Tuesday, August 28, 2007

personal finance & the shabby room

Why are personal finances so taboo?

For us nerds in the personal finance blogosphere, our topic of choice is one of great comfort and invokes some lively discussion. I'm sure many of us have noticed that we are in the minority when it comes to interest and feelings toward personal finance. When one ventures out into the real world the story is quite different. Personal finance is like that bedroom with the hideous paint colour and the gouges in the walls, that you have been putting off patching and painting since you moved into your house. PF tends to be an item that no one likes to talk about for fear that it will cause harm or entail us to stir up some kind of impossible effort or negative feelings.

If anything, whenever personal finance is discussed in social circles, the polite phrases to use tend to be limited to:

- 'I wish I had a million dollars'
- 'That's too expensive'
- 'If I only had the money'
- 'If I only made more money'
- 'I can't afford it'

The 'normal' and 'polite' thing to do seems to be to claim that one does not have enough money, and to want more. Can we learn anything from each other engaging in this type of social behaviour?

Couldn't phrases and discussion points like the following be more helpful?:

- 'Should I pay off the house or invest?'
- 'What technique do you use to save more of your net income??'
- 'I prefer to live below my means, in order to invest in my future.'
- 'It's not how much you make, it's what you do with it.'

Why aren't these phrases on the tips of people's tongues, aside from the fact that the issue at hand is somewhat personal to some people?

...Because no one wants to patch, sand, and paint those walls in that shabby room. No one wants to look in the closet. No one wants to address the issue of those boxes (or bodies) that they've hid in the closet. I think the shag carpet may need replacing and the bay window is moldy as well. Addressing these items will definitely take them away from the activities they enjoy in their everyday lives; so much for that vacation they planned. In private they'll endlessly stress about that shabby room, whether it be at work, even while on the beach in Jamaica...

If you have someone in your life who freely and enthusiastically discusses theirs and your personal finances with you, or even personal finance in general, count yourself lucky.

Friday, August 24, 2007

Royal Bank & the power of dividend growth

Today Royal Bank of Canada (RY) announced a 19% increase in earnings from the third quarter of last year. They also raised my pay (AKA their dividend) by 9% to $0.50, this has been a semi-annual raise. This reminds me of a phenomenon in dividend investing that I believe is extremely powerful and lucrative.

Probably the most powerful part of a dividend growth investment strategy is below. Check out this example of Royal Bank as of today:

Bought in May, 2006 Cost = $47 / share. Dividend at that time was $0.36 / share so the stock was yielding 3.1%

Since then they've raised their dividend from $0.36 to $0.50 (as of today)

The shares now trade at around $55 / share. So they yield 3.6%.


$0.50 (current dividend per share) x 4 / $47 (my investment per share) = 4.3%

These dividends are also getting reinvested, so that adds a whole other benefit to the strategy which employs a compounding effect.

Wednesday, August 22, 2007

top 5 stock picks - 3 month update

About 3 months ago I picked 5 stocks that I thought were undervalued. I also liked the 5 company's prospects at that time as long term investments, which I still do.

Here is a 3 month check up on their performance vs. the appropriate index.

Manulife Financial + 1.9% vs./ XFN Canadian Financials ETF - 5.0%
Walgreens + 0.6% / S&P Consumer Staple Index - 1.5%
FedEx + 5.8% / Dow Jones US Transport Index - 6.3%
Lowes - 6.0% / S&P Consumer Discretionary Index - 8.6%
Johnson & Johnson -2.5% / S&P Healthcare Index -6.8%

Overall my 5 stocks had an average return of 0%, while their benchmarks had an average return of negative 5.6%. 3 months is a very short time horizon, but so far I seem to be beating the benchmarks.

(Please note currency was not taken into account here, as the values are in real terms)

Thursday, August 16, 2007

gaining some experience in the market

Well, what a 'fun' day today was for someone like me who has been in the market in a big way for less than 2 years. The TSX was down by over 500 points at one point today! I really am enjoying this as I have no plans for my capital for at least 10 - 15 years. Here is a great article from the Globe that sums it up well.

Several buying opportunities keep popping up and some have been too hard to resist. As mentioned in my last post I initiated a position in the Bank of Nova Scotia (BNS) earlier this week.

My second purchase of the week was today, when I felt it necessary to double my stake in Yellow Pages Income fund (YLO.UN) as it dropped to the $12.50 range. In my opinion this is an opportunity to pick up some of the safest, high yield in the Canadian market today. The units are trading at points not seen since just after the Halloween Massacre last November, and now yielding 8.7%. This represents a drop of almost 20% off of it's 52 week high. Heck, stocks with much more potential volatility in their earnings (and thus returns) like Petro Canada, EnCana, and Caterpillar are off by less than this from their highs because of this downturn.

It is my belief that as panic has been setting in for some investors, they tend to liquidate trusts that are more liquid (higher daily trading volumes) more readily, as oppose to trusts that trade with lighter volume. This ensures they get a better price for their units. I am willing to buy 8.7% yield off of a hasty panicked seller, as I believe Yellow Pages is a superb business with a stable business model, stable organic growth, and a fabulous brand name. As long as they do not cut their distribution, which has been hailed as extremely safe, I am fine with a little unit price depreciation in the short term. This is one of those stocks that plays the 'baby' role as it is thrown out with the bathwater on days and weeks like these.

