tfsa bonanza

I'm sure the majority of my readers have learned about the new financial instrument that the Canadian federal government has announced in their budget; the TFSA (or 'Thank the Feds' Savings Account), aka Tax Free Savings Account. For those of you who would like to know more about these new accounts that will be available starting in 2009, I'm going to refer you to the clever minds that I read on topics like this:

Mike From Four Pillars, The Benefits of Tax Free Savings Accounts
Canadian Capitalist, Tax Free Savings Accounts
Financial Jungle, Tax Free Savings Account
Million Dollar Journey, Federal Budget 2008 Tax Free Savings Accounts (comments)

If you read these 4 posts, they'll provide a pretty good primer on the TFSA. For those of you who are either really bored, or really excited about the TFSA, you could also read the comments attached to each post, which tend to spark ideas and ideas for further discussion.

After having a few days to digest the TFSA, I do feel that it is a huge positive for financially aware Canadians. The trouble is that many Canadians are not very financially aware, and in that respect the TFSA will turn out to be yet another instrument that is beneficial, but underutilized (a la RRSP).

Will We TFSA?
For our situation and goals, starting in 2009 I will maximize my wife's and my TFSA room ($10,000) every year going forward. Considering our current investing strategy and activity in a non-registered account, by not utilizing the TFSA to it's maximum I would be essentially choosing to pay tax our investment gains on that $10,000 portion. Looking at it this way, I really have no choice but to utilize the TFSA to its fullest. As previously mentioned we do both contribute quite a bit to RRSPs, however we emphasize non registered investing for reasons mainly for the purpose of flexibility and availability of capital. The fact that we'll be using the TFSA will affect goal #4, I will have to sum up the total value of 3 accounts now to track progress toward goal #4.

free money? no thanks

I think I've mentioned before that I participate in my company's defined contribution pension plan. The way the plan works is outlined below:

My Company

• 2% of my salary regardless of my contribution
• 4% of my salary matched to my contribution

What this means is that even if I didn't contribute anything to my Registered Retirement Savings Plan (RRSP) my company would kick in 2% of my salary. My company will also match the contributions that I do make up to 4% of my salary.

For example if I decide to contribute 5% of my salary into my RRSP out of my own pocket, my company will then contribute 2% (automatically), and 4% to match me. Therefore I'll end up with a contribution of 11% of my salary. Since my company is kicking in 6% out of this 11%, I am essentially starting out of the gate with an investment return of a whopping 120%

A recent survey by Sun Life Financial found that 1 in 5 people who have access to this type of program don't participate. About 40% of employed Canadians have access to this type of program, but only 80% participate. What that means essentially is that 1 in 5 people are saying 'no' to free money. Reasons for this varied from no desire to, to no money to spare, but the weirdest reason was the following "they preferred to invest on their own". I would be interested to know what these folks were investing in on their own that was worth passing up a guaranteed return of 25% to 150%, before the money is even invested.

household savings rate feb '07 update

The last time I updated our household savings rate (HSR), (which is the amount of money we save for investments, as a percentage of our after tax income), was on September 30, 2007. By 'investments' I am specifically referring to my non-registered portfolio, my RRSP, my wife's RRSP, and now my son's RESP. Back then we were saving about 36% of our net income. At that time my wife and I were both working away at full time jobs. When our entire mortgage payments were thrown into the 'saving' category our HSR was 51% of net income.

Fast forward to the present day where my wife is taking a government allowance each month, maternity leave, and I am still working full time.

Here are the figures for the last 2 months:

January, 2008 --- HSR = 38%, HSR including mortgage = 58%
February, 2008 --- HSR = 44%, HSR including mortgage = 63%

Also, Goal #1 has been met for both months, as we've now saved $1,388 for our non-registered portfolio for the month of February.

I am extremely pleased with these savings rates. The improvement over late last year might have to do with a general mental attitude to spend less since we are earning less. Another explanation could be the actual reductions in our day to day living costs that come along with caring for a baby.

my Walgreen mistake

As many readers of the moneygardener know I have a long position in U.S. drugstore chain Walgreen (WAG). I first bought shares in Walgreen on January 29, 2007, over one year ago, when the stock was trading at around $45. In October WAG announced a bad quarter, and investors dumped the shares hard. The day of the dramatic drop I actually doubled my position in the stock to average my cost down. This was a mistake!

Was this a mistake because Walgreen is a poor company, with a sketchy future? Absolutely not. I still believe shares of Walgreen should be a phenomenal investment long term. So why was averaging down on the day of that dramatic 15% drop ($47 to $40) a mistake?

