Wednesday, December 28, 2011

DRW Misses Dividend

Click on the image to enlarge.

DRW was one of my favourite dividend paying ETFs. It filled a niche in my portfolio allocation and delivered an outstanding yield, something in the neighbourhood of 14 percent. I've been considering purchasing another 100 shares since DRW seems to have found a new, and much lower, comfort level. I was going to do a little averaging down in hopes of enjoying a good yield while waiting for DRW to recover some of its lost financial ground.

Today I have to question that move. DRW appears to have skipped its December dividend. I found this explanation on the Internet.

"DRW holds PFICs (Passive Foreign Investment Companies) in its portfolio. PFICs must mark to market each year (in Q4) and realize a gain or loss in those PFIC shares. PFIC loses are offset against PFIC gains, and then against portfolio income. The PFIC losses for DRW this year wiped out the gains and Q4 dividend income, therefore, no dividend distribution . . . "

Check the chart taken from the WisdomTree website. This is not the first dividend missed this year. In fact, according to the chart quite a number of WisdomTree ETFs failed to deliver their expected dividend back in Q2.

Is the ship sinking? No, I don't think so, but it has changed course. I've had investments before that did not performed as hoped and sometimes being patient, holding and waiting, brought its own reward. I'm holding until Q2 of 2012. I will re-evaluate DRW at that time. At the moment, there is a red flag on any buying play associated with this once loved ETF.

This is an excellent example of why one does not put too much into one investment. At this point, I only have 1.7 percent of my portfolio in DRW. This is .2 percent more than my allocation. DRW has actually performed a hair better than planned since I last updated my allocation model.

If I jump ship, I won't lose too much. My disappointment in DRW will not lose me any sleep.

Tuesday, December 13, 2011

Overweight Canadian bank stock?

I have a portfolio allocation, an investment map if you will. I follow my investment map as I follow any map; If I think I see a compelling shortcut, I take it.

When Canadian banks were oh-so-cheap a couple of years ago, I bought a lot of bank stock. I invested heavily in the Bank of Nova Scotia when it was less than $30 a share. I wasn't quite so astute, read lucky, with my purchase of Royal Bank shares. Lately, I have tried averaging down a little whenever Royal shares drop below $45.

Today the Daily Edge posted by ScotiaBank contained the following:

[Canadian] bank dividend yields are compelling, P/E multiples low. We expect the market to chase bank dividend yield when systemic risk moderates.

■ Reiterate: Overweight the Bank Group. Reiterate 1-SO on TD, RY and CM. Maintain 2-SP on CWB, LB and BNS, with 3-SU on NA and BMO.

If correct, my shortcut is taking me where I want go. I'm staying my financial course.

Saturday, December 10, 2011

Drum roll, please, 65th birthday on the horizon

Ah, 2012. For me, a fabled year. It was always the year of my retirement, right up until I retired early with a buyout and a slashed pension. Take a pension early, draw on your CPP well before your 65th and possibly suffer a 25 percent cut (or more) in payments. Ouch!

But all's well that ends well, and so far my retirement story is ending very well indeed. I left my job in early 2009 and put much of my buyout funds in my RRSP. It was a good move. My portfolio is up about 37 percent, even after taking out tens of thousands to live. If I could have left my investments untouched, I'd be up 48 percent today.

Of course, the story is not over. It's not over until the Fat Lady sings, or in this case the old, bald guy dies. And even then the story is not really over, my wife has to get by on our portfolio until she too punches out. (With a serious heart disease slowly destroying my heart, I think it is almost certain that my wife will outlive me.)

Still, I'm alive and kicking --- and investing --- and I think 2012 is a good year for taking stock of my financial situation. I track my investments with Excel with one worksheet containing my entire portfolio and showing how closely it follows my allocation model. The truth is, it doesn't. Wild profits in some sectors and fair losses in others have distorted my actual asset allocation over the passing years.

I subscribe to the general rule that one should not remove more than four percent from one's retirement fund annually unless you want to risk running out of funds at some point in the distant future. The problem for me is that I have done so damn well that I am now removing six percent based on my balance at retirement.

On the first day of the month of my birthday, I'm updating my retirement starting balance. If I'm lucky, the amount that I am removing annually will be about four percent of that new figure. This isn't all that important as I only remove dividend income from my portfolio; I do not spend my principal. I like to feel I am respecting my own rules, even if it takes a little bending of the truth to do so.

I'm also going to do my best to bring my portfolio more in line with the allocation model I designed years ago. And while I am at it, I'll rejig the model a little.

  • I may buy about another $1000 of the TD Monthly Income fund (TDB622).
  • If it regains lost ground, I'll sell my small number of Suncor (SU) shares.
  • Likewise, if I get an uptick I'll sell my Progress Energy (PRQ) shares.
  • I'd like to buy another 300, maybe 400, units of ZUT and then hold.
  • A remnant of my BTH.UN investment days, VIP.UN will be sold if it enjoys a small rebound.
  • I'd like to get out of Penn West (PWT) but it will take a jump in the price of oil to reach my exit point.
  • I'd like to sell some XIC and buy some XMD when the opportunity arises.
  • And lastly, I'd like to take a flyer on Canfor (CFX) if it cuts its dividend in early 2012 causing a drop in the price of the stock. I like to place a bet now and then. Adds a little spice to the portfolio.

There is, of course, one big fly in the financial ointment --- Europe. How Europe will play out is any one's guess. It looks ugly. I fear it will have repercussions felt around the world. (Hey, it already has.) There may be more pain than gain in the coming year. Still, as I wrote before, there's no need to panic. There never is. C'est la vie.

Monday, December 5, 2011

Lack of Diversity Plagues Portfolio

This post won't be a long one but it will address a problem with my investments.

My portfolio allocation takes in Canadian, American and international investments, and yet it is plagued by a lack of diversity. Why? Because my goal of enjoying high dividends forces my portfolio to gravitate to the energy sector plus the financials, utilities and real estate sectors.

Personally, this doesn't worry me all that much but still it is a concern.

Of the four sectors mentioned, I am least exposed to utilities. For that reason, I figure I can afford to put my available cash into something like the BMO Equal Weighted Utilities Index (ZUT) or possible the top utilities investments themselves. You see, there are some companies in ZUT that buoy the yield but add to the risk.

How To Invest Online reports that EMA, FTS and CU survived the 2008 crash with much less of a price decline than the TSX Composite. If it's stability one seeks, maybe these are the utility stocks to own. CU doesn't yield enough to be included in my portfolio. The Fortis yield is a little low, but it is still worthy of consideration since my portfolio is yielding almost seven percent at the moment when calculated on its opening balance at retirement.

Emera (EMA) has a yield of 4.1% and closed today at $32.70
Fortis (FTS) has a yield of 3.6% and closed today at $32.58.

A plus for Fortis is that it is again included in the Scotia McLeod Income Plus Guided Portfolio. In the spring, Emera pushed Fortis to the sidelines but that was then and this is now. Today it is Emera that is warming the bench.

I have placed both Emera and Fortis on my watch list.

Picking an ETF

Finding good dividend producing investments is difficult. In the present economic climate, it can keep one awake at night with worry. Still, I'm retired. I need money to live. I must invest. I have no choice. If I don't, I will have to spend my principal and that is clearly a road to financial ruin.

I demand a minimum four percent dividend. That's the magic number for me: four percent. The general rule is one can remove four percent a year from a retirement portfolio and not bleed the portfolio dry. Of course, if you are doing quite well and surpassing the four percent watershed by a good amount, spend more. For the past three years I've been lucky, I've done very nicely, and I've withdrawn far more than four percent annually.

One ETF I watched for sometime was REM (ishares TS FTSE NAREIT MTG Plus Capped Index FD). I bought 200 shares on a recent dip.

Note the "Low Risk" rating at bottom left.

What attracted me originally was the high yield. Today it is delivering 11.16%. Very nice. High yield attracts but it also warns. High dividends often come with high risk. When I began looking into REM I found that it appeared to have relatively low risk, at least according to Morningstar.

