Top 3 Canadian REITs for 2020 – And Why RioCan is not Part of It

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Most retirees love REITs because their sole purpose is to distribute as much money as possible to their units holder. This sounds like music to the ears of those who are looking for a nice paycheck coming into their bank account every single month (or quarterly). But one must be careful and make sure the REIT chosen will be able to sustain its dividend payment, but also to increase it. This is why I’ve built this Canadian REITs ranking. This top three should give you the guidelines you need to select the right REIT for your portfolio.

Why I Won’t Talk About RioCan… for Long!

You’re going to be disappointed. My top three doesn’t include RioCan REIT (REI.UN.TO). Let’s see why it should not be in your portfolio.

RioCan’s yield is huge and the REIT is well established. It owns retail REITs across Canada and RioCan is super strong. Management decided to not let shareholders down and maintain its dividends.

From there, it would be tempting to focus on the yield and to tell me: “Oh, Mike, you’re losing such a great opportunity if you don’t look at RioCan right now!”

Let’s analyse it with a different angle. Over the past 10 years, your paycheck increased by 4.3%. Let me say that again. The REIT loved by any retiree has only increased its dividend by 4.3% in 10 years total.

Would you settle for a job with an annual raise under 0.5% year after year for the next 10 years? This is what RioCan offers you! Your dividend is getting eaten up by inflation.

Plus, stock price comes with another bad news. It hasn’t done much before the pandemic and is now below $15. Again, you are losing on the dividend side because inflation is increasing faster than that.

“But Mike, the inflation is at 1% a year, you’re worrying for nothing.”

Look at your grocery bill: inflation is clearly higher than that. As a retiree, you might not buy houses, computers or cars every year; but groceries and utilities costs will continue to grow at a higher rate than 1%. You’re putting your money and your retirement at risk. This is why we are not in love with RioCan at Dividend Stocks Rock.

Finally, I don’t think that shopping malls will thrive in the future. RioCan has to find other growth vectors, which is going to be hard. Even though they have more than that, those shopping malls will stay and they will probably stay empty too…

3. The Active REIT: InterRent

  • Company Name: InterRent REIT
  • Ticker: IIP.UN.TO
  • Dividend Yield: 3.43%
  • Dividend growth since: 2014
  • Distribution: Monthly

Business Model

InterRent Real Estate Investment Trust (IIP.UN.TO) is a growth-oriented real estate investment trust engaged in increasing unitholder value while creating a growing and sustainable distribution through the acquisition and ownership of multi-residential properties. The company operations are carried out throughout the region of Canada. IIP is mostly active in the provinces of Ontario and Quebec. Their primary market shows 7,864 suites while their secondary market is at 1,534 suites.

Investment Thesis

IIP is what we describe as an “active REIT” where the company actively buys, improves and recycles properties. This was a very smart business model to manage in two growing provinces (Ont and Qc) in the past few years. InterRent seeks to acquire properties that have suffered from the absence of professional management. This is how it can buy at a lower value and “easily” improve their investment. Although IIP seems to show a solid business model, keep in mind things weren’t so peachy during the 2008 financial crisis. There seems to be lots of hype around this stock lately. The recent stock drop offers an interesting opportunity.

And one thing that is super important right now is that they do a lot of improvement in their buildings or the surrounding area. It results in higher rent rates, but it also attracts Millennials or professionals who have a good job and who can work remotely more easily. This is obviously a great competitive advantage in times of a pandemic.

Potential Risks

With an aggressive growth strategy, IIP has successfully created a lot of hype around its stock. The stock jumped by ~30% between June 2018 and June 2019. This makes IIP a great candidate for a major drop if panic hits the market again… and this is exactly what happened! The stock price has dropped by a couple dollars over the last months. Obviously, there are concerns about the economy and about the fact that most apartment REITs won’t be able to raise their rents this year to convince people to come over. There’s also a risk of having too many properties and then the offer would be too high for the demand. However, when you look at how fast InterRent grows its revenue and how fast it grows its dividend, this is definitely a company to hold in a retiree portfolio.

Dividend Growth Perspective

After a severe dividend cut during the last financial crisis (it showed an AFFO payout ratio of 300% in 2010), IIP started its dividend growth policy back up in 2012 and hasn’t missed a year since. Since their first increase, the REIT has maintained an AFFO payout ratio of around 70%. Both assets and FFO show a similar trend since 2010 (CAGR of 25% and 24% respectively). Shareholders can expect continuous dividend increases as long as the housing market is healthy.

Another great point about InterRent: they are sitting on some cash, they have liquidity available. In summary, you’re looking at a company with a solid down sheet, liquidity, and great growth perspectives in Montreal and in Toronto area. InterRent is therefore a very solid REITs offering you a respectable yield.

2. The Canadian Tire REIT

  • Company Name: CT REIT
  • Ticker: CRT.UN.TO
  • Dividend Yield: 5.58%
  • Dividend growth since: 2015
  • Distribution: Monthly

Business Model

CT Real Estate Investment Trust is an unincorporated real estate investment trust that invests in retail properties across Canada. The most significant portion of properties are located in Ontario, followed by Quebec and Western Canada. The trust generates the vast majority of revenue from leasing its properties to Canadian Tire Corporation, which operates the Canadian Tire retail stores. The trust’s portfolio primarily consists of properties anchored by a Canadian Tire retail store, in addition to retail properties not anchored by Canadian Tire, distribution centers, and mixed-use commercial property.

