Wednesday, March 30, 2011

Spreading your bets

Let's be honest, if you're in the market you like a little spice in your investment life. If you don't, maybe you should be buying bonds or GICs.

Once we agree that you crave spice, the big question is: "How much?" Do you like your investments mild, medium, extreme or "erupting volcano" hot?

I used to go for mild but was disappointed by the lackluster returns. I have a friend who likes hot and spicy, volcano hot. When he is on a roll, wow! When he isn't, man his returns are downright depressing.

I've learned to mix my investments to get just the right degree of spice. Check out the three investments that I have posted today: Inter Pipeline, Polaris Minerals and Discovery Air.

When the markets were at their lowest, I bought IPL.UN. Solid company, lots of upside, everybody's favorite. The good monthly dividend and the promise that it would continue well into the future was the icing on the cake. I bought some IPL.UN for both my portfolio and for my wife's.

IPL.UN has done well but that is no surprise and so adds no excitement to my investments. A wise investor, at least a sensible and cautious one, might stop with IPL.UN. I like the fun of a financial fling. I noticed that Discovery Air was selling for mere pennies. This is a good airline that flew into some turbulence. I saw quality selling at a low price and bought.

Polaris Minerals, a relatively new company that came into the world with great promise, has tumbled from a value of about ten dollars to a bit more than a buck. The great promise is still there but followed by a big, question mark. I bought some PLS knowing full well that this might be a mistake. Today the promise is sounding more and more hollow. I know folk who owned PLS who have bailed. Maybe I should too. But I can afford to lose a little and rooting for this little underdog adds the little bit of excitement to my portfolio that I seem to need.

Today, I don't own as much IPL.UN as I once did. I took some of my profits. I don't feel comfortable with too much exposure in one company. I also sold enough DA.A to get back my original investment and I've come very close to parting with my remaining shares. Polaris is down and could go lower, and if it doesn't turn around this summer, I'll probably move on. But taken together, these three have made my investment life both exciting and profitable.

Click on image to enlarge. Numbers on right  show gain/loss percentage.

Tuesday, March 29, 2011

What's the yield? 2.6% or 9.2%? Who's right?

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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.
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Recently, I wrote that I owned DRW, WisdomTree International Real Estate Fund. I said that I was quite content with it as an investment even though it proved to be outrageously volatile during the recent crash of global markets. I think I lost over 60 percent of the value of my investment. (I bought more!) What eased the pain was the dividend, I wrote.

The dividend? The dividend didn't seem all that good to one reader who stumbled upon my blog. They did some research and told me the dividend "sucked."

Click to enlarge.
I'm not surprised that they were not impressed with the numbers. According to the Globe and Mail, DRW has a yield of 2.6 percent. A painfully low yield for an investment that could easily drop by a third in another serious downturn. A 2.6 percent yield hardly covers inflation.

How did the Globe calculate the annual yield? My guess is that they took the March 2011 dividend, 18.2 cents, and treated it as if it was reflective of every dividend payment to be made in the coming year.

This approach works for lots of companies. The Canadian big banks readily come to mind. For instance, the Royal Bank pays a dividend of 50 cents four times a year.

This approach does not work for DRW. The dividend for this ETF changes with every payment and historically it is much, much higher at the end of the year. The December dividend can be more than the other three dividends added together!

Last year DRW paid:

  • March: 16.4 cents
  • June: 51.5 cents
  • September: 21.4 cents
  • December: $1.768

And the December dividend was not unexpected. A year earlier the year end dividend was $1.687 and the year before that it was $1.954.

I fully expect to see a yield on my investment, a yield on my trust in DRW, of about 9.2 percent, more or less.


Monday, March 28, 2011

Mutual Funds: My love has cooled, but I'm not movin' on, yet.

A few years ago mutual funds were all the rage. The market was the place to make money if you knew what you were doing BUT . . . The big but was "but most of us didn't know what we were doing." The answer was to entrust our investment money to some folks who did know what they were doing. In return for earning us big bucks in the market, these experts would take a percentage of the money to cover their costs and pay them a handsome income.

