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Smith Manoeuvre Portfolio April 2009 – The Turning Point?

For those of you just joining us, this 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. For more details, check out my modified smith manoeuvre strategy.

There hasn’t been a lot of excitement in this portfolio over the past couple of months as I haven’t been buying much.  The markets have bounced off their lows, but I’m unsure as to how long this will last.  The predominant reader sentiment is that the markets will head lower soon and perhaps even retest March lows.  As a result of the uncertainty, I have been mostly sitting on the sidelines waiting for the opportunity to use some of my investment cash.

What do I have my eye on?  I’m mostly watching utilities right now as they seem to be unfavored but with attractive fairly dividend yields.  In particular, besides what I already own, my watch list includes Enbridge (ENB), Canadian Utilities (CU), and Emera (EMA).    As a matter of fact, my only transaction since the last update was a utility purchase.  I’ve recently doubled my position of TransCanada Corp (TRP).

Financials (along with the whole market) have seemed to turn around with a vengeance since the March lows but they actually look like they are due for a small correction.  Since my SM portfolio is heavy in financials, my portfolio has recovered a bit as a result.

In terms of selling, I haven’t done any in quite some time.  However, I am tempted to sell Petro Canada (PCA) and my remaining position of Teck Comminco (TCK.B).  Petro Canada is merging with Suncor who has a lower dividend payout, and TCK.B has cut their dividend but is making up for it with capital appreciation.  Decisions decisions.

Here is my SM portfolio as of April 2009:

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 $1.04 3.14%
Fortis Properties FTS.T 100 $26.69 $2,669.49 $1.04 3.90%
TransCanada Corp TRP.T 100 $33.50 $3,349.74 $1.52 4.52%
FTSE RAFI US 1500 Small-Mid ETF PRFZ.US 20 $51.50 $1,029.99 $0.42 0.82%
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 85 $35.90 $3,051.28 $1.20 3.34%
Petro Canada PCA.T 50 $30.57 $1,528.49 $0.79 2.58%
Teck Cominco TCK.B.T 100 $15.35 $1,258.99 $0.00 0.00%
TD Bank TD.T 50 $48.29 $2,412.23 $2.44 5.06%

Total Portfolio Book Value: $51,220 (total invested from HELOC including after tax interest)

Portfolio Value (Cash + Equities): $44,589.29 (as of April 20, 2009)

Total Portfolio Cost Base of Equities (including commissions): $36,362.09

Portfolio Market Value of Equities (as of April 20, 2009): $29,121.70

Total Dividends / Year: $1,437.30

Portfolio Dividend Yield: 3.95%

Leveraged Investing 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 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.

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.

{ 45 comments… add one }
  • daveking April 21, 2009, 9:16 am

    For utilities I like Canadian telecom.

    Bell, Rogers, Telus are all down.

    People are not going to stop using telephone, cell phones and tv services any time in the future.

  • Sampson April 21, 2009, 10:53 am

    Hi FT, looks like the portfolio has made a good recovery, but more importantly, the dividends keep rolling in.

    I don’t recall if you mention this in any of your previous posts, you are heavily weighted in financials, so do you account for these holdings in your total portfolio, or do you consider this portfolio its own entity, with no influence on your overall asset allocation?

  • Dividend Growth Investor April 21, 2009, 10:53 am

    If I were you I would sell Teck Cominco, which is a dividend cutter and If I had a high degree of confidence that Petro Canada merger would happen, I would keep PC untill the merger is realized.

    I agree with the previous poster that some telecoms could do you some diversification wonders. Also have you considered any railways?

    But what do i know? :-)

  • Mark Wolfinger April 21, 2009, 10:54 am

    Once again, I;d like to point out that you ‘have your eyes’ on new investments. That’s the typical method of investors everywhere. You do not have to use all your investment money to own stocks. Especially if you believe the markets are heading lower.

    I am NOT suggesting that you time the market, but I do believe you are missing the big picture. You – and your readers – would be well-placed if you learn how to hedge – i.e., reduce the risk of owning – stock market investments.

    Options are the tools and conservative strategies can protect your holding against big losses. And the best part is that is not a difficult concept for many investors.

    http://blog.mdwoptions.com/options_for_rookies/2008/06/why-you-should.html

  • FT FrugalTrader April 21, 2009, 11:05 am

    daveking, thanks for the suggestions. I am looking into telecoms with decent track record of dividends, but for some reason, I don’t trust telecoms. Perhaps it’s the nortel effect? :)

    Sampson, I’m a believer in total portfolio allocation: https://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm. When I mentioned that my portfolio was overweight in financials, I was referring to my SM portfolio only.

