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Smith Manoeuvre Portfolio – August 2008

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 detail, check out the modified smith manoeuvre strategy.

Onto the business at hand. I skipped last months portfolio update as I didn’t make many changes to my holdings. Since the last update, there was a large financial and energy market sell off in July at which time we added to Power Financial (PWF), Scotia Bank (BNS), Manulife Financial (MFC) and initiated a position in Husky Energy (HSE). What can I say, I’m a contrarian at heart. Only time will tell if this strategy will work over the long term.

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 $1.25 3.56%
Scotia Bank BNS.T 75 $46.20 $3,465.23 $1.96 4.24%
Manulife Financial MFC.T 75 $39.42 $2,851.99 $0.96 2.52%
Fortis Properties FTS.T 50 $27.30 $1,365.00 $1 3.66%
TransCanada Corp TRP.T 50 $36.87 $1,843.25 $1.44 3.91%
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 35 $41.48 $1,471.79 $1.60 3.80%

Total Portfolio Cost Base: $24,549.13

Portfolio Holdings Value (excluding cash) on Aug 27, 2008 : $24,234.51

Total Dividends / Year: $963.25

Portfolio Dividend Yield: 3.92%

Thus far, it seems that my portfolio has taken a small loss in contrast with the big sell offs in the markets.   As of today, it seems that the banks are being sold off again as their earnings are coming in lower than expected.  Perhaps it’s soon time to add to my financial positions!

Have you added to your positions during the market sell off?

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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.

{ 22 comments… add one }
  • The Reverend August 28, 2008, 10:08 am

    just a note, MFC has increased their dividend to 26 cents a quarter.

  • Frog of Finance August 28, 2008, 10:27 am

    Yes, I keep sending money to my investments during a sell off, using my DRiPs (dividend reinvestment plans). Right now a sizable portion of that goes to the banks I own (BNS and BMO). And with DRiPs, I can do that only a few $100 at a time, with no fees or commissions.

    Cheers,
    Frog

  • MoneyGrubbingLawyer August 28, 2008, 11:10 am

    I am adding a few more bank shares to my portfolio, BMO in particular. I love periods of heavy sell-offs- they’re like Boxing Day sales to me.

  • FT FrugalTrader August 28, 2008, 11:12 am

    MGL, nothing beats boxing day sales! I’m the guy lining up at Futureshop 6am for the boxing day sale.

  • Dividend Growth Investor August 28, 2008, 11:13 am

    Yes I keep on adding to my funds and individual stock holdings. I have it set on autopilot by regular payroll deductions as well as checking account deductions. I buy a set dollar amount every two weeks.
    Although Dollar Cost Averaging does not work well in bull markets, choppy markets like the one in 2008 are ideal to dollar cost average into.

  • PhilC August 28, 2008, 12:18 pm

    Buying on sale is nice, but it can also lead to overbuying. I need 3 flat screen televisions about as much as your need to be 76% invested in Canadian financial companies (45% in banks)

    Basically, if find that your sector risk is way too large for a leveraged portfolio. Price is important, but you also have to remove sector risk and company risk from your portfolio.

    There are deals in REIT, services and consumer stables and you will need those if you are serious about achieving your 8% long-term market return. Being diversified will allow you to sleep better at night if and when banks start cutting their dividends ;-)

    • FT FrugalTrader August 28, 2008, 3:20 pm

      PhilC, yes the portfolio has a high concentration of financials, but as you can see, the portfolio is only $20k worth which represents only a portion of my overall portfolio.

      DAvid, congrats on paying off the house! Enjoy the no monthly payments for a few months. Maybe you should spend it on another trip to NL? :)

      TMW, in hindsight, I should have bought more husky at that price!

  • DAvid August 28, 2008, 12:41 pm

    I agree this low offers some great buying opportunities. I used the opportunity to top up and rebalance my RRSP, and beginning next month, will be effecting a Flintstone Flip using the equity in our house.

    Just now I am enjoying the feeling of being debt free, even if only for a few days!

    DAvid

  • ThickenMyWallet August 28, 2008, 2:23 pm

    As a bank stock guy, I am not convinced the worse is over. Disclosure of bad assets on the books has been appallingly bad. I like your Husky buy quite a bit.

