Financial Jungle

The landscape of tax-sheltered investing will forever be changed as the 2008 Canada Federal Budget unleashed the new Tax Free Saving Account (TFSA). When my co-worker, Tony, first mentioned the name “Tax Free Saving Account”, my first guess was a high interest saving account that grows tax-free. To my pleasant surprise, you can pretty much throw any instrument at it. My understanding is that anything that’s eligible for RRSP is also eligible for TFSA. This includes GIC, bonds, stocks and income trusts.

In a nutshell, here’s how TFSA works:

• Starting in 2009, Canadians aged 18 and older can save up to $5,000 every year in a TFSA.
• Contributions to a TFSA will not be deductible for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.
• Unused TFSA contribution room can be carried forward to future years.
• You can withdraw funds from the TFSA at any time for any purpose.
• The amount withdrawn can be put back in the TFSA at a later date without reducing your contribution room.
• Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.
• Contributions to a spouse’s TFSA will be allowed and TFSA assets can be transferred to a spouse upon death.

I have attached a few TFSA references below, so I won’t regurgitate too much. What I pray is that the 15% US dividend withholding tax won’t be applied to TFSA. Since my RRSP is already congested with US dividend payers and Canadian income trusts, I can use a little breathing room with TFSA.

Secondly, I hope they’ll modify the rules such that people over 18 can reclaim their contribution room retroactively. Someone turning 18 this year will stand to benefit the most, but what about me? I’m 33 year-old. I want my contribution room from the past 15 years. (15 x $5,000 = $75,000)

Either way, I’m thrilled about TFSA.

More resources from:
Jonathan Chevreau
National Post
Canada.com
Canadian Capitalist
Michael James
Thicken My Wallet
Tax Free Saving Account calculator

This is the fifth post on the Dividend Increases series.

It has only been 3 weeks since my previous dividend increases post, but I feel compelled to hurry one in as Boralex Power Income Fund just announced a distribution cut from 90 cents to 70 cents, amidst external headwinds from weaker hydrology and the declining US dollar.

In 2007, BPT.un’s $42-million net cash flow related to operating and investing activities was $9-million short of the $53-million circulated to unit holders, but management has been proactive all along warning investors about the hurdles they’re facing.

Rather than masking the problems and jeopardizing the fund’s long-term health, the new distribution policy will see payout easing to $41-million a year. This is a conservative move considering the fund still has $10-million in the bank. (i.e. the cash could’ve prolonged the current payout by another year while waiting for a turnaround.) If it were an oil & gas trust, management would’ve dug themselves deeper into the hole by (a) issuing new shares, and/or (b) borrowing debts.

Here’s my original analysis on Boralex Power Income Fund:

So why is the trust being punished? The answer likely lies in the unfavourable hydrology in the 3rd quarter. Hydrology is fickle science. Due to unusually low water level, their hydroelectric segment generated 22.8% less than historical average, even though that’s only for one quarter. It was only a year ago when the water current was exceptionally strong, while year-to-date, the segment is down only 6%.
…
Since power trusts are generally considered stable and boring, coupled with Boralex’s conservative balance sheet and high ratings from S&P and DBRS, I feel the distribution is safe, and the higher yield offers a margin of safety in a rare event of a distribution cut.

Obviously I was wrong about the payout being safe. Despite the relaxed distribution policy, BPT.un is still yielding an attractive 11+% based on my average purchase price, and I see the distribution chugging back up as hydrology restores to their historical average. Although I don’t think we’ll see 90 cents anytime soon unless the US Dollar is making a come back.

Disclaimer: I’m not a professional investor. It’s vital that investors perform their own due diligent, and invest accordingly.

On a brighter note, here are my dividend increases over the past 3 weeks:

• Great West - 6.4% (14% from last year)
• IGM Financial - 5.9% (13.4% from last year)
• 3M - 4.2% (4.2% from last year) More analyses from Money Gardener and Middle Class Millionaire.

There are several stable stock markets in which investing through different stock brokerage is very profitable. Several forex companies are doing online trading. The home investment or home building business is on its boom nowadays in different developing countries. If you can invest some thing then investment property is the most favorable option.

