Retirement Portfolio Series – Let’s Start With the Basics: Budget and Cash [Podcast]

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There are zillions of books, articles, and services about building your nest egg. However, there are not close to as many resources on creating a paycheck from your portfolio. This is often a cause of doubt and anxiety for the investors about to retire.

This is the intro of a series on How to Turn Your Portfolio into a Safe Money Making Machine at retirement.

You’ll Learn

  • To what extent should an investor consider tax aspects in his investment strategy.
  • How to set a budget for your retirement.
  • How much cash should you keep in your account when retiring.
  • Two ways a dividend investor can build its cash cushion and which one is Mike’s favorite.
  • How does living on dividend payments alone translate on a monthly budget.

Related Content

The “dividend option” is the most classic way to generate income from your portfolio. It makes so much sense to do one simple calculation and then to think you are done. You need $30,000? Easy! Imagine you have $800,000 invested, you divide $30K by $800K and you make sure your portfolio averages 3.75% in dividend yield.

If your calculation leads to a portfolio yield of 3 to 4%, you won’t have to worry about much. In fact, you may be able to cut down your cash cushion to 1-year worth of your retirement budget and you’ll be just fine. Unfortunately, many retirees will face a situation where they need $50,000 per year while having $600,00 invested. Then, generating an 8.3% yield isn’t that easy. Sure, you might tell me that you have found some generous MLP’s or split share products generating 8%+ yield. But, when you look at their long-term returns, you may want to revise your strategy. Here’s a quick example of the Canoe Income Fund (EIT.UN.TO) and Financial 15 split Corp (FTN.TO):

The first case (Canoe) is the “most successful one”. Your dividend income is getting eaten up by inflation year after year while your asset (the stock price) is slowly, but surely going down in value. If you are unlucky and bought the Financial Split 15, then you have suffered from both a revenue loss (dividend was cut in 2020) and a loss of capital (stock price was above $20 and now struggles to stay over $11). This is not what I call a safe money printing machine.

It’s important to note that Quadravest will describe the Financial Split 15 as a “high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers”. You could have saved yourself a lot of time and grief by buying your favorite top 3 Canadian banks and calling it a day.

I understand the 8% yield is easier to calculate and looks more stable. After all, if the company pays 8% each year, you don’t have many calculations to do. You cash your dividends and you move on. However, how many of those 8% yielders eventually cut their dividend and you wake up to a massive capital loss as well?

The answer? Enough of them to kill your retirement portfolio.

We will cover this topic more in depht in the next episode. Exceptionnally, we will do three small episodes in the same week, from May 17th to May 19th. If you want to get notified, please subscribe to our podcast through your favorite platform.

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The post Retirement Portfolio Series – Let’s Start With the Basics: Budget and Cash [Podcast] appeared first on The Dividend Guy Blog.

If You Invest in Stocks, You Must Do This Quarterly

One thing I’ve noticed throughout the years is that it is much easier for investors to invest new capital and build a portfolio than to manage it. Our portfolio models at Dividend Stocks Rock are somewhat capped with the number of positions and we don’t invest new capital. This means we deal with what most investors live with: we all have to use portfolio management theories in the real world.

To make our life easier, though, we have designed a straightforward process using all the DSR tools to manage each of our 9 portfolio models. To get you inspired into creating your own methodology, I thought it would be a good idea to share how we review them quarterly. Most of the time, trades are not about a specific stock per se, but a lot more about portfolio management and keeping the global picture in mind.

#1 Look at Your Ratings

The very first thing I do for each portfolio (including my own) is to watch my DSR PRO ratings along with my dividend safety scores. Obviously, you can create your own rating system, but I stronly suggest you do rate your stocks. That said, I want to highlight each stock with a rating of 3 and under.

Let me be clear: There is nothing wrong with having stocks with a rating of 3 (hold) or a dividend safety score of 3 (decent dividend). However, there is also nothing wrong with wanting to improve those ratings if it is possible!

