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Smith Manoeuvre/Dividend Portfolio Update – Q1 2015 Update – The Oil Plunge!

For those of you just joining us, listed 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 started this portfolio in 2008 (at the height of the market) and write updates every quarter (or so) 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 brokerages.

Since the last update (August 2014), oil prices have plunged about 50% which has heavily impacted this portfolio (see numbers below).  While I realized that this portfolio was heavy in energy stocks, what I didn’t pay much attention to is how much of my portfolio was in energy “services”.  Companies in my portfolio like Ensign Energy, Calfrac Well Services, Pason Systems and Mullen Group, are all in that category, which were hit the hardest from the energy market sell off.

What am I going to do?  While some investors would sell off energy services stocks, they have maintained their dividend (so far), which means I will continue to hold.  In fact, I’ve added to my Pason Systems position.  What allows me to be patient during times like this is my focus dividend income rather than portfolio value.  While it still hurts to see the portfolio fluctuate manically to the downside, I believe that it will recover over time.

New/Added positions:

  • No new positions in this portfolio.  I have been initiating new positions to my corporate dividend portfolio instead.
  • I added to my Pason Systems position.

Dividend growth:

Since this portfolio is focused on dividend growth stocks, the portfolio did not disappoint where a significant number of dividend paying positions increased their distributions since the last update.  The dividend increases came from:

  • CIBC (CM), Bank of Montreal (BMO), Royal Bank (RY), TD Bank (TD), Scotia Bank (BNS), Fortis Properties (FTS), Manulife Financials (MFC), TransCanada Corp (TRP), Enbridge (ENB), First Capital Realty (FCR), Canadian Utilities (CU), Ensign Energy Services (ESI), Rogers (RCI.B), Pason Systems (PSI), Corus Entertainment (CJR.B), Thompson Reuters (TRI), SNC Lavalin (SNC), Potash Corp (POT), Emera (EMA), and BCE Inc (BCE).

Dividend Cuts:

One thing I do not like to see in this portfolio are dividend cuts.  Some energy stocks had high yields even before the oil correction, so some dividend cuts were inevitable.  Some of these cuts include:

  • Canadian Oil Sands ($1.40 to $0.20);
  • Baytex Energy ($2.88 to $1.20); and,
  • Major Drilling Group ($0.10 to $0.04).

Watch List:

My dividend watch list remains similar where I am looking to increase my positions in CU, IMO, SNC (pricing is starting to get attractive), TD and possibly add new positions in Cineplex (CGX), and Canadian National Railway (CNR) when/if their valuations become attractive (let me know if there are any ideas that I’m missing out on).

Despite the large dividend cuts and no new capital added to the account (cash generated from dividends are used to reinvest), as of today, this portfolio generates about $5,635 / year in Canadian eligible dividends, compared to around $5,603 in the fall.

In the near future, I may provide portfolio income updates based on all portfolios to get a better idea of our journey towards financial freedom.

The Smith Manoeuvre Portfolio as of March 9, 2015 (prior to open) – note that any changes to the portfolio are indicated in bold.  Also note that the yield displayed below is the “yield on cost” which is the current dividend rate on my original cost.  I display this to illustrate the power of dividend growth over time.

 

