Monday, December 31, 2007

2007 final portfolio summary

Well, 2007 has come to a close in the financial markets and here are how some of the major indices fared:

S&P 500 = +3.5%
DJIA = +6.4%
TSX = +7.1%

Let's take a look at 2007, the year in review for our non-registered portfolio.

Volatility = Good Buying Opportunities
By all accounts 2007 will probably be heralded as a volatile year in the markets. I am thankful for the volatility that we experienced because it gave me some good opportunities to buy a few great dividend growing companies on sale. For example, in August I picked up quite a bit of Yellow Pages Income Fund (YLO.UN) at around $12.60, and since then it has recovered back to a trading range of $13.50 - $14.50. Another blessing that came in mid August was Bank of Nova Scotia (BNS) trading in around $47.50, where I scooped some up for my dividend growth portfolio as well.

Currency Squeeze
The strength of the Canadian dollar this year really took a bite out of my portfolio. The loonie appreciated about 18% over the course of the year against the greenback. U.S. stocks that I bought in 2006 or early 2007 look really red on paper currently. For example I bought Procter & Gamble in two lots during March of 2007 and since then the stock is up about 17% in real terms, but because of the rapid appreciation of the loonie on paper I am actually down 1% on the stock.

Worst Performers
Walgreen Co. (WAG) down 17% on the year
Telus Corp. (T.A) down 8%

Best Performers
Procter & Gamble (PG) up 14% on the year
Sun Life Financial (SLF) up 13%

Portfolio Returns and Statistics
This was a year of furiuos buying for my non-registered portfolio, so this combined with the currency squeeze mentioned above have been a real drag to my portfolio.
  • 2007 Return = +0.2% (incl. dividends) (fully time/value weighted)
  • 2007 Dividend Growth Rate = 529% (incl. new funds)
  • 2007 Final Div./Dist. Income Per Year = $1,430
  • 2007 Final Portfolio Value = $35,574
  • Largest Asset = Financial Services (30%)
  • Smallest Asset = Technology (0%)
  • Geographic = 65% Canadian & 33% U.S.
  • 2007 New Funds (Savings) = $23,513 or $1,959/month
In Summary
Overall I am pleased with our progress in 2007. When I look back on 2007 I'll probably mostly see the strong appreciation of the loonie as the story of the year for my portfolio. Also, 2007 will probably bee seen as an accumulation year as we deposited about $24,000 and bought 10 new stocks in the calendar year. I don't expect to deposit anywhere near $24K into the portfolio in 2008. Also, I expect my emphasis in 2008 will be adding to existing positions, although I may still purchase a couple new dividend growing stocks or Exchange Traded Funds (ETFs). 2007 was a really bad year to use any type of benchmark to judge my portfolio performance as the currency move and scale of new funds that my portfolio experienced were unprecedented. Next year I am going to try to develop a good benchmark to evaluate my performance.

Happy New Year!

Sunday, December 30, 2007

december '07 blog stats

Well, 2007 is coming to a close as the month of December winds down. Let's take a quick look at some blog stats obtained from FeedBurner® for the moneygardener for the month....

Average Unique Daily Visitors = 301
Cities In Order = Toronto, Van., Cgy., Edm., New York, Ottawa
Most Popular Post = the human side of dividends
Most Frequent Incoming Traffic Source Blog = Canadian Capitalist
Most Frequent Outgoing Blog Link = The Dividend Guy

If you haven't had a chance to check out the two blogs mentioned above you should go ahead and have a look, as both blogs are excellent resources for the financially concerned. Also, if you are currently using a reader to more efficiently organize your blog visiting, which by the way I would really recommend, please remember to subscribe to the moneygardener by clicking on the orange tab on the right panel.

Tomorrow, don't forget to visit the moneygardener for a year end results and summary article, disclosing the performance of my non-registered portfolio, stay tuned....

Saturday, December 29, 2007

3 winners for 2008?

A member on the Financial Webring Forum, probably one of the best online resources for Canadian investors, is running a stock picking contest for 2008. It is a simple contest, you pick three stocks and let them ride for the entire year. The winner is determined by the best return over 2008 assuming equal weighting of each stock.

