Financial Jungle

Drooling over living off passive incomes one day?

Before plunging butt first into the sea of dividend-paying stocks, you must perform your due diligence. Get your hands on every conceivable dividend investing literatures: Dividend Growth, The Dividend Guy, Dividend Money, Dividends Matter and The Investment Zoo.

Then, you will need a few candidates to furnish your stock watch list. Not that these are all dirt cheap at the moment, but given the right entry points, these stocks will serve you well over the long-term to achieve your retirement goals.

1. IGM (3.40%) - The house always wins in casinos, and in the world of mutual funds, IGM is the house of King Kong. Every time a customer buys one of IGM’s array of equity investment products, he’s seemingly swindled anywhere between 2% to 3.5% in management fees. Much of these will eventually funneled to spoil IGM shareholders in the form of dividends. This is why I feel so guilty being an IGM investor. Can you blame me for yearning over this cash cow? The high yield coupled with the traditional dividend hikes in the teens make this one of the most formidable dividend payer in TSX.
2. Manulife (2.20%) - Another King Kong, but this time it’s in the life insurance space. Well managed by one of the most respected CEOs in Canada, Dominic D’Alessandro. Under his helm, Manulife doubled both its revenues and dividends over the past 4 fiscal years, thanks in parts to the brilliant John Hancock acquisition in 2003. The business has been so profitable, D’Alessandra accumulated over $10 Billions in the company vault to scout for other home run acquisitions. Manulife is not only big in Canada, but its operations are well diversified in the US and Asia, and currently penetrating the rapidly growing Chinese economy.
3. TD Bank (3.30%) - With the announced acquisition of New Jersey-based Commerce Bancorp, TD bank is now a true North American bank, according to CEO, Ed Clark. You have got to hand it to this guy for clutching his cash up until the last possible moment - when his Canadian bucks are near the all-time-high and US banks are in dire-straight. If I’m going to entrust my money to someone, that would be Ed Clark, who’s also genuinely composed enough to not succumb to U.S. subprime mortgages; unlike most other banks. The fact that TD sports the cheapest price/book among Canadian big backs and commands the biggest market share in online trading space give you reasons to buy and forget about it.
4. Canadian National Railway (1.60%) - One of the most diversified and efficient railroad business in North America. The CNR stock has been derailed recently by the rising Canadian dollar and ailing forestry sector, but this presents a buying opportunity for a long-term hold. Over the next many decades, CNR will continue to chug along as a big player in a space with strong economic moats. For one thing, it’s too expensive for new entrants to jostle into the railway networks. For another, oil prices will likely remain high, and that will set the stage for trains to surpass trucks as the most efficient mean of transportation. Of course, the fact that Canadian National Railway, Canadian Pacific Railway and legendary long-term investor, Warren Buffett, are all gobbling up other railway stocks is a hint that bargain hunting season had just begun.
5. Encana (1.10%) - When you invest in gas giant, Encana, you own oil and gas properties all over North America as mapped on their Corporate Profile page. This business is a money making machine who understands how to take care of shareholders. Over the past 5 fiscal years, Encana used its enormous cash flow to buy back about 22% of its own shares, while quadrupling its quarterly dividends from 5 to 20 cents. Furthermore, the recent latest record-breaking quarter has satiated Encana with $2.2 billion of free-cash-flow. If we annualize it, that’s $11.72 a share per year. Not bad for a stock trading at around $66.