    DGI, thanks for the tip! The merger though will transform the PCA stock into SU. I’m not sure if I want to add anymore SU to my portfolio as I already own it within my retirement account.

    Mark, thanks for the tip! I am looking into options, but I’m not sure if holding options within a leveraged portfolio would negatively affect the tax deductibility of the loan. However, I will most likely be exploring options within my TFSA.

  • Thicken My Wallet April 21, 2009, 11:23 am

    What are you thinking of doing if you sell some energy holdings?

  • Victor April 21, 2009, 11:41 am

    Can someone please explain how the overnight lending rate (down to 0.25% today) affects the prime rate (ie: mortages)? Thanks!

  • moneygardener April 21, 2009, 12:13 pm

    I agree that telecom looks pretty good here and I wouldn’t compare Rogers, Telus, Shaw, and BCE to Nortel. Think of telecom like utilities, steady cash flow rolling in from services rendered.

    As far as utilities in general go, I believe they have a safety premium built into them and will not appreciate as much when the economy recovers as cyclicals like railways and banks will.

  • nobleea April 21, 2009, 12:23 pm

    on the subject of options, a common technique is to sell in the money call options on stocks you just purchased. it works well in a flat or down market. you get the option premium and the dividends (maintaining your interest deductibility), and if the option isn’t exercised, you can repeat.
    for example, buy TRP at 30, sell July call options with a $28 or $30 strike price. get the option premium and the dividend payments until then. you are limiting your upside, but also giving some guaranteed income.

    RE: PCA. i’d get rid of it since the takeover talk has boosted the share price. i don’t know how much further it will go up. suncor reacts well to the price of oil, but petro canada is a laggard. i don’t know how the new company will be. husky might be a better option if you want energy exposure and dividends.

  • FT FrugalTrader April 21, 2009, 1:59 pm

    TMW, I haven’t thought that far ahead yet! :) I will probably put money wherever the cheapest dividend stocks are.

    Victor, if the banks follow suit, then prime will be lowered by 0.25% as well.

    MG, you are pretty good at dividend analysis, which of the telecoms are your fav?

    Nobleea, yes, I was looking into the covered call option writing and it looks like an interesting strategy. Only problem is that it seems that the CAD options market has fairly low volume (relative to the U.S). Thanks for the tip on PCA, I was thinking along the same lines.

  • Daniel Wintschel April 21, 2009, 2:06 pm

    If anyone is looking for an extremely secure investment for a Smith Manoeuvre strategy, I know of two amazing options in the limited market (both of which I’m invested in on my personal Smith Manoeuvre account). One pays monthly distributions, the other quarterly. One of the investments actually insures the principal. Yields are way better than you’ll get from equities. I’m more than happy to share the info with anyone who wants it (email me, or find my contact info on my web site). A lot of people have been pretty stressed since around Oct/Nov, but both of these investments have continued fixed distributions, and the principal remains at 100%.

  • FT FrugalTrader April 21, 2009, 2:39 pm

    Daniel, please no solicitations for business within the comments. If you have 2 investments options that you want to share, then please add them to the comments.

  • Oil Baron April 21, 2009, 2:49 pm

    I don’t really believe in the telecomms these days. It seems there is too much new competition. My understanding is that the traditional big names (BCE, Telus) are losing customers every month to VOIP or cellphone providers. I could be wrong though. Shaw may be a better choice.

    I do own MBT. I don’t own BCE, Telus or Shaw.

  • Victor April 21, 2009, 2:59 pm

    Thanks FT.

    Out of curiosity, how much lower can these rates go? I mean, even in theory, can the overnight lending rate go negative? I did not think that was possible. Same for prime. How low is it even possible for prime to go? I figure prime would always be at least 2% higher than the lending rate, and I don’t see how the latter can go negative without a total system collapse.

  • InvestAssetWealth April 21, 2009, 3:34 pm

    FrugalTrader,

    I can see your dilemma with Petro Canada. You can sell today for about $6 above your average buying price. If you wait until the end of the summer, Petro Canada will probably be somewhere around the same levels as today. The dividend is not great, but better than nothing. If you sell today, decent gain, nothing lost. Teck just received some breathing room from lenders and stock popped up a bit. Best of luck with whatever you decide.

    Interesting recap of your HELOC portfolio.

