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Smith Manoeuvre Portfolio – May 2012

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’s been almost half a year since the last update (Dec 2011) with a bit of activity in the leveraged portfolio.  We have added to a couple of our existing positions, and added a couple more new positions.   With the TSX in negative territory year to date, it’s a tough time to write this report as everything is down!  But despite the market volatility, I’m happy to report that several of our picks have increased their dividend in the first half half of 2012.

So which dividend paying companies increased their distributions thus far in the year?  In my portfolio, I have Royal Bank, Scotia Bank, TransCanada Corp, TD Bank, Canadian Utilities, Rogers Communications, Pason Systems, Corus Entertainment, Thompson Reuters, Canadian Pacific Railway,  and Canadian Oil Sands.

What did I buy over the past few months?  I added to a couple of my existing holdings, namely, Pason Systems and Leons Furniture.  New positions include Encana and Transcontinental which has already increased their dividend since purchasing.

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 TMX Group (X), Bonterra Energy (BNE), Canadian National Railway (CNR) and Bell Aliant (BA) when their valuations become attractive.

The Smith Manoeuvre Portfolio as of May 14, 2012 (prior to open):

Stock Symbol Shares Avg Buy Price Total Div/Share Yield
Royal Bank RY.T 100 $48.39 $4,838.99 $2.28 4.71%
CIBC CM.T 45 $67.14 $3,021.25 $3.60 5.36%
Power Financial PWF.T 105 $35.14 $3,689.65 $1.40 3.98%
Scotia Bank BNS.T 105 $41.91 $4,400.52 $2.20 5.25%
Manulife Financial MFC.T 125 $33.12 $4,139.48 $0.52 1.57%
Fortis Properties FTS.T 150 $25.63 $3,843.98 $1.20 4.68%
TransCanada Corp TRP.T 100 $33.50 $3,349.74 $1.76 5.25%
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 $2.80 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 $2.88 5.97%
Enbridge ENB.T 80 $18.43 $1,494.39 $1.13 6.05%
TransAlta TA.T 50 $21.47 $1073.49 $1.16 5.40%
First Capital Realty FCR.T 160 $9.71 $1,555.20 $0.80 8.24%
Canadian Utilities CU.T 50 $36.40 $1,819.99 $1.77 4.86%
Ensign Energy Services ESI.T 200 $14.98 $2,995.98 $0.42 2.80%
Mullen Group MTL.T 100 $14.54 $1,453.98 $1.00 6.88%
Rogers Communications RCI.B.T 100 $34.39 $3,439.48 $1.58 4.59%
George Westin Ltd WN.T 50 $68.64 $3,441.99 $1.44 2.09%
Pason Systems PSI.T 200 $13.97 $2,793.98 $0.44 3.15%
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 $1.28 3.83%
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 $1.25 6.53%
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.B.T 100 $12.72 $1,217.99 $0.58 4.56%

More Stats

  • Total Cost Base of Equities (inc. fees): $73,865.15 (vs. $68,093.19)
  • Market Value of Equities (Closing May 11,  2012 – not including dividends or cash): $81,099.70 (vs. $73,429.05)
  • Total Dividends / Year: $3,195.23 (vs. $2,897.03)
  • Portfolio Dividend Yield: 4.33% (vs. 4.25%)

Sector Allocation (based on market value)

  • Financials:    30.48% (vs. 32.22%)
  • Utilities:    11.73% (vs. 12.38%)
  • Energy:    29.40% (vs.  28.01%)
  • Resources:    0.00% (vs. 0.00%)
  • Real Estate:    7.05% (vs. 7.12%)
  • Consumer/Telecom:     13.99% (vs. 14.27%)
  • Other: 7.36% (vs. 6.01%)

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.

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 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?”   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.

{ 18 comments… add one }
  • Steve @ Grocery Alerts Canada May 14, 2012, 4:45 pm

    Are you still bullish with Rogers being able to pay out dividends at their current ratio?

    They have closed several websites online and laid of hundreds of staff.

    Why do you have this stock over Telus?

  • emilio May 14, 2012, 5:35 pm

    Hi FT,

    Very interesting collection of stocks you got there.

    I am curious as to how much interest are you currently paying for this loan?

    Also, after all of this work what is the total yearly profit after tax.

    It seems very labor intensive to manage all those stocks (in such small quantities), and I am left wondering whether this excercise pays more than minimum wage…

    Can one generate similar profits by taking a second job at a Starbucks on the weekends, and avoiding a huge level of risk? (TSX has potential to drop by 50% in a matter of few months)

  • Howard Hare May 14, 2012, 6:13 pm

    Why not just buy an ETF like XDV, most of those stocks are in it, lot less headaches?
    Moi. I hold XDV, CDZ, XCB and XTR

  • ExpectingFather May 15, 2012, 12:51 am

    Howard, I think this would explain why ETFs like yours are not a good choice for the SM.

    http://www.milliondollarjourney.com/why-i-dont-use-a-dividend-etf-for-my-leveraged-portfolio.htm

    I am like FrugralTrader here. I only hold dividend paying stocks in my SM.

  • safesidetrader May 15, 2012, 12:53 am

    I just stumbled upon this site and there is a lot of great info. But wow!, it seems super risky what you are doing! Frugaltrader may not be an accurate name for you. But I don’t know so much about this stuff, just wondering what a neebie like me can do with say $10K (a manageable number for me). anyone?

  • FT FrugalTrader May 15, 2012, 9:01 am

    @ExpectingFather, thanks for sending the link.

    @Steve, I’m not sure, if they end up cutting their dividend, I will likely sell the stock.

    @Emilio, the interest on the HELOC is at prime 3% of which 40% is tax deductible. Basically, the portfolio pays for itself. As well, I buy and hold forever (unless a stock cuts their dividend) so it requires very little work. I don’t think I’ve spent an hour in total on the portfolio year to date.

