Jan 022018
 

Hello friends. It’s a new year. 😀 My investment strategy for 2017 was simple; to buy dividend growth stocks and alternative investments. Dividend stocks and alternative assets tend to grow in bull markets but also hold up well in recessions. The plan is to earn respectable returns while reducing risk to the downside. Here are my 2017 results.

Average return on investable assets = 18.9%

Overall I am quite thrilled with this outcome. 🙂 The broad Canadian stock market index (S&P/TSX Composite) returned about 9% in 2017. I remain convinced that a dividend based investment strategy works better than index funds.

Another variable that worked to my advantage is geographical diversification. Most equity markets in foreign countries performed extremely well. For example, the S&P 500 index in the U.S. gained 20%. Holding U.S. and European stocks helped me a lot this year.

The Best of 2017

Liquid’s Top 10 Best performing stocks of the year:

  1. Canopy Growth Corp (WEED) +213%
  2. Match Group Inc (MTCH) +82%
  3. Caterpillar (CAT) +64%
  4. Avigilon Corp (AVO) +63%
  5. Dollarama (DOL) +59%
  6. Amazon.com (AMZN) +58%
  7. Premium Brands Holdings (PBH) +55%
  8. Deere and Co (DE) +55%
  9. Blackberry (BB) +54%
  10. Netflix (NFLX) +53%

The Worst of 2017

Liquid’s Top 10 Worst performing stocks of the year:

  1. Crescent Point Energy (CPG) -45%
  2. High Liner Foods (HLF) -23%
  3. Cineplex (CGX) -22%
  4. Cameco Corp (CCO) -14%
  5. Viacom (VIAB) -10%
  6. Halliburton (HAL) -8%
  7. Keyera Corp (KEY) -7%
  8. Boardwalk REIT (BEI.UN) -7%
  9. Target Corp (TGT) -6%
  10. Goldcorp (G) -5%

We can’t win them all. But as long as we get it right most of the time then everything will work out eventually. 🙂

 

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2017 Investment Breakdown

All returns mentioned below are internal rate of returns (IRR) unless otherwise stated.

TD Portfolio 
Annual return = 16.3%
Net Asset Value = $190K

This includes my entire RRSP portfolio, most of my TFSA and a small cash account all held within TD Direct Investing. The combined return over the last 12 months was 16.28%.

I hold about 15 individual securities in my TD TFSA, and another 30 in my RRSP account. If you are interested to see exactly what they are I’ve listed all the stocks on my portfolio page. 😀

Note: Past performance doesn’t guarantee future results and readers should not take any stocks I buy as recommendations.

 

Interactive Brokers – Non Registered Portfolio
Annual return = 25.3%
Net Asset Value = $158K

This is where I have my margin account. I hold Canadian, U.S. and U.K. securities in here – mostly preferred stocks and dividend stocks due to the preferential tax treatment of their returns. One reason the return is so high in this portfolio is because I am using leverage (borrowing money to invest.)

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Nov 242017
 

For long term investors, earning 5% to 7% annual return (after tax) is a suitable target to aim for. But this is difficult to pull off today. The current expected returns of the financial markets are extremely low by historical standards. Traditional asset classes such as stocks and bonds are generally overvalued now.

Stock Market Expected Return = 3.2%

The Shiller P/E ratio is currently about 31 for the S&P 500 stock market index. This is much higher than the historical average ratio of 16. The Shiller P/E ratio is based on average inflation-adjusted earnings from the previous 10 years.  The inverse of the ratio (1/31) is how much the market is expected to earn for investors going forward.

Bond Market Expected Return = 2.3%

Here are some popular bond ETFs.

  • BMO Aggregate Bond Index ETF (ZAG) – Weighted Average Yield to Maturity = 2.34%
  • Canadian Aggregate Bond Index ETF (VAB) – Weighted Average Yield to Maturity = 2.28%
  • iShares Core Canadian Universe Bond Index ETF (XBB) – Weighted Average Yield to Maturity = 2.35%

As we can see, all their Avg YTMs are below 3%. The 10 year Canadian government bond is paying only 1.9% as of writing this post. 🙁

As a long term investor I don’t see the point of buying a bond that pays less than 2% interest when the Bank of Canada openly declared it wants to erode the Canadian dollar’s value by 2% a year. That effectively creates a projected negative real return on investment, 😼 ouch. This is why I stay away from ETFs like these which primarily hold low yielding government bonds. These funds aren’t necessarily bad investments. I’m just saying they’re not for me. We can find slightly higher yields in U.S. bonds, but not much better.