Stock Symbol Shares Avg Buy Price Total Div/Share Yield
Royal Bank RY.T 100 $48.39 $4,838.99 $3.08 6.36%
CIBC CM.T 45 $67.14 $3,021.25 $4.24 6.32%
Power Financial PWF.T 155 $32.11 $4,976.64 $1.40 4.36%
Scotia Bank BNS.T 105 $41.91 $4,400.52 $2.72 6.49%
Manulife Financial MFC.T 125 $33.12 $4,139.48 $0.62 1.87%
Fortis Properties FTS.T 150 $25.63 $3,843.98 $1.36 5.31%
TransCanada Corp TRP.T 100 $33.50 $3,349.74 $2.08 6.21%
AGF Management Limited AGF.B.T 50 $22.71 $1,135.49 $1.08 4.76%
Bank of Montreal BMO.T 45 $54.97 $2,473.83 $3.20 5.82%
Husky Energy HSE.T 135 $32.53 $4,391.27 $1.20 3.69%
TD Bank TD.T 100 $24.12 $2,412.23 $2.04 8.46%
Enbridge ENB.T 130 $28.39 $3,690.38 $1.86 6.55%
TransAlta TA.T 50 $21.47 $1,073.49 $0.72 3.35%
First Capital Realty FCR.T 222 $11.72 $2,601.03 $0.86 7.34%
Canadian Utilities CU.T 100 $18.20 $1,819.99 $1.18 6.48%
Ensign Energy Services ESI.T 200 $14.98 $2,995.98 $0.48 3.29%
Mullen Group MTL.T 200 $17.98 $3,596.97 $1.20 6.67%
Rogers Communications RCI.B.T 125 $36.25 $4,530.97 $1.92 5.30%
George Westin Ltd WN.T 50 $68.64 $3,441.99 $1.68 2.44%
Pason Systems PSI.T 250 $15.59 $3,897.97 $0.68 4.36%
Corus Entertainment CJR.B.T 150 $21.67 $3,250.98 $1.14 5.26%
Thompson Reuters TRI.T 90 $33.40 $3,006.18 $1.34 4.01%
Brookfield Properties  (sold in 2013 due to acquisition) BPO.T 150 $16.01 $2,401.23 $0.56 3.50%
Canadian Pacific Railway CP.T 30 $54.23 $1,626.99 $1.40 2.58%
Canadian Oil Sands COS.T 150 $19.14 $2,871.48 $0.20 1.04%
Leons Furniture LNF.T 200 $12.06 $2,412.98 $0.40 3.32%
Encana ECA.T 100 $18.82 $1,881.99 $0.28 1.49%
Transcontinental TCL.A.T 200 $11.32 $2,263.98 $0.64 5.65%
Calfrac Well Services CFW.T 300 $12.12 $3,635.98 $0.50 4.13%
Baytex Energy Corp
BTE.T 35 $42.98 $1,504.14 $1.20 2.79%
Finning International FTT.T 200 $22.95 $4,589.98 $0.71 3.09%
SNC Lavalin Group SNC.T 50 $38.55 $1,927.49 $1.00 2.59%
Crescent Point Energy CPG.T 50 $37.13 $1,856.49 $2.76 7.43%
Bird Construction BDT.T 250 $13.12 $3,280.98 $0.76 5.79%
Calian Technologies CTY.T 150 $20.55 $3,082.98 $1.12 5.45%
Imperial Oil IMO.T 50 $42.81 $2,140.49 $0.52 1.21%
Potash Corp POT.T 100 $37.64 $3,763.98 $1.52 4.04%
Emera Inc EMA.T 100 $31.05 $3,104.98 $1.60 5.15%
BCE Inc BCE.T 50 $41.68 $2,083.99 $2.60 6.24%
Major Drilling Group MDI.T 450 $7.71 $3,467.98 $0.04 0.52%
Bombardier Inc BBD.B.T 600 $3.58 $2,145.99 $0.10 2.80%
Teck Resources TCK.B 100 $25.58 $2,567.99 $0.90 3.50%

More Stats

  • Total Cost Base of Equities (inc. fees): $124,486 (vs. $121,996)
  • Market Value of Portfolio:  $153,981 (vs. $164,701)
  • Total Dividends / Year:  $5,635 (vs. $5,603.03)
  • Portfolio Dividend Yield on Cost: 4.53% (vs. 4.59%)
  • Portfolio Dividend Yield: 3.72%

Sector Allocation (based on market value)

  • Financials:  24.03% (vs. 23.12%)
  • Utilities:   9.63% (vs. 7.79%)
  • Energy:   25.51% (vs. 30.38%)
  • Resources:  3.10% (vs. 4.04%)
  • Real Estate:  2.88% (vs. 2.56%)
  • Consumer/Telecom: 14.98% (vs. 13.19%)
  • Other: 19.87% (vs. 18.91%)

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, I consider this account to be my Canadian exposure (which is mostly financials and energy) and my US, international and other sector equity exposure 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 occasional 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.

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FrugalTrader About the author: FrugalTrader 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.

{ 41 comments… add one }
  • Le Barbu March 9, 2015, 12:07 pm

    I finaly implemented a kind of SM buying 95k$ of ZCN in January. My HELOC was 130k$ and increase by 20k$ every year. I intend to buy another 20-25k$ next year. The MER represent only 50$/year (0.050% for ZCN) and the “low” dividends of 2.52% will not hurt my tax bill to much. I capitalize the interests so they don’t affect my cashflow. Once a year, by the end of february, I just have to get the report issued by CDS Innovations to help filling my taxes and to know if there is a ROC distribution. As an example, this year cash ROC was about 8$ for 5000 shares.

    Thank you FT for all the informations related to SM and keep up!

  • Dan @ Our Big Fat Wallet March 9, 2015, 3:37 pm

    Looks like a solid portfolio overall. It sucks to see good companies like COS go down so drastically. I think everyone is seeing some red from the recent oil slide. Have you considered buying RioCan (REI.UN)?

