Sunday, 21 August 2016

Investment metrics : Raising dividends

Another metric that I use when determining when to put my hard earned money to invest is raising dividends.  I like dividend investing, pick your stock, investigate whether it is fits your criteria to be in your portfolio.  Of course, neither me or anyone else can control whether the stock price goes up or down.  I would be lying if I only purchased stocks that increase in value.  That fact is, we can't control anything when it comes to the price of the stock.  What we can control is when to buy and dividends.  For a long term perspective, raising dividends appeal to me, a company that pays outs dividends has an obligation from the board of directors to maintain profits.  In fact, if a company hikes dividends on a regular basis, this translates into the board of directors having not only to maintain profits but to increase them.

An example of the type of chart to look for would be Fortis (FTS.TO).  Currently at a stock price of $42.95 with a quarterly dividend of $0.375 per share, Fortis' dividend yield is 3.49%  The dividend yield for any stock can be calculated by this simple formula.

Dividend per share paid times number of times paid during year / stock price

In Fortis' case, the calculation would be:

(0.375 x 4) / 42.5 = 3.49%

The formula can be changed easily when dividends are paid monthly as opposed to quarterly simply by change the 4 to a 12 in the above formula.

That being said, my ideal stock would have a dividend yield between 3.00% to 5.50%  This is what I would consider the sweet spot of dividend yields.  It gives you enough skin in the game and is also not being greedy.  There are tons of stocks with dividend yields above 5.50% but a high yield indicates a possible dividend cut.  Who wants that.

Here is a chart that sums up the last 4 years of dividend payments for Fortis:

Dividend Date
Aug 17, 2016
May 16, 2016
Feb 15, 2016
Nov 16, 2015
Aug 17, 2015
May 14, 2015
Feb 12, 2015
Oct 22, 2014
Aug 13, 2014
May 14, 2014
Feb 12, 2014
Nov 13, 2013
Aug 14, 2013
May 15, 2013
Feb 12, 2013
Nov 14, 2012
Aug 15, 2012
May 15, 2012
Feb 13, 2012
As you can, the amount of the dividend paid by the company increases once a year.  I like that.  If I was to go further back, I would see regular increases once a year.  Again I like that.  This is the type of chart I look for in a stock, raising dividends on a regular basis.

So along with my article on P/E ratios as an investment metric P/E Ratio  .  Raising dividends are another metric that I use to determine which stock my hard earned money I invest in.

Monday, 1 August 2016

Investment metrics : P/E Ratio

Another conversation happened recently.  "Peter, how do you know which stocks to pick?"  Well I will never advocate that I can pick winners every time.  But to at least know the basics of how to pick and what to look for as a "retail investor".  Since this term has been given to us by the real investors, aka the fund managers.  When a fund has a bad day, nothing really happens, they lose money and the fund manager continues with his life.  If a retail investor has a bad day, it can change your lifestyle if you are not careful.  That being said, to be careful, I use certain investment metrics to help me pick a stock.  This blog post will examine the investment metric called P/E ratio.

The P/E ratio or price-to-earnings ratio is likely one of the best known fundamental ratios, it's also one of the most valuable.  The P/E ratio divides a stock's share price by its earnings per share to come up with a value that represents  how much investors are willing to shell out for each dollar of a company's earnings.

P/E ratio

In the chart above, which is simply the big 6 banks in Canada currently and what their stock price is on August 1, 2016 along with their P/E ratio.  Why I am only using the same stocks in the same industry.  The reason being you can only compare P/E ratios of a similar company, that is where it is most valuable.  You could say it is comparing apples to apples and oranges to oranges.  I would not compare say a bank P/E ratio to a food stock P/E ratio.

So someone asks me which stock to buy that is the best bank.  Most investors have their tickers loaded into yahoo finance or google or even directly on their smart phone.  They right away say either TD bank or National bank.  TD trades at $56.89 and National trades at $44.71 so they are the cheaper stock, right?  That would be incorrect using technical analysis which includes looking at the P/E ratios.  I would answer that CIBC is the cheapest stock right now.  They answer, how can that be?  CIBC is at $99.19 which is almost double TD bank?

The answer lies in the P/E ratio.  CIBC's is at 10.88 vs TD Bank at 12.96  Simply put, investors value TD more than they value CIBC.  "Buy low, sell high".  Remember that old saying.  Using the P/E ratio, you buy lower valued stocks to sell high later.

Looking again at the chart, you will notice that BMO's P/E ratio is higher than the other banks by quite a bit.  Double CIBC's in fact.  This right away tells me that investors have rallied BMO stocks more than other bank stocks.  They think BMO will perform better than the other banks.  If you were to buy bank stocks today, I would take a double take at BMO and maybe avoid buying them using the P/E ratio as your guide.