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May 082017
 

How to Invest in U.S. Infrastructure 

Donald Trump’s policies focus on building infrastructure and prioritizing America first. With the U.S. economy growing stronger than Canada’s, I believe this is a good time to look south of the border for opportunities. Thanks to the Trump rally, the S&P 500 market index in the U.S. is up about 7% year to date. It appears the market could reach even higher by the end of the year. 🙂

One way to invest in a country’s growing infrastructure is to buy ownership in stable, and profitable cement and construction companies! But the concrete business isn’t always what it’s cracked up to be. 😄 There is a lot of competition in this space so it’s important to invest smartly. I have done research into several companies such as Martin Marietta Materials (MLM), Vulcan Materials (VMC), and others. But the company I liked most was Summit Materials Inc (NYSE:SUM)

Summit Materials is in the business of cement and small rocks called aggregates used to make roads and buildings. In addition to supplying aggregates to its customers, the company also uses its materials internally to produce ready-mix concrete and asphalt paving mix production. I like the widespread geography that Summit is operating in. It conducts business in over 20 states, including Texas, which borders Mexico. I’m looking forward to that wall being built. 🙂

I guess you can say this company rocks. 😄 Valuation wise SUM is slightly expensive, but is actually fairly valued when compared to its competitors in the market. Over the last year the company earned $0.88 per share. According to analysts, the company is expected to grow its earnings at 10.5% a year over the long run. We can use the Graham Formula which I’ve explained here, to determine the fair market value of this stock.

Doing so will give us a Graham value of $25.96 per share. (V = 0.88 x (8.5 + 2 * 10.5)

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Sep 222016
 

Lower Cost with Interactive Brokers

Everyone likes a discount, especially personal finance enthusiasts. We tend to get hyped over even marginal deals. 😀

16-09-why-pay-10-discount

Speaking of margin-al discounts. I recently lowered my stock margin rate from 4.45% to just 1.95%. Hot damn! It’s even lower than my mortgage now, haha. 😁

One of the best things investors can do to increase our net returns is to reduce the cost of investing. When it comes to leverage, or borrowing money to invest, the best way to reduce our cost is to find a broker which charges the lowest interest rates. 🙂

In the past I have held my margin account with TD Direct Investing. The current interest rate they offer is 4.25% or 4.75% per year, depending on which currency investors borrow in.

16-09-td-margin-rates

Although TD’s rates are already competitive relative to the other large banks in Canada, it is not the lowest. After doing some research online I’ve discovered that a U.S. based brokerage firm called Interactive Brokers offers the lowest margin rates, and has cheap trading commissions. So I recently transferred my entire margin portfolio from TD to IB to reap the benefits of lower cost borrowing. 🙂

Interactive Brokers Advantages

Here are 4 reasons why I switched to IB.

  1. Reduced margin rates for more cost-effective leverage. I currently have about $54,000 of margin debt. I was paying on average 4.45% a year for this massive loan with TD. But with Interactive Brokers I’m now paying only 1.95% on average because I have both US and Canadian dollars. This represents a difference of 2.50% between the two brokers, which translates into $1,350 of interest rate savings every year! 😀 “BM” in the table below refers to the benchmark rate set by Central Banks.16-09-interactive-brokers-margin-rates
  2. Cheaper trading commissions. TD and many other brokers charge a flat fee of $9.99 per trade when buying stocks. But IB charges 0.5 cent per share for U.S. accounts, and 1 cent per share for Canadian stocks. The minimum cost per transaction is $1. For example if I buy 200 Shares of BMO (Bank of Montreal) shares, then my total commission would be $2.00 CDN. My trades are typically worth between $1,000 to $3,000. This means I rarely buy more than a few hundred shares of anything because most companies I prefer to own are dividend growth stocks, which tends to be priced at $20 per share or higher.
  3. Access to global markets. This isn’t a big deal for most people, but for more advanced investors Interactive Brokers allows trading in foreign currencies outside of North America. This means we can buy European stocks in Euros, or Australian stocks directly from the ASX using Aussie money. 🙂 TD used to have a platform that lets Canadians like myself trade internationally, but they cancelled that service last year. 🙁 I’ve mentioned in a previous post, that I want to diversify into other countries and there could be some good opportunities in the U.K. after the Brexit event earlier this year. So having access to a global trading platform is important for my financial goals. 😉
  4. Great for options trading. $0.70 per contract; $1 minimum order; volume discount available. And in the unlikely chance that our open options are exercised or assigned, there is $0 assignment fee, unlike $43 for TD or BMO.

Disadvantages of IB

Here are a couple drawbacks with IB.

  1. Penalty for not being an active trader. If investors do not spend at least $10 in commissions per month, we will be charged the difference. Furthermore, there’s a $10 fee for real-time quotes each month which is waived if at least $30 in commissions is spent. I typically trade once or twice a month so I will be paying these fees.
  2. $10,000 USD minimum balance to open up an account. This isn’t an issue for me, but some investors might have trouble coming up with $10K.

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Apr 112016
 

The New York stock exchange regularly releases information about how much margin (or debt) investors are using to invest. Based on the latest reports from the NYSE market data, Doug Short who writes for advisorperspectives put together the following graph which conveniently compares the credit balance of investor’s accounts to the S&P 500 over the past two decades. We can clearly see some correlation between the two sets of data.

16-04-investor-credit-margin-stock-nyse

The blue dotted line represents the nominal performance of the stock market index since 1995. The set of red and green bars represents the net credit balance inside investors’ accounts. This credit balance is basically the sum of free credit in cash and margin accounts, minus margin debt. Red bars show that investors have negative credit balances (borrowing money to invest,) and green bars mean they have excess cash or credit.

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