    InvestAssetWealth

  • Dividend Growth Investor April 21, 2009, 5:58 pm

    FT,

    Which of the telecoms has the longest streak of dividend increases? What are their dividend payout ratios? What are their 5/10 year average annual dividend growth? Are dividends supported by EPS and revenues and is dividend growth supported by the business?

    One other questions for canadian readers, where do you get historical stock quotes and dividends about canadian companies? Yahoo finance canada has some limited date over the past 5/10 years, which is not a large enough sample for me.

  • Daniel Wintschel April 21, 2009, 6:04 pm

    I would be really interested to know how people feel about some of the varying REITs and income trusts that have exceptionally high yields, as part of a Smith Manoeuvre portfolio, as opposed to straight up company equities.I don’t own any of these, but have been considering them mostly from a TFSA perspective.

    Some of the ones I’ve looked at a bit (including approximate yields) are:

    Harvest (HTE.UN / ~10-20%)
    Penn West (PWT.UN / ~20%)
    Whiterock REIT (WRK.UN / ~20%)

    Any thoughts or experiences?

  • georumble April 22, 2009, 12:59 am

    FT, do you reinvest the dividends or receive cash?

  • Jay (market folly) April 22, 2009, 4:35 am

    Not sure if you’ve ever checked out hedge fund portfolio replication (we have an entire blog on it), but if you clone holdings based off of some of the top hedge fund managers out there with proven long term track records, you can beat the S&P pretty handily (or the Canadian equivalent). I see you’re going for more of a dividend, income stream portfolio. In the end, yield/gain is yield/gain. So, just thought I’d toss out another option.

    For instance, we’ve been tracking a clone based off the holdings of the ‘Tiger Cub’ group of hedge funds that has beaten the S&P by 15% annualized since 2000. Really amazing stuff you can do with a little backtesting and public SEC filings. Elaborated more on the topic if you’re interested in reading the study: http://www.marketfolly.com/2009/04/creating-tiger-cub-hedge-fund-portfolio.html

    Your market/portfolio related posts are the only ones where I can really chime in haha since I’m a market blogger more-so than a personal finance blogger. Love reading your stuff and will leave that realm to you!

    Jay

  • FT FrugalTrader April 22, 2009, 8:55 am

    georumble, right now, I receive cash. The intention is to use the dividends to pay down the mortgage, which further increases my credit line to invest with. However thus far I haven’t withdrawn anything from my investment account yet.

  • FT FrugalTrader April 22, 2009, 9:00 am

    Daniel, income trusts have a high portion of return of capital which can be an accounting headache when using a investment loan.
    https://www.milliondollarjourney.com/key-tax-considerations-on-an-investment-loan.htm
    https://www.milliondollarjourney.com/how-return-of-capital-works.htm

  • Sampson April 22, 2009, 10:27 am

    FT, I know your venture into the SM is fairly new (2-3 years now?).

    But I wonder, part of the strategy is to continually readvance the equity in the home, draw upon it, to continually produce larger dividends/returns. I view the strategy as a continuously accelerating method to grow returns. However, you haven’t really done this. I’m just wondering why?

    You are obviously benefiting from the tax deductibility, but it appears you are well on your way to paying off the mortgage without the SM.

  • FT FrugalTrader April 22, 2009, 10:43 am

    Hey Sampson,

    We actually started the SM in spring of 2008, so it’s about 1 year old now. I’m in the mindset of deploying capital when I feel that the time is right, not for the sake of using capital when it’s available. I’m dabbling a bit more now with buying, but I plan on buying more if/when there is another correction.

    But yes, you are right, we will be paying off the mortgage soon (hopefully 2 years) with or without the SM.

  • Styr April 22, 2009, 1:22 pm

    FT,

    What if you wanted/had to move now, would you have to sell your SM portfolio for a loss?

  • FT FrugalTrader April 22, 2009, 1:34 pm

    styr, great question. No, I wouldn’t have to sell at a loss. If I had to get a new mortgage, I would simply get a new HELOC to replace my old one. I’m in the position where I’m borrowing way less than my credit limit and with some equity in my house.

  • Mark in Nepean April 22, 2009, 9:22 pm

    Hey FT,

    Questions:
    What’s the hesitation on ENB?
    Are you DRIPing with all your investments?
    Curious…

    Question for all:
    Which is better in this market?
    1) Pay down the mortgage (currently at a fixed rate, year 1 of 5, unfortunately, @ 5%) or
    2) buy stocks?

    I currently have $3,000 to invest.
    Thinking about more ENB or BMO.