I don't do any due diligence whatsoever on the stocks that I select for this contest. I try to go outside of the boundaries of my conservative universe of stocks, as I am shooting for high short term growth. This year I am using a bit of what I would call a 'momentum' theme with a focus on technology and emerging market needs. Here are my picks:

Garmin Ltd. (GRMN) - After receiving a GPS navigator for Christmas, I am convinced that everyone needs one of these things. Guys, no more asking for more asking 'Are we lost?'...reason'll never be lost with a navigator. Garmin is coming off of a stellar 2007, where the stock gained 80%. More gains could be in store as everyone clamours to buy one of these, when they borrow their friend's Christmas gift.

Google Inc. (GOOG) - The innovation seems to have no end at this internet leader. With the success of YouTube, along with their other advertising presence online, they should continue to really crank out the earnings. As they delve into other markets like wireless, etc., if they bring the same genius that they have brought to the web, they should have much success. GOOG also had a great 2008, as the stock rose 54%.

Hanfeng Evergreen Inc. (HF) - Fertilizer + China...enough said. The stock was up 245% in 2007. This would be the most volatile of the three as if China's growth continues unabated, HF should grow like a cornstalk again in 2007, whereas any small signal of slowing growth in China could really plow the stock under.

As mentioned I have failed to do any proper due diligence on these three companies. All three are probably currently priced for perfection, and could suffer serious losses in 2008 and beyond. I am not a financial advisor, and I have been dead wrong many times before.

Thursday, December 27, 2007

where renting is underrated...

Well, perhaps real estate is not always a good investment....

Home prices in the United States fell in October, 2007 for the 10th consecutive month, posting their largest monthly drop since early 1991. Home prices fell by an average of 6.7% in the S&P/Case-Shiller home price index. The index tracks prices of existing single-family homes in 10 metropolitan areas compared to 2006.

This has me wondering......What would this type of price action do to some one's net worth who had a large proportion of their assets tied up in their home? (our home is ~74% of our asset base)

Well, assuming I was Joe Average U.S. citizen living in a major metropolitan area:
My last reported net worth would have declined from $131,011 to $116,606, a decline of over 11%.

If I happened to live in Miami, Florida where house values declined a whopping 12.4% during the same period my net worth would have gone from $131,011 to $104,351, a decline of over 20%. That hurts!

Of course I realize that these devaluations are gradual, and not month to month, which is not how I am representing it above but it does have the same net affect. This type of data reiterates why I am trying to diversify away from our over weighting in real estate.

Wednesday, December 26, 2007

the moneygardener... gearing up for 2008

Over the moneygardener's brief 8 month history I have written about several money-related topics, not limited to stocks, dividends, personal finance, net worth, saving money, consumerism, and energy use. I am expecting 2008 will be a great, first-full year for the moneygardener.

Below are the top 10 reasons why 2008 will be a breakthrough year for the moneygardener:

10. My wife is on maternity-leave as of Dec. 1, 2007, so now as much as ever we'll really need to be smart with our finances, allowing for a focus on frugality.. (is that a word?)

9. I am currently reading 'The Four Pillars of Investing' by William Berstein. Next, I plan to read several more personal finance and investing books to be pondered, and discussed. I also might talk about some strengths, weaknesses, and good ideas from the books I've already read.

8. We have a new little member of the family on the way any day now...this should provide for many financial related adventures that could turn into posts...

7. One word, sub-prime.

6. Without giving anything away....there could be some more give-aways this year! (whoops I guess that was a bit of an oxymoron).

5. Non-Registered Portfolio as well as Net Worth updates should start getting more interesting as we've built a good base to work from in 2007...

4. Our goals are all set, now we just need to work toward them, how will we do...?

3. I'll welcome at least one Guest Poster early in 2008.

2. I'm going to start profiling more dividend paying stocks, and introduce some new names that you don't hear much about. I only buy a stock if it is trading at reasonable value or preferably less than that....I'll always give you the details on my version of value....

1. I received a great new office chair for Christmas....very comfy indeed!

Sunday, December 23, 2007

the wealthy barber buys stocks...

