Retirement thesis being tested

When I retired I made a bet. I bet that putting all my money into the market would yield the best income for me and my wife. So far, my thesis has worked. Oh, I've modified my holdings over the years, I've jettisoned my bond funds and bond ETFs and made other changes, but I'm still guiding my retirement portfolio and it is heavily into Canadian income-producing stocks.

This year the market has not been good to me. Come January 1st, I can envision being down 10% or more from where I was just one year earlier. This sounds bad but it is not as bad as it sounds. I will still be up something like 55% from where my holdings stood at the time of my retirement in early 2009.

The big test of my retirement plan will be my dividend income. If my revenue drops substantially, making it impossible for me to pay my bills, my thesis will have failed. If I get through the market down time with my finances intact, I will count this as a win.

But win or lose, I will be reallocating my money, I will be making changes to my holdings yet again. I may get back into bonds. I will definitely take on more exposure to the States, at least in my RIFs. I will spread my bank investments among more financial institutions and not be so concentrated in just three banks and one insurance company. I'll take some time to carefully increase my exposure to utilities. I will again consider ETFs and possibly cut back on my direct ownership of specific stocks.

Stay tuned.

I'm liking Morguard North American Residential Real Estate Investment Trust MRG.UN

I'm liking Morguard North American Residential Real Estate Investment Trust  MRG.UN

I've been playing with the screener software supplied with the TD WebBroker self-directed account. One stock that keeps appearing on my screens is Morguard North American Residential Real Estate Investment Trust (MRG.UN).

I began looking deeper into this REIT. I'm liking what I'm finding. I  discovered that the TD analyst believes the present and future growth is not being reflected completely in the current share price. MRG.UN is rated a BUY with a Target Price of $18.50, up from $18.00.

Morningstar calculates a Fair Market Value for this stock of $18.32. I always like to pay less than the fair market value, if possible. At this moment, MRG.UN is selling for $17.43. Despite today being a down day, MRG.UN is up .81% .

The profit margin is 95.84%, well above the industry average. The ROE is 25.23%, more than twice the industry average. And despite yielding almost 4%, the payout ratio is only 10.35%.

As usual, all the numbers are not as good as those mentioned but reading the figures leaves me with confidence. It this stock takes a dip, I'll try and buy a few hundred shares. What would it take to make me a buyer? I'd like a yield of 4%. I'm retired, I need the cash flow to live.

Note: I am talking about Morguard North American Residential Real Estate Investment Trust (MRG.UN). I am NOT referring to Morguard Real Estate Investment Trust (MRT.UN). The one is MRG and the other is MRT.

EMA: Yup. Buy EMA on the dips.

EMA (Emera), a utility, is one of the few really bright lights in my portfolio at the moment. I'm up more than two thousand in just a very few months. My portfolio desperately needs that boost.

This morning I read that Emera his a price target of $48 at BMO Capital. The utility has been doing well and is rated by many analysts as an Outperform. I took another look at its numbers. All is not perfect, then again, that rarely happens. But a lot of the usual signs of financial health are there. For instance, the ROE (Return on Equity) is 9.06%. This is well above the industry average of 3.8%.

ROA (Return on Assets) is also good. The ROA of Emera at 2.07% is greater than that of many of its peers. The industry average is 1.28%.

If you go down the list of posted numbers, you will find some to give one pause but stop, take an in-depth look, and all seems reasonable. I won't be buying more, I have filled my quoted for this stock, but, if I  did not have any holdings, I'd be watching the dips for a buying opportunity. Heck, with a big enough dip, even I might pick up another 100 shares to make a quick profit.

For my kin: I own both stocks but I only like one.

I put the thoughts below to 'paper' this morning. Then, as the day unfolded, I watched Inter Pipeline (IPL) lose 2.83% or 66-cents. A stock, highly recommended by a number of 'expert stock pickers', was shrinking when it came to stock price and I was writing it off because of its high dividend payout ratio. Is this really the best way to play this, I wondered. (The dividend is now yielding 7.55% annually with a payout ratio of almost 109%.)

Should I be looking more deeply into IPL's financial strengths? One wants to buy on the dips. Here was a dip. Should I be adding to my position? If this leaves me overweight, I can always sell as the stock climbs, if it climbs.

I've decided to find a book I read some years ago on evaluating companies and the balance sheets. Tomorrow, or the next day, I may rewrite the following post. Who knows, maybe IPL is worth buying. Let's learn together.

Stay tuned, kin.
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When you have a self-directed investment account you have a wealth of information available to help with your stock picking. I like to check out the Action Notes Summary from TD WebBroker every morning. An Action Pick is worth a look, a Buy is a hold, a Hold is iffy and a Sell is run-away-fast.