Next, I examined the top ten investments that make up the REM package.

These holdings are generally all holds. Not appealing but not frightening.

I check every one of the top ten investments. As I write this a chap on BNN is talking about NLY. He told a caller that NLY had a great dividend and the dividend was, in this person's opinion, "sustainable."

In the above report, NLY is rated a buy. Note the falling and levelling trend indicator.

At this point, I am getting a feel for the investment. When I did this originally, REM was a blazing buy in my estimation. When I got a chance, I bought 200 shares on a dip. Before writing this today, I did another run through my pre-purchase procedure. REM is more hold today than buy and for me the word hold holds no attraction. Hold says concern. I would not be too fast to buy more REM today. As an owner, and one who is slightly up on his purchase, I'm holding and I'm happy.

I also like to take a quick look at some of the Risk & Reward measurements, such as beta, standard deviation, sharpe ratio. I take these with the proverbial grain of salt but I do consider them before buying.

Note the above numbers and then click the above links to get a full understanding.

Lastly, one must remember that this investment also contains a big measure of currency risk. I've owned Canadian funds that hedged the currency risk and I've owned U.S. investments outright. I've decided to accept the risk and get on with my investing. I have a U.S. investment component to my allocation and that component comes with some currency risk. Maybe I should learn about hedging currency risk. I'm still learning.

But, while I'm learning the approximately $300 I earn from owning REM will help keep a roof over my head and food on the table. Am I worried about owning REM? A little. But, I worry a lot less when I'm dry, warm and not hungry.

Wednesday, November 30, 2011

Up days cushion down days

In my last post, I talked about not getting into a panic as the global markets drop in value day after day. And drag our portfolios with them, I might add. I wrote, the markets have "a long way to go before it is panic time. Corrections, even big corrections, are normal."

Today The New York Times ran an article headlined "Banks Act, Stocks Surge and Skeptics See a Pattern." All very true. The Dow was up 490.05 points. The TSX soared as well. But I agree with the concern voiced by The Times, this rally could evaporate.

I've bought all I'm buying on the dips. I'm keeping whatever cash I've got. I'm keeping, as they say, my powder dry. I would be surprised if we did not see more market volatility in the coming weeks and months.

To put today's rally in perspective let's look at the stocks I mentioned in my last post. These were all stocks that I had bought on recent dips. Four of the six were down when I last checked --- a couple by as much as 5%. That's a lot when you realize I just bought all these stocks at supposedly bargain basement prices.

Tonight, I discover:

  • BMO Equal Weight Utilities Index (ZUT) is up 6.4%.
  • Claymore S&P/TSX Canadian Preferred Share Units is down .4%. Not much, but still it is in the red.
  • REM is also in the red, down .8%
  • PWT-T up 5.4% 
  • AUSE is up 2.1%.
  • RY-T  is up 4.8%.

So, my recent purchases are, as a group, in the black. My income has grown thanks to the extra dividend income and I'm happy --- for the moment.

As I prepare for bed, the Asian markets are up:

  • Nikkei is up 2.12%.
  • Hang Seng is up 5.85%.
  • Shanghai is up 3.43%.

As I went to bed, I thought, "barring any unforeseen problems, tomorrow should be another good day for North American markets." Well, its morning and Europe is essentially flat at 8:30 a.m. EST and the premarket trading in the States is trending lower. I may lose a little of my profits from Wednesday but overall it will be a fine day. My cash reserves will continue to swell as the month end dividends show up in my account.

I'm not gloating over my profits, even though I am up many, many thousands for yesterday. I fear these profits may be ephemeral. I see my growing portfolio as simply being fattened in in preparation of the next famine. If it gets fat enough, it may well weather the coming bear market, and weather it very well.

Whatever, don't panic.

Wednesday, November 23, 2011

The world's not coming to an end --- yet

To hear many in the media tell it, the economic world is crashing and burning. It is in a bit of a tailspin, I'll admit. But, it has a long way to go before it is panic time. Corrections, even big corrections, are normal.
Europe is well off its game, as is the United States. China is slowing. We could yet be in serious trouble. But with some luck, we will be through this rough patch in eighteen months to a couple of years. As a chap on BNN pointed out today, the stock markets are usually the first indicators pointing the way to the downturn's exits. That means the markets could be looking at a return of the bulls in a year or so.

But right now, now bad is it really? Well, I have been buying on dips and two recent buys are still on the plus side of the ledger but the rest are wilting.

  • BMO Equal Weight Utilities Index (ZUT) is still up 4.38%.
  • Claymore S&P/TSX Canadian Preferred Share Units are up .16%. Not much, but still in the black.

Meanwhile the following are all down and showing signs of further weakness:
  • REM down 2.9%
  • PWT-T down 5% 
  • AUSE is also down 5%.
  • The RY-T that I just bought is down 2.7%.

I'm getting slower and slower rising to the bait of new lows. I'm setting goals. If and when RY offers a yield of 5.5% based on the share price, I'm buying. If PWT drops into the $12 range, I'm buying. And CFX has dropped more than 10% since I started following it. I expect a cut in the dividend come the new year and this should result in another price drop; At that point, it may be a good dividend paying stock to buy.

If I'm right, and I've been wrong many times in the past, but if I'm right, buying on the upcoming lows will position one to enjoy some wonderful gains in the recovering markets. Be warned, I'm always the optimist.

(If this gets really nasty, it could be a good time to look at buying: CPG, IPL.UN, EMA and POW. There are others that will be worth a look, but these are the ones on my wish list.)

Tuesday, November 22, 2011

Investing for retirement: Have a goal, have fun

The other night a friend asked about investing. This young woman is already thinking about retirement and is considering a self-guided portfolio inside an RSP as one way to realize her goals. The following advice is for her, but I think it is worth a post.

As I write this, the financial world is in turmoil and possibly heading for another incredible dive along the lines of 2008 and 2009, this promises be a great time to build a solid portfolio for future growth.

The first step in building a good portfolio is to make your first step a small step. Pick up some books on investing and retirement and read them. Your local library will have a slew of these. I especially liked Protect Your Nest Egg by Eric Kirzner and Richard Croft and The Portfolio Doctor by David Cruise and Alison Griffiths. I found both at the library but later bought my own copies. I figured the authors had earned my respect and my money.

At this point you might like to open an online portfolio tracking account with The Globe and Mail, Globe Investor. The basic portfolio tracker is a free service, free being a nice bonus. Build an imaginary portfolio and watch the imaginary profits pour in. If you have dividend paying stocks, the dividends will appear in your imaginary cash balance. This service may be free but it is sophisticated.

Another free feature offered by Globe Investor is the Watchlist. This is handy for tracking stocks in which you have an interest. The Watchlist even tracks dividends. Very slick. (Click on the image below to see my Watchlist at an easy to read onscreen size.)

A partial view of my Globe Investor Watchlist.

I have mentioned dividends a few times now. I am a firm believer in the rewards of dividend investing. Given enough time, dividend paying stocks can dig themselves out of a financial hole. Often investors with a long time frame will put their money in "growth stocks" or mutual funds that promise "growth."

If a mutual fund openly promises lots of upward potential by putting growth in its name, it is also --- but not so openly --- admitting it has lots of downward potential. A dividend strategy vs. a growth strategy is often a contest between the turtle and the hare. The growth stocks will surge ahead at times but then lose momentum and stall; They will probably lose a lot of their value now and then. At the end of decades of investing, the fitful growth of these stocks is often surpassed by dividend investments. Dividend investments will also wax and wane with bull and bear markets, but their losses are cushioned by the steady flow of dividends.

To see this effect in action try playing with this TD Asset Management mutual fund graphing tool.
In my example, I compared the TD Monthly Income mutual fund --- one of my favourites --- to the TD FundSmart Managed Maximum Equity Growth (Premium Series). Over the period tracked, the turtle wins. (Again, click on the image below for an easy to read onscreen size.)

TD Monthly Income delivers $7727.88 more in this example.

