the moneygardener turns 1!

I created the moneygardener on April 30, 2007, and since then have logged 192 posts, 110,000 hits, and 243 subscribers; these days we are averaging 322 daily visitors.

I would like to thank everyone who has ever posted a comment to one of my posts, as I read and give some thought to them all. I would also like to thank everyone who has taken the time to send me an email over the last year. I have received several emails from readers, and most of these have been thoughtful and flattering; I have them all posted on my board in my home office. It is motivating, and downright astonishing to me how people feel about this blog, and that they take the time to let me know this. Please note that my email address has changed, and you can find it on the bottom of the right panel. Finally I'd like to thank all the other personal finance bloggers out there who have helped and supported me in the last year. A special thank you to Middle Class Millionaire, The Dividend Guy, Quest for Four Pillars, Canadian Capitalist, Financial Jungle, triaging my way to financial success, and Million Dollar Journey for supporting me in some way over the past year.

I feel like I have learned quite a bit over the last year; about myself, about personal finance, stocks, and the market. I hope others have been able to take something, no matter how small, away from reading this blog. Thanks again, and break out the Champagne or Heineken, whichever you prefer!

'sell Royal Bank' - citi

As the credit crunch rages on, the latest arrow comes from Citigroup, who have downgraded Royal Bank of Canada (RY) to a 'SELL'.

Citi analyst says, "In our view, as the largest of the Canadian banks, Royal likely has significant exposure to the deteriorating credit markets. Given the bank's size, C$632B in assets and diversified lines of business we think long term the bank will be able to withstand the current credit crunch. In the near term, we anticipate credit related write downs to adversely impact earnings and book value. We also expect increased provisions for loan losses as credit trends continue to deteriorate. "

No doubt Royal has exposure to melting credit markets, and given their size they do have their hands in a lot of cookie jars. It is important to note though that Royal derives a significant portion of the revenue from Canadian retail banking, as well as Canadian wealth management, which are in healthier current states and will buoy them. One of the large Canadian banks, in fact the largest and arguably the best positioned and strongest, being rated as a 'Sell' is likely a rare call in Canada or the U.S. for that matter. If Citi's call comes to fruition this could be a great opportunity for long term dividend growth investors. Citi changed their target price for shares of RY from $47 to $40.

Royal trading at $40/share (citi's target price) means:
P/E = under 10x trailing EPS
Dividend Yield = pushing 5%

It is reassuring for Citi to point out that Royal should survive the credit crisis long term and thus should not go bankrupt due to it. I'm glad they pointed this out, as I would have assumed the bank would fail. (sense the sarcasm here)

weekend links

A few articles, from Canadian personal finance blogs that caught my attention in the past week....

Wheredoesallmymoneygo found a very cool mortgage calculator.

Quest for Four Pillars wonders if being 'upside down on your mortgage' is such a bad thing...

Dividends are steady income, without the market volatility, writes Financial Jungle, he uses the example of Johnson & Johnson, who incidentally raised their dividend this past week

bought Husky with petro dollars

Today, in an uncharacteristic move, I sold all my shares of Petro Canada (PCA) for a profit and used the capital and proceeds to initiate a position in Husky Energy (HSE).

Why was this move uncharacteristic?

• According to my investment philosophy I rarely sell stocks
• I bought Husky near its 52 week high (I usually buy stocks that are well off of their highs due to valuation reasons)
• I am buying an energy company while oil is trading north of $118/barrel, this probably represents some downside risk
• I sold Petro Canada within 2 years of buying it; I fashion myself as a holder of stocks for the long term

So, why did I make the trade?