  • Le Barbu March 9, 2015, 3:42 pm

    REI.UN distribution includes 51.95532% of ROC (2014)…

  • Erik March 9, 2015, 10:16 pm

    Heads up, AGF.B’s dividend is also set to take a hit.

  • FrugalTrader FrugalTrader March 9, 2015, 10:20 pm

    Thanks for the comments guys. We do own a significant amount of REI.UN, but held in our TFSAs.

  • Al March 10, 2015, 12:51 am

    Watching the TSX has just been painful as of late. My international stocks in my RRSP are doing fairly well, but my corporate ETFs are sucking majorly.

    Modified “somewhat of a Smith Maneuver investment LOC” 145K invested into 3 private mortgages is yielding 13.4% annually which is then invested into RRSPs to make the revenue tax neutral. This has been the real stud of my portfolio as of late.

  • Adam @ AdamChudy.com March 10, 2015, 1:07 am

    I’m highly leveraged to energy as well. It’s been a rough 6 months, but I keep adding as well as keeping them on DRIP. Just lets us accumulate shares cheaper.

  • SST March 10, 2015, 11:30 am

    @Al — can you provide any details on your private mortgage investments? Thanks.

  • SST March 10, 2015, 11:54 am

    I don’t see it mentioned any where, but it should be — different crude oil grades. The stuff that comes out of the oil sands, where many of the listed stocks get their revenue, is a lower grade oil product than the global benchmark price you see on the news (Brent/WTI). It’s usually priced $10-$15 below this benchmark. As well, all oil is priced in $US.

    Just something to think about if you are planning an oil play right now.

  • Al March 10, 2015, 2:34 pm

    Hi SST

    I’ve got 3 mortgages. A) 35k primary lender 12% interest only per annum 40% approx LTV, 1 yr term.

    B) 2nd mortgage 50k 15% interest only per annum, 50% total LTV, 1 yr term.

    C) Renovation loan 1/2 of 120k = 60k total, 13% interest only, 1 yr term. Have both house under renovation & investors primary residence tagged. 40% ltv for both properties

  • FrugalTrader FrugalTrader March 10, 2015, 2:36 pm

    @Al, what is the process of putting a lien on a property?

  • Al March 10, 2015, 4:18 pm

    The best way I’ve found is through a mortgage broker, they screen the applicants etc then handle all the legal stuff. You get a statement of all their debts paid off, registered mortgage against the deed & even get fire insurance policy made payable to you as first recipient.

    You fund the deal and 7-10 days later you get a big package in the mail with all the stuff mentioned above plus 12 post dated cheques.

  • FrugalTrader FrugalTrader March 10, 2015, 4:22 pm

    Thanks for the info Al. How does the broker get compensated?

  • Al March 10, 2015, 5:49 pm

    Broker is compensated via “finders fee” at the commencement of the mortgage. However reputable brokers will soon realize that the alternative investment crew is a small crowd and stinging an investor with a bad deal will kill repeat business.

  • SST March 10, 2015, 11:30 pm

    Because inquiring minds want to know…where are you located, Al?
    And would you be up for an email exchange re: investment information?

  • Ed Rempel March 11, 2015, 2:07 am

    Al,

    Do you get credit reports, net worth statements, proof of income and other details to support the credit-worthiness of the borrowers? If they are willing to pay very high interest plus the finders fee and registration fee, it would be important to know.

    Also, if the borrower decides not to pay you, will you buy out the first mortgage so that you can foreclose, or just wait with your lien to collect if and when the borrower ever sells?

    Ed

  • Al March 11, 2015, 9:43 am

    Credit reports, proof of income, list of current debts (net worth?), copy of pass port/. Drivers licence, all govt data on the property registered owner etc, fire insurance in your name, current appraisal (within past 60 days). The borrower knows they have to pay for the appraisal & service fees to get the loan administered (finders fee) and it’s included with the loan amount.

  • Dividend Growth Investor March 11, 2015, 1:48 pm

    Nice portfolio. Have you tracked how your dividend income has increased over time – I think it would be pretty motivating to see that in action over the past 6 – 7 years.

    Can you invest in foreign dividend paying stocks in this SM portfolio? I think many global companies would be a nice addition, add more diversification, and could be easily purchased on US exchanges.

    • FrugalTrader FrugalTrader March 11, 2015, 1:51 pm

      @DGI, thanks for stopping by. I have the numbers from previous updates, so maybe I’ll add a chart within these updates to show dividend growth in this account. I do hold US dividend achievers as well, but they are in my RRSP.

  • SST March 11, 2015, 3:52 pm

    Just by a general cursory look, I think the portfolio yield has remained fairly unchanged since inception, ~4%.