6. Canadian Oil Sand (6.30%) - Canadian Oil Sand owns a 37% interest in the Syncrude project, a pure play in an oil sand that has stunning reserve life of 40+ years. Compared with the $95.93 oil, Canadian Oil Sand’s 2006 operating cost per barrel is dirt-cheap at $27.07, and it’s anticipated to mark down further due to economies of scale. So far this year, the operating cost per barrel has been $26.70. The trio of low operating costs, higher oil price and production positioned COS to raise quarterly distribution from 40 cents to 55 cents, or a cool 38%.
7. Teck Cominco (2.20%) - With Alcan being taken out, Teck Cominco is crowned as the only conglomerate mining company in Canada, and they only getting bigger with the recent acquisition of copper producer, AUR Resource. After losing a bid for nickel producer, Inco, to Brazil’s CVRD, Teck Cominco returned with a vengeance by adding copper, gold, coal and oil sand to its asset mix. Despite ponying up $4.1 billions for AUR Recourse, Teck Cominco’s balance sheet is still squeaky clean with $1.8 billion in cash. This figure is more than the $1.5 billion in long-term debt, so the company is effectively debt-free. Valuation wise, Tech Cominco is cheap according to an article by Andy Hoffman of The Globe and Mail. That’s because when broken into pieces, the individual segments are trading at lower multiples to their respective peers.
8. TransCanada (3.40%) - TransCanada is a diversified and stable utility company in an industry where all the pipelines in North America are already running at full capacity. The stock offers a safe play in the oil and gas sector without direct exposures to the underlying commodity prices. The yield is attractive, but I like it recently when it’s trading in the low $30’s. With 50 years experience and 59,000 km under its belt, TransCanada will add another 3,456 km through its Keystone project, due to complete in late 2009 or early 2010. This pipeline network will have the capacity to move 590,000 barrels of cruel oil per day from Alberta to US Mid West. It has already secured contracts to send 495,000 barrels per day with an average term of 18 years. If you’re looking for a pipeline investment with a little more yield and lesser growth, check out my post on How To Pick Pipeline Trusts.
9. Reitman (3.50%) - One of the tenets of dividend investing is to plunk your money down when good managements stumble. Fiscal 2008 hasn’t been gentle to apparel and accessories retailer, Reitmans. Unfavourable weather conditions and uninspiring rags from the Cassi experiment, a banner designed for middle aged women with youthful spirits, have torn the stock apart to a new 52-week low, thus pushing yield to a glittering 3.5%. Even though Reitmans stumbled on the recent catwalk, this debt-free retailer does have a long history of delivering superb return on equity and raising dividends. Number of outlets is expected to surpass 1,000 this year or next, and the company is poised to profit from the rising loonie. Opportune dividend investors will have a serious look to see if the valuation is compelling.
10. RioCan Investment Trust (5.9%) - You know what the real estate guys say. There are many uncertainties in the world, but there is one thing for sure. Land. They make them no more. With a few mouse clicks, you can instantly diversify your real estate holdings across Canada by investing in RioCan Investment Trust, which commands a quarter of the Canadian REIT index. RioCan, who owns 207 offices and shopping centres, has increased its annual distributions for 12 years straight. This company is known to be conservatively smart. CEO, Ed Sonshine, along with 4 other senior executives have been with the company since inception. In the first 5 years of this century, RioCan was quick to snap up undervalued properties with 9.3% CAP rate (this is unheard of in Vancouver, by the way). With real estate being high in the past few years, they sold off some non-core properties with CAP rate at around 6.3%.