Keep in mind I never trade based solely on ratings. The ratings will tell me where to direct my attention though. I will use both ratings combined to create a scoring on “10”. Technically, all stocks that don’t make 5 or better should be put on the sell list and we should consider potential replacement of those securities.

Source: Dividend Stocks Rock

If I look at the 100K USD portfolio for example (screenshot above), I quickly see that I have three “ordinary or weak stocks”. The first one is Disney. At first glance, that rating combination doesn’t make sense to hold with the worst dividend safety score. Here’s your invitation for investigation! When going through my stock analysis, I’ll realize that Disney suspended indefinitely its dividend in 2020 due to the pandemic. This explains the poor dividend safety score. However, after reading the investment thesis and looking at other financial metrics on the stock page, I realize the company has plenty of growth opportunities and it will use that extra cash to create more content for its streaming platform. Do I really want a 1% yield on my investment, or do I want Disney to build the second-best streaming platform in the world?

The second company with a poor rating is Hasbro. While Hasbro shows the same combined score as Disney (4+1 = 5, 3+2 = 5), HAS doesn’t show any great ratings. By going through our analysis, I then notice the company has potential growth vectors (which explains the rating of 3), but shows a poor dividend triangle:

Source: Dividend Stocks Rock

At this point, it looks like Hasbro should be on my sell list.

Finally, when I look at the third company, Brookfield Infrastructure with a PRO rating of 3 and dividend safety score of 3, it doesn’t look that bad. First, the company has a combined score of 6. This is not awesome, but it’s not terrible either assuming a perfect score of 10 is nearly impossible in our model. Plus, after reviewing the stock card, the BIP dividend safety score is close to a 4 with the last dividend increase being +5%. Therefore, there isn’t an emergency demanding action on this security. In fact, it fits well in the 100K USD portfolio with a yield close to 4%, a good growth perspective, and a dividend safety score that will likely reach 4 in the coming years.

#2 Look at Sector Allocation

Once I have identified companies that should leave the portfolio (in this case Hasbro), it’s now time to look at the sector allocation. I must know if I will replace the stock with a company in the same sector or if I should use this trade to balance the sector allocation. If I continue with the 100K USD portfolio, I can look at the sector allocation graph:

This portfolio is already well balanced between several sectors. None of them shows a weight over 20% which would expose the portfolio to potentially higher fluctuations. Hasbro is part of the consumer cyclical sector that is already at 12.5%. I could pick again in this sector or opt for a sector with a smaller weight such as real estate, energy, or communication services.

Sometimes, the sector allocation needs more attention. I wouldn’t add more shares in a sector that already represents 20% or more of a portfolio.

#3 Look at Each Stock Weight

Making sure the portfolio shows a good balance between various sectors is important, but it’s equally important to look at the weight of each stock. When I look at my own portfolio, I like to know that each position has the potential to move the needle toward a better retirement. This means I make sure not to hold stocks with less than 1% weight in my portfolio. In an ideal world, I would like each position to be around 3% of the portfolio. I’ve also set a limit as I don’t want to invest 25% of my capital into a single stock. This forced me to sell Apple shares a few times in 2020.

Again, using the 100K USD portfolio, you will notice that Procter & Gamble has a dominant position (8.11% of the portfolio) followed by Sysco at 6.34% and Apple at 5.79%. This portfolio currently holds 21 different stocks. Technically, we should aim at having about a 4.50-5.00% (4.76% to be exact) weight for each stock. This tells me that I will eventually have to cut down PG if the situation remains as it is. I’m not the type of investor that will trade stocks every time it goes a little over the average weighting. There is no point in multiplying trades either. For now, I’ll stick with PG at 8% and follow this position closely in the coming quarters.

Source: DSR PRO

Many times, the portfolio will rebalance itself as the market fluctuates. I’ve experienced this with my portfolio where the USD lost in value, reducing the weight of all my US positions compared to my Canadian holdings.