  • InvesturMTG March 11, 2015, 9:13 pm

    AL,

    Great info on the private mortgages. Generated some good Qs and As. Maybe someone could write an article about this subject FT?

    I have done these in the past and most have worked out. This is a more exotic product and the higher rate of return comes with higher _____. When they go wrong it can be a long and slow process to recover your interest owing, penalties, and even the principal. In the worse case if there is a problem with the property valuation, you might not get full principal back. Also, each province/state will have there own specific process for eviction and power of sale. Does the broker handle these issues or are you on your own?

    Adding mortgage to a portfolio makes lots of sense, but maybe when there is a higher NW? Make sure you do not need the monthly cheques to live on.

    Finally, the whole deal depends completely on the valuation of the property. If it is off or wrong, it might cost you dearly. Proceed with caution.

    h

  • Le Barbu March 12, 2015, 4:01 pm

    When capitalizing the interests only, does anyone ever faced questions or comments from his banker?

    i.e. “When do you intend to repay some capital, sir?” or “Since you maintain your HELOC to the eyeball all the time and just paying interests, our internal policy request we raise your interest rate, unfortunatly”

    Just wondering…

  • My Own Advisor March 12, 2015, 9:34 pm

    Keep staying the course FT, you know this much better than most :)

    Great work as usual and thanks for the update.

    Mark

  • Steve April 22, 2015, 7:29 pm

    BBD shares have taken a hit and no longer pay a dividend. It might be worth noting (I’m a shareholder too.) Also, I appreciate how you are sharing your real life example of the Smith Maneuver and how it can be implemented. The knowledge I’ve gained has definitely increased my confidence for when/if I ever take the plunge into the wonderful world of leveraged investing.

    Thanks!

    • FrugalTrader FrugalTrader April 23, 2015, 9:55 am

      Thanks for the update Steve. I picked up BBD mostly on speculation, I will be reviewing this holding in the portfolio, and perhaps reduce or cut it. Same for tck.b.

  • Matthew Mantle April 23, 2015, 11:53 am

    Hi FT,

    What’s your general comment or feeling on investing in dividends that are below your breakeven threshhold for the interest expense? Do you buy them with an expectation of growth over time? That capital gains will outpace sunk costs? That the other, higher dividends will make up for the drag?

    Just curious…

    Thanks,
    MM

    • FrugalTrader FrugalTrader April 23, 2015, 3:35 pm

      Hi MM,

      Generally, I wait for strong dividend payers to have a yield between 3 to 5% before buying them. There are times when I may purchase lower yielding companies, but I like to ensure that the overall portfolio remains between 3 and 5%.

  • PassiveAgressive April 25, 2015, 4:49 pm

    FT, I’m curious… if you were setting up your SM account today, would you consider VDY now that it exists? Seems to me like the very low MER (0.3%) and microscopic amount of ROC are more than offset by the advantages of better diversification and the possibility of commission-free purchases for semi-monthly DCA. Not to mention overall simplicity and time savings managing the portfolio!

    I’m a long time MDJ lurker and hardcore passive indexer. TBH, I find it perplexing that we have all drank the kool-aid with regards to actively managed mutual funds vs passive indexes, but for some reason, the group-think here favors individual stock picking for a dividend SM account. We seem to all be somewhat hypocritical on this… The index should outperform stock picking in the long run, no?

    • FrugalTrader FrugalTrader April 25, 2015, 5:15 pm

      Very valid points. I think that VDY is a great product. If you are comfortable with dealing with the ROC and a leveraged investment account, then go for it. For me, I’m comfortable with holding individual securities. However, a number of my non-leveraged portfolios are indexed, RESPs, my wife’s accounts, and a portion of my RRSP.

  • Justin Barracosa May 10, 2015, 5:59 pm

    May I ask, anyone willing to answer, the following question regarding any general patterns with respect to WHEN dividend cuts might come…in relation to stock pricing?
    For example: Obviously a dividend cut will “generally” come AFTER a drop in share price (for whatever reasons, just speaking generally).
    I often hear many individuals who would call themselves “Dividend Growth Investors” reference a portion of their “strategy” to often include purchasing shares in companies that have increased dividends by some amount for a certain amount of time.
    Generally, they also refer to a company cutting its dividends as a part of their criteria indicating that it’s time to sell (because they’ve now decided that said company is not REALLY dedicated to growing its dividend, and therefore is no longer suited to the DGI.
    The problem being, the realization of the cut is generally only seen AFTER an accompanying hefty capital loss on the market value of said shares.
    – How do DGIs “deal” here “generally”?
    – Take the loss of dividend and sell for a large capital loss?
    – Attempt to wait for the market value to return (and just accept the low dividend until the share price comes back up to even?
    – Does a dividend cut “generally” speed up the company’s ability to raise share price back due to them having more cash (by paying less dividend?)
    – Is a company like this “forever” ignored in the coming years, even if they reinstate the dividend?

