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Now THAT’S what I call a dividend increase!

I have been a dividend growth investor since 2011.  I invest only in companies that pay a dividend, and which have a track record of growing the dividend over time.  My holdings consist primarily, although not exclusively, of blue chip companies.  Part of the reason for this is that these companies tend to be less susceptible to severe cash flow fluctuations, and as result experience less downward pressure on their dividend.

That said, I have not been immune to the outrageous fortune of dividend cuts.  In the last few years alone, Baytex, BHP, Crescent Point and Potash have all cut or eliminated their dividend (I subsequently exited each).  One of the hard-earned lessons for me was that commodity stocks in general, and energy producers in particular, were simply too volatile to fit within my strategy.  As result, the percentage of commodity stocks in my portfolio has declined from approximately 25% a few years ago to less than half of that today.

Having been on the wrong end of significant dividend cuts, or worse, the dividend being eliminated entirely, it is nice and every once in a while to get a positive surprise in the form of an unexpectedly large dividend increase.  That is precisely what I was treated to earlier this week when ZCL Composites (ZCL-T) announced a dividend increase of 50%.  Although the stock is now trading at $13.23 per share and yielding 2.42% (not factoring in the latest increase), my purchase price was $9.10, when it was yielding 3.56%.  To have an already sizeable dividend juiced by 50% is a bonus to say the least.

Then, just when I thought the news could not get any better, in the same earnings release, ZCL also announced a special dividend of $0.65 share.  That amounts to an almost 5% return on the current share price, and over 7% based on my cost.  I think I might cry!

So is this post merely just an exercise in gloating? Yes.  Of course not.  Instead, it is a reminder that just because you experience a few bumps along the way in the form of dividend cuts, this should not deter you from staying the course.  I can assure you that no one was more frustrated than me when the stocks noted above slashed, or eliminated, their dividends.  However, rather than panic sell or throw in the towel completely on my dividend growth investing strategy, I assessed what had happened, and tried to learn from it.  My takeaway was that while commodity stocks may fit nicely into other people’s portfolios, they are not for me.  Armed with that knowledge, I altered my strategy accordingly, and believe I am now a better investor for it.

Lest anyone think I am now of the belief that I am immune to future dividend cuts, I am a lot of things, but terminally naïve is not one of them.  I plan to be around for many, many more years, and no doubt over that time I will get stung again.  However, when that happens, I am confident that I will understand that no matter how unpleasant a dividend cut feels at the time, it is not a fatal blow to my portfolio, but instead just a little bruise that will heal over time.  After the requisite period of whining and feeling sorry for myself, it will be just a matter of picking myself up, wiping away the tears, and moving on to the next opportunity.

How a health scare reinforced my belief in dividend growth investing.

I have a friend (I will call her Mary) who I assist with her investing.  It all started a few years after I decided to focus on dividend investing.  Mary and I used to work together in the Financial Services industry, and when I started discussing dividend investing with her, she was intrigued.  Later, she asked for my assistance in transitioning her portfolio from primarily bank own mutual funds to individual dividend growth stocks.  I began working with her in July 2013, and today she is an ardent believer in this strategy, to the point where she has now managed to convince her husband to adopt a similar approach.

Anyway, about two weeks ago, seemingly out of nowhere, I got a text from her husband advising that Mary had been rushed to hospital with internal organ issues.  I won’t go into the details, but suffice to say serious enough that her husband was told by the doctors she might not make it.  Thankfully, she managed to make slow but consistent progress over the next couple weeks, and a few days ago she was released from hospital.  She has still not made a full recovery and is not yet back at work, but she has been advised that her long-term prognosis is excellent.

What does this have to do with investing?  A great deal in my mind.  It occurred to me that if Mary’s stay in the hospital had been much more prolonged, this would have had little or no effect on her investments,.  That is because she had structured her portfolio by invested in dividend paying, blue-chip companies which she intended to hold for many years.

Contrast this with someone who is a day trader, or even a momentum or growth investor.  I certainly do not mean to denigrate these investing strategies, because I acknowledge that they can all generate excellent returns if executed successfully.  However, there is no question that momentum and growth investors must pay much greater attention to the market in the short-term than dividend growth investors.  That is because timing is paramount in deciding when to exit momentum and growth stocks.  We have all seen the carnage that can result in a very short period of time, weeks if not days, when the momentum turns, or the growth ceases.