I like the TD Monthly Income mutual fund but it is a bit of an anomaly. Generally, I don't like mutual funds. I've owned some good ones over the years but generally I prefer ETFs or even owning stock outright. The fees charged by mutual funds put them behind before the investing race has even begun. Some mutual funds charge from two and a half to three percent for the honour of having them manage your investment. Those charges can make it very difficult for the mutual fund to outperform a competing ETF, which often charge investors only half a percent or less.

So, get some books, do some reading, understand your goals, work out your asset allocation and play with some imaginary investments using Globe Fund. The final step is to talk with a financial adviser. I am not a financial adviser. Reading this does not count.

Many branches of Canadian banks have people on staff to assist investors and they also have associated businesses where they can send you for advice. I talked with folk at the ScotiaBank and at Scotia McLeod. I also chatted with an adviser I had known for years at the TD Canada Trust branch where I do some banking.

I have self-directed RSP accounts with both TD Canada Trust and ScotiaBank. There are things that I like about both. TD Canada Trust gets the nod from a lot of sources over ScotiaBank but I have found that both have their strengths and weaknesses. As I am not a trader, I am happy with both. I have no strong feelings favoring either one.

To get you started, here is a list of some of my investments:
Bank of Nova Scotia (BNS)
BMO Equal Weight Utilities Index (ZUT)
Claymore S&P/TSX Canadian Preferred Shares / Units (CPD)
Crescent Point Energy Corp. (CPG)
Inter Pipeline Fund (IPL.UN)
iShares MSCI Singapore Index Fund (EWS)
iShares Capped REIT Index (XRE)
WisdomTree Trust Australia Dividend (AUSE)

An average risk investment with higher than average yield.

Lastly, only invest if you are comfortable with losing money, lots of money, in the short term --- and maybe the long term. The financial world is very uncertain today. It is unlike anything in my lifetime. Keep your investments within your comfort range.

I was lucky. I retired at the depths of the recent stock market crash. As the market has been trending lower and lower recently, I have been feeling luckier and luckier. If you find a crashing market encouraging, you may be a natural investor with the nerves to ride out financial storms.

Cheers and good luck!

Thursday, November 17, 2011

Money Sense picks 100 stocks for retirement

Money Sense, awarded the title Magazine of the Year at the 34th Magazine Awards, has a November cover that grabbed me, just as it was supposed to: "Best Stocks to Retire On." "We rank Canada's Top 100 dividend payers," the cover said. I bit. I bought. I read.

It seems the Retirement 100, originally named the Income 100, was started in the summer of 2007 by the folks at Money Sense. Since that time the all-stars* in the list gained 39.2%. Impressive.

 * The All Stars
  1. Great-West Lifeco
  2. Husky Energy
  3. Power Financial
  4. Sun Life Financial
  5. TD Bank
A quick check of the 100 revealed, what I would call, a glaring error. Inter Pipeline (IPL.UN-T) is missing. This is a stock that has been listed as an investment in a number of retirement portfolios, and rightly so. I own it and I adore it.

IPL.UN-T has more than doubled its price in the past few years. The shares I own today, in a sense, didn't cost me a penny. You see, I sold more than half of my holdings for more money than my original investment. The four digit annual income the pipeline funnels directly into my pocket is much appreciated.

If you are interest in the Money Sense article, a condensed version is posted online. I think they may be holding back some info in order to encourage magazine sales. Who can blame them? It is certainly not a bad idea.

Monday, November 14, 2011

The Munk Debates

Summers at World Economic Forum, Switzerland
I watched the live feed of the Munk Debates last night. It was a brilliant pairing: Paul Krugman vs. Larry Summers. Krugman was assisted by David Rosenberg and Summers had back-up in Ian Bremmer.

Krugman is a Nobel prize winning economist, writing for The New York Times, Summers is the former president of Harvard University, Secretary of the Treasury under Clinton and until recently director of the White House National Economic Council for President Obama.

David Rosenberg is a chief economist and strategist with an influential Canadian independent wealth management firm. Ian Bremmer, looking every bit the academic, the only one on stage without a tie, is the American political scientist who created Wall Street’s first global political risk index

The topic of the night: Will the foundering global economy usher in a dismal era for North America similar to Japan's lost decade of high unemployment and slow economic growth?

At least, that is how the Globe and Mail saw the debate. Paul Krugman begged to differ. He said, "Canada has not messed up enough to be interesting." This debate will be centred on the United States and not North America.

The Nobel winner saw the States not as entering a lost decade but of already being deep in one. He described the economy as sour, but with a sourness even in excess of that that stalled the Japanese economy. He defended his position by falling back on the PPE approach: The Proof of the Pudding is in the Eating. For  him, the United States clearly is now eating sour, perhaps even humble, pie.

Both Krugman and Summers agreed on a number of things, one being that the U.S. stimulus program was too little and too brief. It was inadequate.

An interesting twist to the Monday evening debate was that both Krugman and Summers come from the left wing of the political spectrum in the U.S. They both agree on a great deal. For instance, they both agreed that the engine driving the American economy is broken; Both made reference to John Maynard Keynes "magneto trouble" metaphor.

In Keynes day, engines had a magneto powering the spark plugs. Keynes famously said, "We have magneto trouble," as he compared the stalled economy of the Great Depression to a broken generator in an automobile engine. According to Keynes, repair the economy's magneto and the economic engine will purr once again.

Krugman sees the American political system as completely dysfunctional and this leaves him feeling deeply pessimistic for the States. If he does start to feel a little upbeat, he said, he watches another GOP debate and changes his mind immediately. America's economic magneto is not going to get fixed any time soon.

Krugman made it very clear that he sees "no reason to believe the U.S. will do better than Japan."

Summers, on the other hand, said that the Japanese problems were far different than those affecting the United States today. For instance, in Japan housing prices tumbled to 15 percent of their previous value. This has not occurred in the States - yet.

Summers pointed out that the U.S. is still "the place where everyone wants to come, where everyone wants to put their money." The world's biggest and most dynamic economy will not be brought to its knees for an indefinite period, according to Summers. The States is simply too economically resilient for that.

Quoting Churchill, Summers said, “Americans can always be counted on to do the right thing, after they have exhausted all other possibilities.” The magneto will get fixed despite of, or in spite of, the present political gridlock in Washington.

Summers argued, "things are never as bad as you think they are," and added optimistically that in politics, "the transition from inconceivable to inevitable can be very rapid."

The panel touched briefly on the Occupy Wall Street movement. I believe it was David Rosenberg who said the movement was partially powered by the strong backlash against excessive CEO pay and the golden parachutes protecting them from falling into the financial abyss like so many others in today's economy.

Summers pointed out that there are brilliant business leaders, like Steve Jobs, who earned their great wealth. He argued that some economic inequality is not only to be expected but it is good. We need "to recognize that a component of this inequality is the other side of successful entrepreneurship; that is surely something we want to encourage."

Krugman brushed this argument aside: Almost none of the wealthy CEOs under attack are like Jobs. Almost none.

So, what did I take away from the debate. One: it's good to be living in Canada. Canada was mentioned a number of times as a country that has dodged the worst of the present economic malaise affecting the globe. Investing in Canada and Australia, as I am doing, is not a bad idea. One might even add Sweden to the list of countries safely at the head of the pack.

Political scientist Ian Bremmer said he would advise the Canadian government to hedge their bets when it comes to trade. Looking east to China and the rest of Asia is a good plan. He made clear he was not thinking of closely linking Canada's economy to China's in the same way that Australia has done. Canada is positioned right next to the States and an ocean away from Asia. Still, hedging one's bets is often an excellent plan.

I believe Prime Minister Harper and Finance Minister Flaherty are already taking that tack.

Will the Americans suffer a lost decade? They might. Will Canadians be pulled down with them? Maybe, but maybe not. Maybe Canada will motor along a little above the worst of the economic storm. I'm going to keep buying on the dips and praying on the dives. I guess I'm a Larry Summers optimist tainted by Paul Krugman negativity.