• I purchased Petro Canada before I developed my current dividend growth strategy. Husky is a better fit for a dividend growth investor as they prioritize returning growing earnings as cash to shareholders.
• Petro Canada has failed to execute, and has underperformed the entire universe of energy stocks by a wide margin for the entire time I've owned it. I even trimmed my position when the stock hit $60 in July of 2007 because I felt the company was overvalued, and in hindsight I turned out to be correct on that call, as today it trades around $50.
• Husky's dividend growth record speaks for itself, and it currently yields 3.5%, whereas Petro Canada yields 1.1%.
• Husky's regular and special dividends allow me to directly profit from high worldwide energy prices today, hedging me against my personal energy expenditures. This is not including the potential for captial gains long term. This may come in handy when gasoline reaches $2.25/liter in the year 2012.
• Husky is well managed, and really emphasizes shareholder returns as their company aim.
• Husky has higher returns on equity than Petro Canada does.
• The only advantage that PCA holds over HSE that I can see is their stock is cheaper, I am tired of owning PCA for their valuation, besides I am not getting paid to wait.
• I was in a profit position in Petro Canada anyway, so owning the laggard actually did yield modest gains in the end.
• Buying Husky Energy (HSE) allows me to keep the same exposure in my portfolio that I had with Petro Canada (PCA). Husky, explores, refines, and markets just like PCA.

I'm sure now that I have sold out of Petro Canada the company will report fabulous earnings and the stock will shoot past $60/share. I'll find comfort in the fact that today I have increased my income from investments without having to add a dime of new money to my portfolio.

Johnson's 2008 raise

Global diversified healthcare company Johnson & Johnson (JNJ) came though with my raise today as expected. JNJ raised their quarterly dividend from $0.415 to $0.460/share. This represents a raise in my annual dividends from JNJ of 10.8%, and I didn't even have to lift a finger. The makers of Band Aids and Tylenol rewarded investors for holding shares in their company by increasing the amount of cash they distribute to them every quarter. JNJ is now yielding about 2.75%.

Here is their recent dividend payment history:
2005 - $1.275
2006 - $1.455
2007 - $1.620
2008 - $1.795 (estimated)

This represents a compounded raise of about 12% annually.

diaper mayhem II - an act of treason

There has been something bothering me for a few days now... I have an apology to make.

Back on my popular diaper mayhem post in January of this year. I blogged about how I was a slave to the Pampers brand, after a full 13 days as a parent. I should have known not to turn my back on one of my long time allies in our quest to financial freedom; Costco Wholesale, this is my official apology:

I am sorry I doubted your Kirkland Signature brand diapers. I was a green parent and the last thing I needed on top of the stress of new parenthood was 200 potentially leaking diapers. Now that we have had the time to get into the groove of parenthood, we finally took the plunge. That's right, once again Costco came through for me, as my son is now comfortably wearing and 'using' Kirkland Signature diapers. I suspect Kimberly Clark makes these puppies, so in essence they are Huggies, but they seem to work fine now. I should have never doubted the good people of Costco, who incidentally now sell Crocs for $24.99 a pair.

Here is the breakdown on the diapers:
$44.99 for 200 diapers size 3 = $0.225/diaper...likely about $1.80/day

I will update the comparison of Costco's Kirkland Signature to other brands and stores in a later post. I am confident Costco is proving, once again, to be the best value proposition on the retail diaper scene.

still pulling the dividend sled

Husky Energy (HSE) today continued to build on their strong history of dividend growth by raising their quarterly dividend by 21% from $0.33/share to $0.40/share. This announcement came on the back of a 36% increase in profit for the quarter. As I explained in my 'a Husky dividend' post back in October of 2007, Husky has been a spectacular investment over the past several years. Husky has actually returned 457% (not including dividends) over the last five years, compared with 123% for the TSX composite index.

Husky Energy is proving itself to be the Canadian dividend growth investor's energy stock. I just wish I had bought it in 2006 when I began to wade into individual Canadian stocks. At times during the past few years there have been instances when the oil price was moderate and the outlook was bleak for energy prices. These instances turned out to be buying opportunities as oil has since not looked back as it now approaches $120/barrel.

reader q&a; on net worth gains

A reader, yohann (from France) asked a question in response to my latest net worth post from March of 2008:

could you please provide more info about how you did it ? I saw that you had some 6 000$ increase per month when going from 83k to 95k, was it only salary?

