Financial Jungle

The Public Be Damned… you may quote me: Screw ‘em.

That was the remark from legendary value manager, Marty Whitman, cursing fickle investors for fleeing his Third Avenue fund in favour of the more glamorous technology stocks. The exodus shaved his Third Avenue fund’s assets under management from $50 billion to $38 billion in 1998 and 1999. But guess who’s having the last laugh as the Third Avenue fund is enjoying a 9.95% average 10-year run. Compare that to S&P 500’s 5%!

Marty Whitman has always believed in his value philosophy, which is why he invests the bulk of his wealth alongside investors’. With so much at stake, he can also afford to focus on his long-term objectives in the face of short-term adversities. For Third Avenue, giving Whitman the pink slip is never an option given his revered status. Not to mention Whitman basically runs his own show at the firm.

Other mutual fund managers? Hmm…. not so lucky. Several quarters of persistent lousy performance and you’re out!

So why are mutual fund companies so fixated on short-term returns? Don’t look around. Look at ourselves. We’re the culprits. I once had a colleague, who’s brilliant at what he does, but he said to me, “I pick my RRSP mutual funds based on last year’s performance.” This is how most of us are wired, which is why fund companies are so wildly successful at promoting products catered to our myopic views.

According to an article by Martin Gale, most managers’ interests aren’t aligned with investors’. Judging from how managers are compensated, it’s no wonder why 80% of managers fail to beat the market. They’re not paid to beat the market!

It’s simply not good enough to invest with the manager with the most morningstar stripes. In addition to a strong track record of eclipsing the market, the manager must also “eat his own cooking.” After all, if the manager refuses to eat his poison, why should you?

In 2006, Boston Business Journal surveyed 75 locally based fund filings and discovered that 37 funds had zero dollar invested by their own managers. If a manager doesn’t invest the bulk of his wealth in his own funds, then he’s simply a well-compensated employee whose paychecks depend on MER and assets under management (AUM), not investors’ return. The easiest way to grow AUM is by selling the hottest trends; the ones that made the most money last year. Think back at the height of the Internet bubble. What attracted weak money? Nortel or oil stocks? Fast forward 8 years, which one enriched investors handsomely?

I recently came across an interesting article on Reaping What They Sow. The Denver Business Journal came up with a list of US fund companies where managers were investing heavily in their own funds. The article doesn’t go into performance, so I decided to do a little digging on the top 3 firms: Marsico Capital, Jenus Capital, and Cambiar Investors.

• Marsico Capital has 6 funds under managment: Focus, Growth, 21st Century, International Opportunities, Flexible Capital, and Global. All have beaten their respective benchmarks. 2 funds have 10+ year histories. Managers invest an average of $900k in the funds.
• Jenus Capital has too many funds to list. But their 38-year-old flagship fund, Jenus Fund, has beaten S&P500 by 2.4% a year. Managers invest an average of $675k in Janus mutual funds.
• Cambiar Investors has 3 funds under management: Large-cap, Small-Cap, and International. All have beaten their respective benchmarks. Managers have an average of $559k invested.

If you don’t recognize these U.S. firms, I’m sure you have heard of Warren Buffett, Jim Rogers, Eddie Lampert and George Soros. They, too, have their skin in the game.

Robert Rodriguez was voted by CNN Money as the best manager of our time. Since the mid-1984, his FPA Capital has shattered the S&P 500 with a 3.9% winning margin. He’s a smart dude, but guess what. He’s also the largest shareholder of his fund.

You might recognize value-investing firm, Tweedy Browne. Their flagship $6.7 billion Global Value fund has beaten the MSCI EAFE index by 4.5% a year since 1993. The current managing directors, retired principals and their families, and employees have $91.6 million locked up in the Global Fund.

MorningStar International-Stock Fund Manager of the Year winner, Hakan Castegren, invests over $1 million of his money in his Habor International fund, which commands twice the EAFE index’s 20-year annualized return.

