Can You Trust Income Trusts?

I see them there, staring back at me with their juicy dividend payments. Some pay a hearty 6%, while others pay in the incredible 12% range.  More yield then you can  shake a stick at. The banks can take their pathetic 1% interest rates and shove it .... in someone else's face. It sounds to good to be true but they are indeed proven to payout those amazing dividend yields.

But like all dividend payments from income trusts and common shares, they are never fully guaranteed. They can be cut or even eliminated at any moment and the share price will be reduced at an alarming rate along with it. Income trust's dividends don't seem very stable at all. They fluctuate more then a dividend paying common stock. If it's a slow quarter or year, the dividend will be most likely cut. And thanks to new Canadian laws that were ousted in the U.S and Australia, the Government has their fat claws ready to take advantage of the new taxation on income trusts in 2011. I'll  make this simple and a less painful explanation. The new tax rules will force income trusts to form a corporation and greatly hinder the ability to maintain their current dividend because of the increased taxes that used to be paid by the dividend earners. So now Steve Harper and the other oxygen converters can buy the $100 bottles of orange juice AND eat the $30 beer nuts in the fridges of their hotel room and not feel as bad about it. The conservatives might even feel bad they lied to us about not taxing income funds in their election promise, but I highly doubt it

Some trusts have already converted, but I'm still skeptical of the dividends and how long they will be maintained. I will be watching income trusts and their plans on converting to corporations well into 2011 and will be weighing my options. I might miss out on some nice yields, but I'd rather take the time and invest in something rock solid once, rather then buying and selling like a mad man investing in non paying dividend stocks.

Do any of my dozen or so readers invest in income trusts? What are your thoughts on the 2011 deadline and it's effects on dividend payouts?

MERs Are Killing Your Savings

Management Expense Ratio. When you purchase mutual funds, it's listed in the fine print. When I was 18, I began purchasing mutual funds because I was told it was the best way to save for retirement from an advisor. He never mentioned anything about a MER so I had no idea what they were or what it was costing me. I bought several more mutual funds over my life and none of the "financial planners?" told me what the MERs were either. Most mutual funds charge 2-3% and you never see the fee come out of your account, it's subtracted from your contributions.

 So you think that's a fair price for someone to manage a mutual fund? Well to put it in perspective, let's say your have $100,000 in a mutual fund that has a MER of 2.5%. You would have to pay $2500 in fees, so if your mutual fund made 6%, you would only have made 3.5% or $3500 on that investment. To me that defeats the purpose of investing when your return is almost halved due to fees. Majority of funds are rebalanced once a year. All the companies that don't do well are sold and new companies are added. Sounds kinda easy if you ask me. Anyone with a desire to learn can invest on their own and no one is going to make more money for you then yourself.

 If you took matters into your own hands, and invested in Exchange Traded Funds, majority of the fees would be .06% or $600.  You could go even further, and invest in the companies yourself, and pay close to $300 in fees. If you do have over $100000 then it would probably cost close to $100. And after that, rebalancing your portfolio would probably cost $60 a year, depending on how much you sold and how much you purchased.

What stocks should you purchase? The ones the mutual funds own. Just have a look and see what they are investing in, and copy the most lucrative funds. I myself aim for blue chip dividend payers, but then again I'm biased. It's not hard at all, if you take some time and learn about investing, it will change the way you see the world. Events you would normally not care about half way around the world, will influence your investments the following day. If more people invested themselves, then maybe the world would be a better place.... err probably not.

I made this animation in an attempt to show a day in the life of a mutual fund manager. Enjoy!

Becoming One With Your Inner Saver

My last post was a venting towards delusional saving and it seemed crazy that people needed to have money saved for them. What's coming next, banks kidnapping loved ones and demanding a ransom only to return it to you in the form of an RRSP contribution?  But it made me think about the times when I was younger and my money burned a hole in my pocket. It's a lot harder to focus on the future when your twenty and think the good times will never end. I would spend my money of the most stupid things ever. I remember buying a toy lightsaber and NERF guns and my room mates and I would have huge battles that would repel women away for hundreds of miles. I ordered collector items off of Ebay that are now worthless, but I enjoyed spending my money on them.