What are you buying? What is your opinion of this credit crunch?

Tuesday, August 14, 2007

bought some Bank of Nova Scotia

Stay away from the banking sector.......banks are scary right now....subprime is a mess....loan loss potential.....fear.....more fear.....GREAT TIME TO BE A BUYER OF A BANK THAT DOES THE LEAST OF ITS BUSINESS IN THE GOOD OLD U.S.OF A!

I initiated a position today in Bank of Nova Scotia (BNS). Scotiabank is trading far below my fair value estimate, and I believe it might be oversold because of the current debt-related fears in the market. This bank has proven itself to be an exceptional international growth story (operates in 50 countries), while proving to be a reliable and lucrative investment in the process. This play on the developing world, is a perfect compliment to the strong domestic operations of Royal Bank of Canada in my portfolio. Scotia ranks in the top 10 banks in several countries, they are Mexico's 7th largest commercial bank.

BNS is the most efficiently run Canadian bank and probably has the least U.S. exposure of any of the big five. Scotiabank is probably the strongest large Canadian bank in terms of growth, while today it is yielding around 3.8%, which I like because you are getting some growth as well as a nice 'value-oriented' dividend yield. Their record of dividend increases has been phenomenal long term, with their latest year over year increase clocking in at 16.7%.

Return on Equity is over 21% and has been on the rise, while debt levels are very low at a debt/equity of 0.17%. The bank has a modest payout ratio of around 41%.

As far as valuation goes Scotia has been been good value for months. P/E is currently around 12, with a forward P/E of 10.8. In a recent post I described how I like the bank below $52, obviously I was very happy to pick this one up at $47.56 today.

Recently some of these banking stocks including Bank of Montreal, Royal Bank of Canada, Bank of America, etc. have been trading as if the subprime mess is going to actually cause their earnings to plummet for several quarters or even years, while their dividends are halted or even cut. I don't believe this to be the case with Bank of Nova Scotia. If the market continues to sell BNS based on these fears I will not hesitate to pick up more lower down.

The world economy is still strong and BNS will continue to benefit from the growth of the developing market as well as the strong Canadian economy. The bank could very well be hurt by the trickle down affect of all of the subprime losses and fears, however I would rather be buying at a time of fear than a time of exuberance in the market. Over the last full year Scotia's stock has returned a paltry 2.6% before dividend, despite its great operational performance, dividend increases, and gains all over the board.

Wednesday, August 8, 2007

maternity leave financial strategy

As mentioned previously my wife will be embarking on a year long hiatus from the working world when we add a new member to our family in January, 2008. To prepare financially for this drastic reduction in our employment income we have developed a strategy which involved saving, investing and some other adjustments. My wife actually earns a higher income than I do, so our situation may involve more of a drastic change than most.

My wife will halt her RRSP contributions.

We will have our car insurance reduced on her car, as she is going from driving 80 km three times per week (she works from home as well), to no commute.

Our grocery and dining out bills should be reduced as she will have more time to cook so we will purchase less convenience foods and dine out less. Dining out with a newborn does not strike my fancy either.

Our gasoline expenditures should essentially be cut in half.

I have run the numbers into our budget and I believe we will be able to get by on our adjusted income with money to spare each month, albeit much less money to spare than now. The second part below is more of a security blanket or fire escape if you will....

Savings / Investment / Security
The main part of our strategy involves something I started doing months ago, buying Income Trusts. By January 1, 2008 I will have a large part of our non registered portfolio (about 25%) invested in these income producing vehicles. Inter Pipeline Fund and Yellow Pages Income Fund are the two that I hold now. I may continue to add to these two, or I may buy another trust.

This store of income producing capital could accomplish the following:

- Provide upwards of 8% cash back to us in the form of cash distributions to be used for our living costs if required, or for re-investment. I am selecting trusts which I believe have very stable distributions, so I am counting on these distributions not being cut and continuing through the entire period that we hold them.

- Maintain a certain amount of capital stability in case, due to unexpected expenditures, we require the funds during the mat. leave.

- Grow in value or decrease in value.

The real bonus to this strategy in my mind lies in the future. Assuming we do not require this capital over the year mat. leave period and just use the distributed cash, then the real bonus becomes evident. These trusts should grow and continue to spit money out at us into the future. At some point in the future when we decide to have our second child the money is there for us already, so we don't have to do a thing. We will be prepared and will not have to worry or cut back our regular saving and expenditure habits. Also, during this time the chances are that the funds may have grown over time which will allow us to use part of the capital for other reasons or just re-invest the excess. Another possible use for some of the unused or excess capital at the end of the maternity leave would be to start an RESP.

Risks to this strategy include the loss of capital at a time when we do indeed require the funds. Also, even though I have done my homework here the trusts may cut their distributions and we would be left with less monthly money as well as likely less capital when sold.