Investment Thesis

An investment in CT REIT is primarily an investment in the real estate business of Canadian Tire. If you think this Canadian retail giant will do well in the future, but you are more interested in dividend than pure growth, CT REIT is the answer. The fact that CRT is paying a monthly dividend with a yield of over 5% is highly attractive for income-seeking investors. On top of that, CT REIT shows a decent dividend growth rate policy matching (and beating) inflation. This makes it a perfect candidate for an income-focused portfolio. The upcoming months will be difficult, but the REIT quality assets will remain.

Canadian Tire is an icon in the Canadian landscape; they have strong brand recognition among small, medium and urban size cities. The fact they own their own brands could help them to battle against Amazon and other e-commerce. You can’t buy Motorcraft or Motomaster pieces elsewhere than at Canadian Tire. This provides them with a very strong advantage. Since the beginning of the pandemic, Canadian Tire has also pushed a lot on its e-commerce (up by 400% in Q2). It could help protecting them against e-commerce giants.

Potential Risks

We often like diversified businesses when we want to add a company to our portfolio. This is not the case with CT REIT. It is mostly leasing all its properties to Canadian Tire. Therefore, if Canadian Tire can’t keep up its growth (we all know how hard it is in the retail business these day), CT REIT will not have many options to compensate. While we like the Canadian Tire business model, we are still talking about a brick & mortar retail store. The pandemic is not helping, either.

All that being said, Canadian Tire is pretty solid right now. Their stores were opened during the shutdown and still are. They should make money this year again, and we shouldn’t see a bunch of Canadian Tire stores being closed.

Dividend Growth Perspective

Similar to InterRent, the stock price got hit. It’s already on the rebound, which tells you that the market is believing in CT REIT. This REIT continues to grow and show a low AFFO payout ratio. This means your paycheck will continue to rise faster than the inflation. Shareholders can expect to cash a solid 5%+ yield with a 2-3% growth rate going forward. This is a good example of sleep-well-at-night type of holding. They also have access to $200 million in revolving line of credit, which means they have flexibility. As the stock price decreased during the pandemic, the REIT now offers a yield close to 6%. If it ever goes pass the market of 6%, this will become a red flag.

1. The Rock Solid REIT: Granite

  • Company Name: Granite REIT
  • Ticker: GRT.UN.TO
  • Dividend Yield: 3.74%
  • Dividend growth since: 2012
  • Distribution: Monthly

Business Model

Granite Real Estate Investment Trust, or Granite, is a real estate investment trust engaged in the acquisition, development, and management of primarily industrial properties in North America and Europe. Granite’s portfolio is comprised of various manufacturing, corporate office, warehouse and logistics, and product engineering facilities. The vast majority of the company’s assets are logistics and distribution warehouses and multipurpose buildings split fairly evenly amongst Canadian, Austrian, and U.S. locations. Granite derives nearly all of its revenue in the form of rental income from its properties. The company’s largest tenant is Magna International which accounts for the majority of Granite’s lease income.

Investment Thesis

Granite REIT is ont of my favorites for a long time. It used to be an extension of Magna International (MG.TO). Back in 2011, Magna represented about 98% of its revenues. It is now down to 31% (with Amazon as its second largest tenants with 9% of revenue). Management has transformed this industrial REIT into a well-diversified business without hurting shareholders (quite the opposite in fact!). The company now manages 97 properties (+7 under development) spread across 9 countries. The REIT also shows an investment grade rating of BBB/BAA2 stable. With a low FFO payout ratio (around 80%), shareholders can enjoy a ~4% payment that should grow and match/beat the inflation.

Most properties owned by Granite are modern logistic properties and special purpose properties so it’s an industrial REITs. GRT is looking at large businesses and it is well diversified among several segments. About 60% of its revenue is coming from North America (Canada and the US), but it still has some international exposure, which could help in case there’s a recession in a specific country. Its increased exposure to Amazon (or any distribution center) could turn into a nice growth vector and while having stable tenants.

Granite’s stock price has suffered very quickly during the March crisis but it has fully recovered. In fact, it’s going up because of the interest around the ecommerce.

Potential Risks

One word: Magna. If the car part maker hit a slow down and is forced to close some of its plants, GRT would be one of the first victims. Management is aware of this risk and made efforts to diversify its portfolio through further acquisitions. To reduce its exposure to Magna’s business model, Granite is also selling some of its properties. There is no guarantee that new acquisitions will host tenants as solid as Magna, either. So far, the company has dissipated the risk around a recession and the stock has fully recovered from the March market crash.

Dividend Growth Perspective

GRT has maintained a solid dividend growth policy over the past 5 years (~5% CAGR). With its FFO payout ratio well under control, shareholders should expect a mid single-digit dividend growth rate going forward. In fact, if Magna International business is doing well, GRT will perform and keep increasing its dividend. The REIT also has about one billion in liquid assets, which is spread between cash and equivalent and credit facility. In other words, Granite has everything you need as a retiree… When compared to RioCan, the dividend is a lot lower, but also a lot safer; and it will increase. At DSR, we have issued a buy rating on Granite a while ago. It’s still a buy, but the easy money is gone.