Disclosure: Out of this list, I own IGM Financial, Canadian National Railway, Encana, Teck Cominco, TransCanada and Reitmans.

Disclaimer: I’m an amateur investor. If this post entertained you, I’ve achieved my goal. Please consult your financial advisor before making any investment decisions.

As any dividend investor will attest to, the regimen of successful dividend investing involves building a watch list of terrific companies with a long history of rising dividends, but only buy when they are cheap. How do you know when they’re cheap? There is a number of matrices out there at your disposal, but the 2 simplest are:

• Buy when P/E is trading near the historical low.
• Buy when yield is trading near the historical high.

If you’re like me, you’ll find it daunting to decipher the historical dividend payments and earnings to arrive at the highs, lows and averages. Fear no more. There is an excellent little tool that you must throw into your bag of tricks. It’s called, BigCharts. Not only does BigCharts show off the dividend growth of your favourite dividend stocks, it presents the rolling dividends, rolling earnings, historical P/E ratio and historical yield in neat little charts. Forget tables. They’re too discrete. Aspired dividend investors will want historical yield presented in a continuous graph in order to experience or feel the personality of the stocks over a long period of time.

Let’s take an example. Judging from Royal Bank’s historical yield, it’s currently trading at an attractive level yielding a historical high, 3.5%. Simply by gliding BigCharts’ cursor along the 10-year historical yield chart, you can quickly reckon and appreciate the rare but brief moments when Royal Bank traded near this seemingly tantalizing level over the past decade. If history repeats itself, the bargain price won’t remain on the table for long, and probably won’t return for several years. For full disclosure, I bought a bunch of Royal Bank shares yesterday.

One quibble I have with BigCharts is its fragile runtime on Internet Explorer; the Java applet crashes whenever I enter a Canadian stock symbol. It seems to work better on FireFox, so I downloaded a copy just to run BigCharts. Don’t forget to prefix “ca:” in front of your Canadian stock symbols. i.e. “ca:ry”.

Another thing to watch out for is that BigCharts uses trailing 12-months but my preference is forward yield. Nevertheless, the method used is irrelevant as long as it’s consistent. Royal Bank’s forward yield is 3.81%.

Please check it out and let me know what you think. If you have an even better tool, please share.

I wrote this list back in early April when Financial Jungle was relatively unknown. With readership growing, I decided to resurrect and update my top reasons to invest in dividend paying stocks.

1. Dividends set a floor price – Dividend stocks tend to trade within their yield range, and rarely do they yield much higher than Treasury bill. Last summer I purchased Bank of Montreal at $60.50 when it was yielding near the historical high of 4.1%. Not only did the yield defend the stock at this price point, BMO also distributed $3.25 worth of dividends since my purchase, and increased their dividends 4 times.
2. Dividends account for over half of the long-term real return – If you own 100 shares of BMO and receive 4% of dividends, you can DRIP your dividends to buy another 4 more shares. If you keep up the DRIP for 20 years, you’ll have a handsome 219 BMO shares in your portfolio. Even better, some Canadian corporations offer 5% discounts through DRIP.
3. Companies with long-term track records of stable and raising dividends show quality of the managements – Managements show commitment to shareholders by improving fundamentals and sharing profits.
4. Dividends cannot be manipulated like earnings – Dividends are real hard cash in your lap. Earnings can be faked by creative accounting.
5. A stable stream of dividends reward investors even during market down turn – Management pays you to wait even during market setbacks.
6. Dividends are more tax efficient than regular incomes and capital gains – In British Columbia, if you can make $66,000 in dividends, you pay $0 tax. In regular incomes, you pay $16,880 in taxes. In capital gains, you pay $5,097.
7. You can safely spend your dividends without harming your portfolio – If you think in terms of income streams instead of portfolio size, you can consume 100% of your dividends without hurting your portfolio. If instead you go for capital gains, consuming your capital during a depressed market will harm your portfolio immensely.
8. Receiving dividends are passive – Dividends and increases are given to you each quarter automatically without any action on your part. On the other hand, to receive capital gains, you must monitor the share prices continuously.
9. High dividend paying stocks have historically out-performed low-yield stocks – In David Dreman’s Forbes column (April 2004), he cited that between 1970 and 2003, the top fifth highest yield stocks returned 14.5%, while the lowest fifth returned only 8.8%.
10. Dividends are more predictable than capital gains – Suppose BMO averages 10% over the long term with 4% in dividends and 6% in capital gains. In a given year, you can count on seeing the 4% in your brokerage account, but the 6% capital gain is less dependable.

Bonus reasons:

• Your investment return depends on the company’s fundamentals, not the market’s temperament- You may think a business is wonderful and its stock is outrageously undervalued, but if market doesn’t share your excitement, your effort won’t bring you fruition, and you’re needlessly squandering away precious time. On the other hand, if dividends and dividend increases are your investment objectives, you don’t need the market’s blessing to celebrate. This is one fundamental advantage of dividend investing. When you buy dividend-paying stocks, there’s a strong linkage between your analysis and your reward, and this linkage isn’t compromised by market psychology.
• Dividend investing forces you to think in a healthy frame of mind in terms of buying low - I bought IGM last year. I bought it again this year. I will buy it next year, and possibly for the next 20 years. Why would I want my initial purchase to rise at the expense of penalizing my next 20 purchases? The next time you see dividend-paying stocks tumbling down, please come and give me a high-five.