Warning: Don't just buy the dividend.

I'm always on the lookout for a good dividend paying stock. The other day I read a blog extolling the virtues of Canfor Pulp Products Inc.

The double digit yield (14.16%) was keeping this dividend-driven investor very happy. Curious, I did some research on CFX.

The following is from the TD Securities Morning Action Notes:
"With a deteriorating pulp market outlook, we expect the [Canfor] Board will reduce the dividend in early 2012. . . . Under our current forecasts (using US$875 per tonne for North American NBSK pulp in 2012), we believe the company can sustain a $0.20-$0.25/share quarterly dividend during 2012. . .

"There has been a significant negative shift in pulp market sentiment in recent weeks – we expect conditions to get much worse before they get better. . . . discounts are widening and spot prices are declining fast. North American spot prices are in the mid-US$700 per tonne range with unconfirmed reports of one-off deals in the mid-US$600 per tonne range. . . .

"Historically, the performance of CFX tracks pulp price momentum (exhibit 2). More recently, the
relationship has decoupled as Canfor Pulp’s dividend has supported the share price. With ourexpectation for alower dividend in 2012, we expect a tighter relationship going forward."

CFX has a target price in the area of $13. If I can pick it up for $9 or less, I might buy a couple of hundred shares. The 20-cent per quarter dividend would then yield about 8.9%. Over the long term, I have problems with owning a pulp products company. It's a business with way too much volatility for my comfort level. I would watch the target price and sell at an opportune moment.

I love a good dividend but a good yield alone is not enough to entice me to buy.

(Note that the investor I'm was talking about at the beginning of this post appears to a bought her shares of CFX at a good discount compared to today's price. It was a good buy for her back then and it may be a good buy for me in the future. But I'm not convinced that it is a good buy for me today.)

Thursday, November 10, 2011

Placed a bet on the Royal Bank

I did it. As I suggested yesterday, I picked up 100 shares of Royal Bank (RY) at $45.01. This should give me a yield of 4.8 percent. As this investment is inside my TFSA, this is untaxed income. I will get to keep, or spend, it all.

Will I lose my shirt in the short term? Should I have waited? (Hey, at the close I had already lost a dollar.) At the best of times it is damn hard to time the market. In the economic climate today, I think it is impossible.

Now, what to buy next? I've still got a little cash itching to be invested sitting in my TFSA.

Tuesday, November 8, 2011

Getting the RSP money out

The recent bear market has given retirees, like me, an excellent opportunity to set the stage for removing some funds from our RSPs. I figure now is the time to buy additional stocks or units of investments that I already have in my RSP portfolio, but I will buy these outside my RSP and inside my TFSA instead.

For instance, I own Royal Bank inside my RSP. Recently it has been selling at levels lower than my book price. Result: I'm buying more RY but this time I'm buying it inside my TFSA. When RY climbs, possibly as much as ten dollars or more, I'll sell an amount of RY inside my RSP equal to what I own outside my RSP. This will bring my portfolio allotment back in line.

I end up with a lot of cash in my RSP to be removed in order to live. Numerically, I retain all the shares of Royal Bank I started with, but some shares are now outside of my RSP, my overall book price has dropped, and my allotment is dead-on. All  dividends are still available for covering living expenses but they are no longer all being taxed. Nice.

Friday, November 4, 2011

DRW_Too good to be true?


This info was added Dec. 28, 2011. As of today it appears that DRW will miss paying its fourth quarter dividend. Ouch! The overall dividend yield for the year was more than 10 percent but still I was expecting about $400 come the end of December.

What happened? I found this explanation on the Net:

"DRW holds PFICs (Passive Foreign Investment Companies) in its portfolio. PFICs must mark to market each year (in Q4) and realize a gain or loss in those PFIC shares. PFIC loses are offset against PFIC gains, and then against portfolio income. The PFIC losses for DRW this year wiped out the gains and Q4 dividend income, therefore, no dividend distribution . . . "

I'm holding my position. I'm not overexposed and feel little concern. We'll wait to see what the yield is delivered at the end of the first quarter of 2012 and we'll hope the value of this ETF doesn't continue to lose ground. This missed dividend payment does add a whole new wrinkle to owning DRW.

 As you know, I'm retired. I need income. Man, do I need income. With my back to the wall, I take a few chances — or what I see as chances.

I own some DRW. I bought some high and some low. I may buy some more if it drops in price in the present bear market environment. I would not put too much into DRW but it delivers a high enough yield to make chance taking seem reasonable. And how much is that? Answer: 13.10%.

Such a high yield has the weird effect of both attracting me and repelling me. I'm a firm believer that you don't get something for nothing. Such a high yield must come with a downside. So I buy some, but I don't buy a lot.

Yet, Morningstar awards DRW five stars, and rates DRW as a below average risk with an above average return. So, do you feel lucky? Eh?

Saturday, September 17, 2011

Not recommending these but I own 'em.


This info was added Dec. 28, 2011. As of today it appears that DRW will miss paying its fourth quarter dividend. Ouch! The overall dividend yield for the year was more than 10 percent but still I was expecting about $400 come the end of December.

What happened? I found this explanation on the Net:

"DRW holds PFICs (Passive Foreign Investment Companies) in its portfolio. PFICs must mark to market each year (in Q4) and realize a gain or loss in those PFIC shares. PFIC loses are offset against PFIC gains, and then against portfolio income. The PFIC losses for DRW this year wiped out the gains and Q4 dividend income, therefore, no dividend distribution . . . "

I'm holding my position. I'm not overexposed and feel little concern. We'll wait to see what the yield is delivered at the end of the first quarter of 2012 and we'll hope the value of this ETF doesn't continue to lose ground. This missed dividend payment does add a whole new wrinkle to owning DRW.

These are not recommendations but they are investments that I have in my retirement portfolio.

CIB512 (CIBC Monthly Income) yielding 5.6%, Brompton VIP ETF yielding 9.8%, CPG yielding 6.5%, IPL.UN yielding 6%, PWT yielding 6%, XRE yielding 5%, ZUT yielding 5.2%, REM yielding 10.8%, DRW yielding 12.5%, DWX yielding 11%, and AUSE yielding 6.9%.

Although the following are not paying above the magic yield point of 5%, I love owning them anyway. Scotia Bank yielding 4%, Royal Bank yielding 4.7% [If this drops a little lower, I would not hesitate to buy more.] and CPD 4.8% [When interest rates begin to climb, this is worth a look. The yield should climb as the price drops.].

And although it is only yielding 3.2%, this may change after the December dividend, I am still quite enamoured with the TD Monthly Income as a core holding. I have 14.9% of my portfolio in TDB622 and each time my holdings drop below 15% of my portfolio daily value, I buy more.


p.s. If one thinks of a correction as a loss of at least ten percent, based on that number my retirement portfolio has not corrected this year. Much of my portfolio's diminished value is a result of removing funds in order to live.

Friday, September 16, 2011

For retirement start saving early and save lots

I read the following in the Globe and Mail today:

"[a declining market] is a rare opportunity to be treasured, if you can build a retirement portfolio of strong companies with dividend yields of 5 per cent or more. If you have had good advice or been smart yourself, you may just be able to take advantage of these investments in the coming weeks and months. If it is built right and timed right, you may just start your retirement with one of the best pensions around."

This is good advice. Until you actually retire, you will not know how much income you will need. There are lots of sites on the Web with estimates of how much you will need. These estimates are usually expressed as a percentage of your final annual income.

The estimates vary greatly and reality varies even more.

I live in a rambling, three bedroom bungalow. It is a perfect home for a retired fellow with a heart condition. Perfect that is until something needs repair. This summer my wife and I had to have a new roof. This cost $15,000. Ouch!

And behind our home we have large hill with a retaining wall going right across our rather wide, suburban lot. The original wall was made from stacked and interlocking railway ties but after 25 years it was completely rotted. We had to have a new wall --- about 55 feet long and six feet high built. I haven't got the total bill but I'm sure it will be another good one. Ouch again!