#4 Keep Your Goal in Mind – Forget about the Market & All the Noise

As you probably noticed, I didn’t talk about the current market and the economic environment while doing the portfolio review. I would rather focus on the global picture (e.g. long-term investing) than trying to catch what the next trend will be.

Those who figured that the energy sector was the best one to invest in back in September 2020 are doing very well right now. However, now that they are done with the “easy money”, what will be their next step? Keeping all those energy stocks may not reward them going forward. They must be looking at the next big trend.

Sometimes, Making the Hard Choice is the Good Choice

Finally, I just wanted to highlight that you will inevitably face hard choices often when you review your portfolio. For example, I didn’t like selling my shares of Hasbro last month in my portfolio.

Let me confess that I hate to be wrong. Hasbro did good in our DSR portfolios when it was selected back in 2013 and offered a total return of 130% for that period. Unfortunately, I added Hasbro to my portfolio in 2017. I didn’t lose money, but I didn’t make much either (about 16% total return). Nobody likes to be wrong and lose money. I was fortunate, HAS didn’t kill my portfolio returns, but it was time to admit that my investment thesis was wrong. I’m confident I’ll feel better about this trade in a few years.

In the end, most of my portfolio is doing incredibly well for one single reason: I’ve followed a meticulously disciplined investing process. If I want to repeat such returns, I must continue to trust the process. My investing strategy revolves around dividend growers and their ability to outperform the market (in general) with less volatility. Hasbro doesn’t fit this strategy today, and the management hasn’t given me “hope” that they can turn the tide around”. As I have told you before; “hope” is not an investing strategy.

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Dividend EV Stocks and How to Ride that Trend in a Safe Way [Podcast]

Investing in trends such as electric vehicles may lead to bumpy rides! To avoid such stress, you may consider companies that will benefit from the movement while still showing a strong and diversified business model and good dividend growth.

How can a dividend growth investor ride the electric vehicles (EV) wave in a safe way? This is what awaits you in this episode!

You’ll Learn

  • How can we make sure electric vehicles are not just another flavor of the month.
  • How can a dividend growth investor ride the EV trend in a safe way.
  • Mike’s favorite picks in the EV field: Gentex (GNTX), Magna International (MG.TO / MGA) and Texas Instruments (TXN).
  • A word about Albermarle (ALB).
  • What type of impact the EV trend might have on the oil & gas industry.
  • Considering this wave, should an investor worry about stocks like ATD?

Related Content

The Electric Vehicles theme has been trendy for a while and it is not about to end! Many countries worldwide are obviously going in that direction to meet our need for cleaner energy. This is why we also created a video on Mike’s favorite picks.

You might want to have a look at the graphs shared for each!

During the episode, we also briefly discussed Alimentation Couche-Tard (ATD.B.TO), which is part of Mike’s Top 5 Canadian Undervalued Stocks for 2021.

Watch the video below to learn more about this great Canadian company and a few more buying opportunities!

The post Dividend EV Stocks and How to Ride that Trend in a Safe Way [Podcast] appeared first on The Dividend Guy Blog.

Retirement and the Withdrawal Mechanics

I remember my days as a financial planner. When I worked with my clients on their retirement plans, the easiest part was withdrawals. Why? Because we were taking care of their money. In private banking, we offered an “all-inclusive” service where we would manage how, when, and where to withdraw the money to make sure our clients enjoyed their retirement.

The reality is significantly different if you manage your own portfolio. The advantage is that you are not limited by your financial advisor’s set of products, and you don’t have to pay fees. Therefore, there are good opportunities for your returns to be better. Unfortunately, once you get to be retired, you don’t benefit from the “all-inclusive” service where someone manages the mechanics behind each withdrawal.