The market tormenting me. The extra turbulence over the last few business days had taken everyone prisoner, except that they allowed the Biovail stock to revive 10% from its 52-weeks low. D’oh! I was so close in securing a juicy 10% dividend yield, my Achilles’ heel in investing, but the stock got away from me, at least for now.

Immediatelly after FDA’s thumbs down on Biovail’s studies on its formulation of bupropion, “a key component of a new antidepressant”, the market punished Biovail mercilessly sending the stock 37% lower to $17. In the process, it lifted the yield to a remarkable 8.8%.

This drug was supposed to fill the revenue hole left by Wellburtrin XL, a time-release antidepressant which accounted for 44% of Biovail’s revenues. Wellburtrin XL comes in 2 versions: the 300- and 150-milligram dosage. The 300-milligram version is already off-patent, while the 150-milligram version will face copy-cat competitions from generic producers. According to Biovail’s second-quarter financial report, generic competitions had swallowed half of the Wellburtrin XL revenues. That’s a 20% decline of total revenues.

Is the correction overdone? I think so. At the very least, I believe the stock has absorbed much of the decline and there’s plenty of value left in the post-Wellburtrin era. I know this isn’t a growth story like my superstar generic, TEVA. But, if the stock is indeed sufficiently below its intrinsic value, who will say no to free money?

Where’re the values? For starters, the company has $870 million in the bank in 2007 Q1. It means when you buy Biovail for $18/share, $5.40 is cash in the bank, so you’re really paying less than $13 for the pharmaceutical business. With the market being so volatile these days, patient investors might snap this up for a couple bucks less. Imagine one third of each Biovail share being backed by hard cash! I’d be stunned if the stock falls to anywhere near the vicinity of $5. Even cash flush stocks like Microsoft has only $2.49 on a $28.26 share.

The question that most critics enjoy picking on is can Biovail sustain the $1.50 dividend distribution policy in light of their top seller, Wellbutrin XL, going off-patent. For the sake of argument, let’s assume the misery by eliminating all revenues from Wellbutrin XL. (In real life, Wellbutrin XL should chug along residual revenues as with their other legacy drugs.) This drug is responsible for 44% of the 2006 revenues. Just to be on the conservative side, I’ll half their 2006 operational cash flow from $522 million to $261 million. Subtract $45 million for CapEx and $160 million for dividends, and that leaves $56 million of free cash, which serves as another margin of safety in my valuation.

Based on that, Biovail should sustain their dividend policy, but please help correct any flaws in my rudimentary analysis.

Possible Upsides:

• FDA’s eventual approval of bupropion.
• Successful foray into the multi-billion-dollar, global sexual-dysfunction market.
• According to their 2006 report, they have 10 new drugs in their product pipelines: 5 for central nervous system disorders, 2 for pain management, 2 for cardiovascular disease, and 1 for gastrointestinal disease.

One Objection I Heard:

Biovail relies heavily on outside collaboration/alliances with other companies, research institutes and projects for current R&D. Not having expertise in house can provide limitations over control.

Even with an army of in-house Ph.D.’s, expertise can be surprisingly difficult to find, according to a report by McKinsey Quarterly, Do You Know Where Your Experts Are - Companies need a new approach to finding their ellusive experts.

Early in the project, it needed someone with deep technical knowledge of a particular protein. We spent weeks looking for an expert — calling HR, asking around the office, scanning personnel records. Finally, we concluded the expert didn’t exist. Three days later, I’m in an elevator complaining about this to a colleague, when the woman next to me turns and says, “I wrote my doctoral thesis on that protein. What do you need to know?”

Take Procter & Gamble for example. Despite having a $1.7 billion R&D budget and 1,200 Ph.D.’s in-house, the company enjoyed a 45% success rate by outsourcing its most challenging problems to Innocentive, a market place setup by Eli Lilly to bring together solution seekers and 80,000 scientists from across the globe. I don’t view having a small R&D team as necessary a handicap for Biovail. In fact, it’s good risk management to selectively align with drug-development companies to license, develop, manufacture and market promising drugs to the market.