Final Thoughts

As a retiree, you want to select stocks that will provide some income and I totally understand that. However, chasing yield only will create the exact opposite. Instead, look for REITs and other dividend stocks that will provide you with a mix of yield and growth. If you want to learn more about my investing strategy, I suggest you download my free recession-proof portfolio workbook. It could help you build the portfolio you really need.

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Canadian Banks Ranking – Which One of The Strongest Bank?

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Mike, are you not tired of writing about Canadian banks?

Of course not! First, they remain amongst my favorite dividend stocks ever. As a passionate investor, I will never get tired discussing my favorite picks! Second, I will not review their earnings this time. Rather, we will look at how they fit in your portfolio for the next 20 years.

Canadian banks are amazing; they have outperformed the Canadian market for the past 5, 10, 15, probably 25 years. Unfortunately, they were not created equal. That’s a myth.

Technically, if you take any of the first six, you’ll do well. But what if I tell you that Scotiabank (BNS/BNS.TO) gave you a 60% total return over the past 10 years while National Bank (NA.TO) has provided you with 250% overall return? Do you really think that both are equally weighted in your portfolio? It would be like telling me, “Mike, if you invest in any tech stocks, you’ll do fine.” That’s not true. Some tech stocks are good, some are average, and some are just crap.

So here’s my Canadian banks ranking – from number six to one – for the next 20 years. Let me tell you upfront: Laurentian Bank and Canadian Western Bank are not part of the list. The investment thesis for each says it all.

Laurentian Bank (LB/LB.TO) Investment Thesis

If you are looking for an overlooked bank with chances of PE expansion, LB could be your candidate. This small bank is trading at a lower PE than its peers (there are reasons why) and pays a solid dividend yield to keep you waiting patiently. Personally, I dislike this bank as it lacks growth vectors due to its small size and lack of presence in the wealth management market. The problem is that LB lacks long term vision. The bank keeps changing its strategies (opening branches to close them 5 years later) and is slowed down by union. During the pandemic, LB is the only bank to have cut its dividend. Do you need another reason to sell?

Canadian Western Bank (CWB/CWB.TO) Investment Thesis

The whole idea to invest in CWB is to enjoy Alberta’s oilsands potential. CWB is a classic “savings & loans” bank that is well established in Western Canada… where the money is. Unfortunately, this investment thesis is not as solid as it seems. With the energy market being completely destroyed, CWB will be stuck in a very difficult situation for many years. I find CWB pricey (using the DDM) compared to the Big 5. Also, CWB isn’t the most generous with its dividend yield and we believe there are better opportunities in this sector. Royal and TD should be on your list before CWB.

Enough said for these two.

6. Canadian Imperial Bank – CIBC (CM/CM.TO)

CIBC operates through three segments: Retail and Business Banking, Wealth Management and Capital Markets. Still, it’s a classic savings and loan bank. If you want my full analysis including the last quarter’s review, it is available on that previous article.

Pros:

  • High yield with a relatively low payout ratio: When you do the math, a low stock price brings a higher yield. A low PE ratio also brings a high yield and so the stock price is low…
  • Mortgage loans: The mortgage side is doing well as housing market in Canada is doing well. But when your biggest growth vector is mortgages right now, I don’t think it will result in outperforming the other banks.
  • Private banking and wealth management: Smart move, but a little late. CIBC is a small player in this ground compared to the others.

Cons:

  • Lack of growth vectors: With interest rates super low, interest margin will be squeezed. CIBC’s only way out is to do more loans. That could be a very difficult path in the next years considering the consequences of the pandemic on the economy.

Wait a minute… Pros are by far more numerous than the cons? Why is it at number 6? You’ll notice that each point of the pros side comes with a downside. CIBC is not bad, but there are better options. Not really convincing to me! This is why Canadian Imperial Bank is at number six.

5. ScotiaBank (BNS/BNS.TO)

The third largest bank in terms of assets and market cap. BNS has three business segments: Canadian banking, international banking, and global banking and markets. The full earnings review and my analysis were shared here.

Pros:

  • Best diversified, most international: For over a decade, BNS focused on growing outside Canada (especially in Central America and in South America). Obviously, their Gross domestic product (GDP) growth rate is better than US and Canada. Their perspective moving forward is also better (they should grow at a 3%-4% rate while it will be hard to reach over 1%-2% in Canada and the US).

Cons:

  • International exposure brings uncertainties: Before the pandemic, BNS had a great story, but they never capitalized on it, and they never outperformed other banks. Why? It’s complicated to do business in Central America! It took several years and several miss attempts for Canadian banks to enter the US. They made bad acquisitions and failed several times. Look at South America and Central America, you realise it’s a lot more complicated than making loans in the US. It’s even worse with the pandemic as countries with lower resources and weaker healthcare system will face more problems than in North America.
  • Worst performing stock from the top 6 over the past 10 years. With all the difficulties I just mentionned, I’m not expecting them to reverse that trend in the upcoming months and the upcoming years.

Overall, I think it’s going to be very hard for Scotiabank in the upcoming years. The dividend is safe, but I wouldn’t bet on that one to outperform the others.

4. Bank of Montreal – BMO (BMO/BMO.TO)

BMO conducts its business through three operating groups: Personal and Commercial Banking (P&C), Wealth Management and BMO Capital Markets. I’ve discussed their latest quarterly earnings and shared a full analysis in this recent post.