Even if you don’t have someone taking care of your withdrawals, it doesn’t have to be complicated. This article is all about making your retiree’s life easy. The goal here is that you have more time to spend with your family, laughing, traveling, or eating out. We don’t want you to spend your weekends in front of your computer designing budgets and orchestrating withdrawals.

I’ll go with how I intend to manage my portfolio once I retire. I’ll cover the how, when, and where to withdraw money from a portfolio.

But first, a few words about taxes.

Withdrawal and Taxes

Considering that each situation is different and that I have Canadian, American, and even European readers, I will not discuss tax implications. You already know that I’ will advise you to seek professional advice on tax issues.

I believe one should perform tax optimization after he/she has set his/her investing strategy (global asset allocation, risk tolerance, types of investments). It’s good to save a few bucks in taxes, but not at the expense of the bigger picture. In other words, I don’t think it’s a crime to pay withholding taxes on dividends paid if it enables you to have a more diversified and better-performing portfolio.

However, when it’s time to retire, the order and timing of withdrawals could greatly affect your budget. You can’t control your portfolio performance, but you can control a great part of the taxes you will pay (or save) at retirement. Therefore, crunching numbers with a tax expert will likely make a big difference in your lifestyle. Make sure to make your appointment, develop a plan, and thereby avoid potential costly mistakes.

How About Inflation Protection?

I have received many questions about inflation lately. It’s understandable considering the amount of “advertisement” for the “Flations of the Apocalypse” (namely In, Stag and Hyper). Gold believers will not miss an opportunity to tell you about how much cash the FED has printed in the past twelve months. Bitcoin fans will explain that the only viable currency is digital. Finally, some go as far as comparing Canada with Zimbabwe or Venezuela and today’s U.S. with 1990’s Japan. In other words, many are calling for a massive currency value drop creating hyperinflation. This is a lot of noise that you don’t need in your life.

If you book your entire weekend to try to understand what is happening between the creation of money (stimulus bills in the U.S., support in Canada, etc.), gold prices and the rise of Bitcoin, you will have lost a great opportunity to take a walk outside and enjoy spring. Here’s my confession: I regularly read articles about those topics because it’s my job (and it’s my interest). Each time I read something that makes me think “hum…this makes sense”, I read another piece telling me the complete opposite and this article also makes sense.

Conclusion: I’m not smart enough to tell you if we are going to get into hyperinflation or not. There are multiple forces driving currencies and prices both up and down at the same time. Then, what is the smart thing to do?

How to protect your portfolio against inflation

If you search for ways to protect your portfolio from inflation, you will likely end-up on pro gold / precious metals or pro bitcoin articles. In fact, there isn’t a bullet proof methodology to protect your money against inflation. Not even gold. Did you know that since its peak price in the 80’s, gold has never fully recovered when considering inflation? I just found this gem written by Morning Star showing how gold is far from a good hedge against inflation.

Below, you will see a graph showing you how commodities (blue), Real Estate (red), equities (orange), and gold (yellow) did over the last three critical inflationary periods. Shocker: gold is the worst hedge of them all! It worked tremendously well during an episode of stagflation (inflation mixed with a recession) but appeared to be a dud for regular inflationary periods.

The article suggests commodities having the best correlation (e.g., protection) with inflation. However, you must be ready for a wild ride as it is also the most volatile asset class. Real Estate usually does well as landlords tend to pass the inflationary pressure to their tenants. Finally, there isn’t much correlation between stocks and inflation. However, long-term returns from equities tend to be superior to all asset classes. I guess this is how you can protect your portfolio against inflation, right?

I know a way to not worry about inflation though. It’s called dividend growth investing. By selecting companies with the ability to increase their dividends year after year, you protect your retirement income from inflation. In 2020, my portfolio dividend payments increased by 7.7%. That’s more than enough to cover inflation.