    Thanks everyone!
    Mark in Nepean

  • cannon_fodder April 22, 2009, 11:37 pm

    FT,

    I think it would be more illustrative for you to post the yield of your portfolio based on your purchase price rather than the current one. I’d like to see how much up (or likely down) each position is and what the initial yield was.

    I’d keep Teck – it was seeing it on your blog that encouraged me to buy it. Although I purchased it at quite a discount from your price I still bought it way above its 52 week low. Now it is my best performing stock in my SM portfolio.

    “Patience, Luke… Patience!”
    If only I had heeded the words of my master…

    Get rid of PCA, too and take your profits while waiting for a drawback within the next 30 days (when the earnings releases will be almost complete).

    I’ve actually taken some of my dividends and bought hedges – the beta proshares bears. When I think we are truly over the worst, I will then sell them short. Apparently, if you want to be in a position using EFT’s that go 2x the direction of the market, you actually are better of selling the opposite position short rather than go long in that position. The constant readjusting and error in tracking are to your benefit by doing it this way.

  • FT FrugalTrader April 23, 2009, 7:59 am

    Cf, my post isn’t very clear in the calculations, but my yield is based on purchase price, not market value. Thanks for the tip on TCK.B and PCA. Can you explain more about choosing the opposite direction of the betapro shares? what do you mean that error in tracking can benefit the investor using this method?

  • FT FrugalTrader April 23, 2009, 8:07 am

    Mark, I’m just about ready to pull the trigger on my initial position of ENB. No, i’m not DRIPing, simply collecting cash and reinvesting when stocks are cheap. DRIPing also comes with the headache of tracking your ACB of the stock in the case that you sell in the future.

    With regards to your mortgage vs the market question, it’s a personal decision. With your mortgage rate being 5%, paying it down gives you a guaranteed after tax return of 5%. If you think the market can do better, and not afraid of volatility, then go with the market.

    That is providing that the $3k is adding to your portfolio and not starting out. I’m not sure that $3k is enough to give you a diversified portfolio.

  • cannon_fodder April 23, 2009, 10:39 am

    FT,

    For a very lengthly discussion on tracking error and leveraged ETFs, here is an article I found:

    http://seekingalpha.com/article/126765-leveraged-etfs-is-tracking-error-really-so-troublesome

    Now, take a few minutes and go here:

    http://www.google.ca/finance?q=TSE%3AHxu

    Play around with various short term timeframes (because you really shouldn’t use the leveraged ETF’s for long term investing). What you will notice is that if you wanted to be long the TSX composite, you could invest in Beta Proshares ETFs such as HXU (Bull – 2x the TSX) or you could short HXD (Bear – 2x the inverse of the TSX).

    Because of friction of fees, use of derivatives and the imperfect action of having traders determine the price of these ETFs there is a drag on the performance. The HXU doesn’t quite hit 2x the underlying ETF it tracks – over time this can become significant, especially in a volatile market. And, if you guessed wrong and bought a bear like HXD when the market is going up, up and up, the drag will make you lose MORE than 2x the underlying ETF fall.

    But, that is where the advantage is. If you wanted to be long the TSX, you would then short the bear thus giving you more than 2x the movement!

    I just heard this thought earlier this week on BNN and I think I’m going to adopt this approach as a hedge against a market retracement.

    Thus, since I believe we are headed perhaps 10% lower in the next 30 days, I would short the bull (as opposed to go long the bear) version of the indices I want to track.

  • zadko April 23, 2009, 2:10 pm

    Hi Frugal,

    Can you help as I am new to stocks which yield dividends. For me to receive the dividends do I simply have to purchase the stock? do I have to register so they know where to send me the dividend payments? how does that work? can you help me out please or send me a link to your previous articles.

    Keep up the great work, all of your content and discussions are very helpful

  • FT FrugalTrader April 23, 2009, 4:14 pm

    Hi Zadko,

    When you buy dividend stock within a Canadian Discount Brokerage, the dividends will automatically be added to your brokerage account on their payout date.

    Here’s a primer on how to buy and sell shares on the stock market.

  • zadko April 24, 2009, 12:14 am

    Thanks I appreciate it, i will probably asking more questions in the near future, as I just found your site, and it is really good , talk to you soon.

  • Canadian Finance April 24, 2009, 3:58 am

    FT, you mentioned that dividends are added to the brokerage account… is it possible with Questrade to have them go straight to a chequing account so it’s one less transfer when I start a SM soon?