And it wasn't in the budget, but I had to buy a new car. I got a 2011 Volkswagen Jetta TDI. On the bright side the payments are only about fifty dollars more than what I had been paying for my old Saturn Ion and the new beast is delivering more than 40 mpg in the city. Still it wasn't in the budget. Ouch, yet again!

What I'm getting at is that one not only has to have money to cover day to day expenses but enough money to cover the emergencies that crop up with some regularity in life: furnace repairs, air conditioner maintenance, washer and dryer repairs, snow tires and rims, etc.

Don't be cheap when planning for retirement. If you do manage to save too much, you can always take a cruise to celebrate. If you don't save enough, not taking a vacation will be the least of your worries.

FYI: Keep a record of your annual expenses. If you use Excel you can easily average your annual records. It is really not that time consuming and you will be surprised at how much it actually costs you to live. I credit my careful records for giving me a good handle on what retirement was going to cost.

Monday, September 12, 2011

A rough week coming up

Can't sleep and so I got up and checked the Web. I learned that the markets in both Asia and Europe are down and down a lot. The Greek default situation has flared up again - big time.

I'm mentally preparing myself for some big losses in the coming days.

Before all this global financial stuff began unraveling I created a spreadsheet to estimate of my maximum losses in what I would term a financial meltdown. I am nowhere close to those absolutely horrid numbers but another potential daily hit of possibly two percent or more is frightening.

Oh well, it is too late to bail. I'm going to just try and ride this out. It is the 12th of the month today and by Friday I will have a nice bundle of dividends swelling my cash accounts. The 15th of each month as well as month ends are my paydays. This month, September, is a special treat as some investments only pay dividends every three months. September is one of those months.

And December, the end of the year, is only about three months away. December is my biggest month for income. As the dividends roll in, I'm going to keep putting them into what I see as good dividend paying investments. Buying low, or at least believing that I am buying low, should ease some of the financial pain I am about to endure.

If the markets have stabilized by December, maybe even recovered somewhat, I'll be even happier. Maybe I'll even sleep better and not be up blogging well before dawn.

Good luck in the coming week!

Wednesday, September 7, 2011

Portfolio yielding about a six percent

Let's take a look at some of my recent buys mentioned in my posts: ZUT is up 6.73%, yielding 5.2%; CPD is up 1.09%, yielding 4.79%; PWT is up about 1%, yielding about 6%; REM is up .22%, yielding 10.74%; AUSE is up .27%, yielding 6.45%. The lesson to take from this is that if one picks a down day to buy, almost anything you buy may well be a winner --- at least, in the short term.

As long as interest rates keep refusing to lift, CPD should perform as expected. It should provide a bit of portfolio solidity in an unstable financial world while, at the same time, delivering a nice dividend. PWT may yet revisit the under $17 price arena. If it does, it offers good value with a steady monthly dividend. Can oil, and even gas, stay down for long?

I bought all the mentioned ETFs and stock. I take my own advice. My portfolio is yielding about six percent in this down market. If it continues to show weakness, I will continue to buy more ETFs and some stock with my dividend flow. I might as well increase my income while I've got a chance.

Thursday, August 11, 2011

Tracking your investments and more

I'm retired. My wife is sorta retired; She works the lunch hour at a neighbourhood daycare centre.

We both have RRSPs and when my wife retired she was given control of the retirement fund her employer operated for her. When I was bought out, I had two retirement plans shifted to my control. That's a total of five plans we must track, if you're counting.

Now, some of these plans are quite small. One given to me by Sun Media is worth about $250. Other plans hold our main retirement investments in retirement. Tracking five plans could be complex but it isn't. I have a Globe and Mail "My Portfolio" account.

I played with the Sun Media/Canoe portfolio tracker but was not impressed. The Globe and Mail got it right. For instance, dividend income and DRIPs are automatically calculated and added to "My Portfolio". Maybe this is now being done by SM/Canoe, I don't know, I haven't played with their portfolio tracker in years. (Maybe someone from SM/Canoe would like to comment on the strengths of their product?)

The Globe's "Watchlist" feature is a really handy. It will update while you watch, if the markets are open. I used the list to follow some ETFs for weeks before committing to invest. Click on the name of an investment and it brings up a screen showing a rich summary of everything related to the stock, ETF or mutual fund in question. Again, the quote shown is updated frequently, although it is delayed 15 minutes. Of course, this does not apply to mutual funds which are updated daily after the close of the markets.

I've been getting some assistance with managing my retirement money from a financial adviser at the ScotiaBank. I simply print out "My Portfolio" and bring it to the bank. One sheet details all our investments, my wife's and mine.

And best of all, the basic "My Portfolio" is free.

Wednesday, August 10, 2011

If you can be an adult, charge everything

Surfing the Web I came across some advice from P.J. Harston, at one point the national editor-in-chief of 24 hours and the former Sun Media national business editor. I love how so many financial writers at daily papers have made their careers from bundling widely accepted ideas and presenting them as insights.

When it comes to managing your money, P.J. advises his readers to "get rid of those high-interest department-store credit cards." Use a pay-as-you-go card that you pre-load with cash, he says. For this advise I'm supposed to buy a newspaper? If I followed P.J.'s advice, it would cost me a minimum of a couple of of dollars a year. This is money I cannot afford to remove from my budget.

Flooring: planks and installation on card
You see, I'm retired. I don't have a lot of money. I squeeze every penny. I have discovered that charging almost everything is an easy way to increase the limited buying power of my pension. I charge my telephone bill, my groceries, my car costs. I'm having my roof replaced and I'm charging that. When I had hard wood flooring installed, replacing the worn wall-to-wall carpet, I charged that.

What card do I use? Well, at the moment it is a Canadian Tire Master Card Options Elite. You can't apply for a CTC elite card; you have to be invited. If you charge enough using the CTC card, I think it is about $20,000 annually, CTC contacts you to tell you you've been declared an elite card holder. Your membership is assessed regularly and if your card usage drops, CTC may drop you from the program.

Before this I used a GM Visa card but GM put limits on how much reward cash could be used in the purchase of a small GM car. It was a great piece of plastic when you could save a decent down payment for a GM vehicle. Since this is no longer possible, I have shelved the card.

There are, of course, other cards offering rewards. Look around. You may find one that better answers you specific needs.

Charging everything makes budgeting very easy. One monthly bill details the vast majority of my purchases. My bills peak each December and January with Christmas expenses and there are smaller blips on the months that I must make home and car insurance payments.

I track my expenses using Excel and a spreadsheet downloaded for free from the Web. The sheet is designed specifically for tracking and budgeting income and expenses. I've been using this approach for a few years now. Today there are few surprises. I know where my money goes.

Since you are only charging stuff that you would buy anyway, your costs don't go up but go down thanks to the rewards.

To make this approach work there is only one thing you must do. You must act like an adult. If you can't afford it, you don't buy it. A credit card is not for running up debts. Put big items on the card for a few weeks, when the bill arrives you pay the piper. To pay off a roof or a floor installation you may have to take out  a low interest bank loan but you'll enjoy a few weeks of interest free money and earn some rewards for doing so. Never carry an unpaid balance on a credit card. That is not something that adults do.

Tuesday, August 9, 2011

On buying low or timing the market

I try to buy low but one look at my portfolio makes it clear that I often don't. This should come as no surprise as it is impossible to know the future.

They say, "Don't try to time the market." That sounds like downright foolish advice. One has to try. Just don't be too upset when you fail. And don't try too hard.

Surely, you were not surprised when the market corrected. There have been signs for months that the market was losing momentum. I took the weakness as a time to dump almost all my mutual funds. They were not doing all that well and they were not delivering the dividends I need in retirement.

I kept only two mutual funds: the TD Monthly Income fund and the CIBC Monthly Income fund. I have approximately 15 percent of my portfolio in each one. Both these funds hold their value rather well in a severe down market. This is not surprising as both are nicely balanced funds with a good chunk of bonds in each. (The CIBC fund pays a better monthly dividend while historically the TD fund has performed a little better overall.)

