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Smith Manoeuvre Portfolio – February 2013

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.

It has been about six months since the last update (August 2012) with a bit of activity in the leveraged portfolio.  I didn’t add to any existing positions, but added a few new positions.    I started new positions in SNC Lavalin Group, Crescent Point Energy, Bird Construction, and Calian Technologies.

Since this portfolio is focused on dividend growth stocks, which dividend paying companies increased their distributions since the last update?  I’m happy to report that several companies did, particularly the bank stocks.  In my portfolio, dividend increases came from:

  • Royal Bank, CIBC, Scotia Bank, Fortis, TransCanada Corp, Bank of Montreal, TD Bank, Enbridge, Canadian Utilities, Ensign Energy, Mullen Group, Rogers Communications, George Westin, Pason Systems, Thompson Reuters, and Canadian Oil Sands.

My dividend watch list remains similar where I am looking to increase my position in BMO, TD, ENB, FCR and possibly add new positions in Canadian National Railway (CNR), Bell Aliant (BA), Potash Corp (POT), Shoppers Drug Mart (SC) and Indigo (IDG) when/if their valuations become attractive.

The Smith Manoeuvre Portfolio as of February 18, 2013 (prior to open) – note that any changes to the portfolio are indicated in bold.

Stock Symbol Shares Avg Buy Price Total Div/Share Yield
Royal Bank RY.T 100 $48.39 $4,838.99 $2.40 4.96%
CIBC CM.T 45 $67.14 $3,021.25 $3.76 5.60%
Power Financial PWF.T 105 $35.14 $3,689.65 $1.40 3.98%
Scotia Bank BNS.T 105 $41.91 $4,400.52 $2.28 5.44%
Manulife Financial MFC.T 125 $33.12 $4,139.48 $0.52 1.57%
Fortis Properties FTS.T 150 $25.63 $3,843.98 $1.24 4.84%
TransCanada Corp TRP.T 100 $33.50 $3,349.74 $1.84 5.49%
AGF Management Limited AGF.B.T 50 $22.71 $1,135.49 $1.08 4.76%
Bank of Montreal BMO.T 25 $44.17 $1,104.24 $2.88 6.52%
Husky Energy HSE.T 135 $32.53 $4,391.27 $1.20 3.69%
TD Bank TD.T 50 $48.24 $2,412.23 $3.08 6.38%
Enbridge ENB.T 80 $18.43 $1,494.39 $1.26 6.75%
TransAlta TA.T 50 $21.47 $1073.49 $1.16 5.40%
First Capital Realty FCR.T 160 $9.71 $1,555.20 $0.84 8.65%
Canadian Utilities CU.T 50 $36.40 $1,819.99 $1.94 5.33%
Ensign Energy Services ESI.T 200 $14.98 $2,995.98 $0.44 2.94%
Mullen Group MTL.T 100 $14.54 $1,453.98 $1.20 8.25%
Rogers Communications RCI.B.T 100 $34.39 $3,439.48 $1.74 5.06%
George Westin Ltd WN.T 50 $68.64 $3,441.99 $1.52 2.21%
Pason Systems PSI.T 200 $13.97 $2,793.98 $0.48 3.44%
Corus Entertainment CJR.B.T 100 $19.87 $1,996.99 $0.96 4.81%
Thompson Reuters TRI.T 90 $33.40 $3,006.18 $1.30 3.89%
Brookfield Properties BPO.T 150 $16.01 $2,401.23 $0.56 3.50%
Canadian Pacific Railway CP.T 30 $53.90 $1,626.99 $1.40 2.58%
Canadian Oil Sands COS.T 150 $19.14 $2,871.48 $1.40 7.31%
Leons Furniture LNF.T 200 $12.06 $2,412.98 $0.40 3.32%
Encana ECA.T 100 $18.82 $1,881.99 $0.80 4.25%
Transcontinental TCL.A.T 200 $11.32 $2,263.98 $0.58 5.12%
Calfrac Well Services CFW.T 50 $23.00 $1,149.99 $1.00 4.35%
Baytex Energy Corp
BTE.T 35 $42.98 $1,504.14 $2.64 6.14%
Finning International FTT.T 100 $24.10 $2,409.99 $0.56 2.32%
SNC Lavalin Group SNC.T 50 $38.55 $1,927.49 $0.88 2.28%
Crescent Point Energy CPG.T 50 $37.13 $1,856.49 $2.76 7.43%
Bird Construction BDT.T 150 $13.91 $2,085.99 $0.72 5.18%
Calian Technologies CTY.T 100 $20.88 $2,087.99 $1.12 5.36%

More Stats

  • Total Cost Base of Equities (inc. fees): $91,652.20 (vs. $79,921.26)
  • Market Value of Equities (not including dividends or cash):  $109,586.40 (vs. $87,749.55)
  • Total Dividends / Year: $4,212.34 (vs. $3,499.04)
  • Portfolio Dividend Yield: 4.60% (vs. 4.38%)

Sector Allocation (based on market value)

  • Financials:  26.42% (vs. 30.96%)
  • Utilities:  8.58% (vs. 8.43%)
  • Energy:  31.28% (vs.  29.89%)
  • Resources:  0.00% (vs. 0.00%)
  • Real Estate:  5.14% (vs. 4.95%)
  • Consumer/Telecom:  14.12% (vs. 14.13%)
  • Other: 14.45% (vs. 11.65%)

Common Questions:

Why the high concentration in financials and energy?

