. And the TD says it does these in kind withdrawals frequently and all is done without my involvement. I do not have to open a new account as was demanded by their competitor.

My first choice when it comes to which equities to move will be underperforming stocks that also pay a poor dividend. These are stocks that may be down but which I hope will recover eventually. I will pay tax at time of withdrawal, this is only fair, and the tax will be based on the depressed FMV at the moment the equities leave the protection of the RRIF.

Funding fun in retirement is important.
I want to keep my biggest dividend payers in my RRIF as long as possible. I want to accumulate some cash in my RRIF to give myself wiggle room as I withdraw money. I don't want to be forced to sell stock at the wrong time.

Most of us have lots of headroom in our TFSAs. I want to take advantage of this to the greatest extent possible. With luck, I hope to get enough dividend paying stock shifted into my TFSA to make that account an important source of funds in retirement. The nice thing about funds removed from a TFSA is that they do not count as income and do not trigger a claw-back of one's OAS.

One advantage of my TD Direct Investing account over the now closed accounts at the other bank is that the TD account information can be downloaded and linked automatically to an Excel spreadsheet. I no longer have to fill in the fields myself. Nice. Now I have more time to spend with my grandchildren.

Friday, July 3, 2015

I added to my D.UN position

I have a rule: Don't put too much money into any one stock. Too much risk. I've watched too many supposedly good companies stumble and fade away.

That said, D.UN is a good company. It is not a great one, but it is a good one. It has suffered some downward pressures that are unique to it but I don't see them as insurmountable in the least. I own D.UN and I'm in it for the long haul. It is one of my core holdings, at this time.

As I said in an earlier post, REITs may not take the severe hit that many are expecting when interest rates begin climbing in earnest. And if they do, they should recover over time. I'm willing to make a small investment and take on the risk.

When I originally got into D.UN I could only buy 500 shares and remain below my investment cut-off point. Today D.UN dropped in value to a point that I could pick up another 100 shares and still remain below my total investment cut-off point. I will now make about $112 each month from my core D.UN holdings.

One REIT that I do worry about is REM. The American mortgage REIT from iShares is a dividend factory. It pumps out double digit yield annually. I love it but it worries me. If interest rates do start to climb, and they will, REM may take a big hit. On the bright side a small holding gives my income a very nice lift and has for a number of years now.

I'm up in the four digits region with REM. If it starts dropping, I'll drop it from my holdings. If the mortgage REIT ETFs drop low enough, I'm thinking of REM or MORL, I would consider getting back into the high-yield game.
___________________________

Since writing this, D.UN has continued to slide. With the price of oil at six year lows, leasing office space in Calgary is not the plus it was. D.UN has lots of office space in Canada's West and this has become quite the drag on the once buoyant REIT. Unexpected changes at the top have add to investor concerns.

D.UN is a hold today and no longer a buy. I'm holding and reinvesting my D.UN dividends in other areas to add diversity to my portfolio.

Wednesday, June 10, 2015

Park the stuff and get on with life

As a retired couple, my wife and I need income to live. My pension, CPP and OAS taken together are not going to keep us in our home. I took a cut of about 25% in both my pension and my CPP when I accepted an early retirement offer from my employer, Quebecor. My wife was forced to begin drawing her CPP early in order to balance our books. This meant she took a slightly larger cut in payments than I did. She is younger than I am.

Yet, my wife and I are still in our home some six years into my retirement. We have bought a new car, a VW Jetta TDI. We have taken one big vacation: six weeks in my vintage Morgan (since sold) to California. Life is good. How is this possible? Dividend paying stocks.

Take our investment in REITs. I buy them and hold them and live on the monthly dividends. Whether the value of these holdings goes up or down is not of big concern to me. I would not like to see a cut in the dividends, that I would notice faster than a fall in unit value, but even the unit value can fall without causing me to lose sleep.