I certainly wish that Mary did not have to go through her recent health scare.  However, it has reminded both of us that health is precious.  Try as you might to eat well, exercise and maintain a healthy lifestyle, there simply are no guarantees.  This event has also reinforced my belief in dividend growth investing, in part because I have realized that should an unforeseen event occur, I (or my family) can focus on the priorities of the moment, without being distracted by the fear that my investments are at risk if not constantly watched.   For me, the return on that peace of mind is incalculable.

Putting cash to work in CVS, JNJ, UL and ALA.

As I noted earlier in the week, I sold Norfolk Southern (NSC) after holding it for several years. Shortly after the sale I reinvested most of the proceeds to initiate a full position in CVS Health Corp (CVS) at $76.57/share.

I am underweight health care, with JNJ being my only health care related holding, and that is not a pure play heath care stock. To the extent that CVS might be considered to reside in the consumer staples or retail sectors, I am also underweight these as well.

CVS is one of largest pharmacy companies in the U.S., with approximately 10,000 stores.  It ran up to just over $105 in May 2016, but plummeted to under $70 in November 2016, in part due to the Hillary’s anti-health industry bluster in the months prior. It recovered to the low $80’s in early January 2017, but fell again below $75 as recently as early February 2017.  This most recent drop was triggered by fears that pharmacy benefit managers (which makes up a portion of CVS’s business) may be in Trump’s line of fire.

CVS provided guidance in December 2016 which indicated rising GPS, operating cash flows and free cash flows. Tomorrow (February 9) CVS is set to report earnings for the fiscal Quarter ending December 2016, so I will be interested to see what that brings.

The company trades at about 12.2 times 2017 EPS estimates, and at today’s closing of $77.03 it yields 2.30% based on an annual payout of $2.00, which has grown at a pace of over 27% the last five years. CVS has also announced a $5 billion share buyback.

In short, I saw CVS as an opportunity to buy a quality dividend growth stock at an attractive valuation, which happened to marry up nicely with a sector void in my portfolio.  My hope is that CVS will form a core holding for me for many years to come.

I mentioned that I used most of the proceeds from the Norfolk sale to purchase CVS.  I used the few thousand dollars left over to add to existing positions in JNJ at $112.79, and Flowers Foods (FLO) at $20.16.  I also used funds not from the Norfolk sale to add to positions in Unilever (UL) at $41.11 and AltaGas (ALA) at $31.00.

Putting Norfolk Southern on the outbound train…

On January 2, 2017, I wrote that I was considering selling Norfolk Southern (NSC), in part because it had not raised its dividend since February 2015.  Not fatal, but something I was more monitoring.  Then, two weeks ago, NSC announced a 3.38% dividend increase.  Although this was certainly good news, today I decided to sell it nonetheless.  Performance was not the issue.  As I noted in my previous post, I had held NSC since 2012, during which time it had produced an annualized rate of return of 11.3%, plus a dividend of 3% at the time of purchase.

The lack of a dividend increase the last few years was a concern, but the bigger factor was my purchase of CN Railway last year.  The more I thought about it, the more convinced I became that I did not need two railways in my 34 stock portfolio.  NSC was the obvious sale candidate, firstly because I believe CNR to be the best-managed railway in North America, and secondly I thought it a good time to capitalize on NSC’s 25% run up in price the last three months.

The NSC sale allowed me to establish a position in a U.S. health care related stock I had been monitoring for several months, and add to two positions in two existing positions.  However, since it is getting late, and it is unanimously agreed by my wife, daughter and dog that I need beauty sleep more than most, I will defer elaborating on those purchases until later in the week.

Don’t be a twit by investing based on Trump’s tweets.

There seems to be much talk as of late as to how investors should alter their investing strategies, if at all, in response to the Donald’s affection for tweeting whatever pops into that wild little world between his ears.  Unless you are a trader (or I suppose a “traitor”) I am not sure there is much value in reacting to the Donald’s social media forays.

That is not to say that they cannot have an effect.  The question is can you accurately predict the market’s reaction?  And even if you can, are you able to forecast the durability of that reaction?  My guess is the respective answers are “occasionally” and “no”.

The sheer volume of the tweets from Mr. President aimed at specific companies dwarfs the population of Rhode Island.  In a January 10, 2017 article, Yahoo Finance identified 61 different companies that the fair-haired prince had targeted on Twitter.  Anecdotally, it seems to me that the pace of his tweets may have slowed down since that time, but rumor has it that is only because he smashed his finger with a hammer while building a wall.