The reason I believe this was a mistake, but a mistake I will learn from is:

• This trade exhibited my lack of patience, as an investor

Why I thought I needed to average down so quickly when they announced that weak quarter, is a mystery when one looks back at it now. Yes hindsight is 20/20 but, in reality, I made the trade in fear that WAG would bounce back up to $43 or $44 very quickly, when investors came to their senses. It showed overconfidence on my part that I thought I knew more than the market. No one becomes enamoured with a good growth stock, just after they report flat earnings. In reality I had months to watch the stock and average down. I've been kicking myself over the past few months as shares of WAG have drifted down to a low of $32.50. I could have got them 19% cheaper than my averaged down price, if I could have shown some patience.

• Why catch a falling knife when you can buy a stock on the rise later?

The interesting fact is that what I thought was such a great deal at a 15% discount at $40/share back in October, has been down to $32.50 and has now bounced back to today at over $37. It is my belief that Walgreen has now bottomed. If I would have just waited until all the pessimism was wrung out of the stock, even if I didn't catch the bottom I could have bought it today 8% cheaper, and on the rise, instead of reaching for that falling knife.

The good news is that over time, this should all be water under the bridge as I expect my shares of Walgreen will appreciate smartly over time. I want to try to learn from experiences like this as I continue on my quest to buy great companies, that pay growing dividends, at reasonable prices.

bank dividends braking or gearing down?

Robert Sedran, an analyst from National Bank Financial, writes about the possibility of Canadian banks putting dividends on hold. Specifically Royal Bank (RY), TD Bank (TD), BMO (BMO), and CIBC (CM) may forego dividend increases this quarter as their profits decline, he writes. He goes on to say that Canadian banks typically raise dividends twice per year, but they may postpone increases because average profits before one-time items should be down about 1.4%. He will view any increases as a bullish sign.

It will be very interesting to see what comes to pass here. Canadian banks have been raising dividends at fabulous rates over the past 5 years. No doubt that the operating environment for these banks has softened. The capitial markets, wealth management, loans including subprime, and the general economy do seem soft currently when compared with the last few years. These banks in the past have all shown that they can continue to raise dividends and average out making more money on a year to year basis even in tough economic times. Fee-based revenue and retail banking probably really prop them up in poor times.

Royal Bank (RY) for example had a target pay out ratio (dividends paid divided by earnings per share) in 2007 of 40-50%; they ended up coming in at 43%. For 2008 their target remains at 40-50%. As you can see there is a little wiggle room in those numbers. Earnings can be flat, while dividends continue to grow, and this could continue as long as their outlook remains so that the pay out ratio comes back down into the desired range. Bank of Montreal (BMO) on the other hand may be getting close to the top of their targeted range, especially when you include recent one-time items; their targeted range is 45-55%.

This analyst's viewpoint and comments are indicating that he believes the '2 times per year' dividend raising habit may be lost for this year for these 4 banks. He does not seem to be doubting an annual raise all together for the banks.

In a separate article, analysts doubt Bank of Montreal (BMO) will raise dividend at all in 2008.

baby savings

The birth of a child is a wonderful thing, but it can also be a wonderful thing for your finances. Keeping in mind that a dollar saved is worth much more than a dollar earned, here are a few of the unexpected lifestyle-related cost savings that we've realized since our son was born over a month ago.

• We're no longer supporting OPEC. Months before my son was born our typical monthly gasoline bill was approximately $250 - $300. Our last two bills were $140, and $40 respectively. We actually went through one full tank of gas in one month.
• Dinner and a movie? How about take out and Rogers On Demand.
• Where should we go on vacation this year? The closest I'll actually get is the Sandals commercials, which I do enjoy....

Funny, these three initial items all have to do with the fact that 'We don't go anywhere'.... I didn't really fully realize this when drafting up the maternity leave budget spreadsheet; go figure.

I have a feeling there will be more to come on this....

'step away from the bagels'

Just when things seemed like they couldn't get any worse for Canadian grocery retailer Loblaw (L), they make a few startling announcements. I actually bought and sold Loblaw before I began this blog. Loblaw is the only stock that I have ever completely sold out of. The reasons I sold the stock were many, including the company's poor outlook and direction.

Some of the information released by Loblaw today was confounding and really shows the weakness of this company right now in my opinion.

• Loblaw said they're trying to tackle the 1 Billion dollar problem of goods disappearing from their stores because of theft or mismanagement, by weeding out prospective employees with criminal records, while trying to reduce employee turnover by offering up a 10% employee shopping discount.

---- Wow, I don't know where to begin....Loblaws 2007 revenue was about 30 Billion. So 3.3% of their annual revenue was simply being lifted from their stores, or otherwise disappeared. This surely shows poor management. Never mind Wal-Mart, Loblaw's own staff is quite literally eating their lunch.

---- Hiring employees with criminal records might have been a bad idea from day one. Ya think..?