At some point, you will come to the point of investing money into the bank stocks.  How much money tho?  $1,000? or $5,000?  Let's assume you are going to buy $5,000 worth of bank stock.  For BMO, that would be 58 shares, for TD that would be 87 shares and CIBC that would be 50 shares.  So basically you are buying $5,000 worth of stock but CIBC at $99.19 seems expensive?  It's the same amount of dollars invested, don't assume the stock price determines who is cheap and who is not?

Now you have a general understanding of using P/E ratio analysis to help you determine whether a stock is a buy or no buy.

Sunday, 17 July 2016

All banks or 1 bank portfolio

Recently I had somewhat of a reunion with old friends from way back in the day, it must have been close to 2 years since us 3 had a chance to sit down and just chat.  Eventually the topic of money, investments, RRSP, RESPs, etc came up.  Well both have been aware of my financial blog and one of them has been hearing of my speeches of money for I would say 4 plus years now.  My constant ramblings back in the olden days mostly consisted of the evil Mutual Fund MER.  Well to shorten the story, he took an investment course and the instructor even had worse things to say about Fees, Life Insurance, Investments, mutual funds, etc.  It literally opened his eyes, short of acknowledging my ramblings all those years, he has switched.  Well not completely switched.  "No more new money into mutual funds" was his final statement.  He's almost there.  He asked me if I am out of mutual funds, I answered completely.  He's almost switched over, he's shocked about fees.  Self directed accounts is all he has now.  I've explained my rational of dividend investing among other topics like technical investing (50 day Moving average, 200 day moving average, P/E ratios, etc).  Baby steps, baby steps.  If my ramblings open the eyes of someone in my circle and they save money, then I will keep rambling.

Onto my 2nd buddy.  Let's just say he works at a big 5 bank and leave it at that.  His major holding is guess what, a big 5 bank.  Now the question to me was, he has had contributions to his big holding for many years now and it has performed for him.

Before we get into this analysis,  I want to disclose that I own 4 holdings in the banks.  Bank of Montreal, Royal Bank, TD Bank, and Laurentian Bank.  And as consistent with my previous articles, I own enough shares to drip 1 share with the exception of TD, which I drip 2 shares every dividend payment.

Canadian Banks are unique that they operate in an oligopoly, where the sheer scale of them makes it hard for any new entrants into this sector of the economy.  This could be described as a moat in my forever stocks post.  The Canadian banks have many revenue streams, personal / business lending, investment banking (discount brokerages), wealth management, and auto, life, property insurance.  The banks have many years of growth over the years and have provided regular dividend increases.

Now some numbers, I will compare the 10 year, 5 year performances for CIBC, Coke Cola, and Enbridge.  I will compare this to the TSX performance for the same period.

On June 30 for the years 2016, 2011, and 2006 for CIBC, the stock price listed on yahoo finance is $46.74, $60.45, and $97.04  This gives CIBC a 5 year gain of 68%, a 10 year gain of 107%.

On June 30 for the years 2016, 2011, and 2006 for Coke Cola , the stock price listed on yahoo finance is $16.02, $29.02, and $45.33  This gives Coke Cola a 5 year gain of 56%, a 10 year gain of 182%.

On June 30 for the years 2016, 2011, and 2006 for Enbridge, the stock price listed on yahoo finance is $12.33, $26.87 and $54.73  This gives Enbridge a 5 year gain of 104%, a 10 year gain of 343%.

On June 30 for the years 2016, 2011, and 2006 for the TSX, the price as listed on TMX money is 11,612 and 13,300 and 14,04  This gives the TSX a 5 year gain of 5%, a 10 year gain of 21%.

Investors have bought bank stocks thinking they provide the best returns so why not put my life savings  and invest it into 1 bank or only 5 banks.  This means if you have life savings of $600,000 you will buy only CIBC or split it 5 ways into all the banks hoping for the best returns.  Now the 5 year and 10 year numbers I've gotten show that CIBC destroys the TSX which is the benchmark for all investors to beat.  The 10 year for the TSX is 21% while CIBC clocks in at 107%.  It isn't a fair contest.  But if you wanted the best returns, why not put $600,000 into Enbridge, their 10 year is 343% which triples CIBC's stellar decade.  But no one would ever dream about just buying Enbridge.  Same holds true for Coke Cola.

Now to avoid diversification by buying only 1 bank or only the banking industry is just dangerous.  Granted, the canadian Banking industry is well regulated but the 2008-2009 financial crisis showed that banks can fail.  They failed in the U.S. and can fail in Canada.  There is still risk.  There are too many what ifs.  What if the housing bubble bursts, what if the global economy slows, what if interest rates are rise too fast.  What if.