The Wealthy Barber buys individual stocks, and a couple other interesting links for some holiday reading...

David Chilton, author of the gold standard personal finance book in Canada The Wealthy Barber in an interesting interview 15 years later, by globeinvestor magazine online.

Smaller Canadian companies have dividend growth as well, by globeinevestor magazine online. offers up a pretty unique gift option this Christmas, just be careful who your buying for....

Happy Holidays To All!

Friday, December 21, 2007

Walgreen's health improves

Back by popular demand; I'm going to continue to track a key stock for the moneygardener, Walgreen Company (WAG).....

Looking back, in WAG's last quarter (4th quarter) which was announced on October 1, 2007, the company reported a slight decrease in earnings per share (EPS) from the prior year. This sent the stock into a violent tailspin where it actually ended up declining about 24% over the next few months. Higher expenses and some lower reimbursements on some popular generic drugs were to blame. You can clearly see the serious drop in the share price on google finance WAG chart. My reaction to all this was clear on this early October post, where I doubled my position in the stock. At that time Walgreen CEO Jeff Rein indicated that management was going to make cost cutting a priority to try squeeze out some more earnings growth in the short term, while the weaker generic environment and difficult comparable numbers lingered.

Fast forward to December 21 when WAG announced its first quarter results. Walgreen beat analyst expectations by putting up EPS of $0.46 per share, compared with the average analyst estimate of $0.44. Forty six cents represents earnings growth of about 6% from last year. This report was up against a stellar 1st quarter of 2007 where the company increased EPS by 26% from Q1 2006. Overall revenue was up over 10% in the latest quarter, and the important retailer metric, same store sales growth was up over 5% in the quarter which is a very healthy number for a U.S. retailer in this environment.

Management is also showing definite signs of delivering on their cost cutting initiatives. Sales and general administration costs increased 9.5% year over year, while sales increased 10.4%. These costs actually increased 18% in the year prior. Walgreen is seeing especially strong sales on its private label brands as the economy softens and consumers look for more value. While the first half of the year will remain "challenging'' for the company's profits, there should be improvement in the second half, Rein said. "We are recession-resistant, but not recession-proof,'' Rein said. The stock ended the day up over 6% at $38.47.

My impression of the latest quarter is that they did what they had to do cost wise to at least improve modestly on some superb numbers from last year. I am expecting Walgreen to grow earnings by a slower pace than they have in the recent past in 2008, probably by around 8-10%. The last quarter seemed to be a bit of a wake up call for the expense management side. 2009 will likely be a better year for WAG as they go up against easier comparables, the drug environment improves, and perhaps the U.S. consumer picks up. With respect to the stock valuation, under $40 still looks pretty attractive using a moderate growth rate of 12%, and a very conservative P/E of 17x. There is really no rush to get into the stock though as short term expectations are probably still tempered due to Rein's comments.

Long term Walgreen couldn't look better as while America ages WAG is building convenient, well run drug stores, and also adding 'Take Care Health Clinics' inside these stores. Currently they operate 119 clinics and by the end of calendar 2008 they expect to operate 400.

Thursday, December 20, 2007

why no REITs

According to Wikipedia, a real estate investment trust or REIT is a tax designation for a corporation investing in real estate, that reduces or eliminates corporate income taxes. In return, REITs are required to distribute 90% of their income, which may be taxable in the hands of investors. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.

Why I Do Not Invest in REITS
The reason for my not investing in REITs is simple. As previously described, our house value already makes up about 73% of our total assets. We are grossly overweight in real estate investments already. Yes, we may live in our house for the time being, but that does not take away from the fact that it is a part of our asset mix. We could sell our home tomorrow and rent another house or condo.

When we borrowed the money to buy our house, we took out a loan in the form of a mortgage from a bank. Compared with our previous life experience with money, the dollar amount of this loan was overwhelming. Even though we had plans to live in our new house, which we do now, we made an extremely large investment in Brantford, Ontario, Canada residential real estate. I prefer not to add to my real estate investments (which already make up 73% of our total assets), by buying REITs. Similarly, if we were renting a condo and we had a $250,000 portfolio of stocks and mutual funds, I might consider adding some REITs or even buying a house.