Pros:

  • Focus on capital markets and wealth management: They were the first in the country to have their own ETF suites. They saw where the market is going, and they took advantage of it. They were also among the first Canadian banks to make a move towards private banking with the acquisition of Harris Bank in Chicago. They’re well established in wealth management and in capital market and I like that.
  • Well established in the States.

Cons:

  • Revenue and earnings are more volatile: Because of that focus, their revenue and earnings are more volatile or riskier. Their dividend growth perspective versus the other five is lower.

All that put together, BMO remains a good pick and a great bank, but I cannot select it as a winner. BMO is therefore closing my bottom three.

3. TD Bank (TD/TD.TO)

Moving on to the top three of my list. So far, I don’t own any of those banks. I don’t own my number three either. TD Bank has an approach similar to CIBC in terms of classic savings and loans, but they did it in a very nice way. It operates three business segments: Canadian retail banking, U.S. retail banking, and wholesale banking. When I reviewed its latest earnings report, I noticed how it remains a strong bank.

Pros:

  • Revenues (a third) coming from the US: They really caught up that game from their southern neighbors; they know how they want to deal; they have a great exposure over there.
  • Largest amount of assets in Canada.
  • Doing things simple but doing them the right way: They have been doing very well for the past 10 years.
  • Strong wealth management: Their segment from Ameritrade did very well, and now they’re selling to Charles Schwab.

Cons:

  • High exposure to mortgages: Hot markets such as Vancouver and Toronto could cool down a lot at one point in time. If we get into a housing bubble, then it’s going to be harder for TD.

Everything is running smoothly for TD. I’m not worried about them. But is it the best we can get from Canadian Banks? Getting close, but not quite there yet.

2. Royal Bank – RBC (RY/RY.TO)

Now my top two favorites! I own both of them. Sometimes number two becomes number one and vice versa, but right now my second favorite is Royal Bank. RY has a strong position in the personal and commercial banking sector (46% of its revenue). I was happy when I reviewed their latest quarter report.

Pros:

  • Battling with TD to be the largest bank in terms of assets: They’re well established across all of Canada.
  • Rouhly 50% of their revenue are coming from classic banking activities: Which means only 50% is subject to the interest rate squeeze.
  • The other half is about wealth management, capital market, and insurance: They have been able to do lots of cross-selling across those segments, they are maximizing their presence in the wealth management, and they had a huge deal with BlackRock for ETFs.
  • Outperformed the average bank in Canada in terms of market: Recently, they have also shown their strenght in terms of earnings.
  • Strong dividend growth policy in place: Don’t expect any dividend increase for the rest of 2020 from any banks. I’m pretty sure Royal Bank (and other Canadian banks too) will wait a little, see how things go, see how their loan book is being affected, and then they may resume in 2021 or 2022. Still, the dividend is safe.

Cons:

  • Royal Bank could also get hurt by a bearish housing market: This is a rather small downside considering RY’s strenght and ability to face headwinds.

Honestly, there’s not much to dislike about Royal Bank. It could be your number one and would hardly disagree.

1. National Bank (NTIOF/NA.TO)

National Bank is the smallest of the top six. Actually, a lot of Canadians – especially if they don’t live in Quebec – will talk about the Big Five and discard National Bank because it’s more like a super national bank based in Quebec. . Its smaller size is currently paying off as National Bank was quicker to develop a strong brand in Wealth Management with Private Banking 1859 and built a highly profitable Financial Market division. I also recently reviewed it in this post.

Pros:

  • One of the fastest growing wealth management businesses in the country: They have a very strong brand recognition there. Since they were doing a lot of loans in Western Canada, they actually opened private banking branches there too. Not regular branches where everybody can go, but selling points where private consultants and private bankers could be there for their clients.
  • Strong in capital markets: They’re very active on the market. This creates more volatility, as it is the case with BMO, but overall, they’ve been doing well, and they’re making more money.
  • International branch and US segment: In the international, they focused on Cambodia. They completed the purchase of ABA Bank over there. They’re trying to create growth outside of Canada, but they’ve selected emerging markets in Asia instead of South America.
  • Heavily based in Quebec: In the past, it was a reason to lie a little behind, but over the past 10 years, Quebec has proven its resiliency. They’re not dependent on energy to grow their economy; they have a Canadian economy similar to Ontario. They’re doing well. In the pandemic, Quebec has been hit with a lot of cases, but its economy seems to be on the way to recover faster than the other banks.

Cons:

  • International branch and US segment: We’re going to see how it goes. It’s not my favorite part of their business model but I like the fact that they try to diversify.

As I mentionned, Royal Bank could be my number one in a couple months. I really like them both. However, the fact that Quebec’s economy seems to be recovering faster than other Canadian provinces has convinced me to put National Bank as my winner!

Final Thoughts

Canadian banks could be compared to the salt you use in your hearty fall soup. Some salt in it is making it tasty and great. Add too much salt and it is totally ruined. Act with the same caution for Canadian banks. Pick one or two, but don’t add too much in your portfolio!

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August Income Report – The Tech Bubble 20 Years Later

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In September of 2017, I received slightly over $100K from my former employer which represented the commuted value of my pension plan. I decided to invest 100% of this money into dividend growth stocks.

Each month, I publish my results. I don’t do this to brag.  I do this to show you it is possible to build a lasting portfolio during an all-time highly valued market. The market will inevitably go down… as it has lately. But I continue to enjoy cashing consistent and growing dividends despite that negative market action!

