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Smith Manoeuvre Portfolio – December 2010

For those of you just joining us, below is my portfolio that is leveraged with money borrowed from my home equity line of credit (HELOC). As the money borrowed is used to invest, the interest charged is tax deductible. I write an update every so often to show new positions added along with any market gains/losses. For more details on the strategy and procedure, check out my modified smith manoeuvre strategy and my comparison of online stock brokers.

Since the last June 2010 update, very little has changed in the portfolio as bargains have been challenging to find.  I did manage to find one position to add to, and what was Mullen Group (TSE: MTL) where 50 shares were added.  The best performer of the year was First Capital Realty (FCR) and the worst performer was by far Manulife Financial (MFC).

Overall with the markets going up in 2010, the rising tide resulted in a gain in this portfolio which I’m pleased with. As we have our house paid off, our home equity line of credit now has a lot of room to move.  I plan on keeping the investment loan balance and even increase it should the opportunity arise.

My dividend watch list hasn’t changed much since my last couple reports.  I am looking to increase my position in T.BMO, T.TD, T.ENB, T.FCR and new positions in T.CNR T.L and T.BPO (new on the list) when their valuations become attractive.  What’s also interesting are income trusts that will be soon converting to corporations.  It’ll give this portfolio a few more choices.

If you are a dividend investor, which income trusts are you interested in?

The Portfolio as of December 2010:

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 105 $35.14 $3,689.65 $1.40 3.98%
Scotia Bank BNS.T 105 $41.91 $4,400.52 $1.96 4.68%
Manulife Financial MFC.T 125 $33.12 $4,139.48 $0.52 1.57%
Fortis Properties FTS.T 150 $25.63 $3,843.98 $1.04 4.06%
TransCanada Corp TRP.T 100 $33.50 $3,349.74 $1.52 4.52%
AGF Management Limited AGF.B.T 50 $22.71 $1,135.49 $1.00 4.40%
Bank of Montreal BMO.T 25 $44.17 $1,104.24 $2.80 6.34%
Husky Energy HSE.T 135 $32.53 $4,391.27 $1.20 3.69%
TD Bank TD.T 50 $48.24 $2,412.23 $2.44 5.06%
Enbridge ENB.T 40 $37.36 $1494.39 $1.48 3.96%
TransAlta TA.T 50 $21.47 $1073.49 $1.16 5.40%
First Capital Realty FCR.T 160 $9.72 $1,574.99 $0.80 8.23%
Canadian Utilities CU.T 50 $36.40 $1,819.99 $1.41 3.87%
Ensign Energy Services ESI.T 100 $13.81 $1,380.99 $0.35 2.55%
Mullen Group MTL.T 100 $14.54 $1,453.98 $0.50 3.44%

More Stats

  • Total Cost Base of Equities (inc. fees): $43,837.14
  • Market Value of Equities (Dec 10, 2010): $48,143.90
  • Total Dividends / Year: $1,859.23
  • Portfolio Dividend Yield: 4.24%

Sector Allocation (based on market value)

  • Financials:    51.51%
  • Utilities:    17.87%
  • Energy:    25.58%
  • Resources:    0.00%
  • Real Estate:    5.03%
  • Other:     0.00%

With regards to sector allocation, you may notice that this portfolio is fairly concentrated in financials.  Note though that this is one of my accounts where I treat all of my accounts as one big portfolio.  In other words, my international and other sector equity exposure are in other accounts.

Disclaimer: There have been a lot of readers who have mentioned that they are interested in a leveraged portfolio.  Over the long term it may be lucrative.  However, over the short term, equities are volatile and can put the portfolio deep in the red.  My portfolio over 2008 is a prime example of what can happen.  If you can’t stomach losing 20-30% in the portfolio in any given year, then your risk tolerance isn’t suited for leveraged investing.  Here is an article I wrote answering a reader question “Should I Start the Smith Manoeuvre?”   Finally, the securities mentioned in this post are not recommendations to buy or sell.

If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).

FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 33 comments… add one }
  • Future Money-Bags December 13, 2010, 9:33 am

    Very much appreciate the update! I have been waiting for this for a while to see your gains and your portfolio.
    I don’t want to rush into things, but I don’t want to stay on the sidelines forever.
    I have a large savings pool that is just growing for a D/P, But I would love to invest a little of it to start getting some passive income. I am thinking of purchasing my first RRSP’s next year to get some compound growth going on for the future.

    Where do you buy your divident paying stocks? Are they just in a leveraged account in an online broker (Quest)? I currently have a small amount of Seg’s in my TFSA but I am wondering about getting dividend stocks inside that account?

    I know you are no financial guru advisor, I just looking for some tips. I learn many tips from your site, but it is sometimes quite difficult to obtain detailed knowledge on certain topics which I am interested.

