Sunday, December 9, 2007

MG's 4 goals - (goal # 3)

About one year ago my wife and I set 4 long-term goals for our non-registered portfolio. I have these goals indicated on one of my Excel spreadsheets that I use to track my non-registered portfolio. The reason I have them there is so that I can see the 4 goals as a reminder, as well as to check up on my progress regularly. When creating these goals I tried to make them simply stated, specific, challenging, and of course realistic. I thought I would share these 4 goals for our non-registered portfolio in a series of posts. Goal # 1 was shared on my November 4th post and Goal # 2 was shared on my November 24 post.

Goal # 3
Keep our portfolio dividend yield between 2.0% - 4.0%.
For example, we currently want a $35,000 portfolio to pay us between $700 and $1,400 annually. The rationale behind this goal has to due with my investing strategy. The strategy calls for investing in companies with a high current yield. By 'high yield' I am looking for a yield level above 2.0%. The reason I top the yield out at 4.0% is because in the current interest rate environment, a yield above 4.0% usually signals some type of growth expectation issue in my opinion. Examples of dividend yields greater than 4.0% that might come with relatively slow growth would be Pfizer (PFE), Bank of America (BAC), Bank of Montreal (BMO) or Consolidated Edison (ED). While growth can still be achieved with a greater than 4.0% yield in some companies, I don't want to overemphasize high yield in my stock picking and find myself with a portfolio yielding 5% that grows an average of 1% per year over and above dividends. Simply stated, I want to strike a good balance between share price growth and dividend payments.

Progress
Currently our portfolio is yielding 4.1% so technically we are not meeting this goal. I am going to excuse us for the time being because of our current heavy weighting in income trusts. This weighting will come down over time as our maternity leave financial strategy comes to an end.

Where this goal becomes a little cloudy is when you consider that economic times change and interest rates change as well. A yield range of 2.0% - 4.0% might seem appropriate now for my universe of equities that I pick from, but as interest rates rise my yield range perhaps should rise as well.

If anyone has an idea for a method to use to know when and how to adjust this yield range to fit my universe of stocks, I would be interested. For example should it be tied to some sort of bond rate, or other industry rate....?

12 comments:

Anonymous said...

Nice blog. Aren't yankee dividends taxed as income. Hence in Ontario, one would be better off with a cnadian dividend yield of a lesser amount.

4Life said...

Anonymous: How are Canadian dividends taxes for Canadian citizens?

Best Wishes,
Dividends4Life

MG said...

anon, Yes you are correct.

D4L, We receive a tax credit for Canadian dividends. The exact percentage depends on your tax bracket, but it is very light.

John said...

Here is possible Canadian Div List

I own them all

ADV 6.00%
BCE 3.71%
BMO 4.70%
BNS 3.59%
CM 4.22%
ENB 3.18%
IGM 3.57%
LB 3.32%
MBT 5.78%
MFC 2.33%
MG.A 1.75%
NA 4.66%
NBD 4.92%
PWF 2.99%
ROC 5.44%
RUS 7.16%
RY 3.83%
SLF 2.50%
T 3.83%
TCK.B 2.62%
TD 3.16%
TRP 3.39%

John said...

PS

Your approach to investing is very sound and very sophisticated.

You asked how to adjust this yield range to fit your universe of stocks. You never have to. It is built into the price of the gain.

As you “buy and hold” the effect of the constantly increasing dividend increases will be reflected in the appreciation of the share price.

In your GE post you hit it perfectly.

So 20 years from now GE may still be in the same yield range but the shares will be priced much higher.

If you go back and look at your yields at your acquisition price then they look much bigger over time. (I.e. my Canadian bank stocks look like 4%on today’s price but yield 10 to 15 on the price I paid a few years ago)

I posted my current list above. In another account I hold CU and EMA and they also have been great over time.

MG said...

Hi John,

I realize that.

What I am getting at has more to do with the economic environment. If interest rates rise a great deal then perhaps I should be holding stocks that yield more in the 4.0 - 6.0% range...etc.

John said...

So true, the highest yields are always when inflation is high and interest rates are up.

My average today is in the 3.5 to 3.8 range across all the dividend stocks

A few years ago the same stocks (vs market price) were just over 5%

MG said...

That is why I think this goal is kind of fuzzy logic. Reason being that the range will fluctuate. I guess as that occurs I will shift my paradigm and realize where my new range should be just judging by my universe of stocks.

Nurse B, 911 said...

You sparked my interest in a thought which might turn out to be a great follow up post for you depending on the feedback given over on the CB forums. I titled it "Portfolio Dividend Yield Ranges" and just put down a few thoughts I had after I read your post. Might be interesting later to see what the FWF members think since your "Original Yield on Investment" thread received some great feedback originally.

Sami said...

good goals to achieve.

yes income trusts need to be purged out from long term portfolio.

what do you think about reits? Canadian reits pay higher yield than US ones and much smaller that will have room to grow?

Financial Jungle said...

2-4% is a reasonable range. I'm aiming for 3-5%, only because my income trust weighting is a little higher.

With regarding to Pfizer, the stock still has tremendous growth ahead. Lipitor's patent is due to expire in 2011. This drug represents 30% of Pfizer's sales. By my calculation, Pfizer has enough cash balance and free cashflow between now and then to buy back ~40% of equivelent shares outstanding. (They can also pay back long-term debt, however that's only $6.0 billions compared to $22.8 billions in their bank account.)

In other words, the pie may be shrinking, but your slice is growing at a faster rate. I think Lipitor is old news, and it's time to look ahead to segments inside and outside of the company as Pfizer has one of the strongest balance sheets among US large-caps.

John said...

I do not agree with the Income Trust comment

The stocks I listed above are my non RRSP portfolio where a 3.5% to 3.9% overall dividend return is reasonable given the current interest rates and the tax advantages of dividends.

RRSPS are best for US stocks and Income Trusts which would be taxed at a higher rate then Canadian dividends out side an RRSP.

In your RRSP you should expect a much higher return and put the things in thatwould be brutally taxed outside an RRSP

In my RRSP I hold the same quality US dividend stocks as our money Gardner and add my own “secret sauce” of Income Trusts.

Since the October 2006 Income Trust decision by the government Trust are a steal.

This is especially true for closed end Trust funds. For example look at CITADEL DIVERSIFIE TRUSTS UNITS (CTD-UN). I own this one and others and they are pure money machines.

Why? They are thinly traded and sell at a massive discount to their Net Asset value.

I am getting 10 to 11% return on these.

Mix a few of them in with quality US dividend stocks and your blended RRSP return is 7 to 8%

You need to do your homework and look for ones that have a massive discount to NAV and where the fund is committed either to buy you out at X% of Nav or committed to buy shares to close the gap