As always, I’m not your financial advisor. I’d be interested if anyone can point out any pitfalls with Biovail.

Disclosure: I don’t own Biovail shares, although I might start nibbling below $17.

In many ways, I’m living the deja vu of the 2006 summer correction. The skittish stock market, beleaguered by the subprime mortgage woes and the credit crunch, is lunging 1% ahead one day and plummeting 2% the next. As in the last summer, my Hotmail account is flooded with stock alerts which I setup on Globe Investors. Not that I’m pulling the trigger on every alert. It’s more for awareness than anything else, however I did nibble on few fallen stars like as Bank of America, Citigroup, Bank of Nova Scotia, Bank of Montreal, National Bank, CI Financial, Telus and Talisman, and 2 significant positions on Inter Pipeline fund and Boston Pizza Royalty fund.

It’s nerve racking to watch some of my holdings tumble, but I’m thrilled at the same time as I need to deploy new savings to high-quality but inexpensive businesses, and most stock screens always seem to bring me back to the same stocks in my portfolio. If I have it my way, we’d have a correction every second day, and Bank of Montreal would remain at $61 for the rest of my life, because a cheaper stock means more shares, more dividends and more importantly, a shorter road to financial freedom. I bought BMO in 2006 at $60.40. It rocketed to $72 before falling back to my purchase price momentarily on Wednesday. Fantastic! Same price as last year, but with a phenomenal 4.4% yield that will knock your socks off - they increased their dividends by 28%. It’s not just BMO, the other Canadian banks are teasing me with their dividends too.

If I learned anything from the 2006 correction, it’s that the moody market rewards contrarian dividend investors who have the conviction to become net buyers in a tough market. Looking back, I’m laughing myself silly that I peed my pants (not literally) when I bought IGM below $45 at a time when other investors were cringing under the falling sky. No, I wasn’t a genius. I was simply good at following instruction out of any sensible dividend investing book such as “Stop Working” by Derek Foster. Since that time, IGM’s quarterly dividends surged from 37 cents to 46 cents per share — a 24% hike! I need to have a talk with my boss about matching that pay raise.

Alas, I’m still a rookie investor. Some of my purchases have been premature; most notably DR. Horton. This time, I suspect it’ll take longer than a year before l laugh myself silly. Although my batting average is far from perfect, over the long-term, I feel that the aggregate of all the dividend-paying positions will do marvelously. Aspiring dividend investors who hang tough in this ordeal won’t come out empty handed, especially when corporate balance sheets are strong, profits are rich and unemployement rate is at a 33-year low.

In order to elevate fundamentals over the long-run, short-term pains are necessary to prune out dead weights, such as questionable structured commercial papers, loose lending standards and as ThickenMyWallet put it, NINJAs (no income, no job, no asset). Once these excess baggages are out of the way, the path to prosperity is paved for many decades to come.

Jungle Guy’s shopping list: all Canadian banks, REITs, Yellow Pages, Reitmans, pipelines (TRP/ ENB/IPL.un), insurance (MFC/SLF), CML Healthcare and CI Financial.

At $68, BMO is a mighty compelling investment despite competing against raising bond yields. Minus the recent hiccup with the derivative trading losses, BMO has done an admirable job over the past 10 years, when they bought back shares, paid back 30% of their long-term debts, doubled their earnings, and more than tripled their dividends. Check out their dividend history:

In this post, we’ll find out how BMO stacks up against the Canada 10-year bond. However, just to be on the conservative side, let’s assume zero growth for BMO over the next 10 years, and that investors can purchase the bond without a spread.

Currently, BMO is sporting an attractive 4% dividend yield and a cheap P/E ratio of 13. In other words, for every $100 invested in BMO, the stock earns $7.70. Contrast that to only $4.68 for the 10-year bond.

Out of the $7.70 earnings, BMO distributes $4 to shareholders in the form of dividends. A Vancouverite in the 30.65% tax-bracket receiving the dividends would pocket the $4 entirely tax-free, and that’s in addition to a modest tax-refund from the dividend tax credits. On the other hand, the same Vancouverite receiving $4.68 from the bond must surrender $1.43 in taxes, and wind up with a paltry $3.25.