On the particular update that johann was referring to, our net worth did increase by about $12,000 in 2 months. In valuing our home within our net worth I try to keep an eye out for the selling price and time on the market of very similar houses in our area. Our neighbourhood is actually made up of bit of a monoculture of homes, which likely makes this valuation more accurate. I use comparable homes and I attempt to be very conservative when valuing our home. In this particular update I increased the value of our home by $6,000. Therefore this made up half of the increase yohann was asking about. Real estate in my area had two very good years in 2006 and 2007, however I expect my home value to remain fairly flat over the next few years.

During this same period we were able to save about $6,000 for our non-registered portfolio. It looks as though the market return during that period was likely modest to negative so that did not help out whatsoever. Our normal savings for our other registered accounts, as well as our traditional slow and steady debt reduction also contributed. It's interesting to look at the period in question when compared to our latest update (March of 2008) which yielded a paltry $1,193 increase in net worth.

Generally, going forward our net worth gains month by month (reported bi-monthly) should be attributed to a few factors:

• We Spend Much Less Than We Earn (probably half, including bonuses, etc.)
• We Save & Invest the Balance
• Our Investments Should Grow in Value Over Time
• Our Investments Pay Us Income (dividends & distributions), Which in Turn get Re-invested

On another note this is the first post on the moneygardener which I have actually written outdoors! There is nothing like those first few beautiful Spring days!

canadian financial stocks have bottomed!

Wait a minute….Do you really think I would be brash enough to make such a statement, considering as you know, nobody can predict where the market is going. While I am not signing my statement in blood, the trading action over the last couple weeks including this morning's high volume rally in Canadian financials has to have one wondering if we have seen the worst for companies in the money business.

See for yourself, take a gander at the 3 month stock charts for Bank of Nova Scotia, Toronto Dominion Bank, and Bank of Montreal. I am not much of a technical stock chart analyst, however I believe these charts may appear to be showing a bottom. Call it an ABC correction, a double bottom, a higher high, a higher low, or a triple sow cow, but they sure look bullish to me. Readers know I've been wrong before and I'll be wrong again, and they should always make their own decisions based on their own judgement system whether they're a do it yourself investor, or use a financial advisor.

Does any of this matter? Likely not, but if you've been considering buying a position in a Canadian financial, it seems as though the charts are at least showing overcast skies as opposed to a hail storm….. If you buy them for their dividends, and pay little attention to the noise, these charts can become to you nothing but indicators of sale prices, like flyers or coupons. In that case March 17, 2008 would have been a great day to be a frugal shopper.

lowering my ACB on Walgreen

I took the opportunity today to lower my Adjusted Cost Base (ACB) on U.S. drugstore chain, Walgreen Company (WAG). Long time readers of the moneygardener have likely read posts about my accumulating shares of WAG over the past year. Today's purchase was just another wrung on the ladder, decreasing the overall cost of my equity stake in Walgreen.

The thesis behind holding shares in Walgreen long term is simple:

• America is getting older in a big way, with this comes the need for drugs and convenience
• Walgreen has a history of strong growth and dominates the market along with CVS Caremark (Walgreen currently trades at a P/E of 17x while CVS changes hands for 21x)
• The Canadian dollar is nearly at par; U.S. retail sales sentiment is extremely low...

the smart R.E.S.P.

The Canadian government's Registered Education Savings Plan (R.E.S.P.) program is a great way for parents to save for a child's education. When used intelligently, the plan can really allow parents to give their child significant funds for their education while outlaying very little of their own money.

What do I mean by this? There are several ways to use the plan intelligently, but by 'used intelligently' I am referring to 2 practices in particular:

Invest fully, EARLY
Utilize the Universal Child Care Benefit (UCCB) and the Canadian Tax Benefit (if applicable)

By following these 2 simple tips, funding your desired portion of your child's education will be a breeze....much easier than first year chemistry anyway... Here's an example. Let's take two sets of parents, we'll call them the 'Smiths' and the 'Einsteins'.