Today I tried to time the market; I bought on the bounce. I bought the following:

  • AUSE WisdomTree Trust Austrailia Dividend Fund --- Dividend 6.84% --- Average Risk
  • CPD Claymore S&P/TSX CDN Pref Share (ETF) Units --- Dividend 4.84% --- Low Risk --- 5 Star (Performs more like a bond investment than an equity one.)
  • REM iShares TR FTSE NAReit MTG Plus Capped Index Fund --- Dividend 10.46% --- Low Risk --- 5 Star
  • TD Monthly Income Fund --- Dividend 3.12% --- Low Risk --- 5 Star (I buy this for safety.)
  • XRE iShares S&P/TSX Capped Reit Index Fund --- Dividend 5.32% --- Average Risk --- 4 Star
  • ZUT BMO Equal Weight Utilities Index ETF  --- Dividend 5.54% --- new ETF but has been in the 1st/2nd Quartile

I've been watching these investments for sometime.  I liked them all for a variety of reasons for my retirement portfolio. Today they all were priced for sale, for sale to me.

Tomorrow they may be even better priced. I may have bought early. I know they cost more today than they did yesterday. So, I bought 'em at a price I wanted, for a price I've been waiting for, and I'm not going to worry.

Hey, you can't time the market.

Do I feel lucky?

Dirty Harry's famous line can be said to more than just wrong doers looking down the barrel of Harry Callahan's Magnum .44. It's also a good warning to those looking to invest in mutual funds. Both situations are fraught-with-danger. This is not always clear to young, naive investors.

I had a chance to think about this this past weekend. I was at a family reunion and a young woman told me how she had just put aside some money in an RRSP. She was encouraged to buy a growth fund as she was in her thirties and needed to play financial catch-up, according to her adviser.

Now, I am not a financial adviser. I'm just a retired photographer. But, to the suggestion that she needed to buy a volatile growth fund, especially at this time in this market, I say: "Balderdash!"

The money had only been invested a few days and already the young investor was down in three digit, red territory. Yesterday may have doubled her losses. I'm sure she is feeling very uneasy about her investment right now. She wasn't told that what can grow can also shrink. She bought a growth fund because she was promised growth. Instead, she got instant shrinkage.

What's in a name? If it's "growth", it's a warning and not a promise. During the big downturn of 2008/2009 some growth funds lost 60 percent or more of their value. This not the scale of loss that young investors expect from a fund carrying the "growth" label.

So, what investment would I have suggested to the young woman? Answer: the TD Monthly Income Fund. Play with the calculator posted on the TD Asset Management website, as I did, and see what results when you punch in your own numbers.

For my example, I invested a hypothetical $15000 in the TD Monthly Income in January of 2008. I made no further contributions. I picked that date as it is before The Big Crash. I compared this investment to a similar investment of the same amount made at the same time and placed in the TD FundSmart Managed Aggressive Growth mutual fund. As you can see, aggressive growth translated into aggressive shrinkage.

Click or double click on the graph for an enlarged view.
FYI, my personal portfolio has earned better than 15 percent annually since I retired in January of 2009. That takes into consideration both The Big Crash and the recent global correction. I do not consider my portfolio to be growth oriented but rather it is centred on dividend producing investments.

Wednesday, July 13, 2011

AUSE looks good to me

AUSE was yielding 6.07% yesterday. I bought a hundred shares.

WisdomTree is an ETF provider with a unique take on investing and two very big names attached to the WisdomTree approach: Jeremy Siegel, professor of finance at The Wharton School, and well respected investor Michael Steinhardt.

I'd love to report that WisdomTree has gone great guns since its inception a few years ago, but it hasn't. When times were really rough in the markets, they waffled a bit and fudged their financial algorithms. One WisdomTree ETF based on U.S. stocks saw its investment strategy modified to eliminate all investment in American banks.

Some, of course, see this as reasonable and comforting; The managers react to reality and do not doggedly hold to failing theories. Others see these moves as revealing weaknesses in the basic WisdomTree approach.

Me? I'm a little looser in my demands. WisdomTree strives to deliver solid, dividend-producing companies wrapped up in a nice, tidy ETF bundle. I won't live forever but while I'm alive I need cash flow and WisdomTree is one of the companies I have been turning to.

Lately, I have been hearing and reading good stuff about Australia. When the WisdomTree ETF AUSE dropped yesterday to just under $59, I bought a hundred shares. I need a minimun of four percent yield to live and I'm betting that AUSE will deliver this and more. At the moment, it yields 6.07 percent.

Be aware that AUSE has a number of risks attached, currency risk for one, and I'd do some Internet searches before following my lead. But I like it and if it drops substantially in the coming weeks, I'll average down. If it climbs in value, I'll just smile and cash my dividend.

Monday, July 4, 2011

Still holding DRW, still happy: 13.47% yield


This info was added Dec. 28, 2011. As of today it appears that DRW will miss paying its fourth quarter dividend. Ouch! The overall dividend yield for the year was more than 10 percent but still I was expecting about $400 come the end of December.

What happened? I found this explanation on the Net:

"DRW holds PFICs (Passive Foreign Investment Companies) in its portfolio. PFICs must mark to market each year (in Q4) and realize a gain or loss in those PFIC shares. PFIC loses are offset against PFIC gains, and then against portfolio income. The PFIC losses for DRW this year wiped out the gains and Q4 dividend income, therefore, no dividend distribution . . . "

I'm holding my position. I'm not overexposed and feel little concern. We'll wait to see what the yield is delivered at the end of the first quarter of 2012 and we'll hope the value of this ETF doesn't continue to lose ground. This missed dividend payment does add a whole new wrinkle to owning DRW.

As you know, I'm retired; I need income. One of my favorite ETFs is DRW (WisdomTree Global ex-US Real Estate Fund.)

Let me make one thing very clear: This is not a buy recommendation. I am not a financial adviser. I am just a retired fellow trying to make ends meet. My investment in DRW goes a long way to enabling me to pay my bills.

DRW is presently yielding about 13.47% according to the ScotiaBank. Nice. It is up about 22.73% in the past 12 months. Nice, again.

I worry about the fiasco in Greece and how it might impact on my investments should Greece implode, possibly taking some of the other PIGS (Portugal, Ireland, Greece and Spain, possibly Italy) with it.

There is nothing I can do about that whole problem. It may blow; It may not. (I've got a strong feeling that the situation in Greece is a long way from being solved.) I've got a chunk of my portfolio in cash in order to weather a financial storm. And if my investments like DRW continue to be cash cows, I can go a few years without dipping into my principal.

And if there is a second big dip? I'm going to get burned — badly. On the other hand, I've got stuff in my sights to buy and I've got the cash to do it. Buying on the big dips makes a lovely profit-filled purse out of a sow's ear.

I'm watching Emera as a possible stock to add to my dividend-rich portfolio and AUSE as a possible ETF to add. During this recent, and still continuing, pullback in the markets, I've switched about one percent of my holdings into the TD Monthly Income Fund. My goal is to have 15% of my portfolio eventually in the TD fund and possibly as much as a full percent in Emera and other one percent in AUSE.

Good luck and good investing.

Thursday, June 23, 2011

I'm upping my cash holdings

The European markets falling today.
I'm retired. My RSP is my financial lifeline and it is tied to nothing but equities and one very small GIC.

The GIC is so small that until I started writing this post, I had forgotten that I even had it in my portfolio.

The market has been soft for awhile with very low trading volumes. A good friend, also retired, recently went to cash. He's pretty astute and I took his move as a cautionary warning about the health of the market.

Now, the markets have begun to pull back and I have begun to follow my friend's lead, but not to the same bold extent. I am converting some of my portfolio to cash.

My RBC O'Shaughnessy mutual funds no longer fit my portfolio allocation plan and I was holding them only to reap the reward of a continuing recovery after The Big Fall. The recovery seems to have reversed and it seems like a good time to bail. A lot of the economic indicators are negative and Greece is looking more and more shaky.