Today two of my holdings appeared on the equity research list: Emera (EMA) and Inter Pipeline (IPL). Emera can be picked up for just less than $43 today. I paid something close to $40. TD has a target price of $48, up from $47. Inter Pipeline is now selling above $23 and heading for $31, if you believe TD. I paid a couple of bucks more and I'm in the red on the purchase at the moment and it got redder as I wrote this.

On the plus, IPL pays $342 annually and EMA delivers $1410 annually. Why the big difference? I own three times as many shares of EMA as I do of IPL.

It is not only TD that likes EMA. Morningstar has EMA on its Canada Core Picks list. It is a four star rated stock with a Morningstar fair value of $46.

Would I advise others to buy these stocks? Would I increase my holdings? No, to the last question. EMA has a dividend payout ratio of 92.5%. That's a bit high. I'll hold. That said, if you don't own any EMA, buy a little on the dips. In a serious correction, EMA will drop but it will bounce back and pay you for your patience.

IPL may be a personal favourite but I would hesitate to recommend it. It has a dividend payout ratio of 109%. I've seen worse, much worse, but such a high ratio gives me reason to pause. I only hold 200 shares and I won't be buying more any time soon.

For my kin: Only buy with confidence

Look at the big picture. If overall you're up, don't let a few losses get you down.

Some months ago I started amassing cash. I was sure a correction (10% drop), or even a bear market (20% drop or more), was coming. It didn't and I finally tired of watching stocks climb while I sat on the sidelines. I bought. And the correction arrived. I'm down on a lot of money on my recent buys.

In the past, I've done very well buying Canadian banks. I felt very confident when I bought 300 shares of TD. I have now lost hundreds and I may lose even more in the coming weeks. One bright thought among the gloom: Canadian banks don't tend to cut their dividends -- ever. If the dividend isn't cut, I can hold on indefinitely. I support my wife and me in retirement thanks to the dividends.

I  owned Inter Pipeline, IPL, in the past and I was well rewarded for buying and holding it. After more than tripling my money, I sold. A big mistake. I should have taken my original investment, plus a bit of a profit, off the table and left the remainder to ride. It would have made a very nice core holding.

When IPL dropped about a third from its recent highs, I bought back in at the lower share price. I had confidence thanks to my past success with this stock. I even paid a little less per share to buy back in compared to what I was paid when selling out. I only bought a fewer shares and considered this correcting the mistake I made when I jettisoned all my IPL holdings.

IPL continued to drop. I had caught a falling knife, as they say. I am now down hundreds of dollars. Some say the dividend is safe but others are not quite so sure.

Did I buy anything else? Yes: Ontario Hydro (H), Pembina Pipeline (PPL), Shaw Communications (SJR.B), Emera (EMA) and Fortis (FTS).

I had confidence in all the stocks mentioned. Yet, all but EMA and FTS are down. Am I concerned? No. My earnings on Emera on Fortis are doing very nicely at balancing my losses suffered on my other buys. Both EMA and FTS are up in the four digits. When you look at the big picture, all is not so bleak.

But I haven't mentioned one purchase: Altagas (ALA).

I wasn't all that confident in Altagas. I had unanswered questions. I bought despite my misgivings and I got whacked. It is down massively, about $10 per share. Luckily, I didn't buy that many shares. My exposure is light even though my percentage losses are heavy.

I  expect ALA to slash its dividend by something in order of 60% and I expect it to liquidate a lot of stuff to bring its books more  inline with market demands. Will I be selling soon? No, I doubt it. After the dividend cut, I should be seeing a yield of about 4% and that new yield should be safe.

The word is that the dividend cut has already been priced in but I'm not so sure. It may drop in value again but I thing that that price may well establish a floor. I can foresee some bad endings to this story; forinstance, a buyout at much less than originally paid.

One stock picker, has ALA with a target price of $18. That's about three dollars higher than today's market price. But, I don't have a lot of faith in published target prices. The stock-picking experts miss the target all too often.

If something comes along promising a secure 4% yield paired with a promise of good future growth in stock price, I'll sell and move on. It may take some time to recoup my loss but I have confidence. (Note: there is always the chance that ALA will be that future stock. I bought Norbord in the $20s and then it dropped deep into the teens. I bought more and sold all in the mid $30s. Never lose heart.)

There's always tomorrow. In that, I have complete confidence.
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In a future post, let's examine what it is that gives one confidence.