    By the way I love your blog the most because I am amazed at all of the topics and catagories you manage to have so much experience and knowledge in. While others are more geared towards a couple fields.

    THANKS! :D

  • Echo December 13, 2010, 11:54 am

    FT, would you consider adding to your Manulife position now that it seems to have found the bottom?

    Nice yield on FCR, I can see why that’s been a big winner for you (great entry point). Hopefully they can increase their dividend soon.

  • Steve Zussino December 13, 2010, 11:59 am

    Do you rebalance your account every year? I notice it is heavy in financials and energy.

  • FT FrugalTrader December 13, 2010, 1:02 pm

    @Future Money Bags – Yes, the stocks are held within a discount broker account. Note though, that if you use an investment loan to fund a TFSA, then the interest is not deductible. Let me know if you have any other specific questions and I’ll try to help out where I can.

    @Echo – I actually added to my position to MFC within a registered account @ $12.80. I did that because I had a bunch of cash in the account and it looked like a good opp.

    @Steve – no rebalancing, just buying more when it appears cheap. Although, seeing that i’m heavy in financials and energy, I am currently focusing more on the other sectors – real estate, telecom, retail etc.

  • DoNotWait December 13, 2010, 1:36 pm

    Nice ones to me. I think your choice for MFC makes sense also.

  • Ryan December 13, 2010, 2:23 pm

    What is the break even analysis for the Smith Manoeuvre?

  • Sustainable PF December 13, 2010, 3:17 pm

    Pretty wary of the income trusts after the dividend giant Canadian Oil Sands slashed theirs by 60%. We got out with a small loss and avoided a lot of pain as the stock fell about 13%.

  • Ryan December 13, 2010, 6:21 pm

    What is the break even analysis of the Smith Manoevre?

  • PuddleJumper December 13, 2010, 6:36 pm

    Looks like its been awhile since BPO increased dividends. The rolling dividend resembles my chances of getting a raise this year…Pretty Flat. Hopefully that changes for both :)

  • Querysmith December 13, 2010, 6:46 pm

    Great site and series on this technique, How much of your withdrawals from your home equity do you need (or are your required) to maintain “invested” for the Smith manoeuvre to “work” from an accounting and tax reduction point of view.

    I know you can’t invest in “interest” bearing instruments (so alot of great Canadian REITs are off limits) but can you hold any cash at all?

  • Jungle December 13, 2010, 7:14 pm

    You hold a lot of stocks! Have you ever considering any telecom stocks?

  • Andrew F December 13, 2010, 7:15 pm

    FT:

    Since you plan to keep your investment loan, any thoughts on refinancing it with a new mortgage to save on interest costs? You trade off your option to repay the loan in full at any time, but since you are a buy-and-hold investor, this shouldn’t be a problem.

  • FT FrugalTrader December 13, 2010, 8:30 pm

    @Jungle, I’m not a big fan of telecoms in Canada as they are facing increasing competition. However, if I were to own one, it would be Telus at an attractive valuation.

    @Andrew, that’s not a bad idea! The only issue with a new mortgage is that a portion of the payment would go towards principal. My HELOC rate is pretty good which is @ prime. With the tax deduction, it’s a very cheap loan.

  • FT FrugalTrader December 13, 2010, 8:36 pm

    @Querysmith – you can hold some cash as long as it’s intention is to be invested in the very near future. At least that is my understanding.

  • Andrew F December 13, 2010, 9:04 pm

    FT:

    You could pay the mortgage with your HELOC. You should be able to save 85 bpp.

  • qubikal December 13, 2010, 11:45 pm

    FT – can you share where you got your HELOC at prime? my HELOC was prime before the financial crisis, then it went up to P+1% and has dropped to P+.5% since.

  • zdad December 14, 2010, 12:39 am

    I see you do not hold any U.S. stocks in your SM Portfolio. I realize that by holding Canadian dividend stocks you are taking advantage of the dividend tax credit. But considering the limited number of Canadian Dividend stocks worth investing in, would it not be a good idea to include some US dividend stocks.

    or is them some other reason that i am missing?

  • Andrew F December 14, 2010, 12:59 am

    zdad: He looks at all of his accounts as one big portfolio. So his US equity exposure is placed where it makes the most sense from a tax perspective, in his RRSP account where his dividend income is not subject to withholding tax.

  • zdad December 14, 2010, 1:11 am

    Andrew F – thank you for your reply. Generally right now my RRSPs are in mutual funds. I haven’t been able to pull the trigger and sell and by individual stocks within the RRSP.

    I do have cash accumulating, and I wanted to start a portfolio of dividend equities which included U.S. stocks.

    Is this generally a hard and fast rule that you should always hold U.S. dividends stocks within RRSP?