On April 15, 2008 the Smiths gave birth to a bouncing baby boy named Darryl. But there were planes to catch and bills to pay, so the Smiths put off starting a nest egg for Darryl's education until 2020 when he was 12 years old. At that time they began putting in the maximum amount per year ($2,500) in order to still receive the 20% CESG grant ($500) that the government provides. The Smiths also did not use the $100 / month, that the government of Canada dolls out until the child is age 6 in the form of the UCCB, they hardly even noticed it....

Amount of their own money invested by the Smiths = $15,000
Amount Available for Darryl's Education in 2026 = $23,416
---------
On the same day the Einsteins gave birth to a baby girl named Cheryl. Knowing the power of compounding, the theory of relativity, as well as the benefits of living below your means, the Einsteins began investing the $2,500 annually in the first year of Cheryl's life. Not only did they take this wise route but they also took the UCCB amount of $100 per month and used this as part of their $2,500 per year. The Einsteins had the Government of Canada giving them money upon money by having them match the UCCB to the tune of 20%. When Cheryl turned 6 Albert and his wife abruptly stopped all contributions.

Amount of their own money invested by the Einsteins = $7,800
Amount Available for Cheryl's Education in 2026 = $58,965

Both families invested for 6 years, but because the Einsteins invested early and utilized the monthly UCCB they were able to provide over $58,000 vs. the Smith's $23,416. The Einsteins pulled this off using half the funds that the Smiths used.

*rate of return used was 8%, assumed deposits made a beginning of each year.

Post Sponsor: Sometimes debts can get the better of even the most organized people. If you are suffering from mounting debts, consider a debt consolidation quote from the experts at Rebuild.org.

$5.18 per day & growing

My Favourite Graph - April 12, 2008 Update

Of all the Excel charts and graphs that I keep in managing our personal finances and investments, I must admit I am partial to one. I have explained previously how powerful I believe dividends can be, as well as how I consider them crucial to our investing philosophy long term. Dividend increases mean more money in your pocket, and they have the added benefit of being one of the more permanent aspects of investing. The graph below is immediately affected in this relatively permanent way every time a company that we own raises their annual dividend, as well as every time I add new shares of a dividend paying company to our non-registered portfolio. It is this relative permanence of value that really has me routing for this graph to rise week to week and month to month.

In this April 12, 2008 Update - Our Income from Investments is up 24% since January 30, 2008.

Current Total Annual Income From Investments Per Year = $1,890

Current Total Annual Income From Investments Per Month = $157.46

Current Total Annual Income From Investments Per Day = $5.18

One Year Income From Investments Growth Rate = +330%

_________________________________________________

One way we like to think of our income from investments, is that we currently have a third income in our household, this 'person' earns $1,890 / year (taxed very favourably).

---

My spiffed up 'favourite graph' below is plotted at the end of each month.

cleaning, banking, & thinking

Clorox (CLX) has people talking about cleaning:

• Analyst sees downside to Q3 at Clorox (CLX) from Forbes
• Clorox Dividend Analysis from Dividend Growth Investor
• Clorox Stock Analysis from Dividends 4 Life
• Clorox Continued from Long Term Trader

Toronto Dominion Bank (TD) CEO Ed Clark's goodies:

• TD Bank Sees 2009 Profit Boost from Commerce Buy from Reuters
• TD Chief Predicts Growth Slowdown from The Calgary Herald

Articles that got me thinking:

• No Olympic Gold For Vancouver Real Estate Investors says Financial Jungle on Thicken My Wallet
• Harvest The Fruit from Dividends For Life
• Growth in Value thought aloud about Loblaws

more Sun Life

Today I added to my position in the financial services firm, Sun Life Financial (SLF). For my thoughts on Sun Life have a look at my Sun Life Financial purchase post, which I put up on this blog when I initiated my position about one year ago. Back then Sun Life was trading around $50 per share and yielding 2.5%. Sun Life's 2006 earnings per share (EPS) was $3.58/share. The company was paying a dividend of $0.32/share.