Image par PublicDomainPictures de Pixabay

The Tech Bubble, 20 Years Later

Back in September 2000, I was thinking about which university I would go to. I didn’t even know the NASDAQ was about to collapse and take more than a decade to recover. We just got “high speed” internet at home! Companies like Microsoft (MSFT), IBM (IBM), Apple (AAPL) and Intel (INTC) were trading at high valuations. The price-earnings ratio were between 30 and 60. I’m not even talking about Amazon (AMZN) or Yahoo! whose valuations were based on thin air at that time.

The world thought “this time, it will be different”. The internet was about to open the door for decades of productivity gains and growth. That part was, and still is, true. What went wrong back then is we substituted long-term investing principles of analysis for new sets of metrics such as page views and clicks. Therefore, the NASDAQ took forever to recover because its index was filled with companies with no viable business model.

Source: Ycharts

Unless you were highly concentrated in tech stocks back then, you survived that crisis and recovered from your losses along with the rest of the S&P500 although it took about 6 years. Unfortunately, a second market crash (2008) tested your patience and forced you to wait until 2011 to see gains once again.

If you chose diversification across all of North America, you would have started to make money on the Canadian market in 2004… only 4 years after the tech bubble crash.

By the time the NASDAQ finally reached the break even point (excluding inflation), both the S&P 500 and the TSX were up by more than 60%. This is not exactly an impressive return (roughly 3.50% annualized rate over 14 years). Therefore, you must remember that the stock market rewards patient investors who are in for the long game. Here’s the same graph with results as of September 4th, 2020.

Source: Ycharts

If you look at the 20 years following the tech bubble, you will notice much volatility. What’s the end picture? The S&P500 going up by almost 250%, The NASDAQ by 170% and the Canadian market by 92%.

We would all wish we had invested all our money around 2002-2003 and just watched the market go up from there. But, investing at the peak of the tech bubble has not put your retirement plan in jeopardy if you built a portfolio exposed to many sectors.

This is the lesson of the day: take the time to make sure your portfolio will enjoy growth from the best of breed from many different sectors!

Here’s my CDN portfolio now. Numbers are as of September 4th, 2020 (before the bell):

Canadian Portfolio (CAD)

Company Name Ticker Market Value
Alimentation Couche-Tard ATD.B.TO 7,853.52
Andrew Peller ADW.A.TO 5,467.38
National Bank NA.TO 5,807.20
Royal Bank RY.TO 5,870.40
CAE CAE.TO 3,950.00
Enbridge ENB.TO 6,776.49
Fortis FTS.TO 5,198.49
Intertape Polymer ITP.TO 4,572.00
Magna International MG.TO 4,537.40
Sylogist SYZ.V 4,674.57
Cash 333.96
Total   $55,041.41

My account shows a variation of $1,126.01 (+2%) since the last income report on August 5th.

The start of my portfolio this month is Alimentation Couche-Tard (ATD.B.TO) with its whopping 44% earnings jump. EPS jumped by 48% which was primarily driven by strong growth in merchandise and service and in road transportation fuel gross profit, as well as by good cost controls. Due to the ongoing restrictive social measures in the various geographies in which the Corporation operates, the COVID-19 pandemic continued to have a meaningful impact on its financial results. On merchandise sales, it benefited from consolidated trips by consumers driving larger basket size purchases. While on the fuel side, as revenues declined from lower demand and lower fuel prices, it was compensated for by strong fuel margins.

Here’s my US portfolio now. Numbers are as of September 4th, 2020 (before the bell):

U.S. Portfolio (USD)

Company Name Ticker Market Value
Apple AAPL 11,604.48
BlackRock BLK 8,107.68
Disney DIS 5,995.80
Gentex GNTX 6,420.20
Hasbro HAS 3,680.46
Lazard LAZ 3,257.88
Microsoft MSFT 13,038.00
Starbucks SBUX 7,350.80
Texas Instruments TXN 7,083.50
United Parcel Services UPS 5,846.74
VF Corporation VFC 4,112.40
Visa V 10,448.00
Cash 221.95
Total   $87,167.89

The US total value account shows a variation of +$6,134.99 (+7.6%) since the last income report on August 5th.

At the time of reviewing my holdings, we are in the middle of a “tech drop”. It seems that many investors decided to cash in on their gains and my U.S. portfolio will likely be going even lower next month. In August, my tech stocks have thrived and brought my portfolio values to a record level.

My entire portfolio updated for Q2 2020

Each quarter, we run an exclusive report for Dividend Stocks Rock (DSR) members who subscribe to our very special additional service called DSR PRO. The PRO report includes a summary of each company’s earnings report for the period. We have been doing this for an entire year now and I wanted to share my own DSR PRO report for this portfolio. You can download the full PDF giving all the information about all my holdings. Results have been updated as of July 2020. The Q3 report will be available during my October update.

Download my portfolio Q2 2020 report.

Dividend Income: $356.16 CAD (+0.6% VS August 2019)

I didn’t receive much more money than last year. Is it because my strategy doesn’t work? Not at all. In fact, most of my holdings are showing higher dividends vs the one paid in August 2019. The lack of growth is coming primarily from two factors:

#1 Alimentation Couche-Tard’s dividend was recorded during my July 2020 update while it was recorded last year in my August 2019 update.