This has been a hot topic among bloggers, so I’ll throw in my 2-cents.

Every asset you own can be classified into 3 broad categories: necessities, luxuries and investments.

Examples include:

• Necessities: electricity, gasoline, food, water, clothing, banking, medicine and *shelters*.
• Luxuries: Tag Heuer watches, iPods, Coach bags, Ferraris and sailboats.
• Investments: stocks, bonds and rental properties.

No. That’s not a typo. I did place “shelter” as one of the necessities, but I believe the crux of the misunderstanding centers around what exactly do we consume: is it the warmth provided by the shelter, or the ownership of the shelter itself? Let’s clarify by drawing parallels from my dividend-paying stocks.

I consume electricity, but also consider my ownership of Fortis as an investment. Similarly, I’m a part-owner of Saputo, Canadian Oil Sand, Reitmans, Royal Bank and Johnson & Johnson, which all provide essential products and services including milk, gasoline, clothing, banking and medicine. Yet, I consider these stocks as investments. Furthermore, I don’t plan on ever selling these dividend stocks because they pay for my everyday living expenses; similar to how home ownership pays for rents.

Let’s recap:
Milk = Essential, Saputo = Investment
Home = Essential, Home ownership = Investment (… added)

Yes, home ownership is inessential and I have proof — me! And along with 33% of the population like me. If you think all renters live below the poverty line, you ought to meet the Millionaire Mommy Next Door and Jack Hough, who choose to invest their money in the stock market while “renting” their ways to financial freedom.

Okay, so maybe home ownership isn’t a necessity, but how about pride of ownership? What exactly is pride of ownership anyway? Does owning a BMW give a sense of pride? What about the snazziest cellphone on the planet? Are they essential? Probably not.

If pride of home ownership is neither an essential nor an investment, then that leaves luxury as the only logical option by virtue of the process of elimination. Seriously. 1500 sf? 4 bedrooms? 3 bathrooms? Hardwood floor? Granite counter tops? Home Depot’s Behr paint? 2-car garage? Views? Balconies?

My belief is that for most people, home ownership is a bit of both investment and luxury. Where you draw the line is up to you.

• Jeffrey Strain concocts 10 reasons why we aren’t rich. In particular, I like number 7, You Rely on Others to Take Care of Your Money. Unfortunately, most people want to make money themselves, and this is their primary objective when they tell you how to invest your money. And number 8, You Invest in Things You Don’t Understand. Throwing in your money because someone else has made money without fully understanding how the investment works will keep you from being wealthy.
• Contrary to point 8 above, it may behoove you to emulate super investor, Warren Buffett. Between 1976 and 2006, Buffett’s Berkshire Hathaway eclipsed the market by a herculean 14.65% a year. Any dope who emulated Buffett’s every move one month after public disclosure would’ve surpassed the market by an equally impressive 14.26%. So much for market efficiency, eh? You can access Buffett’s holdings at this clean and easy-to-navigate website, DataRoma.
• Warren Buffett’s astute business sidekick, Charlie Munger, offers his timeless 10 investing principles checklist. Any new value investor should seriously consider this list as a starting point to draft his investment philosophies.
• According to Richard Croft’s article on longevity ultimately leads to success, an investor’s long-term success doesn’t depend on his investment style. Rather, it depends on how well the investor’s psychic agrees with the style in both good and bad times.
• Who says a dividend portfolio must overweigh financials? There are plenty of prosperous non-financial dividend-paying stocks in Canada. Aron Yeomanson is revealing his favourite five strong dividend stocks that aren’t bank stocks.
• Michael Sivy, a Money Magazine columnist, is a huge fan of dividend investing. In this article, Michael articulates the power of dividend yield and dividend growth, and why they’re superior investment vehicles over a more traditional portfolio that relies on capital gains and bond interests.
• John Heinzl explains that there’re no greater sins then dividend cuts. Despite the gloom and doom prognosis we hear in these vulnerable times, the market is still flush with dividend stocks that are still showing off their confidence in their ability to deliver by rewarding shareholders with pay raises.
• The heretic from Langley is convinced that the Vancouver real estate market is living on life support. In his article, he assembles a complete picture to formulate an informed view on the local real estate market.
• Mackenzie Investments just released results from a new test of theirs, and found a majority of Canadians under 50 are demonstrating troubling patterns of overspending. You too can take the Burn Rater Spending Test to see how your spending habits compare to the rest of Canada.