I started becoming a saver when I moved to Edmonton. I slept on the floor of my sister's apartment and started working for a new company. My car that got me to the city was about to die and I was pre approved for a car loan when I opened up my bank account. I was so happy that I got the loan and I didn't even know what the interest rate was. I was very paranoid about losing my job and having to sell the new car and that's when the pilot light of saving was lit. I started saving a few hundred dollars every month in a "just in case" fund. Over the months it started to grow until I had a few thousand dollars. I was like "Wow, were did this come from?" and I used that money as a buffer. I kept it in my account and never spent past that point.  Soon there was another thousand left over and I made that my new buffer amount. Slowly but surely over the next year it grew and grew into what I like to call, a pile of money. It felt good seeing that big number in my bank account, always there, ready to bail me out when financial crisis struck. That's when I knew I liked being a saver.

So why is it hard for people to save money? That's a difficult question to answer because everyone is different. I myself do not have anyone that can bail me out financial so my fear of going broke is one thing that drives me. Having a goal is a good way to start down the path to becoming a saver.  Perhaps its a new house, a new car, saving for education. Right now I'm saving for a down payment on our new house. When I'm tempted to spend money on things I don't need, I visualize the new house in my mind and think how wonderful it will be to move in. As I drive by the fast food places on my way home I decide what I want more;  A nice new house, or a bigger gut. You might think that I'm a fool for not splurging on a fast food treat, but it's a matter of discipline. Willpower is underestimated force, but once you hone your ability to use it, it's a blessing when trying to reach your financial goals.

What do you do to become one with your inner saver?

How are you saving?

I've heard of it a long time ago. Scotia bank had a program that every time you used your debit card, it would round up the purchases and would transfer the extra money automatically to a savings account. Now I'm bombarded with ads saying you can do the same with credit card purchases and have some of your pay cheque saved for you. Now you can save without thinking about it. Well isn't that nice, perhaps next time they can come over and cook me supper, or even perhaps wipe my butt BECAUSE I'M JUST THAT LAZY!

What's wrong with people these days. Are we that ignorant that we need to trick ourselves to save? To the point we need the banks to hide it from us? A system that helps us save by the means of how we purchase. Good Lord, if we are that far gone, then there is no hope for us. We are slaves to the thrill of spending our money on $5 lattes and  fancy smart phones that can play music, play video games, even watch videos on You Tube. You can even use it as a mobile cellular telephone...until it drops your call.

Am I the only person who feels a sense of pride after paying all my debts in a month and still have money left over because I've resisted buying a few things that I never needed, but really wanted? I know life is short, but you're not going to attain absolute satisfaction with the purchase of the latest DVD or the newest techmo gizmo. Maybe that 1000th cup of Tim Hortons will be the most amazing cup of coffee ever! Ahhh.... nope its the same.

Perhaps I should start a new system for people to save money. The next time you use your debit card to buy that 15th pair of shoes, put your card away and walk out. You'll save $200 right on the spot, all by yourself! Or the next time the Rolling Stones comes to town on their "This is our last retirement fund tour ever, honest", put your credit card back in your wallet because their last show will be the same as the new show BECAUSE THEY HAVEN'T RELEASED ANY NEW MUSIC FOR OVER 10 YEARS. Wow, you just saved $300! Instead of "Your richer then you think" , my slogan can be "Hey, your gonna thank me when you retire and there's no CCP left". It kind of just rolls off the tongue, doesn't it?

Maybe this is what people need to save money. It's hard maintaining a false sense of success these days, every little bit helps.

Costco survival guide

I went shopping at a local grocery store this weekend and I was blown away at some prices. I saw 4 little jello cups with pieces of peaches in them for $4.44. I can buy a can of peaches and a box of Jello for half that price and make 4x the servings. That's insane. The only cure for prices like that is a trip to the happiest place on earth... COSTCO!

Some people despise the $55 a year price for a membership, but I gladly pay it because the money you save over the year is worth it. Hate large lineups and people who block the isles with their carts while visiting all the sample tables? I've found the perfect time to go; Sunday morning at 10:05 AM. If you go there at 10am exactly , there's 40-60 people lined up outside like it's a boxing day sale in July event. Once you pull up at 10:05, there's still good parking spots close by and the mob has already entered the building and are now properly dispersed in the massive shopping area.

Now for the plan to work, you need to have a good idea of what you need to get. You can't be dilly dadiling and going up every isle, humming and hawing over whether to get the gallon of ranch dressing or the gallon of mustard. You have to make it a mission. Get in, take what you need and get out. My trick is to leave my wife at home. She has a tendency to wander and look at the clothing and books and blue rays that we already own at home, yet still get PVR'd when they are on TV. It could jeopardize the mission. If you're in and out in a timely fashion, they have more tills open on the weekend then on the weekdays and there are no lineups at 10:35 am. After that your are on your own, stuck behind the gentleman that needed to buy 50 cases of baked beans and an equal amount of toilet paper in his other cart. When heading to check out, look for the people with a few, large items filling their cart, as they will pass through much quicker then the lady buying 100 different small items. Also, avoid getting in line behind large groups of women. Chances are only one of them has a membership, and they all have to pay separately because if Hilda has to pay for Rose's giant jar of pickles, there will be hell to pay.