Looking north of the border, there’s Irwin Michael, whose Fundamental Value fund trashed the TSX by a whopping 6% a year since 1990. He invests his family’s savings in his funds.

Don’t forget Francis Chou, whose Chou Associates and Chou RRSP have compounded returns of 12.4% and 10.6% respectively, despite being somewhat of balanced funds.

What about Wil Wutherich? He’s a new to SteadyHand, but not new to wealth management. His Small-Cap fund annualized 17% over a short history so far. Wil Wutherich is also stuffing his money where his mouth is.

Although 80% of “professional” money managers underperform the market, keep in mind that real professionals have skin in the game. While picking a manager with a large stake in his own funds alone doesn’t guarantee extraordinarily results, at least it weeds out the uncommitteds; the ones not paid to beat the market.

I used to think that since it was a capital intensive business, Carnival (CCL) wouldn’t qualify as a classical dividend growth story, but I stand corrected.

Carnival is the most dominating global cruise company in the world generating revenues in excess of $13 billion; trouncing the $6 billion eked out by distant second place, Royal Caribbean. The company didn’t become this big for no good reason: it has the most recognizable brand and the fattest profit margin (17.5%) in the cruise line business. For comparison, Royal Caribbean’s profit margin is only a meager 9.8%.

Carnival is also spinning out lots of cash, and it’s not afraid to share the wealth with investors. In 2007, the Miami-based company garnered an astonishing $4.07 billion of cash from business operations. Out of which, only $0.54 billion was needed for ship improvements/refurbishments, and developments to various tour assets and port facilities.

With $3.53 billion of free cash flow in hand, Carnival chose to reward shareholders with $990 million in dividends and buy back $275 million worth of shares. They reinvested the rest of $2.26 billion as part of the ongoing new shipbuilding program, including final delivery payments on 5 brand-new ships: Carnival Freedom, Emerald Princess, AIDAdiva, Costa Serena and Queen Victoria. (Carnival owned 85 ships by end of 2007.)

This 36-year old company delivered its first dividend payment of 2.5 cents a share back in February 1989. Today, the quarterly dividend balloons to 40 cents a share. In fact, payments have accelerated in recent years quadrupling over the past 8 years.

Carnival is about 20% off its high. I haven’t pinned down an entry price, but at 4% yield, less than 25% payout ratio based on free cash flow, 13.5 PE ratio, and a good growth profile, I think a reasonable entry price is near.

I don’t own the stock. I’m not a certified investment adviser. Please conduct your own research.

As mentioned in my High Yielding Dividend Stocks Flexing Muscles post, 12 independent studies concluded that investing in high yielding dividend stocks was a winning strategy for much of the previous century. Despite the overwhelming evidence, all the studies were predominantly US and UK based, so I decided to roll up my sleeves and conduct my own research in Canada.

To begin, I queried for all Canadian dividend mutual funds with at least 15-years of historical data from GlobeFund. I then manually weed out funds with too much bond or foreign content; so, only dividend funds with at least 75% common stocks, and 80% Canadian contents made the list.

Here are the final 7 funds along with their 15-year compounded return and Management Expense Ratio (MER):

1. PH&N Dividend Income (Return=14.28%, MER=1.11%)
2. RBC Canadian Dividend (Return=13.08%, MER=1.73%)
3. Scotia Canadian Dividend (Return=12.03%, MER=1.67%)
4. TD Dividend Growth (Return=11.51%, MER=1.94%)
5. CIBC Dividend (Return=9.37%, MER=1.96%)
6. Investors Dividend (Return=8.27%, MER=2.87%)
7. Mavrix Dividend & Income (Return=8.08%, MER=2.14%)

Not surprisingly, lower MER funds tend to churn out stronger performance over time. However, I don’t see the benefit of paying for MER when an investor can easily emulate these dividend funds with a handful of core holdings, and then build on them as the portfolio grows.