Recently, I had the pleasure to get to know one of my blog’s readers, Ryan. Like me, he is a cheapskate who likes to sniff around for dominating businesses that are selling at reasonable prices. One of the stocks on his radar screen is the US retail mammoth, Walmart. He thinks a few trends are working in Walmart’s favour:

Hello to those who are fans of Financial Jungle Blog. This will be guest post and here is my bio I am an Economic and Business student in my last year of school. My financial perspective is very debt adverse and value. My desire is to achieve a CFA and Live in Newfoundland and Labrador.

For a long time I have admired Wal-Mart’s business style and prices. What really got me interested in this stock is the beloved US consumer and their homes. The action that pushed me over the top is Wal-Mart was the first store in Canada to low prices to reflect the higher Canadian Dollars verse the US dollar. This has made me convert to shopping as much as possible at Wal-Mart. This post will discuss why you should invest in this stock and maybe take out a HELOC to do this. ( ADDED JUST FOR A JOKE )

In a nut shell here is why I think the stock will have a good 6 to 15 month run. In good times people over spend because they think that times are going to be really good. As well in bad times I think they will over correct. So I think that Wal-Mart will get a much bigger slice of the consumer’s pie even if this pie is a lot smaller. So I think this will bold really well for them.

Here are my reasons for liking the stock.

1.) Lower Housing Prices across the US is eroding home equity.

This is more evident in California and Florida that consist of 12% and 6% of the total population respectively. Might see a big jump in same store sales in these states which are hit hard with the recent housing revaluation.

2.) Without a declining or vanished housing equity the US consumer will have to deal with their credit card debt. To accomplish this why not shop for lower end products and cheaper household items? This will free up dollars that can be used to pay down debt.

3.) Unemployment up and Prices up.

This is were I think the biggest correction will take place. People do not know if their jobs will be around and this will lead to a big over correction in spending. Since a lot of spending is essential and a lot more of this spending will happen within the walls of Wal-Mart. People have to make up for increased dollars they have to spend on gas and other consumers hit by the commodity run.

4.) Effect of Baby Boomers.

This will have the biggest effect and draw to Wal-Mart for their day-to-day consumption. I say this because The US economy has been running at a great clip for basically 15 years baring the tech bubble. Usually in good times over consumption takes place and people do not save like they should.

Why do I call this the baby boomer effect you may ask? Well its because these are the ones who have used their rising housing prices to buy that nice vacation every year and the vacation home. Their financial plan probably was based on the stock market and housing going up slightly or staying flat. Lately it hasn’t been flat it has been down. What’s going to be the side effect of this phenomenon? Who knows but I think that people are going to flocking to Wal-Mart screaming “ I’m sort X years behind on my retirement and better tighten that spending belt a LOT!” This will mean big increases in store numbers for the next few years.

5.) Down stock market

Another nest age taking a downward spiral. Think I’m going to go out and buy that really expensive bottle of wine for supper along with that Gucci pruse. WRONG! These people are going to down grade their purchases because they have no clue what’s going to happen with their finances. Again flocking to Wal-Mart.

What will make the biggest impact on Wal-Mart earnings over the next year will be # 2, # 4 and # 5. Uncertain times will mean that the US consumer will be spending more of its money to reduce debts most likely credit card debt. Maybe Wal-Mart will allow a low transfer rate as long as you maintain X amount of dollars per month at their stores? Lots of options for Wal-Mart to grow in a slowing Economy espically if the housing market and stock market slide even more.

Long Term View.

I think Dell allowing Wal-Mart to sell some of its computers is a telling story of the tired US consumer because they are trying to use WMT distribution network to help its sales. If other brands that you wouldn’t expect approach WMT in droves to team up you no this is a bad sign for the economy. The consumer is readjusting their basket of goods to lower cost merchandise. If this happens I think at this stock will have a good run for 3 to 5 years.