#2 I had to sell shares of Apple (AAPL) a few months ago to rebalance my holdings. My exposure to Apple shares was about 15% of my entire portfolio. I sold shares across all my accounts which decreased my dividend payments this month. Here’s some of the details on my dividends.

Dividend growth (over the past 12 months):

  • Royal Bank: +5.88%
  • National Bank: +4.41%
  • Lazard: +0%
  • Starbucks: +13.89%
  • Hasbro: +0%
  • Texas Instruments: +16.88%
  • Apple: -17.55% (I sold some shares)
  • *Alimentation Couche Tard was recorded in my last report)
  • Currency fluctuation: -1%

Canadian Holdings payouts: $121.60 CAD

  • Royal Bank: $64.80
  • National Bank: $56.80

U.S. Holding payouts: $178.75 USD

  • Lazard: $44.17 + $3.77
  • Starbucks: $34.85
  • Hasbro: $31.28
  • Texas Instruments: $45.00
  • Apple: $19.68

Total payouts: $356.16 CAD

*I used a USD/CAD conversion rate of 1.3122

Since I started this portfolio in September 2017, I have received a total of $9,459.05 CAD in dividends.  Keep in mind that this is a “pure dividend growth portfolio” as no capital can be added into this account other than dividends. Therefore, all dividend growth is coming from the stocks and not from any additional capital.

Final Thoughts

Before Apple lost about 10% in two days, I was about to sell some more shares to rebalance my portfolio. I didn’t want to do it right away, but my exposure to this company was getting closer to 13% of my portfolio (it was 10% after I sold some shares in June 2020).

AAPL drove my portfolio higher as the stock surged by almost 60% before it rapidly dropped. When I look at all of this, I only see noise. It’s crucial to keep your head straight and focus on your plan. My plan is to keep AAPL close to 10% of my portfolio. If the stock surges again, I’ll sell. If it keeps dropping, I won’t do anything. Why? Because this follows my plan.

Being right or wrong about stock prices isn’t relevant because we don’t know what’s coming up next. Following a straightforward plan is a much better strategy, and the results of my plan speaks for itself.

Cheers,

Mike.

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These Two Stocks Should Bounce Back and Offer Good Income for Your Retirement Portfolio

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Each month, we issue The Mike’s Buy List for our DSR members. They get our best ideas for both U.S. and Canadian dividend stocks. The first Friday of each month, they receive our top 10 growth and top 10 retirement (yield over 4%+) investment ideas.

Yesterday, I covered two stocks that could boost your return. Today, I’ll share with you two picks offering an interesting yield for income investors.

While I’ve always been skeptical about AT&T (T) for years, it could finally see its debt level getting under control and becomre more interesting. Algonquin Power & Utilities (AQN.TO) has been hit by the pandemic. However, everything seems to be aligned for them to bounce back.

AT&T (T)

What’s the story?

The AT&T stock price is not moving much these days. While the company’s balance sheet is improving, AT&T must also face the consequences of some bad decisions. Back in 2015, T paid a steep price for DirecTV ($49B). There are now chatters that the telecom may be looking to sell this low performance business segment.

While there is no deal on the table, some talk about a potential sale around $20B is evident on the street. I’ve criticized AT&T for several years and mentioned repeatedly that the company had too much on its plate to be successful everywhere. Between the integration of Time Warner, the (failed) transformation of DirecTV, the 5G development and its generous dividend policy, AT&T finds its cash flow getting squeezed. While selling DirecTV at this price isn’t a good deal, this would put an end to this nightmare and would lighten AT&T’s total debt on the balance sheet.

Business Model

Wireless communication remains AT&T’s largest business, contributing nearly 40% of revenue. As the second- largest U.S. wireless carrier, AT&T connects more than 100M devices, including 63M postpaid and 16M prepaid phone customers. The consumer and entertainment segment (about 25% of revenue) includes the consumer fixed-line and DirecTV satellite television businesses, serving 20M television and 14M Internet access customers. WarnerMedia now contributes a bit less than 20% of revenue with media assets that include HBO, the Turner cable networks, and the Warner Brothers studios. Fixed-line business communications (14%), Latin American satellite television (2%), and Mexican wireless services (1%) constitute the remainder of the firm.

Investment Thesis

AT&T doesn’t need presentation. It is the largest telecom in the world by revenue. With over $180B in revenue, a ?6.5% yield, and 35 years with consecutive dividend increases, the big T is a favorite among income seekers. Really, what’s not to love? Unfortunately, we can say that the stock’s performance hasn’t impressed anyone in the past 5 years. Even by including its juicy payout, T’s investing return lags behind the market big time. The problem is that T requires lots of cash flow to shift its business (find growth vectors), expand to 5G and continues rewarding its shareholders.

Potential Risks

There are a few reasons why AT&T offers such a high yield (it doesn’t come for free!). First, the company must generate lots of cash flow to support new technologies (5G deployment), maintain dying technologies (wired lines), paying down its huge debts, and rewarding generously his shareholders. AT&T will also deal with customers which budget has been hurt by COVID-19. This is not a perfect solution, but the stock is priced accordingly.

Dividend Growth Perspective

At first glance, T’s dividend profile looks very good. High yield with consistent increases sounds perfect. However, looking at the dividend growth rate, things aren’t so well. Over the past decade, T’s annualized dividend growth rate is at 2.21%. Over the past 5 years, it goes down to 2.12%. This year again, the dividend increase was $0.01/share. You can expect a $0.01 increase per year going forward. Maybe it will get better once the debt gets under control.