Fast forward to today where I bought Sun Life at $47.10/share where it yielded 3.1%. Sun Life's 2007 EPS was $3.84/share. The company is now paying a dividend of $0.36/share.
Therefore since I initiated my position last May the following has occurred:

• Sun Life has grown its earnings per share by 7.3%
• On a 'constant currency'/operating basis EPS would have been up 13%
• SLF has grown its dividend per share by 12.5%
• The stock's yield has risen from 2.5% to 3.1%
• Return on Equity (ROE) increased from 13.8% to 14.3%
• P/E ratio has dropped from 13.6 to 12.1
• The share price has dropped by 6.7% to $47.10

On my valuation model Sun Life looks cheap as it is trading more than 20% under it's fair value given a 9% EPS growth rate and using a multiple of 11.5x. I will likely keep buying these financials as long as they remain good value compared with the rest of the market. Averaging down on a consistent company such as SLF, as dividends, earnings and other fundamentals continue to grow, is a no brainer.

Procter's 2008 raise

In my purchases to date post late last week I pointed out the fact that I can't wait to receive my next dividend raise. I failed to realize when drafting that post that consumer products giant Procter & Gamble (PG) which makes products like Pampers (my favourite), Crest, and Bounty was due to increase my annual pay.

Well, Procter & Gamble (PG) anted up as expected. They gave shareholders a 14% raise, as they hiked their quarterly dividend from $0.35 to $0.40 per share. A great raise, and I didn't even show up for work!

Here is Procter's recent dividend history;
2004 - $0.98
2005 - $1.09
2006 - $1.21
2007 - $1.36
2008 - $1.55 (estimated)

PG has raised their dividend for 52 straight years. It's a great day for shareholders of the makers of Always, Old Spice, and Tampax!

gas prices & me = still friends

I am absolutely fed up with gasoline prices! I just filled up my 2007 Toyota Yaris and it cost me a whopping $43! Obviously I'm joking…gas prices are still not bothering me.

With the summer driving season approaching it will be interesting to see how high pump prices go. I always find it fascinating to read articles about truck and SUV sales vs. higher gasoline prices and whether or not the prices are affecting consumer behaviour. I am in the camp that believes that it will take significant appreciation in the price of petrol for North Americans to change behaviour by driving less, or opt for more fuel efficient vehicles. The migration to more fuel efficient vehicles may have already begun in earnest, however I do not believe the trend has gained any momentum as of yet.

What will it take for North Americans to adapt? I'm not sure. One thing that is interesting is how the Canadian dollar plays into the price of fuel in Canada. If the Canadian dollar was back even close to the levels it sat at years ago we would be in for significant pain at pumps compared with where we are at now. The reason for this is that our fuel marketers buy gasoline in U.S. dollars. So the price I paid today, which was about $1.10 / liter would have actually cost me closer to $1.35 if the Canadian dollar was back at $0.80 U.S. In that case my thirsty Yaris would have taken almost $53 worth of the smelly stuff….

Now if Petro Canada's (PCA) stock price would only perk up....

purchases to date

So far this year I have made 6 equity trades in my non-registered portfolio. Below are the details of the trades (all buys) I have made in 2008.

• Jan.7 Bank of Nova Scotia (BNS) at $47.39
• Jan.23 Reitmans Canada (RET.A) at $15.57
• Feb.15 IGM Financial (IGM) at $42.52
• Mar.14 General Electric (GE) at $33.47
• April 1 Clorox Company (CLX) at $57.10
• April 2 Toronto Dominion Bank (TD) at $65.00

Each of these companies has a solid history of dividend and earnings growth. Each purchase was made at a point in time when I believed the shares offered good value for a long term hold. These companies are all parts of my dividend growth strategy within my portfolio, which I think of as a 'compounding machine'. If all goes as planned, as the years go by they should all decide to award me with a raise in my dividend payments annually; likely this raise will be by a larger percentage than my employer will grant. I won't even have to lift a finger; they'll just pay me ever increasing amounts to hold stakes in their companies. I can't wait for my next raise! Johnson & Johnson (JNJ), which I also hold, is actually due to ante up with my raise in a few weeks.