If I don’t know what inflation will look like in the future, I also know that capitalism isn’t about to disappear. Great companies making great products or services will continue to expand and pay dividends. If you want to fight inflation, I believe this is a classic “offense is the best defense” situation. Gold has failed many investors, Bitcoin has proven one thing and one thing only (it’s highly volatile), but great dividend growers have always performed well over the long term. I’ll bet my retirement on that too!

It is a simple answer to a complicated question. Sometimes, keeping things simple is the best strategy. Now, let’s simplify the withdrawal mechanics!

Cash, Dividends, Selling Shares and Portfolio Allocation

In this section, we’ll elaborate a simple, but effective, plan to make sure you always have enough money to enjoy your retirement. I will tell you what I intend to do once I retire. It may or may not fit with your situation, but this will give you a good starting point.

As previously discussed in the last retirement article, I intend to have between 12 and 24 months worth of my retirement budget in cash on day 1 of my “new life”. The key here is to have enough cash, so I never panic when the market drops and that I’m never forced to sell stocks at a bad time.

With this cushion in mind, I expect to combine my dividend payments with small withdrawals from this cash account. To make the example fun, let’s put numbers into this exercise.

Imagine I retire at 65 with $1,000,000 generating 2% in dividends (my current average yield). Now, let’s imagine I need the classic 4% from that $1M (or $40K/year). This means that between two and four years before retirement, I would have let the 2% dividend pile up in cash to create my reserve. I don’t want to be forced to sell stocks at 65 during the 33rd pandemic wave crushing the stock market ?.

Therefore, at the age of 65 I would have a portfolio of $1M generating $20K in dividends and I would also have $40K in cash. I would review my financial situation every 6 months to determine if it’s the right time to sell some shares or not.

During the first six months of retirement, I would have spent about $20K. Half of it will come from my dividend portfolio and the other half from the cash account. Therefore, my cash account would decrease to $30K. If after 6 months the market is still good (e.g. no crash happening), I would sell a few shares to increase my cash account back to $40K.

If the market is in “crash mode”, I can easily wait another 6 months and see where the market is at that time. At this point, my cash account would decrease to 20K and my portfolio would still be generating the same $20,000 in dividends. In fact, chances are it will be generating a little bit more than that since my portfolio is focused on dividend growth stocks.

A market crash doesn’t drop the value of your portfolio permanently. Most crashes will happen over a few months to a year and then the market will start to recover. If the market is still in bad shape after 1 year of bearish returns, I still have the luxury to do nothing and wait another 6-months using the same technique. Ultimately this strategy would give me up to two years without having to touch my portfolio.

Can You Protect Your Cash Account for More than Two Years?

A two-year break will be enough to cover many bear markets, but not all of them. Therefore, it’s preferable to have two-years worth of retirement budget to cover about four years of bear market. If you don’t want to have ~$80K sitting in a cash account as per my example, there is something else you can do.

It’s always possible to take a few chances with your portfolio and improve your yield. Let’s be honest, a 2% yield isn’t much. It’s quite easy to transform your dividend yield from 2% to a 3-3.5% level. By using my DSR PRO portfolio builder, I can sort my holdings by yield and identify which company “hurts” my yield:

I can then identify each sector where I must find replacements and use the stock screener with filters such as:

  • PRO rating* minimum 4
  • Dividend safety score* minimum 4
  • Dividend yield minimum 3%

*I’ve explained both the PRO Rating and the Dividend Safety Score on my YouTube channel. Click on each ranking title to view them.

I could then sell some Visa, Tecsys, Apple, Alimentation Couch-Tard and buy more Royal Bank, Sylogist, Broadcom and Coca-Cola.

Another technique I could use is to look at my sector allocation. I have a strong concentration in technology and consumer cyclical. I could sell some stocks in those sectors and replace them with companies in sectors with higher yields such as REITs and Utilities.

Therefore, I would end-up with two valid scenarios (you can pick the one you like best):

  1. Portfolio yield of 2% and a larger cash reserve (more like 18 to 24 months)
  2. Portfolio yield of 3%-4% and a cash reserve of about 12 months.

