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.