What’s more, after rewarding shareholders with dividends, the company still retains $3.70 of earnings. So, not only is BMO yielding higher than the bond after-tax, the company still has the means to stimulate futher capital growth over the next 10 years.

Please realize that I’m not forecasting a surging share price, but merely taking a snapshot of the present valuation. Comparatively speaking, I’m favouring BMO over the 10-year bond if my time horizon is 10+ years.

The Dividend Guy is rightfully scolding IGM’s Investors Dividend fund for milking $291,117,000 a year in mutual fund fees. I’m both proud and guilty of being an IGM Financial shareholder. I’m proud because IGM has been steadily increasing revenues, profit margins, earnings and dividends, while maintaining Return on Invested Equity above 20%, and decreasing debt levels. I’m guilty because the prosperity rides on the backs of investors’ ignorance. Let’s face it. By analyzing Investors Dividend’s top holdings, one can easily conclude that the Investors Dividend fund is nothing more than a closet index fund with a tilt toward dividend paying stocks. Even an amateur like myself can assemble an index look-alike portfolio. Heck, pay me 1/100th of $291,117,000, and odds are favouring me to beat this fund over the long-term.

Not only is the Investors Dividend the largest mutual fund in Canada, the MER is also a whopping 2.88%. So much for economies of scale. To appreciate just how much investors are forgoing with the MER, let’s compare the performances between Investors Dividend and the TSX total return. The 5-year compounded returns are 9.71% and 12.43% respectively, or a difference of 2.72%. Peculiarly similar to the MER, the point is investors are better off buying cheap index funds and ETFs, rather than enriching IGM Financial with a jumbo MER for inferior performances.

Here is a totally unoriginal idea. Don’t buy this mutual fund. Buy the company that operates the fund. Buy IGM Financial. At 400 shares, this position is spoiling me with $684 worth of dividends per year, and this money is coming out of the $291,117,000 pot. I’m a guilty IGM shareholder, and you can give me some virtual spanking.

This is a short little post to remind readers and myself how to calculate the dividend tax credits.

Dividend Tax = (Grossed Up Dividends x Marginal Tax Rate) -
(Grossed Up Dividends x (Federal + Provintial Tax Credit Rates))

Step 1: Figure out the marginal tax rate
Follow this link to TaxTip.ca, select the province or territory, scroll to the bottom, and write down the marginal tax rate.

Step 2: Figure out the grossed-up dividend
Grossed-up dividend is 145% of the dividend received.

Step 3: Figure out the federal and provincial dividend tax credits
The Federal dividend tax credit is 18.97% of the grossed-up dividend income. Add this to the provincial tax credit here:

Example

• Personal income = $40,000 in BC
• Marginal tax rate = 30.65%
• Received $5,000 of dividends
• Grossed-up dividends = $5,000 x 145% = $7,250
• Federal + BC Dividend Tax Credit Rates = 18.97% + 12% = 30.97%
• Dividend Tax = ($7,250 x 30.65%) - ($7,250 x (30.97%) = $23

Not only do you receive $5,000 worth of dividends free and clear, there is a $23 tax-refund too.

Darren Rowse from ProBlogger is hosting another get-together among bloggers. The mission is to write a top 5 list on any topic relevant to the blog, and the winning price is a cool $1001. But more importantly, I want to elevate Financial Jungle’s presence in the blogging ecosystem, and mingle with fellow bloggers who share similar interests.

A discussion over at MillionDollarJourney prompted me to do a little digging into Market Growth GICs offered by Canadian banks. Many investors are risk-adverse, while not wanting to relinquish the growth potential of the stock market. This is why Market Growth GICs are so seductive. Investors’ original principal is guaranteed regardless of what the market is doing, while the performance is linked to the market indices tracked by the products. Being a cynic, I’ve investigated and uncovered the following five gremlins of Market Growth GICs:

1. No Dividends – They stole my precious!
Although Market Growth GICs do track the underlying index, investors forgo the dividends issued by the securities along with the juicy dividend tax credits. As an example, the iShares S&P/TSX 60 ETF rewards their investors with 1.66%, which isn’t available to Market Growth GIC investors.