You have to love the media’s overreaction to the effects of Mr. T’s tweeting.  I don’t want to pick on any one particular news(?) network, so let’s just call them FOX.  Some of the descriptions contained in a January 9, 2017 article from this unnamed (FOX) network are set out below, followed by the move in share price between January 9 and February 2, 2017:

“Trump Unleashes Wrath on GM!” – GM down a whopping 0.078% due to the Donald’s fury.

“Single Tweet Sends Defense Industry Into Tailspin” – Lougheed Martin down all of 2.26%.  Alert the bankruptcy trustees.

“Boeing’s Image Takes a Dive Following Tweet” – Boeing actually up 2.49%. Um Donald, if you have a second, would you mind bashing us some more – apparently it is good for business.

“Ford Gets Unexpected Plug” – Ford down 2.77%.  Despite Donald’s gushing platitudes, stock inexplicably declines. Perhaps all part of his secret plan to help Vlad sell more Lada’s in the US?

What can be gleaned from the above? First, that the unnamed network above (FOX) is neck and neck in the gutter with another unnamed bellwether of journalistic integrity (CNN).  Moreover, it tells me that it would be fruitless to alter my investment strategy based on the Donald’s penchant for licking his finger, holding it up to the wind, and tweeting accordingly.

Why assisting my parents with their investments weighs so heavily.

My investment strategy is quite simple.  I invest primarily in quality companies with a history of having sufficient cash flows to regularly increase their dividends.  I have a firm belief that over the long-term this strategy will provide me with investment income that, combined with my work and government pensions, will allow me to comfortably enjoy my post retirement life.

I understand and accept that it will not always be a smooth path, and despite the relatively conservative nature of this strategy, there will be at times when my portfolio value decreases.  Like most dividend growth investors, I am prepared to live with this, knowing that over the long run, quality companies will recover from short-term blips.  Moreover, despite temporary downturns, my dividend stream continues to increase.

Despite my confidence and my strategy, I must admit I find it somewhat more challenging to assist my parents with their investments.  I could not have asked for better parents.  Throughout my life they have sacrificed for their children, and I would not be where I am without them.  We lived a typical middle-class existence, and while we were certainly not rich, I do not recall wanting for anything.

My parents are now in their mid-80’s, and after having lived in the same house for 45 years, they have recently moved to an assisted living facility.  This was certainly not without its challenges, but gradually they are settling in.  The facility is very nice, although my mother remarked that “everyone is so old”.  Hmm, go figure).  While not inexpensive, they are able to pay for it with their government and private pensions, with a small amount left over.  Since retirement they have always spent within their means, investing whatever small amount was left after expenses.  Over time this amounted to a low six figure sum, which has historically been invested in a large Canadian balanced fund.

With the sale of their house, they need to decide where to invest the proceeds (several hundred thousand dollars), and although they have a bank “advisor”, they have shown unassailable judgment and asked me for assistance.  While I am happy to do so, the challenge is that their goals and risk tolerances are of course different from mine.  As result, it is not as easy as simply investing the money as if it were my own.

Capital preservation is paramount.  This of course could be accomplished simply by investing in GICs.  While that would preserve the capital (plus a small amount of interest), in all likelihood it would not keep pace with inflation, and therefore is not an option I endorse.

My inclination at this point is to keep a small amount, somewhere in the neighborhood of 5% – 10% in cash and/or redeemable GICs.  This would allow for sufficient liquidity in the event of an emergency or a larger purchase, but would not be significant drag on returns.

There are infinite options with respect to the remaining proceeds. With capital preservation in mind, I am leaning towards investing approximately 75% of the remaining capital in a low-cost balanced fund, likely the Mawer Balanced Fund.  It has an excellent track record, and while I do not typically endorse investing in funds, Mawer has a well-deserved reputation of offering quality funds at a reasonable cost.  In this case, the MER is 0.94%, which is significantly lower than the MER of just over 2.10% charge by the balanced fund my parents are currently in.

In keeping with the conservative investment goal, I would likely target a bond fund for the remainder of the proceeds.  I am well aware of the real possibility of rising interest rates, and the potential negative impact this could have on bonds.  However, I am not anticipating a rapid rise in rates, and my view is that a short-term laddered bond fund, or a quality active managed bond fund, should be able to capably manage a gradual rate increase.