Well, we all soon learned a few things. First, the experts weren't all that good at making pots full of money. In fact, many of us felt that we could have done as well without them and saved ourselves all the associated costs, called MERs, to boot.

The Management Expense Ratio (MER) is composed of the multitude of expenses incurred by a mutual fund during the year. If you could magically do away with MER, you could up your return by that percentage. On paper some of the expenses that contribute to the relatively high MERs reported by many actively managed mutual funds seem to be expected, necessary evils: research, salaries, marketing.

Yet, in truth, many mutual funds that simply follow an index perform as well as the ones that are actively managed. If an index fund boasts a MER of .5 percent opposed to its counterpart in the actively managed sphere, which may have a MER of 2.5 percent, the index fund is 2 percent ahead of its actively managed competitor right from the get-go. This is a big handicap and most actively managed fund never get over it. A high MER is a killer — for you, not for the managers.

As I first openly confessed last year, during my mutual fund stage I got burned time and time again. One of the funds that I bought wayback when was the RBC O'Shaughnessy US Growth fund. It came highly recommended with lots of stars. Sadly most of its stars fell from the investment sky and today only 2 stars remain dimly glowing.

Last year this fund was perfect, perfectly bad.
When I first talked about my disastrous foray into this mutual fund, I was down 57.07%. Today I am down only 43.56%. Last year I wrote that I continued to hold the fund because nothing in life is perfect. Surely this fund cannot keep its perfect losing streak going forever, I wrote. And I was right. It is now on a tear!

This is an interesting turn of events. Do you recall the book How to Retire Rich by James O'Shaughnessy? I do.

According to Common Sense Advice:  

"Jim set up a set of mutual funds a few years back, promising to use his strategies in the funds. Of O'Shaughnessy's four original funds, only one beat either the Standard & Poor's 500-stock index or its average comparable fund, as measured by Morningstar. And that one, Cornerstone Growth, prevailed by a sole percentage point."

What went wrong? Read what Efficient Frontier has to say:

"Consider the performance of poor Jim O'Shaughnessey, who sliced and diced historical stock returns in a dizzying variety of ways, coming up with impressive excess returns [on paper]. How well have his funds done as a group in real time? Don't ask."

So, why do I hold on? I don't want to make the same mistake on a big scale that I made on a small scale with my block of silver. I held that 100 ounce brick for years. When the price broke free and started to climb, I sold. In just a few months, the price has almost doubled. Oh, I got out with my shirt but I could have gotten out with a full wardrobe.

Check the screen grab below on RBC O'Shaughnessy US Growth. Look at the comparative performance. For the last six months this fund has been on a roll. It has been sitting right at the very top of it's category for the past six months.

I say, don't sell the leader of the pack. But such a herculean effort will not go on forever. The day will come when this fund will tumble from its perch. When it falls deep into the yellow, the green or even dives to the blue depths, I'll dump all I've got, find a good US ETF paying a good dividend and be gone. (This fund makes up part of my U.S. investment allocation. If I sell, I should replace it with another American investment to keep my allocation goals on track.)

Remember, if you click the ScotiaMcLeod Research image, it will enlarge. If you click it again it will be full size and easy to read. Cheers!


Friday, March 25, 2011

Why I like DRW. A personal fave.


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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.
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When ETFs based on International REITs suffered staggering losses in 2008, I lost almost 60 percent of my investment in DRW.

That loss is why I like DRW today.

Since that time International REITs have enjoyed a decent comeback. Some have called their climb in value dramatic, but as I'm still down on this investment, I call the returning value decent, maybe even solid, but certainly not dramatic.

And that is another reason why I like DRW today.

A number of very famous retirement fund managers have said that REITs are a big part of their approach to running a solid retirement fund. The dividend flow, and the positive edge imparted by the real estate connection, are among the reasons for their enthusiasm. If the folk famous for success speak highly of REITs, who am I to disagree.

For Canadians the obvious ETF REIT play is XRE from iShares. It's the lazy investor's way to play the REIT game in Canada. If you've got the money you could easily buy a lot of the composition of XRE directly and cut out the middleman. Another lazy approach for Canadians is to buy ZRE, the Bank of Montreal equal weighted REIT-based ETF.