  • $ave December 14, 2010, 1:35 am

    Good post: I also am building a portfolio of 20 dividend stocks at $10000 each. These dividends will help fund my retirement and when I go to the stock market in the sky, my kids will be able to get money from daddy each month.
    I am currently watching pbn,day,hse. or waiting for a drop in July or in Oct.
    Keep up the good posts.

  • Bupp December 14, 2010, 2:02 am

    +1 to andrew’s recommendation of changing your investment line of credit into a mortgage. You might even consider locking into a 5-year fixed rate since they are so low.

  • FT FrugalTrader December 14, 2010, 8:55 am

    @qubikal, I have the bmo readiline mortgage with a HELOC @ prime. For some reason or another, the rate did not change during the credit crisis but I’m not complaining. :)

  • QCash December 14, 2010, 1:17 pm

    @Future Money Bags – If you look at your entire investment portfolio as one large account, you want to try to maximize the tax advantage of the RRSPs, TFSAs and non-registered. In this case, you may want to consider putting US Dividend payers in your TFSA (which is maxed out at $15,000 as of next year) as they don’t provide any tax credit. The ideal situation (IMHO) is to keep your (canadian) dividend paying investments in the non-registered, interest paying in the RRSP and American paying in the TFSA.

    @$ave – keep in mind that once you reach retirement, the dividend up-lift will affect your income for OAS purposes. So even if you only get $60,000 in dividends, CCRA is going to think you are getting an extra 45% for income-contingent benefits.

    FT – Now that your mortgage is paid off, it is not really a Smith Manoeuvre any more, it is just an investment loan ;-)

    Cheers

    Q

  • FT FrugalTrader December 14, 2010, 5:29 pm

    @QCash, lol, yes indeedy. I’m guessing that your portfolio has rebounded nicely since the lows of 2009? Did you buy more BMO at the bottom?

  • Andrew F December 14, 2010, 6:31 pm

    QCash:

    Just a mild correction. FT has an article on this topic. You have RRSP and TFSA flipped. In TFSA, US dividend payers still have 15% with-holding tax that does not apply in RRSP. So US dividend payers are better in RRSP and fixed income in TFSA.

  • krantcents December 14, 2010, 11:05 pm

    Your choices are interesting! The yield on your investments probably cover the net interest you are paying on your HELOC. In spite of that, I don’t like the idea of using borrowed money to make investments. To be more specific, using a HELOC to fund stock market investments bothers me. If you can sleep at night, good for you.

  • Doctor Stock December 15, 2010, 4:00 am

    Thanks for the post… an interesting read. Hey, have you thought about updating your comparison of Canadian discount brokerages? I’d be interested in seeing the new figures.

  • QCash December 15, 2010, 7:49 am

    AndrewF. Duly noted. Thx. My bad.

  • Future Money-Bags December 17, 2010, 10:16 pm

    non reg account = canadian dividends
    RSP = US Dividends
    TFSA = ?

    I still need to do some more research before making any buys obviously. Just trying to see the maximum benefits of each type of investment holder.

    What would you reccomend reading to help clear this up for me?
    Example: Which investments to hold in a tfsa, in an RSP, or in a non reg account?

    Thanks a million (or more)

  • Future Money-Bags December 17, 2010, 10:23 pm

    I read the couch potato portfolio, and that makes some more sense. Helps to have it cleared up. I want to fully understand what I am doing, before I do it. Sure I learn from mistakes, but why not make it someone else’s mistakes? :)

  • FT FrugalTrader December 18, 2010, 8:58 am

    @FMB, this article on portfolio allocation may help.

  • Future Money-Bags December 18, 2010, 9:20 am

    Ah yes that did help. (I read it in the past but it sure helps to read it a couple more times). Also Qcash’s portfolio.

    More great posts in the year to come!

  • Derek February 27, 2011, 5:48 pm

    Are these returns of yours

    “Total Cost Base of Equities (inc. fees): $43,837.14
    Market Value of Equities (Dec 10, 2010): $48,143.90”

    factoring in what you paid in interest, claimed as a deduction and received back as a ‘tax rebate’ included in this amount? Wasn’t sure if thats what ‘inc fees’ included?

    based on your above calculations it looks like with your 43% or so tax bracket its likely that loan is -1.71% drag on return with interest rates where they are? Would that make a real dividend yeild more like 2.53%?

    I am in the praries (MB), but i thought that if your only income was dividends you could have a much higher income ($90k) before paying any large amount of tax… assuming 0 other income and all Canadian dividends.

    Your holdings are heavy financial and missing some other good alternative trusts: YLO, ARE, NWF, RSI, ACO.X, SC, ECA, RON, CLC. Of course not all are super attractive right now, but most are worth addign to watch lists.

    Ever thought of buying bank preferred vs actual shares?

    thanks

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