Disclaimer: Whatever expressed in this post is only an opinion. Please do not interpret this as a recommendation to buy.

Disclosure: I have an indirect Walmart holding through one of my Vanguard ETFs.

1. 80% of our net worth is our ability to earn income - Our investment portfolios extend well beyond just the securities in our brokerage accounts; our greatest asset is the ability to learn new skills and to become productive citizens of the sociaty. In my opinion, the ability to earn salaries is simply bonds on steriod. I guess you can say my name is Bond. Since 80% of our net worth has bond-like characteristics, we don’t intend to overweight bonds. Instead, we let the remaining 20% ride a diversified basket of dividend-paying stocks. Critics will point out that we could lose our current jobs tomorrow, but then we simply go find another one. Jobs are plentiful as long as we’re not choosy. The only caveat is the transition. The best way to protect against short-term job interruptions is to reserve 6 months worth of emergency cash. For long-term protection, buy disability insurance.
2. Bonds are extremely tax-inefficient - The government taxes our bond income ruthlessly at our marginal-tax-rates. We can circumvent that by hiding our bonds inside RRSP, however our RRSP accounts are too precious! We rather decorate our RRSP with high-quality income trusts (e.g. Canadian Oil Sand) and US dividend-paying stocks than squandering a penny on low-yielding bonds.
3. Bonds have miniscule real growth - The current 10-year government bond offers 3.8% yield. Subtract about 2.2% in inflation and 1.2% in income tax, we’re left with 0.4% real return. That’s a steep price to pay just to tame volatility…
4. Bonds don’t make our portfolio safer - According David Dreman, author of Contrarian Investment Strategies, “The major risk is not the short-term stock price volatility that many thousands of academic articles have been written about. Rather it is the possibility of not reaching your long-term investment goal through the growth of your funds in real terms. To measure monthly or quarterly volatility and call it risk - for investors who have time horizons 5, 10, 15, or even 30 years away - is a completely inappropriate definition. The volatility measurements provide only an illusion of safety.”

The mortgage facilities are offered at various banks. You can choose any buy to let mortgages deals. The most used facility is the home mortgage facility. If you need more loans then there is an option of bank home loan 2nd mortgage available. The free insurance quote will provide you the required estimate. All insurance companies accept the online credit card. Many people are investing in this business due to high insurance carrier and scope.

This is the fourth post on the Dividend Increases series.

First, let’s get the sore thumb out of the way. My portfolio suffered a minor set-back as CI Financial Income Fund, a non-core holding, is cutting distribution by about 10%, likely due to market jitter.

Dividend Increases

• Canadian Oil Sand - 36% (150% from last year)
• Canadian National Railway - 10% (10% from last year)
• Enbridge - 7.3% (7.3% from last year)
• TransCanada - 6% (6% from last year)
• HR Reit - 5.1% (5.1% from last year)
• Bell Aliant Regional Communications Income Fund - 2.8% (2.8% from last year)

I’m not worried about market turbulence…

Once again, TSX and S&P500 investors are reeling over recession fears as the indexes sank by 2.5% and 2.9% respectively today. Good! This just means that we can invest new money and dividends into progressively higher yielding shares. For example, Royal Bank is paying you $2 a share, doesn’t matter if the share is trading at $40, $50 or $60. As long-term accumulators, we don’t want Royal Bank shares to shoot up the roof. In fact, the cheaper the shares, the more we can buy, and the more dividends we collect. Let’s pray for the market to remain at these bargain levels for awhile.

Many investors are wondering if we’re at the bottom yet. Nobody knows. But one thing is certain; at 16.35 PE ratio, TSX’s earning yield is a savory 6.1%, which compares favourably well to Canada 10-year bond’s 3.84%. Yes, there are short-term risks. But 10 years from now, nobody will be lamenting over that they could’ve bought TSX at 1 or 2 bucks cheaper. It’s that they should’ve bought more.