The important thing is to understand the risks and try to make the best decision. I believe the odds are on my side that this strategy has very little downside and much going for it.

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Tuesday, August 7, 2007

how i manage day to day

I’ve been reading several blog posts lately on money saving and management habits that people employ day to day. Namely Four Pillars and Thicken My Wallet have posted on this topic as of late. I wanted to share with my readers what I believe is my unique approach to money saving and management.

To simplify, I’ll lay it out step by step.

1. AUTOMATE RRSP contributions. We do not even see this money, as it is directly deposited into our RRSPs.

2. We get paid on ALTERNATING weeks (ie wife gets paid one Thursday, I get paid the next.)

3. Use CREDIT CARDS. I find this makes things extremely simple as I can expect about 80% of our discretionary spending to come in on 2 bills (mine and hers) each month on the 14th. Obviously bills get paid in full always.

4. MAKE SAVING YOUR FIRST PRIORITY. When I see money come into our account on payday, my first instinct is to transfer this money into my BMO InvestorLine account for investment savings. No reason for funds to sit in the account if there is no immediate plan for use. In fact the simple fact that the money is there may subconsciously create temptation to spend, which I want to eliminate.

5. LOOK ONE WEEK AHEAD. I find looking ahead at shorter time periods (1 week) allows me to save more. If the money that was just received is not needed later in that week then it get saved.

6. Use one account and make it an ELEVATOR. By an ‘elevator’ I mean cash gets on and cash gets off. No money sits in the account for more than 1 week. Why keep money from having the potential to grow? I don’t want to contribute to my bank’s pool of deposits (funds they invest).

7. EMERGENCY FUNDS DON’T HAVE TO BE CASH ON HAND - I don’t believe in keeping emergency funds, as we have a significant unused line of credit and significant non-registered investments that could be liquidated on demand if things went to hell in a hand basket.

8. TAKE ADVANTAGE OF DEBT SPARINGLY when appropriate, usually for investments or short-term timing/convenience issues. Don't use overdraft, and don't take on excessive line of credit debt.

This strategy has allowed us to maintain savings rates (of net income) in the 35% range.

I welcome comments, and suggestions regarding what works for my readers....

Monday, August 6, 2007

Procter & Gamble

Currently making up 8% of my portfolio is global consumer products behemoth, Procter & Gamble....

The Procter & Gamble Company manufactures and markets a broad range of consumer products in many countries throughout the world. Products fall into five business segments: fabric and home care, paper, beauty care, health care, and food and beverage. Today, P&G markets more than 250 products to more than five billion consumers in 130 countries.

This business is based on something that I value very much when investing for the long-term, that something is ‘BRANDS’. Procter & Gamble has over 20 ‘Billion-Dollar Brands’, brands with over 1 Billion dollars in revenue annually. These brands include Tide, Crest, Gillette, Duracell, Folgers, and Olay among many others.

The company recently announced an earnings increase of 18% from 2006, and they are increasing their share buyback program from the current range of 5-6 Billion dollars per year to 8-10 Billion dollars per year. The company has a long term goal of growing earnings by 10%+ annually.

Some Selected Financials and Fundamentals:

Net earnings have increased at a compounded rate of over 14% over the past 4 years.

Net margins have increased every year since 2001.

Return on Equity has averaged 28% over the past 10 years, has come down since the Gillette acquisition.

Shareholder Returns Historically

Here’s the good stuff that we are all interested in, as prospective and current shareholders…

The stock value has grown ten-fold over the past 20 years. That’s about a Compound Annual Growth Rate (CAGR) of 11%.

Dividends have been raised for 50 consecutive years at a CAGR of over 9%. Over the past 10 years the CAGR of dividends has been 11%.

The stock usually yields around 2%, so over the past 20 years shareholders have seen a total return of around 13% per year.

Keys for the future success of the company will be expanding fully into all developing markets around the world, continuing industry leading product innovation, and keeping costs low.

Wednesday, August 1, 2007

IGM reports & hikes dividend

The wealth manager, IGM Financial (IGM), perhaps better known as Investor's Group - Mackenzie reported second quarter earnings after the bell today. IGM's earnings were up about 16% adjusted for items from 2006. Canadian mutual fund sales looked very strong indeed. Total Assets Under Management were up over 21%.

With market conditions worsening considerably over the last few weeks, I would imagine their third quarter might be relatively more challenging. There could be some mutual fund redemptions going on.... Regardless, the business model is superb, as their revenue from MER fees etc. is bound to increase with the market values of assets over time. Also, the demographic conditions that exist today in Canada can only help them as a great number of people are entering into the stage of their lives where saving and investing becomes a necessity.

IGM also hiked it's dividend 7.6%. IGM actually raises it's dividend twice annually, and has raised at a staggering compounded rate of about 18% over the past 6 years.

more yellow

I doubled my Yellow Pages Income Fund (YLO.UN) stake today.

The units have come off about 5% since I originally initiated a position in July. The trust is currently yielding around 8.2%.

To see my thoughts on Yellow Pages, see my original post here.