The average annual return for the group is 10.95%, but if I remove the MER component, gross return jumps to 12.87%. It’s worth reiterating that a typical dividend fund has a bond allocation, so a pure dividend play would see over 13% in return. For comparison, TSX’s total return over the same period is 11.27% before tracking error, or a difference of 1.60+% compounded over 15 years. Over the next 3 years or so, I anticipate financial stocks to rebound and resource stocks to cool, which would widen the lead even more.

For other benefits of dividend investing, please check out my post on Top 10 Reasons For Dividend Investing.

Since all BNN guests are having so much fun with their top picks, I don’t see why we can’t have ours. Here are my top 3 picks:

Scotiabank (BNS) - Canada’s most international bank is trading at a cheap 11.7 PE and yielding an attractive 4.2%. The market is hurting the bank even though it has no exposure to US subprime. Risk of a dividend cut is virtually non-existing, and the distribution will head higher over the horizon.

Artis REIT (AX.un) - Retail, office and industrial landlord who has a knack for acquiring undervalued properties with in-place rents significantly below-market rent rates in the booming Western provinces. Currently sports a 6.6% distribution yield, a conservative 75% payout ratio, and a healthy 49.2% debt-to-GBV. For comparison, debt-to-GBV are 55% for Calloway REIT and 61% for HR REIT.

Boralex Power (BPT.un) - Management recently cut distribution from their long-term assets due to USD depreciation and below average hydrology; both of which were outside of management’s control. Odds are in favour of US dollar and hydrology to revert to their historical average. Boralex’s current plight is more than priced in to the 13.9% distribution yield.

What are your BNN top 3 picks?

Disclaimer: This is a fun post. Please conduct your own research before making any investment decision.

The Dividend Guy recently touched on a research paper that revealed a surprising result about dividend investing; stocks that generously distribute larger percentages of their earnings to shareholders tend to outperform their stingy counterparts. This is counter-intuitive considering that the more earnings a company distributes to shareholders, the less retained earnings remain to grow the business. For more on this finding, download Does Dividend Policy Foretell Earnings Growth? from Papers.SSRN.com.

As if that wasn’t a head-scratcher, renowned value-investing firm, Tweedy Browne, compiled a series of studies suggesting another firmly held conventional wisdom is about to come crumbling down. It’s widely believed that one law of dividend investing is to buy lower yielding stocks if you want to accelerate portfolio growth. Beware of such assumption as the paper begins eloquently with a quote from T.H. Huxley.

The deepest sin against the human mind is to believe things without evidence.

As far as I’m aware, this is the very first time that someone gathers not one, not two, not three, but twelve independent research studies using empirical evidence to reinforce the claim that the highest yielding stocks trash their low-yielding counterparts consistently over a variety of periods and geographies.

Here are some quotes from each research:

1. Triumph of the Optimists: 101 Years of Global Investment Returns (2002) - Over 101 years, [Elroy Dimson, Paul Marsh, and Mike Staunton] found that a market-oriented portfolio which included reinvested dividends would have generated nearly 85 times the wealth generated by the same portfolio relying solely on capital gains. (1900 to 2000, US & UK.)
2. Dividends and the Three Dwarfs - [Robert D. Arnott] concluded that dividends were far and away the main source of the real return one would expect from stocks, dwarfing the other constituents: inflation, rising valuations, and growth in dividends. (1802 to 2002, S&P500.)
3. Taxes, Dividend Yields and Returns in the UK Equity Market - Using data from the London Share Price Database (LSPD), [Gareth Morgan and Stephen Thomas] examined the relationship between dividend yields and stock returns from 1975 through 1993 in the UK. Database companies were ranked by dividend yield at the end of each month and divided into six groups, including a zero dividend group (companies that did not pay dividends). … they find a strong [positive] correlation between the size of the dividend yield and the average monthly return. (1975-1993, UK.)
4. Market Anomalies: A Mirage or a Bona Fide Way to Enhance Returns? - Using a sample of 4,413 companies which were listed on the London Stock Exchange during January 1955 through December 1988, Lenhoff ranked all listed companies each year according to dividend yield and sorted the companies into deciles. …there was almost a perfect correlation in the decile returns between higher dividend yields and higher annualized returns. The top decile, in terms of high yield, produced an average annualized return over 34 years of 19.3% versus 13.0% for the Financial Times Actuaries All Share Index. (1965 - 1998, UK.)
5. The Importance of Dividend Yields in Country Selection - Michael Keppler examined the relationship between dividend yield and investment returns for companies throughout the world. … The study indicated that the most profitable strategy was investment in the highest yield quartile. The compound annual investment return for the countries with the highest yielding stocks was 18.49% in local currencies (and 19.08% in U.S. dollars) over the 20-year period, December 31, 1969 through December 31, 1989. The least profitable strategy was investment in the lowest yield quartile, which produced a 5.74% compound annual return in local currency (and 10.31% in U.S. dollars). (1969-1989, world.)
6. Dogs of the Dow - [Michael O’Higgins] discovered that by investing in the 10 highest yielding securities in the Dow Jones Industrial Average of 30 industrial companies, and rebalancing annually, one could substantially outperform the average itself. (1973-1998, Dow Jones Industrial Average.)
7. Triumph of the Optimists: 101 Years of Global Investment Returns - Higher dividend yield stocks outperformed their lower-yielding counterparts and the index by 180 and 160 basis points annualized from year end 1926 to year end 2000 (a basis point is one-hundredth of a percentage point). This translated into 2.29 times the wealth generated by the lower-yielding stocks. (1926-2000, US.)
8. The Future for Investors - In Jeremy Siegel’s study, on December 31 of each year, the S&P 500 stocks were sorted into five quintiles ranked by dividend yield. He then calculated the returns of the stocks and quintiles over the next year, re-sorting at year-end. He found that better results were directly correlated with higher dividend yields. The highest yielding quintile (top 20% of S&P 500 based on yield) produced an annualized return of 14.27% versus an annualized return of 11.18% for the S&P 500 Index, which resulted in three times the wealth accumulation of the index. (1957-2002, S&P 500.)
9. Contrarian Investment Strategies: The Next Generation - David Dreman analyzed the annual returns of price-to-dividend strategies using data derived from the Compustat 1500 (largest 1500 publicly traded companies) for the 27-year period ending December 31, 1996. As indicated in the table below, he found that the highest yielding top two quintiles of the Compustat 1500 stock universe ― as reflected by low prices in relation to dividends ― outperformed the market by 1.2% and 2.6% annualized, respectively, and outperformed the stocks with low-to-no yield by 3.9% and 5.3% annually. (1970-1996, US.)
10. Lehman Brothers Equity Research - High dividend yield stocks were found to have produced more return with less risk than their low-yield counterparts. The Lehman analysts studied the one thousand largest of U.S. firms ranked by market capitalization, and rebalanced these securities quarterly, starting in January 1970. They found that the top-yielding quintile produced a 13.7% equal-weighted total return per year with a 15.5% standard deviation of return. The bottom-yielding quintile, in comparison, returned 9.0% with a 29.1% standard deviation. (1970-2006, US.)
11. High Yield, Low Payout - Over the 26-year period, [Credit Suisse Quantitative Equity Research] found that stocks with higher dividend yields generally outperformed those with low dividend yields, but the highest yield decile did not produce the best overall return. As their chart indicates, deciles 8 and 9 outperformed decile 10, the highest yield decile. … However, the best returns have not come from those with the highest yields ― higher yields coupled with low payout ratios have produced the best returns. (1980-2006, S&P 500.)
12. When The Bear Growls: Bear Market Returns - The Compustat 1500 database (1500 largest publicly traded stocks) was used, and the performance of four value strategies ― low price-to-earnings, low price-to-book value, low price-to-cash flow, and high dividend yields ― were measured and averaged for all down quarters and then compared to the index itself for the 27-year period. All of the value strategies outperformed the market, with the high dividend strategy (low price-to-dividend) performing the best of all the value strategies, declining on average only 3.8%, or roughly half as much as the market. (1970-1996, US.)

