Dec 042012

The tables are turning in North America. Canada’s economy, known to be one of the strongest ones in the developed world, has hit a road bump (o_O) And the US in turn is going full steam ahead! Real GDP in Canada in the 3rd quarter (July to Sept) only grew by 0.6% annualized. That means our economy pretty much stayed stagnant 🙁 This GDP slow down was unexpected by most economists.  By comparison,  GDP in the United Sates grew by 2.7% in the same time.

Big congrats to all my friends south of the border 🙂 You guys worked hard during the last several months so you deserved it. GDP of course measures the total economic output, or money, that people are making in an economy. If the number of workers in Canada doesn’t increase, but our GDP grows by 10% then that means on average, each Canadian worker is making 10% more money :0) And more income leads to a better quality of life :0)

GDP slow down

At first it might not seem like good news for Canadians that the US is growing at 4.5 times faster than us. But there’s actually an opportunity here to make some nice investments :0)Right now US companies are lacking the confidence and sometimes the liquidity to invest, but there are many undervalued businesses there, sometimes laden with debt (like Hostess and their Twinkies brand.) So what we’re seeing lately is Canadian companies taking advantage of this opportunity and buying cheap US companies, before other potential buyers in the US can get a chance.  Saputo, Canada’s largest dairy producer, is acquiring US based Morningstar Foods LLC for $1.45 billion. And a Toronto based private equity firm called Onex Group is buying the US based Insurance Broker USI for $2.3 billion.  Thousands of US employees will soon be working for Canadian companies, Puah-ha-hah!! Go Canada. We have the last laugh now (⌒▽⌒) Smart Canadian businesses are picking up cheap US companies now at decent prices, so that when the US economy starts growing consistently at a more regular pace, which it might be starting to do now, then Canadian business will also benefit financially, since the US is still our largest trading partner.

How can you and I benefit from this trend? Don’t do the obvious and buy US companies, because it’s hard to pick which one will be a target for acquisition, and taxes on US equities aren’t favorable for Canadians unless they’re bought in a registered account. Instead I would buy Canadian companies with lots of cash on their balance sheets and are looking at buying assets outside of Canada. Saputo and Onex would be good examples. Our banks like TD, RBC, and Scotiabank are also really good at expanding their businesses outside of Canada and have benefited from external economic growth so far by buying other companies already in those other countries 😀 Yeah we rock! Canadian companies, and by extension their investors like myself, and maybe even some of you reading this blog, will one day take over the world, woo! But let’s keep that to ourselves for now 😉

My personal financial situation for the moment reflects the Q3 economic growth we’ve had in this country. Slow growth, but heading in the right direction at least.

——————————————————–net worth is still moving up but only steadily, much like the recent GDP slow down
*Side Income:
  • Part-Time Work = $600
  • Dividends = $300

*Discretionary Spending:

  • Eating Out = $100
  • Others = $200

*Net Worth: (MoM)

  • Assets:
  • Cash = $20,200 (+$1,100)
  • Stocks = $67,400 (-$500)
  • RRSP = $29,100 (-$1,100)
  • Home  = $248,000
  • Liabilities:
  • Mortgage = $204,800 (-$400)
  • Margin Loan = $20,900 (+$4000)
  • RRSP Loan = $1,000 (-$5,900)

*Total Net Worth = $138,000 (+1.3%

Borrowed some money from my margin account to pay down my RRSP loan. Stocks went down a little bit because the entire TSX composite was down in November. The “others” spending includes my Christmas shopping which is all done now. Luckily my list of people to give presents to this holiday is really short! 😀

* Numbers are rounded to the nearest $100.

Feb 142012

My bank’s checking account has a $3.95 monthly fee. However this fee is dropped if I have at least $1,500 in that account for the entire month. Typical right? Just about every bank does this. Keep a minimum balance in your account, and the account fee is waived! I used to maintain the minimum balance to avoid paying fees. But I wasn’t too happy about it because I was essentially lending the bank my money, interest free.

But recently I have removed the minimum balance out of my account and started to actually pay $3.95 every month. But why would I choose to pay more fees when I don’t have to?  Answer: *Opportunity Cost (^_^)
It’s true that by keeping a minimum balance of $1,500, I save $47.40 a year on checking account fees. But if I can make more than $47.40 a year by investing $1,500 then I would be better off investing that money instead of keeping it tied up in the bank right? So that’s why I transferred the money from my checking account into my brokerage account, and used all that money to buy my bank’s own common shares.  In other words, I purchased $1,500 worth of TD Bank stocks. That’s because the stock’s dividend was more than enough to cover my checking account fees. Even today, according to google finance, TD Bank currently has a dividend yield of 3.46%. This means if you invest $1,500 into TD shares today, TD will pay you $51.90 every year in dividends. If you live in BC and make between $43K and $74K of income per year like me, then you will only have to pay a *few dollars of tax on that amount and pocket $48.38. Not too shabby (^o^)
To review, I am now paying the bank $47.40 in fees every year. Meanwhile the bank pays me $48.38 (after tax) for being a shareholder. Basically this means I get to use the bank’s chequing account service for free, AND make a tiny profit to boot. But it gets better! TD has grown it’s dividends 11 times in the last 12 years ( ゚д゚)So this year I may receive $48.38 like we’ve calculated, but next year, I wouldn’t be surprised if TD pays me $50 or more because those dividends keep going up. But it gets even better! The *payout ratio for TD is under 50%!  This strategy also protects me from higher banking fees in the future because once I became a shareholder, every dollar of profit the bank makes from charging their customers higher fees will only add value to my stocks.


Of course not everyone banks with TD. But this strategy is transferable. Here’s some basic information on a few other banks below.

BMO Practical Plan Chq Acct: Fee = $4.00/month. Waived with $1,000. BMO’s stock dividend yields 4.80% 
CIBC Everday Chq Acct: Fee = $3.90/month. Waived with $1,000. CIBC yields 4.69%
Scotiabank Powerchequing Acct: Fee = $3.95/month. Waived with $1,000. Bank of Nova Scotia yields 3.96%

But I can see why this may not be a good idea for some people. This strategy does come with risks after all. You risk the banks cutting their dividends in the future, even though they all have a solid history of growing them. You also risk losing some of your initial investment if their share prices drop and never recover, even though banks are the oldest and largest companies in Canada and the backbone to our whole economy. For short term investors and those who want to play it safe, keep your balance in the bank to save yourself some money. But if you want to live on the edge like me, then don’t let your bank hold your money to only benefit their own interests. Buy a piece of your bank instead and profit with them, and by the time you retire maybe you’ll be a little wealthier than if you hadn’t. (^_~)

*Opportunity Cost – Losing the opportunity to profit from a choice, because another choice was taken. Go ask an economist for a better explanation (>_<)
*few dollars of taxThe dividend tax credit makes dividend income very tax friendly. Depending on your location and other income, you may not have to pay any taxes on dividends at all.
*payout ratioTo be explained in a future post.