With regards to sector allocation, you may notice that this portfolio is fairly concentrated in financials and energy.  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.

Why don’t you use a dividend ETF instead?

Couple of reasons, first, most Canadian dividend ETFs hold stocks that distribute return of capital which can affect the tax deductibility of the investment loan.  Second, the MER eats into the dividend.  I keep the expenses in this portfolio very low through buying but rarely selling.

Should I start the Smith Manoeuvre?

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 during 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?”

Disclaimer: The securities mentioned in this post are not recommendations to buy or sell and should be used for informational purposes only.







16 Comments, Comment or Ping

  1. 1. Jungle

    After you own the banks, a railway, telecom and pipeline, maybe some oil, I find it hard to keep adding new Canadian companies because we don’t have the selection and other companies, like the us does.

    I recently added THI and TD for dividend growth, but really I am going to stop adding new Canadian companies and start adding US ones in our rsp.

    BTW do you not drip? You can easily get another 1-3% in annual dividend growth, with most shares.

  2. 2. Echo

    @Jungle – In the grand scheme of things these positions are rather small so rather than continuing to search under rocks for Canadian dividend payers I would add to the existing positions as they become more attractively priced. Sometimes that means waiting awhile.

  3. 3. Sarlock

    When the main purpose is tax deductibility, you want the Canadian dividend stocks for this purpose unfortunately. Do as Echo says, just increase your holdings of companies that you already have.
    As for a drip approach, that can work… but you can just as easily turn your dividend income over in to new purchases as well and accomplish the same thing. And perhaps better because you can optimize your purchases with price swings.

  4. @Jungle, Yes, I agree about the lack of selection of Canadian stocks. I keep my US dividend payers in my RRSP. I do not DRIP simply for the fact of the paperwork involved for tax time (if i sell). I would need to track the adjusted cost base for every DRIP, which means every quarter.

    @Echo @Sarlock, yes, i’ve also come to the conclusion that adding is likely a better bet at this point. However, it’s difficult to find value in this market!

  5. You’ve mentioned before that you have a watchlist and you buy in when those stocks look good – what are you looking for before you buy? A specific dividend yield?

  6. Do you feel that 35 positions is becoming over diversified? Have you thought about trimming the herd? Some of these companies have great value (Banks, Bird, Shoppers, Thomson Reuters) but some are definitely potential dogs, like AGF and Transalta.

  7. 7. Danielle

    I noticed an average price of $53 for CP Rail – well done! It is close to $119 now and is expected to go north of $120

  8. 8. Sarlock

    The oil sands stocks are suffering right now due to lack of pipeline space to reach markets and get a higher price for their product. I expect these problems to be resolved over the next 2-3 years and as projects get approved and constructed the prices will react accordingly. Could be a good buying opportunity at these prices and yields.

  9. 9. Investor2

    Hello,

    I noticed that this portfolio is not exposed to the materials sector, but is overweight utilities and telecom relative to the TSX sector makeup. What was your motivation for leaving the materials sector out of this portfolio?

    Thanks

  10. 10. Sensei

    Might be a silly question, but, when you say “buying and rarely selling”, are you by any chance automating your investment by buying a fixed amount at a set frequency?

    Thanks,
    Sensei

  11. 11. Doug Willson

    I can’t believe you still don’t have Computer Modelling Group which is on the brink of hitting $1B and it is 25th largest software company in Canada.

    Spectacular growth in the stock, profit and the dividend!

  12. 12. Jim

    Hi ….thanks for the great information….but why no BCE ? thx again,Jim

  13. 13. Michael

    Hi FT.

    Maybe a stupid question but for instance.

    I can currently get a HELOC @ prime (3.00%).
    And then i create a portfolio similar to yours which yields 4.6% dividend.
    Then next year, they raise the prime rate to 4.00% (hypothetically), and the unfortunately dividend yield decreases to below prime, then you’d be negative right?

    this is ignoring any capital gain or loss that might have occurred on the leverage portfolio.

    have this ever happened to you?

    thanks,

    Mike

  14. @Michael, you’ll need to calculate your after tax interest rate, and the rate that you’ll pay on your dividends. Even if you are negative, the spread between those two rates will buffer the loss. My portfolio hasn’t gone negative “yet”, as rates have been low over the past several years. However, if rates do spike, then I’ll likely start paying down the investment loan with savings.

  15. 15. Michael

    Thanks FT, i forgot about the tax rebate on the interest. since my marginal interest rate is 46.41%, my real interest paid after the tax credit is actually only 1.6077% on a 3% HELOC!

  16. 16. Joe

    I have been reading about the manuver and they advocate monthly dividends and reinvesting the dividend after paying off the interest mthly. Are you not missing out by going quarterly? Also have you looked at the Quadrainvest products? Especially PDV? Are these returns on capital as well?

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