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Tuesday, December 18, 2007

the moneygardener highlights

New to the moneygardener...? If so, you should make sure you take the time to read these particular posts...

Personal Finance

defying cash emergency funds

'relationship' banking

personal finance & the shabby room

Stock Analysis

GE - past success, future potential

Yellow Pages Income Fund

Bank of America purchase

the moneygardener Favourites

late stage capitalism

want a raise?

want to ensure financial difficulty your entire life?

the human side of dividends

To those loyal readers of the moneygardener, thanks for the support! I really appreciate the numerous emails I get from readers, and I hope you continue to read and participate in this blog, which I really enjoy maintaining.

If you have any suggestions for post topics that you would like to see on the moneygardener, feel free to send me an email...

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Monday, December 17, 2007

Reitmans purchase

I initiated an opening position today in the retailer Reitmans Canada Limited (RET.A) at $18.18/share. Reitmans Canada Limited operates a network of clothing stores (around 935) specializing in women's & men's fashions and accessories. The company operates Canadian stores under the banners Reitmans, Smart Set, Pennington Superstores, RW & Co., Thyme Maternity, Addition-Elle, and Cassis. Brands and demographics written all over it, my kind of stock.

How It Fits
Reitmans will be added to my portfolio as the smallest company I own. With a market cap of only $1.3B, it is significantly smaller than most companies that I currently hold. Before adding RET.A I had a 10% weighting in consumer products; the addition should increase this to 14% joining Procter & Gamble (PG), and Scotts Miracle Gro (SMG) in this asset category.

The Story
Reitmans is a very old company with its roots firmly planted in Canadian business success, going back to 1926. The company has always been regarded as being well managed and seems to really know how to retail clothing. The diversity of banners above, and their ability to seemingly adapt to changing tastes and trends really sets them apart. They have the market cornered on clothing whether you are a businesswoman, on a budget, pregnant, a single guy, or a plus sized woman, Reitmans might be able to help you look the part. It is interesting to note that their Thyme Maternity banner is Canada's largest specialty retailer of maternity wear, and no doubt contributes well to net margins. Going forward Reitmans should continue to do what they do best as they diversify their lines, perhaps make acquisitions, and put up new stores.

One trend that they seem to be taking advantage of is the 'outlet store' set up. These banners are now starting to pop up all over the place, outside the traditional mall setting, which seems to be where the consumer is hanging out (near the big box giants Wal-Mart, Future Shop, and Home Depot, among others). A challenge for Reitmans recently has been it's attempt to revamp it's baby boomer banner, Cassis. Recently the company reported poor performance and a complete overall of the 12 stores, which make up a very small proportion of overall earnings. Reitmans also has a natural hedge against cross boarder shopping, in that they procure their goods in greenbacks, and turn around and sell clothes in loonies.

Leading Up To The Purchase...
Over the last six months Reitmans shares have really been dumped hard. The company announced some bad earnings which they blamed on unseasonably warm weather. Considering the stock was priced for some pretty rapid growth, and analysts had lofty targets, the stock was taken down from around $25 at a high to around $16 at a low. Perhaps value investors who made their money already, and growth investors fearing slowing growth got out. When the stock was trading down around $16 - $17 a few weeks ago I was very interested, but I decided to hold off and wait to see the next earnings report, as well as a dividend increase which was due.

The Current Situation & Valuation
The third quarter earnings report I was waiting for came in on December 4, and operating earnings were up 17%. Also, they raised the precious dividend 13% to $0.72/share. This was the confirmation I needed to get involved. The valuation got too attractive to pass up today specifically, as the shares were down about 4%.

As my model sees it, the company is currently priced as if they are going to grow earnings at a pace of about 6% going forward. In other words RET.A is mispriced by about 60%. This is based on a P/E of about 14x. This is too cheap for a phenomenal dividend grower, with $215B in cash, almost no debt, return on equity and assets in excess of 20%, and a recent record of earnings growth that blows your wool socks off. A P/E of under 13x for this quality, yield, and growth? That is a sale that gets my attention.