--- I appreciate the attempt to have their employees as customers, but is a 10% shopping discount going to really reduce turnover? Perhaps it might keep a few employed there, but I'm not sure Loblaws can take that kind of margin hit.

profit from canadian financials

Stocks representing the Canadian financial services sector have really been taken down lately in the midst of the U.S. credit crunch and concerns about the weakening U.S. economy's affect on Canada. The Canadian economy has been firing on all cylinders for a few years now, and the market seems to be anticipating a slowdown in activity in Canada due to the weakness of our largest trading partner to the south of us. iShares XFN, an ETF that tracks the Canadian financial sector is down 12% in the last year. So far, in general, there has not been a real drop in earnings growth for these financial services firms, although it is widely expected by investors and by the companies themselves.

A drop in earnings growth has probably been priced into many of these banks, wealth managers and insurance firms, and consequently they are now offering up some pretty hefty yields. The yield is the percentage of your invested dollars that the company pays you annually, as a shareholder. Many of these companies have long histories of dividend increases, which can really benefit a shareholder in the long term, as one recieves an ever-increasing stream of cash. Many of these companies have increased their dividends paid to shareholders at compounded rates in the 7-12% range long term. This type of annual raise really trumps the typical 3-5% raise in employment income that one might expect slaving away at a 9-5.

Where to put your money? If you have a hoard of cash that you won't be needing for at least 3-5 years then why use a saving account where your capital just gets eaten up by inflation, and the income you receive gets taxed accordingly? Dividends from Canadian corporations are taxed less than all other forms of income. The income you'll recieve in the form of dividends from these firms is only half the story, as in the long term you should also garner some capital gains from selling the stocks.

Selected Popular Savings Account Interest Rates in Canada
ING Direct 3.65%
President's Choice Financial 3.75% (balance over $1,000)

Some Selected Canadian Financial Institution Yields on Common Stock
Bank of Montreal (BMO) = 5.2%
Royal Bank of Canada (RY) = 4.0%
Bank of Nova Scotia (BNS) = 3.9%
IGM Financial (IGM) = 4.4%
Great West Lifeco (GWO) = 3.7%

buying the manager, not the product

At the market open this morning I doubled my stake in Canadian wealth manager IGM Financial (IGM) at $42.52/share.

IGM shares are currently down about 33% from their 52 week high. The company announced a 10% rise in fourth quarter EPS last night, as well as a strong 6% raise in the dividend, which they've been in the lovely habit of raising twice annually for several years. IGM is currently yielding about 4.5%. Their dividend growth record speaks for itself.

Rough waters may lie ahead for Canadian wealth managers. This article from the Globe and Mail indicates that Canadian Mutual Fund Sales Are Plummeting. Count me in as part of the crowd that does not believe Canadian Mutual Fund Sales are circling the drain long term. As the baby boomers come of age in this country, wealth accumulation for the future will become more and more of a priority. The housing crisis in the U.S. only emphasizes the benefits of diversification. Those that have all of their financial eggs in the real estate basket in Canada should, and will probably look south to find an example of why to not have all of their assets tied up in bricks and mortar.

In my opinion an investment in IGM is an investment in the company's marketing and sales, and in the trust, and apathy of the customer. Most customers want to save and invest but don't want the headache of managing their own money, or researching the most cost effective method to do so. These investors (customers) don't care or know enough about investing to do it themselves. The marketing message is simple, "this is important for your life and good for you, trust your advisor and trust your mutual fund managers to steer you right for the long term." Relationships and percieved need for professional services will always trump competitive products like ETFs, index funds, etc. In the meantime, IGM will reap the ever-growing fees which seem like peanuts to the customer.

Sun Life ups dividend

Canadian insurer Sun-Life Financial (SLF) announced today that operating earnings increased 4% in the 4th quarter to 0.98/share. Exlcuding the impact of the strong Canadian dollar, earnings would have been up 12%. Full year 2007 earnings came in at 11% over 2006 EPS. Operating Return on Equity was 14.3% for 2007, up from 13.8% in 2006. These results could hurt the stock, as they have missed analyst estimates by the amount of the currency hit.

"Our 2007 EPS growth and ROE are strong despite volatile economic conditions," said Richard P. McKenney, Chief Financial Officer. "The strength of our balance sheet enables our continued pursuit of our growth objectives."

I own shares of SLF; Sun Life Financial Purchase and life's brighter under the sun are two of the posts where I have discussed Sun Life.

Sun Life (SLF) also raised their quarterly dividend to $0.36/share from $0.34/share. This represents a 6% increase. Sun Life has increased their dividend 12.5% over the past 12 months. Here is a snapshot of SLF's recent dividend history:

2005 = $0.99/share
2006 = $1.105/share
2007 = $1.28/share
2008 = $1.42/share (assuming no 2nd increase)

This represents an annual raise compounded at around 13% over the last 4 years.