There are a number of short-term laddered ETFs that could likely meet this goal.  However, at this point I am leaning towards the Phillips Hager & North bond fund.  This fund has an exceptional track record with what I believe to be a quality management team, and one that I was invested in for several years prior to 2012.  At 0.60% the MER is more than competitive, particularly in light of the fund’s impressive long-term track record.

The purpose of this post is not to solicit specific investment ideas. Given that readers know little of my parents situation beyond the generalities set out above, that would be a senseless request.  I think the point I am trying to make is twofold. First, one size does not fit all. My goals, life expectancy, risk tolerance and financial status do not mirror that of my parents, and our investments strategy should reflect this.  I am a dividend growth investor, but that does not mean this must be the strategy they adopt.

Moreover, regardless of what suggestions I offer to my parents, I know that on at least some level I will be second-guessing myself. That is because they have always given me sound advice when it was most needed, often firm, but never judgmental.  This is a chance now for me to help them, and I want to do everything I can to provide the best counsel I can.  Even if my advice turns out to be spot on, it would fall well short of the repayment they are owed, but never once sought, for a lifetime of guidance provided.

Norfolk Southern Dividend increase

Three weeks ago I expressed my concern with the NSC’s lack of recent dividend increases, and wrote:

I will be patient with Norfolk, but if it goes another calendar year without a dividend increase, I suspect I will move on to other opportunities.

Well today, NSC announced an increase in the quarterly dividend for $0.59 to $0.61, which represents a 3.39% increase. Not exactly setting the world on fire, but still an increase.  It is a cyclical company, so I do not expect smooth, linear increases.  The stock has had a nice run from $85 to $116 the last six months, and the increase suggests that the company is a little more optimistic about its cash flow, at least in the near term.

Sometimes I hate being a landlord…

I suspect that most people considering becoming a landlord probably realizes that it is not simply a matter of purchasing property, finding a tenant, and letting the cash roll in.  I have seen many excellent posts chronicling the difficulties with tenants, and the financial and property carnage that can result when the tenant turns out to be less than stellar.  Last week I posted about the primarily positive experience I have had since becoming a landlord in 2011.  In the interest of full disclosure, I thought I should mention a few of the headaches I have endured (fortunately bad tenants have been avoided to this point):

  • Tax Time – we live in Canada, and own a condo in the US, which we lease out on a long-term basis. I am not sure if the same headaches arise for US citizens, but for us having to file taxes in the US is at best time consuming, and at worst a nightmare.  I have a Commerce degree, I spent time practicing securities law, and I dare say I am at least somewhat familiar with financial filings.  Despite that, I still find it necessary to hire a professional accounting firm experienced in cross border tax filings to make sure I get it right.  Even with that, it is a royal pain in the ass to have to compile the documents for them, and then once completed ensure that they get filed at both that the State and Federal level.  I cannot wait to see what lovely surprises the Donald has up his sleeve to enhance my filing pleasure going forward
  • Property Manager – it would be great if we were able to monitor the property ourselves. However, not being resident in US, this is impossible, and thus we have no choice but to hire a property manager.  We were advised by many people in advance that it was very difficult to find a quality property manager, and having lived through numerous headaches the last five years, I can assure you they were spot on.

    Our property manager talks a good game, but that is largely where it ends.  It started out badly almost from the beginning, when we noticed that after several months, rent checks were not being deposited in the account.  When we contacted the property manager she advised that the tenant had moved out because she had felt “spooked by the break-in”.  Break in?  What f*ing break in?  The property manager was quite sure she had mentioned it to us.  I assured her that no, I was quite certain that had she mentioned that little tidbit, I would have remembered. Moron.

    Despite the above, we have not changed property managers (who’s the moron now you may rightfully be asking).  The primary reason is that the one benefit our property manager has is that they are on site, and manage (I use that term loosely) multiple units.  This should give them the advantage of being able to monitor things more closely than an off-site property manager, but that is clearly debatable.  I would switch in a heartbeat if I thought I could actually find a property manager worth anywhere near what we pay them ($100 per month, which works out to just under 10% of the gross monthly rent).  I suppose I should not whine too much, because in truth my search for a new property manager has been only slightly less exhaustive than O.J’s search for the real killer.