Obviously the market is pricing in some serious earnings growth deterioration, which could very well occur, but I doubt the company has overnight turned from a 14% earnings grower to a 6% earnings grower. If by off chance they did take that horrible step down the ladder of growth then I bought a fairly valued company, and my investment should appreciate by 10% per year (6% + 4%(yield)).

Oh yeah, did I mention my favourite part? Reitmans is yielding about 4.0% currently and their recent dividend history looks like this:
2003 = $0.10
2004 = $0.11
2005 = $0.20
2006 = $0.42
2007 = $0.58
2008 = $0.72 est
This represents a compound growth rate of dividends of a staggering 32%+.

Which leads me to believe that perhaps Reitmans is turning into a 'value' type stock instead of a growth stock. That is unless they continue to crank out the growth we've seen over the past few years and the yield slides back down below 3 points. Alternatively, their growth could really be slowing and might sit down in single digits for the foreseeable future, that is perfectly fine by me as I bought the stock under 13x earnings with a yield of 4%, so no high growth is really priced in today.

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Sunday, December 16, 2007

watchlist review - what's cheap?

I am currently now sitting on about 3% cash, so I am starting to look at where I might be able to deploy it. I have spent some time updating my watchlist, while having a look at where the stocks that I watch are trading. Some stocks that I watch are in earnings decline, so they might look really cheap but nobody knows how far down the rabbit hole goes. Others have shown little or no sign of earnings decline, and yet still look cheap. These have potentially less downside risk at their current levels in my opinion*. Here is how the list breaks out currently:

Cheap Stocks (ranked cheapest first)
  1. Citigroup (C) - in earnings decline
  2. Lowes (LOW) - in earnings decline
  3. Wells Fargo (WFC) - in earnings decline
  4. Reitmans (RET.A) *
  5. Bank of America (BAC) - in earnings decline
  6. Home Depot (HD) - in earnings decline
  7. Telus (T.A) *
  8. Manulife (MFC)*
  9. Bank of Nova Scotia (BNS)*
  10. Royal Bank of Canada (RY)
  11. 3M (MMM)

Several others would be deemed to be 'Fairly Valued' including General Electric (GE), Johnson & Johnson (JNJ), Walgreen (WAG), Shoppers Drug Mart (SC), Leon's Furniture (LNF), Sun Life (SLF), Great West Lifeco (GWO), IGM Financial (IGM), Bank of Montreal (BMO), TD Bank (TD), Canadian National Railway (CNR), Canadian Pacific Railway (CP), Toromont (TIH), etc.

Expensive Stocks (ranked most expensive first)

  1. Colgate Palmolive (CL)
  2. Pepsico (PEP)
  3. TransCanada Corp. (TRP)
  4. McDonalds (MCD)
  5. Automatic Data Processing (ADP)

I think I am going to take a closer look at the stocks marked with an asterisk* above. These are stocks that are showing up as being cheap, but yet don't have much of a negative catalyst really impacting the stock as much as the others.

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Saturday, December 15, 2007

MG's 4 goals - (goal # 4)

About one year ago my wife and I set 4 long-term goals (which were recently refined) 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 4 post, Goal # 2 on November 24, and Goal # 3 on my December 9 post.

Goal # 4
Grow our non-registered investment portfolio to $175,000* by February 1, 2014 (age 35).
*It is important to note that the $175,000 is in 2014 dollars, which will be worth less than $175K is worth right now.

How did I arrive at this goal?
First I'd like to give credit to The Dividend Guy, for introducing me to the calculator located here. I used this calculator to perform the following analysis:

There are 4 variables involved here:
1. Amount of money we can save each month (could be $1,000 - $1,600)
2. Starting Value (current portfolio value of $34,336)
3. Market return rate (could be 8% - 11%)
4. Number of months to end of goal (74 months)

To arrive at what I believe to be a realistic, yet very challenging goal I performed the following:

A - Save $1,000 per month & market returns 8% (low end & pessimistic)
B - Save $1,200 per month & market returns 10% (mid range & average)
C - Save $1,600* per month & market returns 11% (high end & optimistic)
*Keep in mind that over the past 20 months we have saved an average of about $1,500 per month. Also, our goal level of savings as per Goal #1 is $1,000 avg. per month.----------------------------------------------------------------------------------------------------------------------------------------------------------
Results (obtained by inputting scenarios into calculator):
A = Future Value is $151,400
B = Future Value is $185,567
C = Future Value is $235,804

The reason I selected $175,000 as the target value is because I wanted the goal to be challenging, yet realistic. If we can meet Goal # 1 (save avg. of $1,000 per month), we should be able to achieve $151,400 without any out performance from the market. I am anticipating that with some effort we can exceed Goal # 1, and this will put us ever closer to $185,567. The market is the wild card here, but if we can get a solid 8%+ out of the market, and still save around $1,100 - $1,300 per month we should be able to flirt with Goal # 4 which I set at an even $175,000.------------------------------------------------------------------------------------------------
Setting a goal like this is very difficult because you never know what will occur in life as well as in the market. The important aspect though is that we have some sort of framework to set goals in, and the fact that we have a mid term goal like this. Challenges to this goal include going through periods of reduced employment income (as we are currently in), as well as major downturns in the market. When I go back and evaluate our progress on this goal, I will have to take these challenges into consideration when measuring our performance.

I have included a chart below which outlines where this portfolio is coming from over the past several months:

Wednesday, December 12, 2007

random portfolio stats # 1 - 12/07

As previously mentioned I am a bit of a numbers guy. I actually found out today that I am predominantly a 'FIERY RED' personality type (competitive, decisive, strong-willed, demanding and task/goal focused), so apparently my motto should be "Be Brief, Be Bright, and Be Gone". The second largest component of my personality though, is the 'COOL BLUE' type, so I also have a lot of interest in facts, figures, logic, and everything analytical. Someone who is this 'COOL BLUE' personality will have the motto "Give Me Details". Being partly the details guy, I'd like to share some random stats that I track for my non-registered portfolio. The holdings inside this portfolio are listed down the right panel of the screen.

  • Cash Weighting = 2%
  • Canadian Equity Weighting = 63%
  • Financial Services Weighting = 32%
  • Cash Savings Per Month (last 20 months avg.) = $1,481
  • Percentage of Money in a Dividend Reinvestment Plan = 19%
  • One Year Dividend Growth Rate to Date = 507% (new contr. included)
  • Portfolio Yield = 4.1%
  • Portfolio Yield on Cost = 4.0%
  • Dividends Per Day = $3.78

I'll try to update these figures randomly and periodically as a type of information update on my some facets of my portfolio. I welcome any new ideas for interesting stats to track for a stock portfolio.

Tuesday, December 11, 2007

GE hikes dividend

As anticipated General Electric (GE) hiked its annual dividend 10% today at its annual shareholder meeting in New York, from $0.28 to $0.31 / share. I can't wait to update my spreadsheet.... Here is a brief dividend history for GE over the past few years:
  • 2004 = $0.80
  • 2005 = $0.88
  • 2006 = $1.00
  • 2007 = $1.12
  • 2008 = $1.24 (est.)

This represents a compound annual growth rate of dividends of about 10.5%.

GE also announced a $15B stock repurchase plan, as well as an estimate for 14-18% earnings growth for the fourth quarter of 2007, and at least 10% (quote '10% is in the bag') earnings growth forecast for 2008. GE promises safe and reliable earnings growth as the economy evolves. They also claim that because of their strong, globally positioned business led by infrastructure, they can grow revenues at 10% per year, despite a slowing U.S. economy. This is precisely the reason why I am bullish on GE, as I believe they are no longer a proxy or bell weather for the U.S. economy, but more of a global growth play.

The 10%+ EPS growth forecast disappointed analysts who had beefier earnings growth in mind for the company. The stock got hit right after the announcement, and subsequently recovered to close off 1%. GE also noted that they may sell or seek a partner for their private label credit card business in the U.S.

General Electric is the world's biggest provider of jet engines, power-plant turbines, medical imaging equipment, locomotives, private-label credit cards and aircraft leasing. Other divisions include water treatment, appliances, lighting and real estate.