Note that the yield is only one facet of a sound stock selection process. Although the typical high-yielding stocks have overwhelming astounded investors with superb total performance, others have slashed or halted their juicy yields due to unsustainable dividend policies.

Just to be on the safe side, we should also examine other financial figures abreast including, but not limited to the price-to-earning (P/E) ratio, free cash flow, payout ratio, debt-to-equity (D/E), return on invested capital (ROIC), revenue growth, and earning growth. One of my favourite sites to look up financial numbers is MSN Finance. Here’s an example link to Saputo’s historical cash flow statements.

The investment saying, “dead cat bounce”, has been thrown around recently to warn investors about the nasty surprises prowling right behind the beguiling recovery of fallen financial stocks.

While I don’t know where the financial sector is headed in the short run, as a dividend and long-term investor, I try to block these little price squiggles off my mind and focus on my long-term views and investment philosophies. Without the benefit of hindsight, no one can predict where the stock market will go over the next few days, weeks or months.

I remember reading a few doom and gloom posts in the Canadian Business forum just days after the near collapse of US investment banker, Bear Sterns. Pundits plead investors to sell financials as the whole sector was being crippled by subprime, ABCP, derivative, credit, and liquidity crisis. Many critics were combing for and cherry picking web articles that supported their point of views. One of the articles even recommended the following:

“If your only nest egg is your IRA, then I suggest taking half of your money out, and paying the penalties, and buying physical silver or gold immediately from your local coin shop.”

Having radical recommendations like this displayed in a public forum is disturbing. I hope no one actually followed up on this recommendation and parked half their nest eggs in one precious metal. That would go against the principle of diversification. A wrong bet could send investors into a financial tailspin.

Sure enough, over the next 2 days, the Vanguard Financial ETF surged 5.6% and gold slid 5.9%.

“Enjoy the dead cat bounce while it lasts !!”, one critic trumpeted.

But, apparently the dead cat had 8 lives remaining as the Vanguard Financial ETF subsequently rose 4.4% and gold fell another 2.9% as of closing today. Even the two most hated Canadian banks, Bank of Montreal and CIBC, jumped nearly 20% since the March 18th low. The other 3 big Canadian banks (RY, TD, BNS) are also up a respectable 7% on average.

I’m not suggesting everyone to flee their gold investments and plunk 100% into financials. That would defeat the purpose of this post. If you believe a particular sector will stumble in the foreseeable future, why not prune gently instead of pulling out the root system entirely? The best way to keep portfolio risks in check is to maintain a reasonably diversified portfolio across all sectors, and avoid keeping a finger on the buy/sell trigger while reading these sensational forecasts from financial forums no matter how convincing or colourful they may be.

By and large, dual-class shares are unloved by investors and PF bloggers because the structure creates a double standard that gives one class of investors unfair voting power over another. ThickenMyWallet recently wrote a post on dual-class shares titled “You’re a fool if you buy…“:

The primary disadvantage of a company with a dual-class share structure is there are no effective checks and balances to management excesses such as excessive executive compensation… The larger issue is that companies with dual-class structures tend to be poorer performing stocks than their single-class structure counterparts (ask someone who invested in shares of Ford).

Yesterday, The Dividend Guy followed up with “Dual-class shares suck“:

From a statistical perspective, it would be better to hold the single-class stock in the industry you are looking at, compared to the dual-class company.

Both bloggers singled out controlling shareholder, Conrad Black, whose extravagant lifestyle single-handedly brought Hollinger International down to its knees. While both bloggers put forth rationales with strong merits, ThickenMyWallet did offer a glimpse of hope suggesting good stocks do exist in the dual-class structure.

