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Smith Maneouvre Portfolio - June 2008

Written by FrugalTrader on Jun 30, 2008 filed under Portfolio

Time again for the monthly Smith Manoeuvre Portfolio update, June 2008 edition.

For those of you just joining us, The Smith Manoeuvre is a Canadian wealth strategy that utilizes a home equity loan to invest in income producing assets. The result is a tax deductible loan and portfolio that increases as you pay down your mortgage.

The markets are currently in correction mode which means it may be a good time to add to my positions. All the financial yields are up. It seems that some economists are predicting a global market crash, however, don’t let that phase you. If the markets do correct, see it as a good time to jump in!

Onto the business at hand, the portfolio. In terms of trading, the Bank of Nova Scotia position was doubled in addition to a small new position in the fundamental index ETF for U.S small-mid caps. Along with that, we initiated small new positions in BMO and a mutual fund management company that I was eyeing last month, AGF Management.

Stock	Symbol	Shares	Avg Buy Price	Total	Div/Share	Yield
Royal Bank	RY.T	75	$47.62	$3,571.25	$2	4.20%
CIBC	CM.T	45	$67.14	$3,021.25	$3.48	5.18%
Power Financial	PWF.T	75	$35.68	$2,675.75	$1.25	3.50%
Scotia Bank	BNS.T	50	$46.50	$2,325.24	$1.96	4.21%
Manulife Financial	MFC.T	50	$39.42	$1,971.00	$0.96	2.44%
Fortis Properties	FTS.T	50	$27.30	$1,365.00	$1	3.66%
TransCanada Corp	TRP.T	50	$36.87	$1,843.25	$1.44	3.91%
FTSE RAFI US 1500 Small-Mid ETF	PRFZ.US	20	$51.50	$1,029.99	$0.42	0.82%
AGF Management Limited	AGF.B.T	50	$22.71	$1,135.49	$1.00	4.4%
Bank of Montreal	BMO.T	25	$44.17	$1,104.24	$2.80	6.34%

Total Portfolio Cost Base: $20,042.46

Total Dividends / Year: $796.75

Portfolio Dividend Yield: 3.98%

As you can see, the portfolio is still heavily weighted in financials, but it’s starting to get diversified into utilities like TRP and FTS, along with a small position in the U.S small-mid cap index. I’m looking into more ways to diversify the portfolio, and still meet the CRA tax rules for a leveraged investment loan. One goal of the portfolio is to have a larger growth portion. Any ideas?

Stay tuned, the June net worth update will be posted later today.

27 Comments, Comment or Ping

1. Four Pillars

If you are looking for yield in Canada then it’s very hard not to overweight in financials. Maybe that’s just the way it is? (right now at least).

Mike

Jun 30th, 2008 @ 7:57 am
2. FrugalTrader

What are you invested in for your leveraged portfolio FP?

Jun 30th, 2008 @ 10:17 am
3. The Financial Blogger

I guess you can play on the line as most mutual funds are giving a small interest or dividend income… The CCRA rules don’t explain how much you should receive for your investment ;-)

Jun 30th, 2008 @ 10:37 am
4. Four Pillars

We’ve got BMO (a lot), BNS, IGM, CIBC.

100% financials at the moment, but we are planning more additions in the future which will not be financials.

Like you, we have other assets so if I count all the investments as one portfolio then it doesn’t look so bad.

Mike

Jun 30th, 2008 @ 10:39 am
5. The Financial Blogger

FP,
How much did you buy BMO? I hope you didn’t buy when it was in the 60’s….

Jun 30th, 2008 @ 10:52 am
6. Chuck

For growth you might want to look at companies that have a small, consistent dividend payout but a fair bit of upside. I own suncor for this purpose, and have traded POT this way. I also keep a non-leveraged account for my more speculative / non-dividend plays.

Jun 30th, 2008 @ 11:05 am
7. DG

What’s the best way to find out the composition of a dividend (ie, interest vs eligible dividend vs ROC)? Do I need to dig through each company’s website to find this (ex http://www.transcanada.com/investor/dividend_information.html ) or is there a nice online database somewhere that will tell me this?

Thanks,
Dan.

Jun 30th, 2008 @ 11:46 am
8. nobleea

Hey FT,
What about Shaw (SJR.B-T)? P/E is about 18 right now, and it yields 3.6%. They’re highly respected out west for their customer service. They are bidding on wireless channels which would round out their portfolio.