My Mawer World fund, one of my favourites, a little gem in my book, has also been liquidated. I can't say dumped. The O'Shaughnessy funds were dumped. (I also dumped my TD e-funds. Not a one had recovered completely since the crash and they were not paying the dividends demanded by a retiree.)

My cash holdings are now a little better than 10 percent of my portfolio. Will I sell some of my ETFs and lighten my exposure to equities even more? Maybe. I'll let you all know if I do.

If this has been nothing more than a correction, I'll take this as a chance to refashion my portfolio closer to my allocation plan. If this is a double dip, I now have the cash to take advantage of a bad situation by buying good stocks at low cost. This should increase my chances of having my portfolio make a speedy recovery.


Tuesday, April 5, 2011

Bonds not always "safe"

When I first started managing my own retirement portfolio at the urging of a consultant at TD Canada Trust, I trundled off to the library and for a stack of books on investing. I quickly read them all and the ones I really liked I bought. One piece of advice was in every book --- keep a portion of your portfolio reserved for bonds.

In my original allocation model I had about 40 percent of my money in bonds in the form of XSB, the iShares short term bond ETF.

Unfortunately, when interest rates nudged upward the value of my bond-based investments nudged lower. I made the error of deciding that  interest-wise I'd do better holding stocks and I dumped all my XSB and moved into equities. This has proven to have been a lucky move. I say lucky because I made out like the proverbial bandit but I hardly think such luck should ever be mistaken for wisdom.

And I must confess when interest rates crashed, the bond ETFs I had held regained their value, climbing back on their old perch. But the bond climb did not come close to the amazing return of my stocks over the same period and so I consider myself lucky.

Well equities, especially many of the ones that I am now holding, have recovered quite nicely and I'm beginning to think about bonds again. But, I am only thinking about bonds; I am not rushing into buying them.

Why? As interest rates climb, bond funds and bond ETFs fall in value. My understanding has been that the longer the average term of the bonds held by a fund, or ETF, the steeper and deeper the fall. According to an article in The Globe and Mail, Bond lovers: Prepare to feel some pain, it is a little more complicated than that but calculating the potential loss is easy if not totally accurate.

Rob Carrick, of the Globe, writes that to determine the potential change in value of a bond fund one must first determine the average duration of the bond fund or ETF. Find that number and you know how many percentage points the fund or ETF will fall if rates climb by one percentage point (the opposite applies, too). To find the average duration he says:

"Bond funds: You may be able to find the average duration for the portfolio in the monthly or quarterly profiles that fund companies make available on their websites.

Bond ETFs: Check the online fund profiles or fact sheets available on exchange-traded fund company websites."

The weighted average duration in years for XSB is 2.61.
I took Carrick's advice and went to the iShares overview of XSB. I discovered that the weighted average duration in years for this ETF was 2.61.

So, if interest rates rise one percent, this fund could be expected to lose 2.61 percent. Ouch! (On the other hand, equities don't even feel they are in a correction until they suffer losses four times that amount.)

Out of curiousity I checked the distributions for this ETF. It didn't even pay a dollar. This accounts for the current yield of only 3.1 percent. I noticed that this was much higher than the weighted average yield to maturity of 2.37 percent quote on the iShares website.

According to the globe, the current yield is not the best yield number for investors to be use. John Heinzl of the Globe has a video, Don't be fooled by bond ETF yields, and he will walk you through the bond yield maze. When Heinzl is done, he seems to come down firmly on the side of yield to maturity rather than current yield. Watch the video and see what you think.

All I know for sure is that when it comes to XSB neither current yield nor yield to maturity is paying enough to attract me. I need more yield. I have bills to pay. I'll take my chances in the equities arena for a while longer with hopes interest rates will climb and the entry cost to get into the bond fund/ETF game will drop.

Maybe I'll get lucky again.

Monday, April 4, 2011

Allow me to bring Emera to your attention.

Going with the herd can be good if you pick the herd carefully. Click to enlarge.
I'm a dividend investor. I sincerely believe that for most of us dividends are important. Markets can go up and markets can come down. It is not unheard of for one to buy into the market, ride it up, then down, and a year later have nothing to show for months or years of staying invested --- that is if you bought a non-dividend paying stock.

While saving for retirement, I suggest taking those dividends as they appear and immediately reinvesting them. Keep that dividend money working.

Retirement is another game entirely. In retirement you need money to live but you don't want to be cashing your investments constantly. At least, I don't. For me dividend investing is the answer.

In theory, I like ETFs and low MER mutual funds. In reality, I like anything that I feel confident in owning. With ETFs and funds I gain confidence from the rich mix that makes up the ETF or mutual fund portfolio. One mistep by one company is well buffered by the mix. With single stock investments, I say keep the amount invested a small percent of one's portfolio and a mistep will only stub your financial toe and not drop you to your knees.

Please keep all the above in mind as I tell you about Emera (EMA). Emera is one of the stocks on the ScotiaMcLeod Canadian Income Plus Guided Portfolio. It is in the utilities sector and carries a low risk ranking. It's price has been in the $31.70 area recently but it has a ScotiaMcLeod target value of $35. EMA pays a dividend of about four percent. I'd like more, but I can live with four.

If you can live with four and EMA fits your allocation model, maybe this is a buy for you. Do a little research and see what you think.


Friday, April 1, 2011

Buy, sell or hold: Making investment decisions.

The post today is based on a feature in the ScotiaMcLeod Investment Portfolio Quarterly (IPQ) from the Summer of 2010: Investment Pitfalls and Opportunities: Replacing Psychology with Discipline

This feature was written by:
  • Justin Kusinskis, CFA – Associate Director, Portfolio Advisory Group, Fund Research
  • Carolyn Tsai – Associate, Portfolio Advisory Group, Fund Research
Kusinskis and Tsai wrote:

"We continue to live in interesting times – and it seems the times in which we live get more interesting with each passing month. From a high-level perspective, the world (at least economically speaking) is not in great shape."

Over the last couple of years investors, skittish after financially taking a bruising beating in the crashing market of 2008, have been largely avoiding equity funds. Money market funds were used heavily in mid-2008, then they, too, were redeemed in the fall as confidence collapsed lockstep with the Lehman collapse. These money market funds were later repurchased.

As the market recovered, people redeemed their money market funds, but instead of going into pure equity funds, they chose balanced funds and bond funds. The trend was towards a more conservative approach to investing.

Kusinskis and Tsai concluded:

  1. Investors have not had the confidence to return to pure equity funds, even as the market
    experienced a recovery from March 2009. This is not consistent with previous up markets where
    investors would pile into equities as the market was rising.
  2. Further, the investment choices of balanced funds and bond funds are
    considered less risky options. Given the significant volume of flows into balanced funds and
    bond funds over the last two years, investors have clearly indicated they have a reduced appetite
    for risk compared to previous periods.
  3. It seems investors are reacting more quickly to negative market activity, perhaps an indication of suffering with the last market decline in late 2008 and early 2009, and not wanting this to happen again.

Is any of this ringing a bell? Does it sound like the closing bell of the stock market? I know that I have rejigged my own portfolio allocation to reflect a full 15 percent investment in the TD Monthly Income fund and another full 15 percent in the CIBC Monthly Income fund. 30 percent of my money now resides in these two balanced funds. I freely admit these two funds are my security blanket as I invest the other 70 percent of my portfolio in equities, mostly Canadian but about 26 percent is invested outside the country.

I had no idea I was part of a financial stampede. According to the authors:

"Standard economic models assume individuals are rational and will try to maximize their benefits and minimize their costs."

However, studies have shown that investors are not always rational. Stampedes aren't rational. Investors can be driven by a strong aversion to loss, driven by herd mentality and by something the authors call availability bias.

Loss Aversion: the intense emotional response individuals feel when confronted with losses versus
gains of equal magnitude. Generally, the pain of a loss is approximately double the pleasure generated by a gain.

