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Smith Maneouvre Portfolio – June 2008

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.

StockSymbolSharesAvg Buy PriceTotalDiv/Share Yield
Royal BankRY.T75$47.62$3,571.25$24.20%
CIBCCM.T45$67.14$3,021.25$3.485.18%
Power FinancialPWF.T75$35.68$2,675.75$1.253.50%
Scotia BankBNS.T50$46.50$2,325.24$1.964.21%
Manulife FinancialMFC.T50$39.42$1,971.00$0.962.44%
Fortis PropertiesFTS.T50$27.30$1,365.00$13.66%
TransCanada CorpTRP.T50$36.87$1,843.25$1.443.91%
FTSE RAFI US 1500 Small-Mid ETFPRFZ.US20$51.50$1,029.99$0.420.82%
AGF Management LimitedAGF.B.T50$22.71$1,135.49$1.004.4%
Bank of MontrealBMO.T25$44.17$1,104.24$2.806.34%

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.

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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.

{ 28 comments… add one }
  • Four Pillars June 30, 2008, 7:57 am

    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

  • FT FrugalTrader June 30, 2008, 10:17 am

    What are you invested in for your leveraged portfolio FP?

  • The Financial Blogger June 30, 2008, 10:37 am

    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 ;-)

  • Four Pillars June 30, 2008, 10:39 am

    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

  • The Financial Blogger June 30, 2008, 10:52 am

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

  • Chuck June 30, 2008, 11:05 am

    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.

  • DG June 30, 2008, 11:46 am

    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.

  • nobleea June 30, 2008, 12:35 pm

    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.

  • DK June 30, 2008, 12:56 pm

    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.

  • MikeG June 30, 2008, 1:05 pm

    +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

  • FT FrugalTrader June 30, 2008, 3:28 pm

    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.

  • Thicken My Wallet June 30, 2008, 3:48 pm

    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).

  • nobleea June 30, 2008, 4:07 pm

    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.

  • Chris June 30, 2008, 7:15 pm

    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! :)

  • FT FrugalTrader June 30, 2008, 7:28 pm

    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.

  • nobleea June 30, 2008, 7:50 pm

    “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.

  • Andrew June 30, 2008, 11:28 pm

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

  • ThickenMyWallet July 2, 2008, 9:07 pm

    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.

  • LongTime Smither July 3, 2008, 12:25 am

    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.

  • Telly July 3, 2008, 1:52 pm

    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.

  • FT FrugalTrader July 3, 2008, 2:15 pm

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

  • Ben Lam July 3, 2008, 6:34 pm

    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

  • Options Trader July 4, 2008, 6:35 pm

    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.

  • Paul_Z July 24, 2008, 12:19 pm

    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.

  • FT FrugalTrader July 24, 2008, 12:24 pm

    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.

  • Paul_Z July 24, 2008, 12:49 pm

    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

  • FT FrugalTrader July 24, 2008, 1:58 pm

    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.

  • Amit January 16, 2009, 3:16 am

    I had been trying to search differences between XDV and CDZ for quite some time, and I found this:- http://www.canadiancapitalist.com/2006/10/22/xdv-versus-cdz

    Both have Rothman’s but CDZ has more percentage of it than XDV according to the above link.

    CDZ has income trusts, so with the changes in trust rules, will that be an issue?

    CDZ has low volume than XDV. But of course, it’s criteria to hold stocks is better than XDV as it only adds stocks that have a history of increasing their dividends rather just the ones that pay more. It has almost double the amount of stocks than XDV.

    Also, another difference is due to Questrade. QT buys whole shares automatically as a part of their automatic Dividend Reinvestment Plan (DRIP) and my goal is long-term investment so I like this DRIP option. However, CDZ has monthly dividends while XDV has quarterly dividends.

    At 100 shares:
    XDV pays out approx. 21 cents a share as dividend every quarter, and QT will buy 1 whole shares for me at it`s current price (say, $14.40), while for the same price of CDZ and 7 cents dividends every month, QT will not buy anything.

    At 1000 shares each:
    QT will automatically buy 14 shares of XDV while it will only be able to buy me 4 shares every month (12 shares every quarter) for CDZ. Not a big difference and you probably get better cost averaging with CDZ but in the end less shares get bought in the long-run and you pay more MER (0.60 vs XDV`s 0.50MER).

    I am leaning more towards XDV though. Question for everyone? For tax-purposes since these are all in non-RRSP accounts, what’s the benefit of keeping either of these two ETFs vs the individual dividend-paying stocks if you are only adding the positions, say, twice a year? Is all income from these ETFs considered dividend income? This december I received the dividends on 31st December for all my iShares ETFs (XIU, XMD, XRE, etc.) and each one was marked as “Trust Income”. Is that treated as Interest income/capital gains/ or is that considered as Dividend Income?

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