Studies have shown that to get proper diversification you need 18 stocks across 18 different industries to be properly diversified.  Owning just 1 or just 5 stocks seems super risky.

Mutual funds have been saying it since the beginning of time.  Past performances do not guarantee future performances.  So to answer my 2nd buddy's question.  Yes it is risky to only own 1 bank stock or even own just bank stocks.  But if there is an employer matching to your contribution then some of the risk is taken away but there is still risk.

As a shareholder, I hope bank stocks keep generating solid returns and raise their dividend but I would never bet my entire portfolio on 1 stock or 1 industry.  That's why I diversify with telecoms, large consumer discretionary stocks, food stocks, chemical stocks, REITS, cigarettes, etc.  This type of portfolio will hold up better in a downturn then 1 stock or 1 industry.

Monday, 11 July 2016

RRSP Bashing

I am sure at any BBQ, any brunch, heck even a good old poker game with the guys can generate conversations regarding money.  One particular topic that I have engaged in a few times this year already are anti-RRSP or RRSP bashers.  Yes, you are correct, there are more than I care to share, numbers of people who do not and will not ever, open an RRSP account.  They say they have to pay all that tax back.  They'd rather just spend that money now and have absolutely not a penny in savings except what they have in their savings or checking account.  I ask them what happens when you get to around 58 or 59 years old, and your salary is at $80,000 a year, what happens when you stop working for medical or some other reason.  Where is that $80,000 or even $50,000 a year going to come from for the next 10 years?  They say, it will work itself out.  Seniors living in poverty is not an idea I enjoy. Neither does the government, that is why they have given us RRSPs.

Anti-RRSP individuals will complain about how you can't use the lucrative dividend tax credit or how contributing to an RRSP would turn a tax free windfall into taxable income when taken out of the RRSP.  Also mentioned is how the 50% reduction in capital gains tax is lost.

This type of ideology stays alive, they can only think of the tax they have to pay rather than take the time to understand how RRSPs work.

So here will be a basic, simple example of how RRSPs work, this could be the last time but I doubt that, as RRSP bashers will always be out there.

Let's look at a simple example.

Assume an individual has saved $10,000 for the year and she's wondering whether she should invest it inside an RRSP or in a non-registered account, or worse, just spend it on something like the mortgage (this could lead to the house poor post I've done before).  We will assume her marginal tax rate is 40% and regardless of which account she chooses to invest in, that that stock triples in 20 years.

Would she be better off in a registered or non-registered account?

Before we get an answer to this question, the tax refund needs to be looked at.  Assume her employer deducts taxes from her pay cheque.  If she contributes $10,000 to her RRSP, she will receive a $4,000 tax refund, so that $10,000 RRSP contribution wouldn't actually cost her $10,000, it would cost her just $6,000 ($10,000 minus the $4,000 refund).

Stated another way, if her marginal tax rate was 40% then $10,000 inside an RRSP (which is pretax dollars) is equal to $6,000 in a non-registered account (which contain after tax dollars)

Now we can use these numbers to do a fair comparison.

First, investing inside the RRSP, the $10,000 would grow 3 times in 20 years to $30,000.  If she sells the stock and withdraws the money, she will pay $12,000 of income tax (40% of $30,000) and be left with $18,000 net.

Now, investing outside the RRSP, the $6,000 would grow 3 times in 20 years to $18,000.  If she sells the stock and withdraws the money, she will pay capital gains tax of 20% (half of 40%) on the $12,000 which is the difference between her purchase price ($6,000) and sell price ($18,000).  After deducting $2,400 in income tax, she is left with $15,600 net.

Winner winner chicken dinner.  RRSPs win.  The return in the RRSP setup is better.  Notice that the difference between the RRSP and the non-registered totals ($18,000 versus $15,600) is equal to the capital gains tax ($2,400).  Far from losing the 50% capital gains reduction, the RRSP avoids capital gains entirely.

With an RRSP, the only tax is on withdrawals.  Bashers love to complain about the tax on withdrawals because it looks so large, but really its just the original tax they deferred plus growth of that tax over time.  As the example above shows, even after pay tax on withdrawals, the RRSP investor still wins.  If an investor's marginal tax rate is lower in retirement, the benefits of the RRSP are ever greater, go ahead, try the withdraws at 30%, and watch how much tax you all be saving on withdrawing $50,000 or $60,000 a year.

You will soon see that the RRSP Bashers are really bashing their own head with the money they are losing in tax savings.

Sunday, 3 July 2016

Forever stocks

Forever stocks.  My take on forever stocks.

I'll start with with a Warren Buffet quote, " Our favourite holding period is forever"

Forever stocks are stocks you can buy and hold forever, that is how strong they are, you do not need to worry about their performance, they will come out in the end forever, they will go down but in the long term (forever perhaps), they will outshine most things in the stock market and even beyond.