2. Higher Tax Rate - Give it to us and wrrrriggling! You keep nasty chips.
Since Market Growth GIC investors don’t actually own a piece of the index, gains on GICs are taxed as regular income instead of the more favourable tax treatments from conventional capital gains. For instance, if you’re in the 40% tax bracket, you owe 40 cents for every dollar made in GICs, while you owe only 20 cents in ETFs.

3. No Tax Deferral - NO! That would kill us. Kill us!
Taxes are due each year with GICs, while you can defer capital gain taxes for as long as you hold the ETFs. Let’s do a quick example. If you start with a $1,000 GIC that returns 10% each year, you keep only 6% after tax. Compound this to 5 years and you’re left with only $1,338. On the other hand, you can zoom ahead with ETFs by deferring taxes until the very last year, and are left with a generous $1,488.

4. Capped Return – Don’t follow the light.
A five-year Market Growth GIC offered by TD Bank caps the cumulative return at 60%. This is an annualized compounded return of 9.8%, which is the approximate long-term return for stock markets. As a result, investors have no upside potential relative to the index, while the down side relative performance is –9.8%.

5. No Capital Tax Loss Saving - Stupid fat hobbit, it ruins it.
In the event the market is still down after five years, the principal protection feature kicks in and you recover your loses, however you waive the tax-loss saving to offset capital gain taxes of your other investments.

Principal protection to me is an illusion, because inflation alone will erode the future purchasing power, which is ultimately what you’re trying to protect. If maintaining purchasing power is your objective, stop fooling around with Market Growth GICs, and buy a traditional a 5-year GIC instead at 4.47%. If you still want some exposure to the stock market without exposing yourself to market setbacks, segregated funds are good alternatives. Even though they’re somewhat expensive, you’re compensated with other benefits, which include estate planning advantages, automatic reset of death benefit guarantee, and creditor protection. An example of a segregated fund is CI Signature Dividend GIF which has a price tag of 4.18% MER.

Further readings:
- TD Canada Trust Market Growth GIC.
- How Segregated Funds Protect Your Investments (CI)
- How segregated funds work (Million Dollar Journey)

ps. thank you Canadian Capitalist for bringing this event to my attention.

Tourists have to plan many things like car rental coupons or rent a car by mail. Online surfing for travel information shows many companies offering many things which travelers demand. Discounted and cheaper national car rental facilitates it travelers by all means. Others like hertz car rental and quick car rental suggest advance booking online or through mail for the travelers ease.

Two of my most admired personal financial blogs are pressing the hot button on a very sensitive topic: leveraged investing. To read more on the lively discussions, check out The Canadian Capitalist and Million Dollar Journey.

The pro-leverage group believes that when done properly, leveraging is an effective way to build wealth. The anti-leverage group advocates the old fashion method, which is to pay off your mortgage and invest with cash. It is not necessary to leverage your portfolio in order to reach your financial goals. As The Canadian Capitalist put it:

If you are like me, you want to pay off your home, save for retirement, send your kids to University and eventually, not having to depend on a paycheck. You are not aiming for a spot on the Forbes 400 and couldn’t care less about the list. Do you need leveraged investments to achieve your goals? Not really. A far simpler and less-risky path is to spend less than you earn and invest the difference in a low-cost, diversified portfolio. Why take more risks than you need to?

Just to throw in my two cents. I pick the middle of the road. Most investors concentrate on capital appreciation, but my investment strategy is cash flow centric. Since time is on my side, a moderate amount of leverage is safe as long as I’m getting a positive cash flow out of the portfolio. In Canada, investment loan interests are tax-deductible, while dividends are tax-free for most people. If you’re in the 33% tax bracket, a 3.85% dividend yield is enough to cover a loan interest rate of 5.75% after-tax assuming you leverage your entire portfolio. At the moment, my portfolio has about 17% cash in a high interest saving account, but I’m comfortable with up to a 15% leverage. There’s still plenty of free cash flow left for reinvestments, or paying down debts.