    I know everyone’s “plans” are going to vary, so I’m just looking for some opinions!
    Thanks!

    • FrugalTrader FrugalTrader May 11, 2015, 10:17 am

      Justin, I think it really depends on the investor and the company itself. Dividend cuts do not happen often for true dividend growth all-stars, but it does happen. The one example I can think of is MFC in 2008/2009 where they reduced their dividend. I held onto the company due to the fact that believed that they would recover someday (still waiting). :) On the other hand, TCK.B which I believe eliminated their dividend, so I sold that position.

      If you are a DGI, then best to stick with companies that have a long track record if growing their dividends.

      • Justin Barracosa May 14, 2015, 1:06 pm

        Thank you for that reply, much appreciated!

        As a fairly new investor myself, I haven’t had the opportunity to experience many ups and downs in the market. Could you provide any insight as to whether a dividend reduction / elimination comes:
        • before a large drop in market price, (doubtful) or
        • after a drop in market share price

        In anyone’s experience, does the “free’d – up” extra cash tend to speed up, or help normalize (bring share price back up) any faster? Faster than – for example – a company in the same sector and industry.

        For example: if Cenovus were to cut its dividend now, what effect on market share price (all else being equal) might that have…compared (for example) to suncor, supposing it did NOT cut its dividend?
        Effects now? A year from now?
        Thank you anyone for any wisdom and experience. I know that “past performance is no indication of future performance,” but you know what I mean, hopefully Lol :)

        • FrugalTrader FrugalTrader May 14, 2015, 1:21 pm

          @Justin, there are no hard and fast rules. Generally speaking, if the dividend company “surprises” the market with a dividend reduction, then the stock will generally go down. However, if the market expects a dividend cut (which will be priced into the stock price) because it will result in a more sustainable business, and the cut happens, then the stock may ignite again and start a move upwards.

  • Paul May 11, 2015, 12:05 pm

    Hi,

    This may have been answered in a previous post and if so I appologise for asking the question, what is the typical rate you are getting on the home equity line of credit?

    While I’m aware that the money is tax deductable some of the rates appear high (Tangerine looks good at 3.5%) although that’s as a result of obviously prime being exceptionally low, so would go up in the future.

    I’ve used the Smith Manoeuvre fairly successfully as a few years back I was fortunate enough to secure a 10-year fixed loan at 2.3%. I do fear that a number of people might be getting variable LOC and the rates they are paying could potentially increase in the future…..

    While the interest is tax deductable the rate a person is paying on the ‘HELOC’ is obviously a key to the success of this strategy. It’s refreshing that you’ve inluded the line ‘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’ as some lesser blogs would not point that out.

    Keep Up the good work……

    • FrugalTrader FrugalTrader May 11, 2015, 12:09 pm

      Hi Paul, my HELOC rate is at prime and has fortunately remained at prime (2.85% right now). Yes, i’m an advocate of leveraged investing IF the investor has the risk tolerance and discipline for the strategy. It’s one thing to lose money in the stock market, but amplified many times when losing money in the stock market with BORROWED money.

  • Francois July 4, 2015, 10:23 pm

    Great blog! Is there a place where we can see your overall investment strategy (% of your portfolio in dividend stocks vs etf vs anything else?)

    Thank you for sharing your Journey!

  • Timmy July 14, 2015, 2:24 am

    Resources are the riskiest sector to invest in. Generally not wise to have more than 15-20% of a portfolio in resources. Oil could stay low for a long time, the Saudis keep pumping and world growth is slowing… Better to diversify and have more money in Consumer stocks, finance,manufacturing and utilities. Stick with the blue chips. You will be happy with the results.

  • Bill July 18, 2015, 11:04 pm

    Has anyone looked at TSE:DS (Dividend Select 15 Corp) as a faster way of converting your mortgage to investment loan?

    It has been yielding around 10%.. ~5% from dividends and 5% from options trading. Looks like all distributions are in the form of dividends.

  • Marty October 12, 2015, 5:40 pm

    Great articles. I really enjoy your blog. Just curious, what do you use to buy stocks? Discount brokerage or through your bank? You might have written an article on this, but I’m curious to know what you think of all the different ways to buy stocks and which one(s) you think are good.
    Cheers

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