One thing I've noticed is that Costco shoppers have a tendency to stop in their tracks with no warning when

they see a good deal. Lucky enough they supply you with large shopping carts that can easily mow down these inconsiderate oafs and continue on your mission. One thing that frosts my ass when grocery shopping is shopping cart etiquette. In a perfect world, everyone would be aware that they are not the only person in the store. When entering a highly dense area, stagger your carts like in the illustration below:

On the left, parking your cart next to the easily excited man cuts off traffic flow. On the right, traffic flow is easily maintained with only two seconds of effort to look around, assess the situation, and park your cart appropriately. Your fellow man will thank you. Same goes for sample tables with people I like to call "Sample feeders". If you need to sample everything, please be aware of your cart position. Refer to the above illustration. If you have to wait, walk around the isles once or twice till the sample lady is ready. Don't do the stance of shame waiting for the free samples, then stand there eating it and then commenting to the lady what you think. She doesn't give two shits, as she's just counting down the minutes to her coffee break. Get one, then 8 for each of your kids, then move on. Going to Costco when it opens alleviates the headache of sample feeders because samples start later in the day. If you want to date on the cheap, there's nothing like a walk in the Fall to Costco at dusk , and the innocence of clearing that pesky string of cheese from your date's mouth at the mozza stick sample table. Ahh, "La vita è bella"

Now one of the best things Costco has to offer is it's meat selection. There's no better place to buy quality meat for the cheap. A pork tenderloin for $4? insane! 2.5kg of lean ground beef for $12? They must be mad. You can even by large chunks of rib cut meat to make twenty or more excellent steaks with perfect marbling which works out to $3 a steak. Good Lord! And people are buying ground beef from Walmart in tubes; the same tubes used to package dog food in.(I've worked in a grocery store when I was a teenager, I've seen 'em). The membership alone is paid for with just meat purchases. But great deals are found throughout the departments. Need new appliances? Check Costco first. Need large amount of humus and and equal amounts of pita bread? Yep, check Costco. Need large amounts of garbage bags to hide the nosey postman's body? Ahh, yeah you might want to call the police and report yourself.

 Costco may have a lot of good deals, but like any store, you have to watch your prices. I find the 12 packs of corn, tomatoes, Kraft dinner, pasta, soup and other pre packaged items don't offer the amazing deals like the other items do...unless they are on sale. Yes Costco does have sales, in the form of instant rebates from the manufacturer. Not 10 or 20 cents like Sobeys likes to do. I'm talking $2-$4 price cuts. They change weekly and are not advertised, but they can help cut your grocery bill tremendously.

I hope this survival guide helps with your next mission trip to Costco, and please remember your shopping cart etiquette wherever you go.

Comments? Questions? Lawsuits?

Show Me The Dividends...again

In my final installment, I will talk about P/E ratios and the ever important dividend growth history and how vital it is to a dividend investor.


We all love juicy yields. But if it never increases, eventually that yield of 5% will still read 5%, but the ever annoying, invisible force called inflation is a compounding fiend and will make short work of that 5% yield over time. That's why you want to invest in companies that grow their dividend every year to combat the evil inflation and your portfolio will live happily ever after. I'll use my golden boy stock as an example. Enbridge is a pipeline company that has paid a dividend for 57 years. The yearly average increase is 10%.  That increase of 10% a year negates inflation, leaving some of that growth to increase the yield on your original investment. That extra growth is the heart and soul of a dividend growth machine. It will increase your portfolio a lot more then investing dividends alone. When a company increases it's dividend, it shows that the board of directors are confident of the outlook of the well run company, which in turn increases the confidence of investors to buy more stock. When the stock price goes up,the value of your shares go up. It's like getting paid twice. Winner winner, chicken dinner!


So when I see a company cut it's dividend, it means that the company wasn't running at it's full potential. A dividend cut is devastating to dividend investor. Your yield decreases and the stock price plummets as everyone gets out while the getting is good. It also puts your investment back 1 to 2 years depending on how bad it is. I stay clear of a company that cut it's dividend. Manulife comes to mind and it will always be tainted to me. The only way I'll ever own one shares is if it increases it's dividend for the next 5-8 years. I don't care that it's been around forever and is one of Canada's most lucrative companies, cutting a dividend a sin in my books.