They’re the cable and internet provider in the west. Also have VOIP.

Jun 30th, 2008 @ 12:35 pm
9. DK

Somewhat off-topic but as I didn’t see this posted anywhere I thought I would add a comment here.

It occured to me recently that for families with young children, the SM mortgage has an added advantage: the amount of your Canada Child Tax Benefit is based on your household *net* (i.e. after-tax) income. If your household net income is more than about 37,000 the CCTB starts getting reduced. Therefore by deducting interest payments, which in turn reduces net income, in addition to the tax refund you may also get higher monthly CCTB payments (which by the way is not taxable).

Obviously contributing to an RRSP has the same potential to increase the CCTB, whether or not one has an SM mortgage.

Jun 30th, 2008 @ 12:56 pm
10. MikeG

+1 for shaw, by far best ISP in Calgary…
just my 2c though..

Can you hold any American stock you choose in a smith maneouvre portfolio?
-MikeG

Jun 30th, 2008 @ 1:05 pm
11. FrugalTrader

chuck, I also have SU in my sights, along with HSE.

DG, typically income trusts pay a combination of dividends, interest and return of capital. Corporate dividends are usually dividends only. To find the composition of the distribution from an income trust, you’ll have to go to the company site and do some digging.

nobleea, I haven’t looked into shaw. But after a quick search, it looks fairly appealing, and looks to have some upside. Any idea what their dividend history is like? We don’t have Shaw here in NL, only Rogers, how do they compare as a company?

MikeG, yes you can hold American stock within the SM portfolio. The reason why I limit those holdings is because US dividends are taxed as income. I am looking at purchasing more index based ETF’s like PRFZ and VTI.

Jun 30th, 2008 @ 3:28 pm
12. Thicken My Wallet

Define growth? Outside of income trusts there are several mid-cap stocks that do pay dividends and have upside like: Sherritt (TSX:S) or Marsulex (TSX: MLX) but the former stock price fluctuates quite a bit and the latter does not have a lot of liquidity so there are downsides of both stocks that a large cap would not give you. I don’t see any aggressive dividend hikes in the future for both stocks (MLX hiked their dividend twice in a short period of time) but, as an appreciation play, both interesting stocks to watch with dividends to mitigate downside risk.

These are very much on the aggressive end of the dividend stock spectrum. Having said that, you may want to consolidate some of your positions and average down on some stocks before looking at these (especially Manulife which is getting to value stock territory).

Jun 30th, 2008 @ 3:48 pm
13. nobleea

FT;

I don’t know how long Shaw has been paying out dividends. Since at least 2004 as far as I can tell. And slowly increasing them too.

Shaw and Rogers are similar in that they have the same offerings and are the Davids to the Goliaths of Telus and Bell. We also have Rogers out here. Both companies have outspoken leaders. Shaw is smaller and it’s primary strength is cable TV and internet. Their customer service is top notch - you can get a hold of someone very easily, and if their lines are busy, you leave them a message and they get back to you in a few minutes.

Jun 30th, 2008 @ 4:07 pm
14. Chris

Do you have any “ethical” rules for investing in stocks? I ask because Rothmans Inc (which sells tobacco products) currently has a yield of 5.3%. They did cut their dividend in 2005, but they’ve started increasing it again (plus they pay a special dividend every few years). You ARE trying to diversify! :)

Jun 30th, 2008 @ 7:15 pm
15. FrugalTrader

TMW, thanks for the picks. I will look into them. How do you judge if a blue chip is getting into “value” territory? Do you compare historical P/E or historical div yield?

Nobleea, that is interesting. I’m looking into diversifying into the telecom industry, but I don’t trust them. :) I think the contenders are RCI, SJR, T, and MBT.

Chris, I do have “some” ethics, and is part of the reason why I wouldn’t purchase Rothmans. The other reason is that I believe that cigarettes have very limited upside left in them.

Jun 30th, 2008 @ 7:28 pm
16. nobleea

“The other reason is that I believe that cigarettes have very limited upside left in them.”
As long as they generate more new customers than existing ones that die off, they should be alright. Not too many companies out there that kill their best customers.

Jun 30th, 2008 @ 7:50 pm
17. Andrew

I like the Shaw idea for growth and also Husky Energy - both with nice dividends.