I received a few emails from readers singing the dividend investing tune and craving for more out of this blog. As much as I enjoy these praises, most of the ideas don’t originate from me. I certainly don’t live long enough to survive all the experimental mistakes and live to tell about them. Instead, I mimic dividend investors who have succeeded before me: Stephen Jarislowsky, David Dreman, Tom Connolly and bunyip. But the person who really spring boarded my endeavor into dividend investing is Scott M.(a.k.a scomac).

If you don’t know who scomac is, you owe it to yourself to dig up all the little nuggets he left behind in the Financial Webring and Canadian Business forums. In particular, scomac graciously shared this stock picking template, which I adopted and morphed numerous times over the past 2 years to suit my own investment style. His disciplines have also influenced many forum members/bloggers including Brad911 and Investor99.

To my immense delight, Scott visits my humble blog and even agreed to answer a few personal questions! Thank you Scott!

1 ) I remember reading a prior post of yours that you’re semi-retired. What exactly does that mean? How long have you been semi-retired? Are you working your dream job? How do you spend your spare time?

I would interpret semi-retirement to mean working when you want to, as much or as little as you want to and for reasons other than the need of employment income. I have been semi-retired for a little over three years. If working your dream job means not having to do anything, then I’m probably there.

We have a small farm, so that takes up some of my time, but not as much as it used to since our “herd” now consists of only one dog and one cat. Beyond that, I enjoy cooking, cycling, gardening, golf, skiing and….writing.

2 ) At what point financially did you decide it was time to phase in to retirement? Did you wait until your portfolio income covers your essential living expenses?

I just sort of fell into retirement. There was no grand plan. I had originally intended to go back to school and take some training so that I could enter the financial services industry as an advisor. I took the courses, but haven’t bothered to look for work. I doubt I have the personality for that gig. After I had been “semi-retired” for a year or so, we discovered that we had more than enough income as a family unit to continue living the lifestyle that we were accustomed to.

3 ) You’re a pretty young fellow. 47 if I remember correctly. If you were to travel back in time — but without the hindsight of market peaks and valleys — were there anything that you could’ve done to speed up semi-retirement even earlier?

I wouldn’t have done anything differently. The real wealth generator for me was a concentrated investment in personal business assets rather than the traditional savings and investing methods that are discussed in financial forums. We only began investing in the equity markets in a big way in the last 10 years or so.

4 ) You’re a regular at Financial Webring and Canadian Business. Do you think these financial forums are good training grounds for young people looking to shape their financial philosophies? Or, are they better off cutting out these intoxicating noises and sticking with good financial books, such as Personal Finance for Dummies?

I would advise young people to stick with a few good financial texts rather than spending endless hours on financial forums. I don’t want to downplay the value that these forums can have, but it would be difficult, if not impossible for novice investors to separate the good from the bad. They pretty much have to rely upon experienced forum members to correct any errors, poor guidance or miss-information that is posted. This is handled quite well at some forums, but it can be hit and miss at others. Just because an individual can make a convincing case for following a certain course of action, it doesn’t mean that it is the right path for the reader or even the alternative with the greatest probability of success.

My suggestion for a young person looking to get a good basic grounding in personal finance would be to read the following classic texts:

• “The Four Pillars of Investing” by Wm. Bernstein
• “A Random Walk Down Wall Street” by B. Malkiel
• “The Naked Investor” by J. L. Reynolds

5 ) It’s easy to get carried away and spend over 2 hours each day on forums. For someone thinking of participating in a financial forum, what should one do to make the experience more productive?

Limit your time. There’s more to life than sitting staring into a computer screen. If there are some specific things that you want to know about, then don’t hesitate to ask the questions. Remember that the only silly questions are those that aren’t asked. If you stick to specific areas of discussion that apply to your situation and avoid the heated opinion threads, you will likely find that your time spent was well worth it.

6 ) Forum participants often scoff at the “talking heads” from BNN, but come on! Although buying based on the top picks segments isn’t a sound investment strategy, it’s smart to augment their research with ours. And I’m not ashamed of being the first to admit, some of my favourite BNN guests include Norman Levine, Laura Wallace, David Driscoll, Gavin Graham, Bruce Campbell, Ross Healey and all the guys from Sentry Select. Do you have any superstars on your list?