I bought most of our REITs holdings when I retired. Some are up and one (D.UN) is down. Overall the REITs section of our portfolio is up by a few thousands. I see that as a cushion guarding my sleep. But, there is another cushion and that is the monthly income. We realize an income of about $450 a month from our REITs. This amount is enough to make up the shortfall in our income for a full three months.

REITs have been under great pressure lately. They have dropped in value and this has negatively affected the value of our overall portfolio. Am I worried? No. In fact, I may buy a few more if the price is right. When the market falls, I see a buying opportunity. I figure sooner or later there will be a correction of some size and I hope to have some cash on hand to take advantage of the sale prices.

In the meantime, while I wait, I will enjoy the monthly income, enjoy my grandchildren, enjoy my wife, enjoy my home.

Oh by the way, the Bank of Montreal utilities ETF, ZUT, dropped below $15. This is another nice income payer for those in retirement. I have a little ZUT. If it drops below $14.00, I may double my holdings. (I won't put too much in ZUT as I am not all that fond of some of the stuff held by this ETF. I love Emera and Fortis but have reservations about Just Energy.)

I'm watching XUT as the prices drop. If the prices drops low enough that the dividend yield climbs above 4% I may well buy some XUT. Personally, I prefer the mix in XUT to that in ZUT. The iShares ETF has a lot of exposure to the big, safe names in the utilities category. In fact, one could just buy the top five utilities and create your own pseudo ETF. That said, XUT offers a lazy person a nice mix with safey in the diversity. I'm old and lazy. I'll keep watching XUT for a entry point. (I'm also going to examine some of the other utilities offerings as it does seem that the time to buy may be coming.)

And lastly, I caught a chap talking about both REITs and utilities on BNN. He said his investment company had done an indepth review of how REITs and utilities react in a rising interest rate environment. REITs, as long as they aren't mortgage REITs, fare just fine, he said. He isn't selling off his clients REITs. But, utilities are another matter. These investments suffer. He is lightening up on utilities.

I can agree somewhat with what he is saying and go so far as to add some utilities exposure when the time is right.

Friday, May 22, 2015

A new monthly income fund to consider

I have a soft spot in my heart for monthly income funds. The MERs are not screamingly high but they are still uncomfortable. Some of these MERs are in the 1.5% range. What makes these funds attractive is that whenever the market dives, as it does now and then, these funds hold more of their value than other not-so-well-balanced funds. One can plan on sleeping at night if one keeps money in these investments.

One of my favourite monthly income funds, the TD Monthly Income, charges a MER of 1.47% and has yield of 1.46%. Although Morning Star rates it a four star fund, it has careened from the 4th percentile to the 1st in the past six months. On one hand it appears to be regaining its footing; on the other hand Year To Date (YTD) it is only up .61%. This is on the low side and not what I have come to expect from the fund.

I've been looking at Purpose Monthly Income Fund (PIN) as a better place to park my retirement money while minimizing volatility. The MER for PIN is .95%. High for an ETF but still better than my personal benchmark, the TD Monthly Income fund. The dividend yield today is 4.81% which is more than I need in order to live in retirement and is much better than the TD offering. And PIN is up 1.6% YTD. Another bonus.

Now, I am surprised at how little PIN has grown this year considering the mix. And I am surprised at how closely both PIN and TDB622 track when graphed. PIN is on top more than the TD fund but not by so much as to have any bragging rites.

So what is the PIN mix? Well, it is split between cash, bonds and equities with the biggest chunk of equity investment in the States, followed by Canada and then Asia and Europe. I'd have thought that PIN would have fared much better than the TD fund considering that the TD fund has essentially no money invested outside Canada.

The biggest downside to PIN is its size. The ETF has only about 12.9 million in total net assets. I believe PIN must grow if it is to survive. TDB622, on the other hand, has 6.8 billion in total net assets.

I'd like to see PIN show some signs of growth, of attracting investor interest, before adding it to my portfolio mix.