Jun 30th, 2008 @ 11:28 pm
18. ThickenMyWallet

I look at several things:

1. P/E is 12 or below. The average p/e for the last 50 years has been or about 12 (meaning that our stocks are way over-valued).

2. Price to book is 1.5 or below (I believe this is Graham’s ratio). For real estate companies, look at NAV rather than price to book as a better indicator of value.

3. What is the industry p/e and price to book? Is there a reason why it is above or below?

4. Cash flow and cash or cash equivalents on hand. If there is a large amount of cash on hand and the stock price is low, on a liquidated valuation, the company is worth something (not to mention it can acquire growth or become a take-over candidate).

I agree with Andrew- Husky is a good play. They just raised their dividend and they have an interesting growth play in the South China Sea. I have been eying it as a growth stock/dividend payer as well.

Jul 2nd, 2008 @ 9:07 pm
19. LongTime Smither

What is everyone’s opinion of prefered shares? You get the benifit of market gains plus a higher dividend than normal shares. I don’t currently have any in my leveraged account but am starting to consider it.

Jul 3rd, 2008 @ 12:25 am
20. Telly

FT,

Personally, I don’t worryabout diversifying one particular account. Like you, we hold mostly Canadian financials in our non-registered accounts. It makes the most sense due to the fact that dividends are more advantegeous for tax purposes in a non-reg. account. I think it’s a mistake to create separate allocations for each individual account. Look at your portfolio as a whole (including real estate and your wife’s accounts), for both diversification and asset allocation. As long as financials aren’t running the show overall (which I’m sure they’re not, given the amount of real estate you have), it’s best not to get caught up in trying to diversify every account. At leat that’s my 2 cents.

Jul 3rd, 2008 @ 1:52 pm
21. FrugalTrader

Telly, you are wise beyond your years. I will take your advice and evaluate the the big picture of my holdings.

Jul 3rd, 2008 @ 2:15 pm
22. Ben Lam

Have you guys heard of ShareOwner? I saw it in the Globe, sounded promising, esp for buying partial shares as you pay down the mortgage

http://www.theglobeandmail.com/servlet/story/RTGAM.20080701.wcarrick0702/BNStory/SpecialEvents2/

http://www.investments.shareowner.com/home/v1/index.html

Jul 3rd, 2008 @ 6:34 pm
23. Options Trader

If you are looking to diversify your Canadian dividends in a simple fashion, I would suggest reviewing the iShares Dividend ETF: XDV. Although this may not directly meet your diversification goals it should help with meeting/diversifying the dividend bearing portion of your portfolio.

You should carefully consider whether or not this will increase or decrease your yearly transaction + management costs as well as the impact to your yearly capital gains planning. I keep all my XDV shares in my RRSP and my wife’s RRSP to mitigate the capital gains impacts.

Your growth stock diversification will have to be handled elsewhere however. You might consider SSW as one stock that meets the dual need for sector diversification as well as growth.

That said, I do agree that you need to consider diversification across all your investments rather than one single account. The caveat here being your need to meet the requirements for the CRA tax rules. Which I must point out is near impossible due to how ambiguous they are.

Jul 4th, 2008 @ 6:35 pm
24. Paul_Z

Is this the first year of your “Smith Maneuver” ? I’m in my first year and currently hold Canadian Dividend Mutual Fund, but really thinking to trade it for an ETF (CDZ or XDV). I don’t know why i even bought into this Mutual Fund.

Jul 24th, 2008 @ 12:19 pm
25. FrugalTrader

Hey Paul, if CDZ has the same holdings as your mutual fund except with a lower MER, then it may be worth your while to switch. However, you need to take into account transaction costs. How often do you add to your position? Remember, every time you buy an ETF (or add to a position), you will have to pay a commission where adding to a MF doesn’t cost a thing.

Jul 24th, 2008 @ 12:24 pm
26. Paul_Z

Yes that fund MER is definitely higher than CDZ. Currently I’m not adding to my “Smith” positions, i want to take it slow and make sure it does work with CRA. It is my first year.

How would one choose between CDZ and XDV or even individual stocks?
CDZ pays out monthly with 0.60% in fees
ZDV pays out quaterly with 0.50% in fees

Jul 24th, 2008 @ 12:49 pm
27. FrugalTrader

XDV and CDZ choose their holdings differently. XDV is more of a Canadian dividend index, CDZ only holds companies that have increased their dividends consistently over the last 5 years.

Jul 24th, 2008 @ 1:58 pm