Algonquin Power & Utilities (AQN.TO)

What’s the story?

I’ve decided to add Algonquin to my buy list for its relatively high yield compared to Fortis (FTS). Canadian utility companies such as Emera (EMA.TO), Fortis (FTS) and Algonquin show a very interesting profile right now. Please note that AQN pays its dividend in USD.

AQN’s latest results were hurt by the pandemic. The COVID-19 pandemic and resulting business suspensions and shutdowns have changed consumption patterns of residential, commercial and industrial customers across all three modalities of utility services, including decreased consumption among certain commercial and industrial customers. The Company re-iterated its capital investment estimates for the 2020 fiscal year of between $1.3 billion and $1.75 billion. It also reaffirmed its EPS guidance for the full year (no changes). AQN achieved $5M in cost savings and expects to achieve further expense reductions of $10M in the last six months of 2020.

Business Model

Algonquin Power & Utilities Corp is a North American generation, transmission, and distribution utility. Within its distribution group, Algonquin owns and operates regulated water, natural gas, and electricity distribution utilities in the United States. Most of the company’s revenue is derived from this division and, in turn, most of this division’s revenue comes from its distribution of natural gas. In its generation group, Algonquin sells electricity produced by its energy facilities, including hydroelectric, wind, solar, and thermal power plants. Algonquin’s wind farms account for most of its generation revenue. Finally, the company’s transmission group focuses on building and investing in natural gas pipelines and electric transmission systems.

Investment Thesis

Like many utilities, solid growth is coming from outside the company. AQN had about 120,000 clients in 2013 and now serves 762,000 clients. It achieved this impressive growth through acquisitions, the largest one being Empire District Electric for $3.4B, completed in early 2017. With a budget of $9.2B in CAPEX, AQN has several projects through 2024. These include more acquisitions, pipeline replacements and organic CAPEX. The utility counts on its regulated business to grow its revenue once those projects are funded. AQN shows a double-digit earnings growth potential for the foreseeable future but expect a short-term slowdown due to the economic lockdown.

Potential Risks

Like most utility companies, AQN uses leverage to support its growth. It currently shows about 50% of its capital structure from long-term debt, and the rest comes from the equity market. The company has posted solid growth since 2012, but this may slow down after the next round of projects in 2024. If regulators are less generous than anticipated, revenue growth may fall short. AQN will see its revenue decrease by 10-15% in 2020 due to the coronavirus pandemic. Economic lockdowns will affect commercial and industrial demand for power. However, management still increased its dividend in May (+10%) and confirmed their CAPEX through 2024. Finally, AQN still runs pipelines and is not sheltered from spills.

Dividend Growth Perspective

The dividend fluctuation is due to currency as the company once paid its dividend in CAD, and now it is in USD. As a Canadian company, 93% of AQN EBITDA is in the U.S. Therefore, there is no reason to worry for the company’s cash distribution if the stock drops and the yield reaches close to 5%. With projects generating cash flow, AQN expects to raise its dividend by 10% CAGR and its EPS to grow at a faster rate. Shareholders can expect a single high-digit dividend growth rate for the next decade.

Final Thoughts

Keep in mind that having a strong investment strategy in which you identified what is a buy and what is a sell will greatly help you making the right decisions and avoiding paralysis by analysis.

No matter what stage of life you’re in and no matter what the economy goes through (e.g. a pandemic), there will always be buy opportunities when investing for the long haul.

If you need to refine your game plan for fall, you might want to watch this webinar replay.

Disclaimer: I do not hold T nor AQN.TO. I’m long FTS.

 

The post These Two Stocks Should Bounce Back and Offer Good Income for Your Retirement Portfolio appeared first on The Dividend Guy Blog.

Two Dividend Growth Picks that Could Boost Your Return!

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Each month, we issue The Mike’s Buy List for our DSR members. They get our best ideas for both U.S. and Canadian dividend stocks. The first Friday of each month, they receive our top 10 growth and top 10 retirement (yield over 4%+) investment ideas.

As both markets did well in August, more of our ideas have outperformed the market. I decided to share some of our picks with you. Today, we’ll cover two growth stocks that still show some potential return.

Starbucks (SBUX)

What’s the story?

SBUX has been on a roll in August. As restaurants reopened across the world, SBUX is likely to continue its growth path going forward. More attention has been drawn toward this stock as an investment firm, Stifel, has recently increased its rating to “buy”.

SBUX is arguably one of the restaurant chains that is best positioned to adapt moving forward. With over 16 million members in their loyalty program, Starbucks knows exactly what you want to consume, and when and how you will consume it. Having access to such data will be a critical turning point in adapting to the new reality of the post-COVID-19 economy.

Business Model

Through a global chain of more than 32,000 company-owned and licensed stores, Starbucks sells coffee, espresso, teas, cold blended beverages, food, and accessories. The company also distributes packaged and single-serve coffee, tea, juice, and pastries through its own stores, grocery store chains, and warehouse clubs under the Starbucks and Teavana brands and the Global Coffee Alliance partnership with Nestle. In addition, Starbucks markets bottled beverages, ice creams, and liqueurs through partnerships with Pepsi, Anheuser-Busch, Tingyi, and Arla. In fiscal 2019, Starbucks’ Americas segment represented 69% of total revenue, followed by the international segment at 23%, then channel development at almost 8%.