  • Insurance – this is more of an annoyance than anything else, so it ranks significantly lower on the “Pain-in-the-Ass” scale than the above. That said, no matter how organized I am, I have a perpetual fear that I am going to forget to pay the property taxes on time, or worse, forget to renew the condo insurance, only to have it destroyed by a fire, a flood, or some rampaging Jacksonville Jaguars fan crazed from watching years of unfathomable ineptitude.  Just thinking about it (my condo being destroyed or watching the Jaguars) is enough to make me want to throw back a single malt scotch.  In fact, that is a damn fine idea.  Off I go…

A scintillating post on my recent stock purchases…

I don’t always post my transactions, as quite frankly I find it boring to write about buys/sells .  Last week, while waxing poetically about my success as a landlord, I promised to come clean this week about the perils of this activity, but I have not finished that post yet. So, for those battling insomnia, I thought I would try to assist and bring you up to speed on my recent buys.

  • Flowers Foods (FLO – N) – A few weeks ago I picked up 130 shares of FLO @ $19.76. This was my fourth purchase of FLO in 2016, having previously bought it on three occasions at lower prices. FLO jumped about 15% in early December 2016, after the company announced it settled a class action lawsuit for $9M. The suit had been brought by company drivers, who contended they should be classified as employees and not independent contractors. I felt the suit was likely to settle when I first bought it under $15 in August 2016, and was fine paying a little more after the settlement, as I felt it brought some needed certainty to the situation.  After this latest buy my ACB is $15.61.  It is now essentially a full position for me, so I don’t anticipate any more purchases in the near term.
  • Fortis (FTS – T) – Last week I bought 70 shares of FTS at $40.70. I had bought almost a full position in February 2016 at $37.29, so this last purchase was just to round out that position. I had been waiting for it to get below $40, but decided to pull the trigger now so as not to get to cute on the entry point. I anticipate FTS being a very long term hold for me. As a regulated utility it is nothing if not steady, and they have one of Canada’s longest streaks of dividend increases (over 40 years).  FTS recently made a significant transaction in the form of a US asset purchase, which most analysts expect to be accretive in the long term.  The payout ratio is around 55%, and it is trading between 18 and 19 times next years earnings, which is a little below its five-year average.

PS – If you have made it this far, there is no question in my view that you have a serious sleep problem and should be consulting a medical professional…

Not Fonda’ Fonda…

Canada is a blessed country. Expansive beauty, cultural diversity, and the home of (although not lately) Lord Stanley’s Cup.  What more could we ask for? Why, an unsolicited visit from Jane Fonda of course!

It seems that ol’ Jane, anxious to capitalize on her recent 30 year break from making a watchable movie, thought it a good idea to spread her untapped wisdom on Canada’s energy practices.  To that end, Ms. F. and her posse recently flew over the Canadian oil sands, after which she deigned the good citizens of Fort McMurray with her presence.  Elegantly descending from her private helicopter (she apparently considered mushing, but felt that that would be overkill) Jabberin’ Jane used the photo op to express her heartfelt empathy for Canada’s indigenous peoples. Less audible was Jane urging the masses to get out and see her latest release “Fathers and Daughters”, which I believe had a worldwide audience of slightly less than one father and one daughter.

With the obligatory “free-range seal” carpet ceremonies dispensed with, it was time for Jane to collectively take Canadians out to the woodshed for a good old fashioned lecture.  Why, how dare they pollute the air and rape the fertile land (at least not without first giving her the movie rights).  The old gal was just getting started.  The government had lied damnit, and Justin Trudeau had betrayed the world.  Determined to show that an old, old, old dog can indeed learn new tricks, Jane announced that through the experience she had learned that ““we shouldn’t be fooled by good-looking liberals” (had she omitted the “good-looking” part, I would have accused her of self-loathing).

Fancy Fonda was apparently appalled that people would act only for financial gain.  This of course is completely in keeping with our own principles, in which financial gain was never a consideration.  How dare anyone suggest otherwise!  It goes without saying that she married Ted Turner for love, and only agreed to make such classics as “Fun with Dick and Jane” and “9 to 5” for their obvious artistic merit.

Do I sound petty? I hope so, because that is my intent.  I am tired of the too frequent visits from Hollywood’s social do-gooders  (see “DiCaprio, Leonard “and “Cyrus, Miley”) anxious to berate Canadians, all the while armed with too many cameras and too few facts.  Spare me.  You want to advance a worthy cause Jane?  Start with a public apology for “The Electric Horseman” and then maybe we can talk.