That brings me to P/E ratios. To find the price/earnings ratio, divide the price per share by the earning per share.
For example.  Enbridge's current price is $51.17. It's EPS is $3.65 as of July 16/2010


                                                   51.17/3.65= 14.02


So Enbridge has a P/E of 14.02. What does that mean? Obviously it's a ratio between earnings and share price, but it can be used to gauge the volatility and popularity of a stock. It will be argued that a P/E ratio can mean many things, and that it's an investor "assigned" value, so I won't dwell on it too much. I've read that any stock you wish to purchase should have a P/E of around 15. If it's above 15, it could be overpriced. If it's below 15, it could be undervalued and would be a good buy. Notice I said could be undervalued. It might be low for a good reason, as if the stock is losing value because of an oil spill by chance?  A stock with a low P/E also regarded as having low volatility, which is always good for the steady and conservative dividend investor.


A P/E ratio should never be used on it's own to pick a stock. It should be one of many calculations used to determine which dividend stock to purchase. I use it only for comparison between companies I have on my wish list.


Well that concludes my long winded process of determining which companies to invest in. Again this is just my opinion and everyone has different ideas on how to pick good dividend payers. Find your own groove or consult an investor your trust for your own investment strategy.  Have a good weekend!

Very Important Video

 I've followed David Stanley's articles for a while now, and this video explains my dividend strategy to a T. Watch it, then watch it again to learn why dividend investing is THE most consistent and sure fire way to invest.
Enjoy!

David Stanley Video

Show Me More Dividends!

In my last post I started listing what I look for in dividend growth stocks. With a large freeze of dividend increases during the turmoil in 2008 and 2009, It's hard to find companies that actually maintained their title of "Dividend Achiever". Dividend investing is becoming more and more popular and companies are changing their strategies to attract more buy and hold investors by putting more emphasis on maintaining and increasing their dividends. That's musics to my ears! It's exciting to log on to your account and see REAL money magically deposited without doing anything at all...except making one smart decision on which company to buy.

When I look at the excellent companies to invest in, the yield is always one of the first things I see; not by choice but because it's always automatically calculated and thrown in the open for everyone to see. A high yield at first glance may seem like a good thing, but in actuality it means a stock's price is decreasing. When a stock price is decreasing the amount of money a company makes on the share is also decreasing which means the dividend it is paying out cannot be maintained. The company either has to make a lot more money, or cut it's dividend. Buying a stock just because it has a high yield will start out well, but when that dividend gets cut it's like throwing a wrench in your dividend growth machine. A low yield on the other hand may have a safe dividend, but why take a risk on an investment when you can make the same return with zero risk involved by using a GIC or high interest savings account. In addition, any profit you make at a low percentage is negated by inflation.

My general rule is to never buy anything with a yield below 4%. If a company is solid, and has decades behind them with proven dividend growth, I will buy at 3.5%. You want to make at least 10% on an investment as soon as you can, and by starting at a lower percent return, it will take a lot longer to get there and for me at 31, I want to retire as early as I can.

Debt is bad , no matter how much money you make. When a company needs to borrow money to operate, what happens when interest rates go up and sales slow down? The money they pay in dividends will most likely be used to cover the increased interest. Shazbot! When looking at a company's balance sheet, I make sure they have more then enough total assets to cover their total liabilities, otherwise I steer clear. When in doubt, always look at the cash flow, the more the better.  If a company goes bankrupt, common shareholders are the last to be paid, and usually they are shit out of luck.

When  choosing new companies to invest in, the most important thing that draws me in is the name. Who wouldn't want to invest in a company like Prestige World Wide, or Compu-Global Hyper Mega Net. To come up with an amazing name takes huge skills that only highly trained ninja pirates have. I love lamp...

Join me next time when I explain what to look for in dividend growth and P/E ratios in the exciting conclusion to Show Me The Dividends!

Show me the Dividends!

The stock market. Many a fool have lost their shirt and maybe a sock or nice belt to its ruthlessness. Others, through painstaking analysis and down right luck, have made millions. How can you beat this erratic and frustrating system? By having time on your side! When you invest in the right companies with a little bit of money and a whole bunch of time, you can earn some passive income that grows like a snowball until one day your little investment has turned into giant monthly income that can allow you to be financially free.