This is why investors pull out of the market after suffering a loss and hestitate before re-entering. We see the effects of loss aversion when investors grow timid about equities, deciding to sit on large cash balances. Enjoying the "comfort" of the sidelines has a significant cost in missed investment opportunities. Comfort doesn't come cheap.

Kusinskis and Tsai  write:

"Investors must realize that staying invested is crucial in helping them meet their long-term financial goals."

Another symptom of loss aversion behaviour is the tendency of investors to realize gains quicker than
losses. Whoa! Does this sound familiar. All too often I've bailed on a good investment after holding on for eons while it flailed about lost in the financial wilderness. This predisposition toward "get-evenitis" can take a real toll on a portfolio.

Folk like to say that a loss is not a loss until you sell and lock in your loss. Not completely true. Sell a dog and take the money from the sale and invest in a winner and you will have far more in the end than simply holding on and hoping desperately to "get your investment back."

It took my financial adviser at the ScotiaBank to make realize that I should dump the Yellow Pages Fund and move on. I did and have never looked back. I took my money and bought Trinidad Drilling (TDG). It was about five bucks to get in and I got out when it pushed eight. If I had held a few more months, I'd have gotten nearly ten dollars. As it was, I got my Yellow Page money back; I just didn't use the Yellow Pages to do it.

It turns out it is not just me who finds it difficult to accept losses. The tendency to sell winners too soon and to hold on to losers too long, is widespread. Everybody wants to at least get even despite the fact that the original rationale for purchasing the stock no longer appears valid. Take your licking like a man and cut your losses.

One needs a well honed sell discipline as well as a solid buy discipline.

Herding: the tendancy to follow others. Often this is a response to uncertainty and a belief that the
crowd is better informed than we are. All too often we lack confidence in ourselves. Symptoms of herding:

  • Making investment decisions frequently.
  • Investing in hot stocks/funds because they’re “popular” and selling them when they’re “out of favour”. (This leads to “buying high and selling low”.)
  • Basing investment decisions solely on the opinions of others. You must look under the hood before you buy the latest and greatest hot-rod stock.
"It is easy to get caught up with a particular investment opportunity, particularly when people see
friends/relatives making a lot of money on a particular stock or fund. The idea that the individual is 'missing out' on the opportunity can be too much to bear, causing them to buy the investment while (more often than not) it is expensive."

For multiple reasons, herding is probably one of the worst investment approaches to take.

Availability Bias: is an overreaction to the latest news. Investors suffering from availability bias give too much weight to readily available information. Symptoms of availability bias:

  • Choosing mutual funds that are heavily advertised or stocks of companies that are frequently in the
  • Overreacting to good/bad news.
  • Believing an “opinion” to be factual.

So, how can we avoid being our own worst enemy? In a word: discipline. Don't be a loss averse investor, or a herd follower but instead one must be a disciplined investor. The disciplined investor follows a systematic investment process which interestingly utilizes the same financial inputs as the loss averse investor, and the herd follower.

A research study by Kusinskis and Tsai looked at how these three types of investors, each with a portfolio of a hundred grand, would fare when confronted with a real life investment situation. For the full details, read the report in the IPQ, starting on page 24.

The loss averse investor did not rebalance on schedule and sold equity and bond investments to purchase  a money market fund near the trough of the market, with the result that the loss averse investor had $110,485 after five years for an annualized return of just 2.01 percent.

The herd follower used all available cash to buy equities as the equities were rising. In other words, this investor bought high. As equities continue to climb, they sold their bonds to buy more equities. They were buying even higher. When the market soured, they followed the herd, sold all their holdings and moved into a money market fund where they joined the loss averse investor, with the result that the herd follower only had $92,622 after five years for an annualized return of -1.73 percent. With no investment plan, no rebalancing, and continuing to buy when the market became increasingly expensive, this investor fell into the classic “buy high and sell low” trap.

The disciplined investor decided on a portfolio allocation before anything else. They created a portfolio that adhered to the plan with 60 percent equity and 40 percent bonds. They systematically rebalanced every Dec. 31 each year. With their financial bed carefully made, they were content to sleep on it. They accepted their losses as an expected part of investing and stayed invested for the entire five years. They didn't deviate from their 60/40 allocation.

The big surprise was the magnitude of the outperformance experienced by the disciplined investor versus the others. The disciplined investor had $139,537 at the end for a 5-year annualized return of 6.89 percent.

The disciplined investor had established the appropriate asset mix right at the start and stayed invested throughout the five years, systematically rebalancing once per year back to the 60/40 split. For example, in one of the years, equities appreciated in value to make up 66% of the portfolio, with the bond side of
the portfolio comprising 34%. At rebalancing time, the investor sold the overweight in equities (selling while equities were higher), and used that capital to purchase more bonds (buying while bonds were comparatively lower). Over time, the disciplined investor systematically was buying low and selling high.

One other interesting point, with our disciplined investor they were able to generate virtually the same
return as the market with about half the volatility (given the 60/40 mix as opposed to the market’s 100%
equity weighting) – the result – better risk-adjusted returns.

Bailing completely out of a collapsed market and staying out is the killer.

Kusinskis and Tsai summarized their work: 

"Ultimately, most of us are aware of the benefits of disciplined investing. Numerous historical studies by notable academics have been well-documented, and more times than not, have supported the employment of disciplined investment processes. Unfortunately, human nature can be a powerful inhibiting force to sound logic.

Our advice: Do your homework up front . . . and systematically rebalance at regular intervals. Revisit your objectives on a regular basis, and try not to get caught up with shorter-term performance – use times of weakness and uncertainty to add value to your portfolio."

If this review interested you, check out the complete report. Click here.

Preferred shares for portfolio income and stability: Oh?

This post was updated in mid-September of 2015.

If you haven't gathered this by now, let me make one feature of my investing philosophy very clear; I make dividend paying investments the bulk of my portfolio. I am constantly on the prowl for good, solid dividend paying investments. I like them to come highly recommended and to fit into my portfolio like a puzzle piece. In other words, they should fill a demand, a financial need.

When I read the oft-repeated claim that preferred shares add both income and stability to a portfolio, my interest was piqued. I bought into the claim and bought a little CPD. It was a small mistake and only small because I only bought a small amount. Check this screen grab from the WebBroker site taken some years ago (at the time I made my investment).

Four stars, selling at a discount and a nice dividend; Worth a look.

At the time, the Claymore S&P/TSX CDN Preferred Share ETF rated four stars from Morningstar and delivered a very nice dividend. The dividend, paid monthly, wasn't high enough to make the earth move, but I could take pleasure from receiving it ever month. I checked the Performance and Risk screen. I got on board and bought a ticket on the CPD express: a mistake.

Low risk does not mean no risk.

Low risk with an average return: sounded O.K but it wasn't true. Since taking that screen grab, CPD has dropped from $17.38 to $13.59. This is bear market territory. Anyone riding this ETF down to its present value would not say this investment added stability to their portfolio. And a similar screen grab today shows CPD to be rated now as a "high risk investment." The only redeeming change, and it is a small one, has been  the increasing yield percentage resulting from the loss in value. The yield is up a fifth of one percent. This is not enough to compensate for the losses as the value of the ETF dropped through the floor.

I'm sorry I bought the small amount of CPD that I did. I now understand it was the wrong investment for a tax sheltered account. As I am now removing funds from my SDRIF annually, I will be moving CPD to a non-sheltered account to take advantage of the tax advantage enjoyed by the CPD dividend income. I will not move CPD into my TFSA.

I have found a number of posts with good info on preferred shares. Here are some links and I'd click them, read them and learn. -- Cheers!

The impact of rising interest rates

The gentleman writing the above article warns readers that "in their quest for income security, investors have unfortunately been paying a high price that could lead to capital losses . . . "

The role of preferred shares in your portfolio

This a great in-depth take on preferred shares. Note the advice: Only own in non-registered accounts as their largest benefit is their tax-advantaged dividend income. . . . preferred shares are not appropriate for tax-sheltered accounts such as RRSPs or TFSAs.