Those individuals that take a balanced, prudent approach are those whose opinions I value the most. Ask yourself which one of these characters you would hand a blank cheque to and you will quickly discover whose advice is worth acting upon. From your list of individuals, the person that I would most likely have to manage our investments would be Norman Levine. Paul Gardner, of Avenue Investment Management, has been quite helpful to me on a personal basis on the fixed income side of our portfolios.

6 ) I believe you’re a hybrid stocks/ETFs investor. Tell us about your investment philosophy. What types of stock and ETF whet your appetite?

That’s correct. You can’t be an expert at everything is an old adage that I take to heart with investing. So, with that in mind, I select individual securities where I feel comfortable and use broad market ETFs to gain exposure to other asset classes.

I can be best described as an income investor. I’ve never been completely comfortable with investing solely for capital gains and having to rely on the greater fool theory where someone else will take my shares off my hands at a higher price. I like to be paid to hold investments and then the market value of these securities isn’t nearly so important to me (unless I’m buying or selling).

Our portfolios, in aggregate, are set-up to mimic a pension plan portfolio, so you could say that we engage in “core and explore” investing with the goal to have only about a third of our investments subject to active management with the other two thirds held in passive investments such as ETFs, a laddered bond portfolio and a few dividend paying stocks. The actively managed third could contain pretty much anything that I deem attractively priced from junk bonds to commodities. At the present time, I’ve been accumulating preferred shares, REITs and O&G shares.

7 ) Which tools do you use to research your potential investments? How do you determine the attractive entry prices?

Over the years, I’ve simplified my approach to researching a potential investment. If I’m not familiar with the company then I will spend a fair amount of time researching the company through resources that are available on the company’s web site and/or SEDAR. Once I’m familiar with a company, I’m quite satisfied to use the free historical data that is correlated on MSN Finance. For ETF research, my first stop is always ETF Connect. All of our various portfolios are tracked on the portfolio tracker at Globe Investor Gold. Globe Investor Gold is also my first stop for business news and I will periodically use the advanced stock/bond/fund screener functions.

I’ve used a commercial spreadsheet in the past, but I’m just as happy doing any calculations with my HP 10BII financial calculator. I think folks can get overly confident with their estimates of future value that some of these sophisticated computer programs produce. We can’t forget that it’s an “estimate”. To determine an entry price, I will use Time Value of Money and Discounted Cash Flow calculations that incorporates dividends, book value, growth of book value, growth of dividends and a discount rate that reflects my required rate of return which is typically 15%/annum. Hopefully this provides an adequate margin of safety to mitigate downside risk. As long as the price is reasonable, I’m more concerned that the company I’m looking at has the characteristics of sustainable long term growth that I’m looking for.

8 ) What are some of the core holdings in your portfolio?

• GoC 2021 RRB
• BLDRS (ADRD, ADRE) for international equity exposure
• SPDR (SDY, DSC) for US equity exposure
• Basket of Canadian dividend payers (BMO, BNS, CNR, MRU.A, PWF, SJR.B, SLF)
• Basket of Canadian preferred shares (mixture of financials and utilities)
• Basket of REITs/trusts/small caps (AP.UN, BR.UN, CUF.UN, CWT.UN, PKI.UN, RET.A, RUS)
• Commodities (CEF.A, ESI, NXY, PCA)
• Canadian pooled funds (bond, dividend income)

9 ) The recent market collapse had rumbled along leaving many road kills behind. Are you picking up any bargains these days?

I’ve been buying on a fairly consistent basis through out January. I’ve been active buying REITs, preferred shares and select stocks most notably in the O&G sector. Astute readers may have noted that I re-entered BMO as well. This was a result of a careful examination of the balance sheet after the release of the annual financial results in December. Whether or not my purchases prove out to be bargains only time will tell, but it is my view that they offer good value at the prices I paid. In the mean time, I’ll be quite content to collect the dividends/distributions.