  • FT FrugalTrader April 24, 2009, 9:01 am

    CF, from my experience, withdrawals have to manually made from the discount brokerage account. I’m not sure if anyone knows any different?

  • cannon_fodder April 24, 2009, 12:33 pm

    CF,

    I don’t use Questrade but I do use IB. I can only transfer money out of IB manually and it can only go to the account that funded it (within 60 business days or something like that) or any account if after the holding period.

    I haven’t actually done this yet – I’ve only transferred in.

  • Kumar April 25, 2009, 1:00 am

    Hi FT & other SM Pros,

    Great! site with wealth of information. Keep up the good work.
    Please give your thoughts on the following scenario.
    I have setup a HELOC (not readvanceble as my mortgage is up for renewal end of 2010 and don’t want to pay penalty for readvancing)
    My current fixed mortgage interest rate is 4.04%.

    I have a non-registered brokerage account setup soem time ago and have stocks and cash balance worth of 20K. As my portpolio value is less than what I have invested I may have to wait for bit of a market recovery to sell anything.

    Here is what I am thiking of doing please let me know is this a good idea.

    1. want to use my HELOC (Prime +1) and to withdraw 20K and deposit in to my investment account
    2. Withdraw within days 20K from my investment account and pay 20k against my mortgage.

    Will this be allowed? If not what are the options available for me to use borrowed money for my non-registered account and repay the mortage by the same portfolio worth of my no-registered account.

    Thanks in advance.

  • FT FrugalTrader April 25, 2009, 8:08 am

    Kumar, I’m not sure it’s a good idea to deposit borrowed funds into a non-reg account, then withdraw the other portion.

    You can either wait until your stock return to the value you feel comfortable with before selling, or sell for a capital loss.

    Personally, if you are dead set on putting your portfolio against your mortgage now, I would sell the portfolio, use the cash to pay down the mortgage, THEN use an investment loan to buy more stock.

    One thing to note though, if you sell for a loss, and would like to buy back the same stock in the near future, be careful of superficial loss rules.

  • Kumar April 25, 2009, 11:20 am

    Thanks FT, appreciate your time.
    So, can I at least consider withdrawing the cash balance of my non-registered account and pay down mortgage while waiting for recovery on the stock portion?
    I want to know whether my investment account can have borrowed money and non-borrowed at the same time as it will take some time to recover my invested capital on my existing stocks.

    Do I to pay down mortgage first before deposting in to investment account?

    BTW: I am ware of the superficial loss rules (through your and CC posts)

    sorry for multiple questions.

    Thanks.

  • FT FrugalTrader April 25, 2009, 1:04 pm

    Kumar, you can do whatever you please with the cash portion of your non-reg account. The key thing is to NOT mix borrowed funds w/ non borrowed money in the investment account. Just think, if you were audited, how would CRA know if you withdrew the borrowed amount or otherwise?

    It’s up to you when you want to pay down your mortgage. The reason why I do it is b/c I have a readvanceable mortgage and my credit limit goes up with every dollar I pay down on the mortgage.

    Hope this helps!

  • Kumar April 25, 2009, 6:52 pm

    Thanks FT.

  • Mark in Nepean April 26, 2009, 12:09 am

    Thanks for the feedback FT re: your thoughts on mortgage paydown vs. stock buying. I’ll probably do both!

    Keep up the great work on your posts!

  • cannon_fodder May 5, 2009, 4:01 pm

    FT,

    I hope you didn’t get rid of Teck. It is up another 25%+ since my post! It is easily the best performer in my SM portfolio (although at one time it was my worst).

  • FT FrugalTrader May 5, 2009, 4:02 pm

    cf, I still hold 1/2 my position of tck.b. However, I’m seriously considering dumping it now. What are your thoughts?

  • cannon_fodder May 5, 2009, 4:40 pm

    From your perspective, it no longer qualifies as a dividend producer but rather a capital gains play. It could be some time before it pays a dividend again (my guess is late 2010 at the earliest).

    At this point, you can probably get out and still make some money (it traded earlier in the low 16’s) and then turn around and purchase a dividend producing equity that is in the same industry – or at least not in the financials because of your over weight position already.

    Samuel Manu-Tech is classified as being in the same industry, very thinly traded, has a yield of around 9.5%. It is losing money but would be a proxy on a NA-Mexico economic rebound – kind of what Teck would be.

    It is near a 15 year low. Somewhat speculative one might say. Might be worth keeping on a periodic check list to see if what happens to its losses/profits and whether it can maintain the dividend.

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