Admittedly, I haven’t paid much attention to dual-class structure although I may have to adjust my stock selection process. So far in my endeavor, I’ve found no reasons to shy away from *all* dual-class stocks even though the door is open for management to act in their personal interests. My view is that result should speak louder than share structure, so I tend to stick with management with a strong track record of delivering excellence.

There are many profitable dual-class Canadian stocks with smoking-hot cashflow, and management teams aren’t afraid to share the wealth with generous dividend policies. Reitmans, for example, is a debt-free high quality retailer with a long history of dividend increases. Another one is Teck Cominco which hiked their dividend 10-fold since 2004. AGF Financial also recently boosted their payout by 25%. All three stocks have so much money, at least 3 years worth of dividend is parked in cash or cash equivalents.

Perhaps dual-class structures do raise some eyebrows, but a meticulous screening process should weed out the looters.

Just because the financial sector is ruing Bear Sterns’s stunning collapse doesn’t mean all dividend investors are in dire straits. Smart investors who are surviving this bear market are diversifying into sectors that don’t correlate with the financial sector. Something like the largest pipeline operator in the country, TransCanada (TRP), should fit the bill, because it’s partially immune to both subprime and recession.

TransCanada is a huge conglomerate, but its 2 family jewels are pipelines and energy. Its “network of more than 59,000 kilometres (36,500 miles) of pipeline taps into virtually all major gas supply basins in North America.” The company is also one of North America’s largest providers of gas storage, and a key power plant operator with interests in approximately 7,700 megawatts of power generation.

The pipeline stocks tend to pour in vast amounts of positive cash, but they’re not traditionally known for their growth. However, things are about to change with a glut of crude and natural gas coming on steam in and around Alberta over the next 6 or 7 years. The problem is that the real demand for energy isn’t in Alberta; it’s in Southen U.S. And if crude gets clogged up in Alberta, all producers suffer a phenomenon known as apportionment, where a shortage of pipelines is preventing cruel oil from being shipped to places where it can command top dollars. With producers and refineries crying at both ends of the pipe, companies like TransCanada and Enbridge can come in to relieve the congestion. And to profit handsomely, of course.

Pipelines, are what some people call, a business with strong economic moats. Building a pipeline is tough work. It’s notoriously expensive, complex, and you must wait maybe 2 or 3 years to reap the rewards. On top of that, management must jump through many regulatory hoops, and duke it out with relentless oppositions such as First Nations, farmers, environmentalists and workers unions. The bright side is that all these Mount Everest tall hurdles tend to chase away rookie entrants wishing to duplicate the service. That’s great for long-term shareholders looking to protect their dividend streams.

Here is a map from TransCanada’s annual report showing off their pipelines which span from Canada down to Mexico. Over at the lower right (1) is the recently acquired $3.4 billion 17,000km long ANR gas pipeline system. Next is a 50% ownership in the $5.2 billion Keystone Pipeline (2), which is TransCanada’s venture into the oil pipeline business. This 3,500 km pipeline is currently under construction, and is expected to deliver 590,000 barrels of crude per day. Operation will begin in late 2009. North Central Corridor (3) is a $983 million expansion to the existing Alberta System gas pipeline. The two dotted lines (4) are the proposed Northern Pipelines: the Mackenzie Gas Pipeline and the Alaska Pipeline.

We always think of pipeline stocks as slow moving mammoths, but the company is firing on all cylinders with its numerous growth initiatives, such as the Keystone projects, northern pipelines and expansion to their Alberta system. TransCanada, along with arch-rival EnBridge, are in the most prosperous economical environment possible despite US slipping into a recession. Back-of-the-envelope math suggests that TransCanada is investing at least $11 billion in key pipeline and power projects between 2007 and 2010. (I know I’m underestimating this.) That’s a staggering figure relative to TRP’s $20 billion market cap. In 2008 alone, management forecasts overall capital spending to be $2.9 billion.