Saving some money and using time is the easy part. Finding solid companies that grow their dividend yearly is a different story. I've read countless blogs and books about what to look for in a company that I feel confident sharing what I've learned with my dozen or so readers. They are:

• Strong Cash Flow
• Low Dividend Payout Ratio 
• A Decent Yield
• Low debt
• Cool Name
• Dividend Growth History
• A P/E of around 15 or lower

I'll start with cash flow. Companies are in business to do one thing, make money. If a company doesn't make as much or more then it did the year before, then it's doing something wrong. They say cash is king, and they are in fact correct. Good companies pay their dividends from their cash flow. Bad Companies pay dividends from credit. When looking up a stock to purchase, look at its current and prior years cash flow. If it's steadily decreasing each year with no increases or is consistently in the red, stay clear of it. Cash flow is the first thing I check when looking for dividend stocks. It's very important.

A companies dividend payout ratio tells you if the company is making enough money to maintain its current dividend. The ratio should be between 0-70% , anything higher is not healthy. If a company has a big fat dividend and low earnings per share, then they either have to make more money or God forbid, cut their dividend. The lower the ratio, the easier it is to maintain future dividend increases, which is the heart and soul of a dividend growth strategy.  To find the ratio, divide the total dividend by the earnings per share (EPS).

                                                      Dividend/EPS= Dividend Payout Ratio

Next time I'll explain how big of a yield to look for and how a low debt ratio is important.

Comments are always welcome.

Canada Is On Fire!

 Our dollar is rising at an accelerated rate. Our unemployment rate just dipped below 8% with an increase of enough jobs to offset the ones lost from the recession. China wants our oil and lumber. Russia and other countries are looking to buy our Loonie over the US dollar. Things are really looking up for Canada in these times of financial crisis. But how long will all this last? Personally I hold a lot of value in the power of positive thinking and that it can actually influence your surroundings. Does positive thought influence the stock market? Perhaps.... but it's mostly greed.

I just finished watching Micheal Moores, "Capitalism, a love story". I know the movie is his opinion and should be watched with an impartial mind, but he brings up a lot of good points. In Canada, are banks are still regulated by the government which means they are not allowed to bite off more then they can chew like what happened to AIG and CITI. Most of the bail out money from the US went to pay corporate bonuses and new company jets for the big banks. So having government regulation may limit the amount of money our banks can make, but it keeps them in check and allows them to be admired on a global scale for how well they performed during this recession.

I like investing in Canadian companies, and my portfolio reflects my opinion. They say to properly diversify your portfolio, you must invest in other countries. Well I think Canada has very diverse sectors to invest in. We may lack a lot of consumer goods and pharmaceutical companies, but those sectors are growing every day. Biovail was a very sleepy stock till it partnered up with Valeant from the US. It shot up $5 after the merger was announced. With our continued growth, I see a lot of dividends increasing which always makes me happy. And by keeping my money in Canada, it only adds to the prosperity of the companies and in turn, strengthens our economy.

What Canadian Stocks do you own? Which ones are on your watch list?


Next time I will share what things I look for when purchasing stocks. Have a great weekend!

The Sky is Falling!

It doesn't matter what newspaper I read these days, it seems there's always one person who says it's time to sell all your stocks, we are headed for a depression...again. Just because one person reads analytical data a certain way doesn't necessarily mean what they interpret is going to happen. I might as well have Madam Zula look into her crystal ball, or read tea leaves to tell me what to do with my stocks. Just imagine if  large amounts of people actually listened to every hair brained speculator out there, I'm sure the stock market would crash on a weekly basis. If the stock market were to crash to the magnitude that some experts? predict, it wouldn't matter how much money you lost because it would all be worthless. The entire world economy would collapse and chaos would ensue. If that were to happen, I will be heading to the hills with my wife, a compound bow and a 48 roll pack of Charmin.

  I agree we are in some trying times with the European Union meltdown; China starting to flex it's economic muscle and to top it all off, the destruction of our planet thanks to BP and whoever else is controlling them from behind the invisible curtain. You must act with a cool head and not let speculation get the best of you. I admit my first reaction in the past was always, "SELL SELL SELL" and try to reduce the losses to my pile of money. If I were to sell all my stocks, it would cost close to $500 to get all my money out only to spend another $500 to invest it the next week after the market has recovered. It's hard seeing the value of your portfolio slowly drop, but you have to think long term and save your dividends to invest when the markets stabilize. It's almost human nature to sell when you see prices drop and buy when you see prices rise. You have to reprogram your mind to fight the urge and tough it out. I've come to enjoy the dips of market correction and see them as a "Yield Sale" to better my investments.

What's your take on the market mayhem? Are you cashing out and heading to the hills till things blow over? Or are you battening down the hatches and riding out the storm?