I recently came across a Claymore Canadian Preferred Share ETF article written by Rob Carrick of the Globe And Mail. Although I’m by no mean a preferred share guru, I can’t help but feeling leery about the impeccable timing of this release. Just a few months after our finance minister derailed the income trust gravy train, income-seeking investors are now crying for second best options. There is one important lesson I learned during the dot com era: the financial industry creates new products for investors who are too late in the game. This trend never fails. You have technology in the late 90’s, resource and income trusts in early 2000, and now preferred shares. Who knows? Maybe this time is different, but James Hymas from Hymas Investment Management doesn’t think so. To quote Mr. Hymas, who is a formidable force in preferred share:

This construction difference is apparent from the release. The top three constituents are GWO.PR.X, BCE.PR.A and BCE.PR.C. You know what I like? I like indices that are easy to beat, that’s what I like. I might even be able to earn my fees just by avoiding those things and closet indexing the rest of the portfolio!

Unlike common shares, the preferred share world is complex, illiquid and inefficient. This is one of those rare cases, where I believe active management by a preferred share veteran like James Hymas can add value. Too bad I don’t have the net worth or minimum income required to buy his funds.

The preferred share index that the ETF is tracking is yielding 4.66%. In theory, if you subtract the 0.45% MER from the yield, you net around 4.21%. In other words, the ETF gobbles almost one tenth of the dividends before distributing the rest to you. That’s sounds like a lot to me, but I’m not sure if it’s the going rate. Having said that, I’m still interested in adding a preferred share ETF/mutual fund as part of my diversified portfolio, although I may want to proceed after the frenzies cool off.

Folks. Do you have a suggestion or two for me? Feel free to write me a few comments.

Every investor has a style.  I am a dividend-investing fanatic.  Here are my top 10 reasons for dividend investing:

1)      Dividends set a floor price – Dividend stocks tend to trade within their yield range.  For example, last summer I purchased Bank of Montreal at $60.50 when it was trading near the historical high yield of 4.1%.  The dividends kept the stock from falling more than a couple of bucks before storming back to $71.  BMO also distributed another $1.89 worth of dividend/stock and 2 dividend increases since.

2)      Dividends account for over half of the long-term real return – If you own 100 shares of BMO and receive 4% of dividends by year’s end, you can DRIP your dividends to buy another 4 more shares.  If you keep up the DRIP for 20 years, you’ll have a handsome 219 BMO shares in your portfolio.  Even better, some Canadian corporations offer 5% discounts through DRIP.

3)      Companies with long-term track records of stable and raising dividends show quality of the managements – Managements show commitment to shareholders by improving fundamentals and sharing profits.

4)      Dividends cannot be manipulated like earnings – Dividends are real hard cash in your lap.  Earnings can be faked by creative accounting.

5)      A stable stream of dividends reward investors even during market down turn – Management pays you to wait even during market setbacks.

6)      Dividends are more tax efficient than regular incomes and capital gains – In British Columbia, you can make $66,000 in dividends and pay no tax.  For regular incomes, you pay $16,880 in taxes.  For capital gains, you pay $5,097.

7)      You can safely spend your dividends without harming your portfolio – If you think in terms of income streams instead of portfolio size, you can consume 100% of your dividends without hurting your portfolio.  If instead you go for capital gains, consuming your capital during a depressed market will hurt your portfolio.

      Receiving dividends are passive – Dividends and increases are given to you each quarter or year automatically without any action on your part.  On the other hand, to receive capital gains, you must monitor the share prices continuously. 

9)      High dividend paying stocks have historically outperformed low-yield stocks – In David Dreman’s Forbes column (April 2004), he cited that between 1970 and 2003, the top fifth highest yield stocks returned 14.5%, while the lowest fifth returned only 8.8%.

10)  Dividends are more predictable than capital gains – Suppose BMO averages 10% over the long term with 4% in dividends and 6% in capital gains.  In a given year, you can count on seeing the 4% in your brokerage account, but the 6% capital gain is less dependable.