Here’s an image of their power plants and gas storages. The key excitement in this area is the refurbishment of Bruce A Units 1 and 2 (9) which is expected to add another 19% of additional megawatt of output in 2010. A couple of other initiatives include the Portlands Energy Centre (11) and Halton Hills Generating Station (10) generating 550MW and 683 MV respectively when they’re complete.

Valuation

At 16 PE, TransCanada isn’t exactly a bargain when compared to the 13.9 historical average. (Financials are still the cheapest.) But the business is investing heavily these days to accelerate revenue, cash flow and earning growths. Given their improved growth profile, I believe buying at historical average PE is a reasonably attractive entry price, or ~$33 with 4.3+% dividend yield. TransCanada closed higher on Thursday at $38.06. I’m keeping an eye on this one.

Disclosure: I have positions in TransCanada, EnBridge and Inter Pipeline Fund.

One of the greatest investing dilemmas I reckon with is ethical investing. Loading up on sin stocks doesn’t exactly align with my moral conscious. After all, most people like me have issues buying controversial companies like Lockheed Martin that thrive in times of war. But giving up these little devils doesn’t bode well with generally accepted investment principles such as diversification and return. Pull up a chart of S&P 500 and Lockheed Martin, and you’ll be surprised at Lockheed Martin’s low correction with the index, as well as its marvelous long-term out performance.

In his My Stocks Must Pass The Goodnight Test article, John Heinzl “vowed never to invest in such a vile product again.” The offending product he’s hissing at was tobacco. He recounted an accident where a driver was pronounced dead from a heart-attack that was possibly induced by cigarette consumption. A few weeks after the incident, John sold all his shares of Altria, the largest tobacco company in the United States, with approximately half of the U.S. cigarette market.

I personally don’t own any cigarette stocks, but I must confess; it’d be very tempting to wake up tomorrow and find all cigarette stocks on a fire sale. Not to mention, cigarette stocks have historically been most generous at puffing dividends at shareholders.

How do we measure the sin scale of a stock? Where do we draw the line to discern evil stocks from the ethical ones?

It’s interesting to note that prior to John Heinzl’s horrific car crash experience, he was content to hold Altria for their lucrative dividends. Tom Connolly of the Connolly Report also refuses to buy tobacco stocks because his sister died of lung cancer. That begs the question what if you own a stock that’s hurting everyone else except the people you know. Does that justify investing in a tobacco stock? Should it take a dramatic life experience before we evaluate the morality of a stock?

I also ponder how much of our perceptions are influenced by the media. We often don’t hear enough of the other evils that don’t illuminate as brightly on the radar screen. If you think tobacco stinks, how about oil? Last I heard, our energy consumption is punching holes in our ozone layer leaving irreversible damages to our precious environment. While the Earth is being worn down, the real causalities are the wildlife habitats and our future generations. Too bad for them, their mourning doesn’t garner nearly the same attention as tobacco. If we can somehow systematically measure sins in concrete and quantifiable units, I’m sure you’ll agree that cigarette, booze and gaming stocks are like little baby angels when standing next to these oil devils.

As Canadians, our love affair with energy stocks is best exemplified by the whopping 29.1% sector weighing on the TSX, beating financials to the top spot. Chances are, if you’re an equity investor, you’re probably heavily vested in energy stocks. To make matters worse, even if you’re not investors, the unconscionable is foisted upon you. An interesting fact is that in 2005, the Federal and Provincial governments collectively inhaled $7 billion in tobacco taxes. So much for trying to remain pure in our virtues. See the pavement you drive your car on? It’s built with cigarette money.

Although it’s virtually impossible to construct a completely ethical portfolio, looking at my core holdings, I’m relieved to say that my portfolio is relatively light on the sin scale.

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.

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.