Let me introduce my criteria for picking forever stocks.  It's not as hard as you think.  There are a lot of other factors and criteria out there in the selection process but here are 2 very easy initial screeners that anyone can use.

1. Increasing dividend payouts

2. Moats

The first indicator which I have touched on in past blogs is easier than you think.  My go to place to see dividend payouts and to see if they have increased over the years is Yahoo.  That is correct, a simple yahoo search is 1 minute away.  The path is simple, go to, then to yahoo finance, then type in your ticker.  click look up, click historical prices and then finally dividends.  It will show a perfect shap shot of the dividend payouts.  Now increasing dividend payments is not enough to show what a forever stock should be.

Moat is exactly what you may think.  A moat around a castle, making it hard for an enemy to breach the castle wall.  In investing language, it means either an economic, brand, or management moat.  A company needs to protect itself from competition.  A moat makes it harder for another company to steal your earnings that you have worked so hard for. An economic moat means that it would be hard for a company to encroach on your earnings simply because it would be economically hard for them to match or exceed what you have done so far.  A brand moat would be simply the name of the company, that is so recognized that it can succeed simply on brand recognition.  Management moat would indicate that management has been able to succeed no matter what conditions the environment can throw at them.

One example that I can show you how it works is Coca Cola.  Yes that old soft drink that is at war with Pepsi.  Coke Cola has the ability to thrive for 100 years or in our case, forever.  It's a simple business that is big, and I mean big, globally in fact.  This is the economic moat, this business will not excite most people but it's stock price will rise with profits.  If someone was to challenge them, Coke Cola will simply buy them out with their deep pockets.  Economic moat.  The distribution network for Coke Cola is so vast that it encompasses almost the entire world.  Most North Americans will probably never of heard of the 3,500 different drinks under the Coke label but tishe main brand, the iconic red can, Coke Cola is a brand moat all it self.  Management has kept the profits and the business running with dividend increases for 50 years now.  Check it out on yahoo, it's true.

So with the these moats and dividend increases, it's no wonder you can consider Coke Cola a forever stock.

Disclosure: I own Coke Cola shares.

Tuesday, 21 June 2016

Canadian Bank stock dividends - are they really that good?

At a recent family function.  Someone came up to me and asked me if I liked to talk about investing and  personal finance.  I said of course. Well I got cornered and he has been investing for years now and how you can never go wrong with bank stocks.

"They pay a healthy quarterly dividend come rain or shine and they keep hiking their dividends year in year out".  Combine that what a decent capital appreciation, and you can't do any better.

This is just a quick summary of our conversation that must have taken place in thousands of living rooms, bars, and anywhere else people meet to talk about how things are going in their lives.  Bank stocks sometimes come up, after all banks are in our everyday lives.

The above statements are somewhat true, Canadian bank stocks are in my opinion, almost the perfect dividend stock to own for the long term.  But think deeper.

Like a herd of sheep, we simply refuse to see the banking industry for what it really is, its an industry that is working harder every day to take your hard earned money.  Almost in a silent way.  They make money on your mortgage, your bank accounts, your investments like mutual funds, commission fees for trading, even your payroll deposit, yes that right, they make money on your payroll deposit  Let's face it, everyone uses something at the bank and you can't escape that part of everyday life.

Yet, we give the banks our hard earned money and they pay it back to us in dividends?  And we think because we get this dividend, its good?  It's almost like the money the bank makes, its paying it back to you in dividends.  That's if you own the stock and not just invest in mutual funds.  It's almost like the ultimate ponzi scheme.  Some might go as far to say the banks are trying to suck and blow and the same time.  If this offends you because you are a banker or are friends with a banker, I apologize.  The thing is, every investment comes with a  strings attached.  It just so happens, the banks have a long string into our lives.

A quick look at the 2015 Royal Bank of Canada annual report shows in their income statement that fees totalled $7.8 Billion.  How much did Royal bank pay out in dividends in 2015?  $4.6 Billion.

If you own Royal Bank stock and you bank with Royal, it's important that your mindful of the the fact that your relationship with the bank and the fees paid to maintain that relationship more than covered the dividends you back from your investment in their stock.  I am not just picking on Royal Bank, if you go through all the Big Six bank's annual statements, you will see something similar.

Now recent articles about banks hiking their fees, just seem wrong.  Most consumers will be complacent about the increase, they will continue to bank with their bank.  Now not all Canadians own a bank stock, so if you do not own any bank stocks, you are behind at this point, as investors who own bank stocks have at least gain somewhat of a foothold with their financial establishment.

Now I hear what you are saying, its like a cash back or a discount on my fees I pay because of the dividends they get, if thats the case then so be it.  But remember that when you receive a dividend from the bank, it may not be exactly what you think it is.