This marks the 100th post on the moneygardener!

Monday, December 10, 2007

the feeling is mutual

A dividend growth investor's worst nightmare has come true for share holders of U.S. Savings and Loan, Washington Mutual (WM). WaMu cut its dividend by over two thirds after the market closed Monday in order to raise cash to fortify their capital and liquidity position. Since WaMu decided to slice their compensation to shareholders in a large way, I am guessing that shareholders will be tempted to pull their money out of this company in a similar way.

Investors in Washington Mutual may have seen this one coming though, as the bank was yielding 11.3% at today's close. The fact that investors pushed this stock down to a point where it yielded this high was a sure indication that most expected a dividend cut. The stock is now down almost 9% in after hours trading on the news. It will be interesting to see where the market leaves this stock Tuesday, as the shares are now yielding only 3.3%. If it sounds too good to be true, it probably is...

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.

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....?

Friday, December 7, 2007

GE - past success, future potential

I recently bought some General Electric (GE) shares for my wife's Registered Retirement Savings Plan. GE also makes up about 6.5% of my non-registered portfolio.

General Electric (GE) is a diversified technology, media, and financial services company focused on solving some of the world's toughest problems. GE operates in 100 countries and employs over 300,000 people worldwide. With a market cap of of around 376 Billion GE is one of the largest companies in the world. I believe it is currently # 2 behind Exxon Mobil (XOM). GE spends about $1 per earth citizen, per year on research and development. Founded in 1892 GE is the only current member of the Dow Jones Industrial Index that was listed on the original exchange which begun in 1896.

As mentioned GE has been around for 116 years. They have paid a dividend each quarter for over 100 of those years. They have raised their dividend each year for the past 31 years. The company has also grown its earnings per share (EPS) in 9 of the past 10 years. GE has also grown its net profit margin every year for the past 10 years. Through many wars, the great depression, and other unforeseen events and trends on a global scale GE has endured and profited. GE is also constantly praised for their quality of management and corporate responsibility.

Shareholder Returns
$1,000 invested in GE shares 20 years ago in 1987, would now be worth $7,300, and would be yielding 22% on initial cost. So your GE shares bought in 1987 would be paying you $220 per year, paying for themselves over and over again at a current rate of under 5 years.

Global Growth, Infrastructure Improvement, & Health Care
GE is well positioned to take part in emerging market growth in the BRIC countries as well as the maintenance and improvement in infrastructure that is required in most of the developed world. As an example, China's air traffic is expected to double to 240 million people by 2010. GE is making lighter more fuel efficient aircraft engines to meeting this growing demand. Water process technology, and health care are two more large segments of GE that are expected to grow swiftly in decades to come. Demographics should be kind to GE, if manged right, as some of us will require diagnostic equipment while others on the other side of the earth will require more basic needs like clean water, trains, and energy.

The Environment
GE is on the forefront of providing solutions for environmental management. The ecomagination commitment is allowing GE to lead the way in green products and services. From solar panels and wind turbines to water filtration technology, GE is not waiting for trends to emerge, they are innovating a providing customers with advanced solutions to meet their environmental needs now. This point makes GE a great low risk play on the environmental movement which is shaping up to be a huge theme of the twenty first century.

The Current Valuation
Have a look at a 10 year chart for GE and you will see a good example of P/E multiple compression. The market absolutely got enamoured with GE as a growth stock from 1998 to 2000 during the tech boom. The stock actually traded up as high as $60 per share at its peak, representing a P/E of around 47 times earnings. 2000 would have been a really bad time to buy this stock, and why would you unless you thought GE could grow it's earnings consistently at rates in excess of 25% per year. It is hard to imagine now how investors back in 2000 ever got the strange idea that a company as large as GE, which operates in so many different areas, could grow so quickly to be worth 47 times earnings. Since then the stock price has come off in a huge way before trading at around $23 at the start of 2003 growing to around $37 today. All this time, as Mr.Market had his way with GE, the actual company just kept chugging along growing earnings nicely, while spinning off ever increasing cash in the form of dividends to shareholders.