Since I’ve always focused more on growth than on income, I would likely pick the scenario #1. However, this would expose my retirement plan to more volatility in the case of a severe market crash. Scenario #2 would allow your portfolio to recover fully from pretty much any bear markets while you enjoy a stronger current income coming from your portfolio.

At this point, it’s a personal choice between growth and income. I see both possibilities as good choices (if you don’t jump from one to another repetitively!).

Which stocks to sell?

If I must sell stocks to create my own dividend, I will likely do everything to keep my sector allocation intact. I would then identify if I must rebalance my portfolio first and sell overweighted stocks. If sector allocation is well diversified, then I would sell a few shares of each position to maintain the allocation as is. It may trigger a few more transaction fees, but that’s the point of not selling more than twice a year (or, ideally, once a year).

To summarize

Here’s an easy plan to follow for your retirement withdrawals:

  1. Select between a low yield portfolio with a larger cash reserve or a higher yield (3-4%) and about 12 months of cash reserve.
  2. Write down a tax optimization plan with a tax expert.
  3. Sell overweight stocks to rebalance your portfolio, then sell a little bit of all positions to maintain your sector allocation.
  4. Enjoy your retirement!

Final Thought

When I made the decision to travel for one year with my family, I had this sentiment of urgency to act. While we worked on this project for 18 months before leaving, I was very aware that many kinds of catastrophes could hit our family. I feared an external event would take my dream away. In the end, it was the most amazing experience of my life.

When you retire, you may experience a similar feeling. The fear that an external event could destroy your retirement dream is frightening. But in most cases, it’s just our brain playing tricks with us. If you have a robust plan, you simply must follow it, and everything will be fine. Keep in mind that full market cycles take between 5 and 10 years on average. Therefore, even in retirement, you are down for a least 2 full cycles.



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Brookfield Stocks: Which Shares to Hold? [Podcast]

Which shares to hold from the Brookfield family? That is an often asked question now answered in detail! Which one between Brookfield Infrastructure, Renewable, Properties and Asset Management best suits your portfolio?

Let’s shed some light on these well-known Canadian stocks that also trade in the U.S.!

You’ll Learn

  • Why Brookfield Asset Management (BAM) can be considered as the mother of the “Brookfield family”.
  • What are the differences between partners, trusts and corporate shares.
  • What’s happening with Brookfield Property Partners.
  • Each company’s strenghts and weaknesses: BAM, BIP and BEP.
  • How come Brookfield Business Partners (BBU) is not on our radar.
  • Why considering Brookfield stocks as interchangeable can be harmful for an investor’s portfolio.
  • Mike’s favorites among the family!

Related Content

To clear up each company’s business segments and BAM’s ownership, we’ve added some tables or images right below.

Brookfield Asset Management

BAM is an excellent fit for growth investors, but also offers robust long-term stability. Its structure is relatively complex as the company has stakes in all “Brookfield family members”:

Brookfield Infrastructure

BAM ownerhsip: 28%

One major disadvantage most utilities have is their lack of diversification. Many of them excel at a specific type of service (electric transmission, natural gas, etc.) and show a limited geographic footprint. You break both barriers with BIP as the company operates in multiple business segments and manages assets all over the world. The company is divided into four different business segments, each of them including multiple activities:

Brookfield Renewable

BAM ownership: 48%

Like BIP, BEP offers a great diversification for investors when it’s time to select a renewable energy producer. BEP shows about 55% of its activities in North America, opening the door for good geographic diversification. The company is on its way to more than double its energy generation capacity once it completes its development pipeline. BEP is operating across multiple business segments:

Between January 6th and March 22nd, renewable energy stocks have fallen over 20%. What’s happening and how should you react? Should you want to know more, Mike answered to that question and also discussed Brookfield Renewable in the video below.

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