Toronto Dominion Bank purchase

Today I initiated a full position in Toronto Dominion Bank (TD). TD will now make up about 10% of my non registered portfolio. Since TD is such a widely held stock in a widely followed industry in Canada; instead of a detailed post describing my thoughts on TD, and rationale behind the purchase, and valuation, I thought I would briefly list the most important factors that went into this decision. As always, opinions and comments are appreciated.

My decision to invest in TD for the long term right now was based on:

• industry leading retail bank in Canada, operating within an oligopoly; I am attracted to retail banking as it tends to lend itself more towards consistency, loyalty, brands, and repeatable revenue and earnings
• the credit crisis has improved the valuation of all banks; to a certain degree the babies were thrown out with the bathwater, TD has little exposure and is 15% off it's 52 week high
• the above point is true to a large extent with U.S. banks; I'd like to entrust TD to acquire for me skillfully and take advantage of good value in U.S. institutions
• TD has a great history of earnings and dividend growth and currently sports a dividend pay out ratio of only 38%, and a solid yield of 3.7%

Clorox, a household name for less

Yesterday I initiated a position in The Clorox Company (CLX), which is a global manufacturer and marketer of consumer products. Along with their flagship Clorox line, they are the people behind household brands such as Armor All, Glad, Pine Sol and Brita. The company was actually acquired and divested from Procter & Gamble (PG) back in the 1960's. "We make everyday life better, every day" is the company's slogan.

Generally What I Like About Clorox
Going back to 1913, Clorox has been focused on their brands. Continuing to drive earnings through marketing, innovation, and distribution is their aim. At its core Clorox is a packaged chemicals company, more specifically a bleach company, however the company is evolving in an innovative direction. The recent acquisition of natural products company Burt's Bees , as well as the company's timely launch of their Green Works natural cleaning products line should be the catalysts for growth; and are two steps that I believe puts Clorox on a very solid footing for growth.

Great Company but why now?...The Valuation
Given the recent fears of a U.S. recession, consumer staple stocks have been in rally mode because of a flight to safety. These companies are seen as safe havens against recession as several of the goods that they manufacture would be purchased in spite of tough economic times. Stocks such as McDonalds (MCD), Colgate-Palmolive (CL), and Procter & Gamble (PG) have really run up in this environment and I would not currently consider them to be attractively valued due to this. Clorox has actually been an exception to this rule as some downward earning revisions and commodity cost (specifically resin) issues have had investors selling off this stock. Here are some of the key metrics for CLX that tend to indicate that the stock is very reasonable value today:

• current P/E of 17x is at or near a 10 year low
• current P/Sales of 1.57 is at or near a 10 year low
• the stock is undervalued by over 10% according to my conservative valuation model, which is based on an earnings growth rate of 10% and a P/E of 17x earnings
• current dividend yield of 2.8% is a 10 year high point
• the stock is trading at 2005 levels and CLX's EPS is $3.31 compared with $2.89 in 2005

Dividends and Earnings History

CLX has a solid history of consistency in earnings and dividend growth. Earnings have grown at an average compounded rate of about 10% over the past 5 years. During the same period dividends paid have grown by just over 12% average per annum. Their latest dividend increase was by 29%.

Summary

I think Clorox is a stable, boring, and excellent company with a bright future ahead of it. Their foray into natural products should prove to pay dividends, as they will likely be the cost leader in this area right out of the gate. Rising commodity costs are currently cutting into Clorox's margins, however I see this as a temporary situation, and they can likely pass on some of the burden. Implementing cost controls as well as getting past the restructuring costs associated with the Burt's Bees acquisition should put Clorox in a position to continue to grow earnings as the Burt's Bees and the Green Works line pan out. On the solid base of their brands, and strong marketing and innovation, and a weak U.S. dollar CLX should excel domestically and internationally. This is a rare opportunity to get a household name, and a great dividend growth company on the cheap.