For my kin: a final word on mutual funds

As you may have gathered from the tone and direction of my comments in the previous posts, I am not a big fan of mutual funds. I believe mutual funds are overpriced and under-performing. That said, some folk need hand-holding and a good mix of mutual funds will do that while putting some money in your pocket.

So, if you insist on investing in one or more mutual funds, watch the following:

• Pay as little MER as possible
• Do BUY no-load funds
• Do NOT buy front-end loaded funds
• Do NOT buy back-end loaded funds
• Do NOT buy a fund based on its name
• Do check a fund's past performance
• Do BUY a mix of funds: Canadian, U.S., International equities plus bonds

Check how the TD Dividend Growth fund has performed compared to the TD U.S. Equity Portfolio fund (TDB3092). Canadian Dividend is green line and U.S. Equity Portfolio is purple.

Having some exposure to U.S. equities is highly recommended, as is some international exposure as well.

An expert on investing, whom I have admired for years, writes a blog called: The Canadian Couch Potato. Click the previous link and read what he has to say about creating a couch potato portfolio using TD e-series mutual funds. To see a suggested portfolio mix click this link: Model Portfolio using TD e-series funds. The Couch Potato portfolio is an excellent guide to creating your own well balanced portfolio. One will not go far wrong just following the advice found on the Couch Potato site verbatim.

Still, I shy away from mutual funds. In my experience ETFs are a better bet than mutual funds. In my next post we will look at ETFs.

For my kin: what have we learned?

What have we learned thus far?

Well, we think we've learned that simply paying more for a mutual fund, in the form of a higher MER, does not guarantee better performance. We've learned that the name of a fund may not reflect how it has performed in the past nor how it will do in the future. Just because it claims to be comfortable guarantee that it will be. We've learned that sometimes owning two funds is better than owning just one.

Now, to throw a monkey wrench into all of it. How a fund has performed is based on the time frame under discussion. Nothing is certain in life and the stock market follows this maxim. All we know for sure is how our five funds performed over the time we've operated our sham portfolios. Let's take a look at a longer time frame. We'll only go back three years as one or two of our funds are quite new.

Over the last three years, the Dividend Growth fund (dark blue line) has outperformed all the others after getting past the hurdle of January 2016 when it dove to the bottom of the pack. That was a stressful time for some of those holding this fund but in the end the fund performed as expected. But, let's admit that stress comes with owning this fund. It gyrates up and down more than any of the others. It's a great ride, and in the end worth it, but many would be unable to hold on through the down times.

The Comfort fund comes in second but it's often bested by the Monthly Income and not because the Monthly Income has been such a stellar performer. No, the Comfort fund was simply not all that comfortable to hold. It was a bit volatile. In the end the Comfort fund and the Monthly Income finished in almost a dead heat.

Whatever happened back in January 2016 allowed the Retirement fund to shine. But note, it did so  only because all the other funds did so poorly. The moment the others gained their footings, they pulled ahead of the Retirement fund and never looked back. Today an investor in the Retirement fund has little more than what they originally invested. Is this the performance retirees want from an investment? If this is what makes them happy, maybe they should simply buy a  GICs.

Before ending this post, let's take a quick look at one other time frame: one year.

In this scenario, the Retirement fund is in first place. What I think is important to note is that it is in the red. Yes, the retiree investor would have been better off with a GIC. Heck, in the past year, they'd have done better putting their money under their mattress.

The Dividend fund is at the bottom. Hmmm. Every year I put money aside for my granddaughters' education. I usually stick it in the TD Monthly Income. Maybe I should consider putting a little in the Dividend Growth fund, too. I will definitely buy some units of the Dividend fund for my granddaughters when the next bear market hits.

In the past year, the Comfort has both lead the pack and trailed it. When one inspects its holdings, one can see the logic behind this fund. It is not a dog but it is certainly not comfortable. Aggressive? Yes. Comfortable? No. At one year it is being outperformed by the Monthly Income, a far more comfortable investment.

But do notice that all funds are down after one year. Not one of the funds being tracked is in the black. Trust me. If this were real money and it was yours, you'd be uneasy. Losing money is not easy. And the near future promises to be just as difficult, if not worse. The drop you see is not even a correction, which is a 10% drop. When the bear market eventually roars in bringing a drop of 20% or more in market value, the air will be thick with panic. If one is caught holding the wrong mutual fund, you may never get your money back.

This is what happened to my $4200 that I invested with Freedom Fifty about twenty years ago. The investment went down to $1700 and never fully recovered. I am still waiting for my $3150 guaranteed payout. If I had put the money in the TD Monthly Income fund instead, I'd have better than $14,000 today and it would be immediately available to boot.