Owning one or both of the above takes care of one's investment in Canadian REITs. Adding an ETF like DRW delivers the following benefits.


  • DRW offers international diversification and diversification is one of my core goals. The more the merrier.
  • DRW, like all REITs, offers a hedge against inflation.


So, why DRW? Well, as this chart from Seeking Alpha shows, it is among the leaders in the sector at the moment.


As this chart from my TD Web Broker connection shows, DRW is rated "Average Risk." Being retired, average risk in the most risk that I like to confront.


Also note, the daily sales volume. It is 34.6 K. This, and the total net assets, is enough to keep DRW from appearing on the ETF Deathwatch list.

Lastly, let's look at this chart from my TD Web Broker connection.


Check the Dividend per Share: $2.68 annually for a yield of 9.22%.

Conclusion:

The way I have it figured, and I admit I could be wrong, DRW does not have a fierce downside at the moment, as it has not fully recovered from the beating endured during the recent recession. If it does get smacked down again, it's yield can be be slashed and it may still deliver the 4 percent yield I look for from my investments.

I presently own 500 shares of DRW and expect to see an annual cash yield of more than $1200.

I am presently letting my dividends accumulate in anticipation of a possible correction. If a 10 percent correction hits, DRW will be on my short list of investments.

To round out this post, let me say I also own some VNQ, the Vanguard REIT Index VIPERS ETF. This is rated a 3*** ETF by Morningstar with above average risk. I don't own a lot of VNQ but I do have some. I like the Vanguard name and I wanted the diversity offered by this ETF, almost 100% pure U.S. play.

Tuesday, March 22, 2011

Could I just put everything into a Canadian bank monthly income fund?

The short answer to this question is 'yes'. For an example, look no farther than the TD Monthly Income fund. (Click on the posted graph to enlarge.)



When I originally wrote this, I had been retired for a little more than two years and had removed 9 percent of my original investment in order to live. This left my portfolio up by about 46 percent since retiring. I was happy but realized the market had been making a mad climb into the financial stratosphere ever since I left my job in January of 2009.

Nothing goes up forever and I wondered when the stock market correction would hit. A good friend, and a wise investor, was selling off his stock holdings as he wanted cash at hand to take advantage of what he saw as the coming correction.

I, too, had started converting my non-dividend paying investments into cash in order to take advantage of any big dip. If there was a dip, I could buy low; If there was no dip, but the market just charged on, I'd withdraw cash to live and leave my big dividend producers untouched to enjoy extra growth.

If you have followed this blog at all, you will know that I have an ongoing love affair with the TD Monthly Income fund. I've been a little unfaithful as I have also dabbled in the CIBC Monthly Income fund, too. These two mutual funds anchor my portfolio and supply me with a big chunk of income (CIBC fund) and capital growth (TD fund). But I have wondered whether I could just put everything in a couple of monthly income funds. It certainly would make life simpler. Maybe I possibly get by with just one: The TD Monthly Income fund (TDB622).

Is this possible? The short answer is 'yes'. The long answer is yes, sometimes. For the first years of my retirement, I managed my own portfolio and my portfolio outperformed the TDB622. But this all came to a dramatic end in 2014. The TD fund not only outperformed me by a wide margin but it also outperformed all the lazy investor ETF-based portfolios I follow. Despite the MER of 1.48 percent, the TD Monthly Income fund was the winner.

Check out today's art. (Click on the graph to enlarge it on your screen.) It shows what would have happened if you'd have put $400,000 in the TD Monthly Income on the day it was born and removed 5 percent annually on the anniversary of your investment. I figure one could have removed as much as 8.85 percent of the original investment every year and today still had the original investment intact. Note: this does not take inflation into account. Your original investment would not have the same buying power today by a long shot. 5 percent is a more sensible number.

If you want to play with the calculator that I used, you may find it here. I say may because who knows when the TD Bank will change its Website. TD Asset Management mutual fund calculator.

Cheers!
Rockinon