This brings us to the present where investors are giving GE very little credit for its growth, consistency, and global reach and breadth. A stock can only be held back for so long while it continues to grow its earnings and dividends. Obviously I believe GE is good value today as it is trading at about 17x earnings and 15x forward earnings. This price presents very little downside to this stock which is obviously positioned to benefit from $USD weakness and global growth. Earnings estimates are in the 10-12% range for the next five years. 9 out of 11 analysts have it as a 'buy'.

Getting down to the nitty gritty of valuation, my models tell me that GE should be bought at around $38 and below. I gave GE a 10.4% growth rate in earnings and a historically conservative P/E of 17 to arrive at these numbers. The stock yields around 3 points currently, and executives are likely crunching the numbers for another dividend increase as I write this. The dividend will likely be raised in December, 2007 to $0.31/share giving this stock a yield of 3.3% on Friday's close.

You won't get rich quick holding GE, but if you are a long term dividend growth investor like me, you might just get rich slowly. These are the types of stocks that I can't get enough of. It is difficult to find a more consistent grower of dividends and earnings, that is seemingly so well positioned for global growth trends than General Electric. GE is certainly no longer your Grandfather's light bulb firm.

Thursday, December 6, 2007

Scotia hikes dividend

The Bank of Nova Scotia (BNS) raised its dividend today by almost 5% to $0.47 / share. BNS has been raising its dividend twice annually for many years. The last raise for the Q3 2007 dividend was by almost 7%. Only raising by 5% this time around seems to be indicating an expectation by the bank for slower earnings growth in 2008.

Overall BNS has raised their dividend...:

+14% to 2006
+16% to 2007
...and I'm going to take the liberty to assume +10% to 2008 given this latest raise and a conservative estimate of a 4% raise for Q3 of 2008.

From their Investor Relations Dept:
Scotia's dividend policy is to relate dividends to the trend earnings, while ensuring that capital levels are sufficient for both growth and depositor protection. The Bank's dividend payout is currently in the range of 35 to 45% of net income.

Saturday, December 1, 2007

the human side of dividends

I often think that dividends and dividend growth are concepts in equity investing that are overlooked by the masses. Most people who have only a casual knowledge of investing think that growing the value of your investment means watching the value of your stocks increase. While this is partially true, dividends are like a fabulous goaltender playing on a team that is known for its powerhouse offense. Perhaps not as exciting and directly effective as a strong forward line, but certainly equally key to winning in the long term.

So what is so special about dividends and dividend growth in your portfolio? Aside from what dividends might tell you about a company, and why they'll boost your returns, what benefits do dividends and dividend growth have for you, in your day to day struggle?

The 3 P's
  • Psychological. Psychologically, dividends are a great friend. When the markets are haywire and your stocks are down day after agonizing day, your dividends will still arrive on time. Not to despair, your dividend payment will likely be raised in due time. Dividends are like a hot tea on a cold winter's night, comforting you always and allowing you to stick to your game plan knowing that they will always rein your stocks back in over the long term.
  • Permanence. Dividends supply permanence to your analytical portfolio tracking. What I mean by this is that when I feed a new value that represents a recent dividend increase into my portfolio spreadsheet, instantly I am being paid more money per year than I was yesterday, and I really like that. Whether a company increased its dividend, or a dividend was paid in one of my DRIPs, it activates a permanent positive change to my financial well being forever. Simply stated, the market could rise 5% in a single day and I would not be as happy as I am when a company I own comes in with a strong dividend increase. The dividend increase is extremely likely to be a permanent change, whereas the fickle market could tank 10% the next day.
  • Payment. I like paper gains in stock prices as much as the next guy, but sometimes times get tough and you aren't saving as much money to invest anymore. Your employment income might take a temporary hit, or an unexpected expense crops up taking away from your capital available to invest. It's times like this when dividends are 'money in the bank'. Close your eyes to your portfolio for a little while; heck go on vacation. I'll bet when you get interested again your dividends will have magically piled up some money in your pocket to do as you please, whether that is to invest it or book another week in the Mayan. I'd prefer the latter during weather like this....