    @safesidetrader, it really is all about risk tolerance. I started this portfolio at the height of 2008, so I’ve seen this portfolio get decimated. However, I simply held through it all and it has bounced back nicely.

  • On Demand May 15, 2012, 11:28 am

    Hi FT,

    Will you still hold on the stock if they cut their dividend but still above 5% after the cut? Just to see what triggers your sell button. Thanks.

  • Andrew F May 15, 2012, 1:02 pm

    This is no longer a ‘Smith Maneouver’ portfolio, since you have paid off your mortgage. It is just a leveraged investment portfolio.

    Also, your main reason for using stocks over ETFs (return of capital) seems to no longer be an issue, since you do not need to withdraw income to repay your mortgage.

  • Meghan May 15, 2012, 1:44 pm

    Do you hold any US dividend stocks? I just started a leveraged portfolio of dividend stocks (Canadian stocks in a Scotia iTrade account) and I’m thinking about adding some US dividend stocks for diversity. I’m wondering what the problems with this might be or if it is something to be avoided. Any advice from other other readers would be greatly appreciated.

  • Meghan May 15, 2012, 1:53 pm

    @safesidetrader

    I’m a relatively new investor, about 40K in investments, with a small amount (under 10K) as a leveraged investment portfolio. My recommendation is to start out buying a few ETFs that cover different indexes. You might want to get 3 or 4 putting an even amount of money in each one. As you add more money to your account you can add one or two more ETFs. You can find good recommendations for ETFs on this website, or on the Money Sense website. Some other readers might have useful suggestions for where to find more information. I wouldn’t leverage your investments if you only have a small amount of cash to invest, just focus on building up your portfolio of ETFs until you feel comfortable taking on some added risk by leveraging. But you will need to open up a separate brokerage account for your leveraged portfolio when you decide to go that route.

  • Goldberg May 15, 2012, 3:37 pm

    I would agree that ETFs are good for people who don’t know what they are doing and who, otherwise, should not be in the market. For these people, ETFs are better than mutual funds!

    Having said that, ETF cost you money (about 0.5% every year – or about $400 a year for a portfolio of this size).

    If you don’t trade but simply buy-and-hold dividend stocks over decades. The above portfolio is much better and provide the same diversification.

    It also ables someone to ignore certain stocks the owner could be uncomfortable with. For example an ETF could hold Goldcorp yet you could be uncomfortable with such a volatile business considering your long-term holding goal and the possible “bubble.”

    Not saying that Goldcorp trading at P/E of 8 and paying a nice dividend doesn’t make sense.

  • Jaclyn May 15, 2012, 4:12 pm

    @ Meghan
    Dividend stocks are good if you want a constant cash flow, but this does not necessarily mean that the company will provide you with a high return overall. The good thing about a company paying out dividends, is it shows the health of the company, however you have to ask yourself whether or not it is in your best interest for the company to keep earnings to reinvest in net positive projects, for the potential of a higher overall return, or if you would rather a few bucks in your pocket each year.

  • Meghan May 16, 2012, 9:03 am

    @Jaclyn, I’m a bit confused by your response since it doesn’t seem to address either of my comments. But since you bring up the issue, yes, I realize that you have the option to invest in stocks that pay a return via dividends vs. companies who choose to reinvest profits back into the company (which would provide a return via capital gains). But since we are talking about leveraged portfolios, you need to follow the CRA’s guidelines in order to claim the interest on your loan as a tax deduction.

    The CRA states that you can claim “most interest you pay on money you borrow for investment purposes, but generally only as long as you use it to try to earn investment income, including interest and dividends. However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid.” (Line 221)

    The CRA is pretty loose in their interpretation on this, for example, if a company does not currently pay a dividend, but you know it will in the future, I believe they will allow you to claim the interest on the investment loan (at least that’s what they told me when I called). But if there is no reasonable possibility that the company will be paying dividends in the future, than it is not a good idea to hold the stock in your leveraged portfolio IMO.

  • FT FrugalTrader May 16, 2012, 9:50 am

    @On Demand, that is tough to say, I would need to see their reasons for the dividend cut and their guidance going forward. If it’s a small cut, then I may just hold.

    @Andrew, I like having the flexibility of withdrawing from the portfolio without having to worry about taxation issues. Eventually, I will use the portfolio to pay for expenses.

    @Meghan, I hold my US dividend stocks in my RRSP for taxation purposes. Check out my post on portfolio allocation.

  • My Own Advisor May 16, 2012, 11:41 pm

    Great update.

    ESI has started to tank, might be time to get more shares

    Thoughts?

    I’m thinking of starting a position in this drilling company.

  • jet May 29, 2012, 6:19 am

    FT I like your posts but Iam not sure about this one but best of luck to you

    Being to stomach a 20 -30 % drop in the portfolio I dont think will cut.

    Realisticaly I think more like being able to stomach a 90% drop in the portfolio & more like 25 years for recovery is more practical. like the 89% drop from 1929-1932 that took about 25 years to recover. ( this bubble is bigger & if it goes higher it will suck in more money & set a bigger trap

    In fact if the stock market does like gold did years ago it could drop in value for a 100 years.

  • FT FrugalTrader May 31, 2012, 10:41 am

    @jet, don’t you think that’s a little pessimistic? My thoughts are that March 2009 lows will be hard to beat.

  • Nathan July 28, 2012, 11:55 am

    @FT, I’m wondering why you’re showing AGF.B as a market value of $1,135.49 for 50 shares? The share price on May 14 was $12.84, which would make your 50 shares worth $642.00. Do you think their dividend yield of 9.14% is sustainable?

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