Investment Thesis

The company enjoys one of the strongest brand recognitions across the world and uses it to expand its stores across China. With 500-600 new store openings per quarter, SBUX is growing rapidly in this country. This growth plan will have to take a pause in 2020 but will surely keep-up in 2021 as the economy is reopening. As a bonus, Chinese stores are a lot more profitable than U.S. ones. The coffee maker also counts on its powerful membership (over 19.4M members) to boost comparable sales. Its reward program grew its members by double-digits in 2019. Finally, SBUX should grab more market in China as Luckin Coffee is stuck with fraud problems.

Potential Risks

SBUX growth potential in the U.S. is nearly nonexistent. It will get worst in 2020 as many smaller stores are in shopping malls. Plus, there is a limit to the amount of coffee that can be purchased by an American! The pandemic will affect SBUX sales as many of its customers buy coffee in the morning on their way to work. Closing some stores didn’t help either! Will the $5 coffee remain relevant when you lose your job? As the company faces headwinds in China or India, its growth potential will be highly reduced for the upcoming two years. The company has a break from competitors as Luckin Coffee if facing serious problems after fabricating sales.

Dividend Growth Perspective

Starbucks has increased its dividend payment for the past seven years. Over the past five years, SBUX raised its dividend payment from $0.16 to $0.41 quarterly. This is an incredible annualized growth rate. With low payout ratios, management has lots of room to fuel both its growth strategy in China and its dividend payments. We expect a lower dividend increase in the upcoming years and no increase in 2020. However, the long-term perspective remains the same. Starbucks will continue to dominate the coffee world as the economy reopens.

CCL Industries (CCL.B.TO)

What’s the story?

CCL reported their earnings on August 7th and it wasn’t the best quarter. Both revenue and EPS were impacted by the industry’s volatility and uncertainties. CCL segment’s sales were down 6%, Avery’s was down 28%, Checkpoint was down 31.5% and Innovia was up 21.4%. On a positive note, management expected worse.

Higher volumes and amplified demand for pantry loading fueled the latter’s performance. The company completed a bond offering, raising $600M of 3.05% 10Y bonds. Cash on hand at quarter’s end was $619.4M, with an additional borrowing capacity of $1.2B. The dividend remained intact.

Later in August, CCL announced the acquisition of Graphic West International ApS, a specialized digital printer of short-run folding cartons for the pharmaceutical and medical device industries with operations in Europe and North America. Sales for the 12 months ending June 30, 2020 were approximately $42 million with an estimated adjusted EBITDA of $6 million. GWI will be integrated into CCL’s Healthcare & Specialty business and will immediately adopt their trading identity. Closing of this transaction is subject to regulatory approvals and is expected to close early in the fourth quarter 2020.

Business Model

CCL Industries Inc manufactures and sells packaging and packaging-related products. The company operates through various segments which include The CCL segment, which generates the majority of revenue, sells pressure sensitive and extruded film materials used for labels on consumer packaging, healthcare, automotive, and consumer durable products. The Avery segment sells software, labels, tags, dividers, badges, and specialty card products under the Avery brand. The Checkpoint segment includes the manufacturing and selling of technology-driven, inventory management, and labeling solutions. And Innovia segment through which it manufactures specialty films. The majority of revenue comes from North America.

Investment Thesis

It is quite rare to find a world leader with a well diversified business based in Canada! Through a major acquisition (business units from Avery (AVY)) back in 2013, the company has set the tone for several years of growth. Strong from its previous success, CCL also bought Checkpoint and Innovia in the past few years. The company is still able to generate organic growth (roughly 4-5%) on top of their growth by acquisition strategy. You can also rest assured that management’s interests are aligned with yours since the Lang family still owns 17% of CCL shares. At this point, our only concern is its valuation and its debt level (see risks section).

Potential Risks

We often see rising stars like CCL making many investors rich over a quick period of time. Back in 2014, the stock traded at around $15. But since 2017, shares have been going sideways as the hype is fading. CCL is now a leader in many sectors, but double-digit growth will be hard to achieve going forward. The expectation of a recession is also slowing down the appetite of investors for this growth darling. The latest dividend increase is a lot smaller too. The company has used leverage for its acquisitions many times in the past few years. Further acquisitions to support growth may get riskier as many expect a global economic slowdown. In the meantime, it’s definitely a keep for current shareholders.

Dividend Growth Perspective

CCL shows a nearly perfect dividend triangle with strong revenue and dividend growth over the past 5 years. CCL’s business model is built around repetitive orders generating consistent cash flow. With low payout ratios, you can expect dividend growth for many years. The latest increase ($0.01) was lower than what investors have been used too. Considering the economic impact of the covid-19, we now expect high single-digit dividend growth going forward.

Final Thoughts

You should not expect each stock to beat the market after only a few months. Some stocks may take 12 to 18 months to demonstrate they are worthy of your investment. As is often the case when investing, patience is the most essential element of our strategy.

You may also want to consider adding a Dividend Achiever to your portfolio. This list shows nearly 300 companies with more than ten consecutive years with a dividend increase.

No matter your pick, always proceed with due diligence and make sure your pick fits in your investment strategy.

The post Two Dividend Growth Picks that Could Boost Your Return! appeared first on The Dividend Guy Blog.