  • DividendMan August 28, 2008, 4:04 pm

    PhilC: I don’t think there is such a thing as overbuying a good company at a good price.

    Achieving an 8% return doesn’t seem unreasonable even in one sector when banks are yeilding up to 6% in dividends and trading at < 1.5x book value and their regulatory capital requirements are easily met so the likelyhood of dividend cuts or share issues are low (except I’m not up to date on CIBC on this).

    Not to mention the fact that the consumer banking divisions of all the major banks are growing at a nice clip.

    I think it’s a good idea to load up. What does it matter if one sector is 75% of your portfolio and is yeilding 4-6%? It only matters if you’re going to sell or the fundamentals are out of whack – or if you can’t stomach the swings.

  • Chuck August 28, 2008, 4:44 pm

    BMO has been under my ACB for it. So I’m jumping all over the opportunity to buy more and lower my ACB. Also they’re still making enough to cover all of their dividends, despite being down.

    Also with the strike at POT we were able to get in at a great price.

    @dividendman — going from memory CIBC did a $500m equity offering in the spring which helped them pull their capital requirements back in check. I would hope they factored future loan loss provisions into their requirements.

  • PhilC August 28, 2008, 6:33 pm

    DividendMan: Comparing 8% and 6%… 8% is the average target return and 6% is BMO’s dividend yield, currently a top yielding bank. We can compare averages to maximums all day and come up with some pretty convincing arguments and some guaranteed-to-win portfolios.

    Being 75% invested in one sector matters because in the long-run you are exposed to more risk, more uncertainty about value as well as yields.

    You also cannot totally predict if and when you will have to sell. This is not your money, it’s the bank’s money. What is the bank recalls the loan while your matching assets are underwater. What if interest rates go up while bank dividends stagnate and another sector of the economy develops. You could be paying 8% prime while banks yield 4% and while sector X is getting large dividend increases.

    Frugal: I know you are diversified and 20k is pocket change. But still, you have to set the example your us kids ;-)

  • Dividend Growth Investor August 28, 2008, 6:49 pm

    One issue with FT’s portfolio is its overexposure to financials. Historically however there have been several sectors with pretty decent yields – trusts or mlps, reits, utilities and financials. In order to be somewhat diversified one has to purchase high dividend growth low current yield stocks such as canadian natl railways or PG and JNJ. Do not forget however that dividend growth is more important than dividend yield since it carries a higher chance of capital appreciation..

  • Mike August 28, 2008, 7:12 pm

    New reader – first comment.
    Thanks for your transparency and allowing others to actually see what you are doing as opposed to just claiming to have done something. In terms of credibility, you gain a ton.

    My thought is that if someone is doing this manouver then they are not generally risk averse to start with. Having less diversification doesn’t make the strategy any worse/better. You only broadly diversify when you cannot handle volatility. More concentrated portfolios will either perform significantly worse or significantly better than any market index. I don’t know anyone that has decent coin from being broadly diversified. Generally they become broadly diversified as they pare down successful concentrated holdings.

    My question is do you think you will unwind your Smith Manouver portfolio over the next year or two as the TSFA’s will offer better tax advantages and any debt incurred to invest in a TSFA will not be tax deductible?

  • paul s August 28, 2008, 9:33 pm

    FT…good post.

    As others have said, for me there are too many stocks to follow, and too many financials. If you had coincidently bought those two years ago when finaincials were going through the roof, you’d be kicking yourself today. It’s a good test to look back like that.

    I’d get rid of all financials but Royal, Power, Manu. and BMO (6.8!!!). I’d add an iShares REIT ETF, and an Iceland bond. Great diversification and great yield.

  • DAvid August 28, 2008, 10:51 pm

    Frugal Trader said: “Maybe you should spend it on another trip to NL? :)”

    Only if the weather is like it was the Saturday we met, rather than Regatta day! Look for me in 2010, on my biennial pilgrimage!

    DAvid

  • FT FrugalTrader August 28, 2008, 11:45 pm

    Mike: Thanks for leaving a comment. I plan to use the smith manoeuvre strategy for the long term. When TFSA’S come around next year, I will most likely be maxing those out also. With the TFSA’s, I like the idea of buying high income investments that pay tax free distributions (as withdrawals are tax free). That would be a great way to supplement income.

    Paul s: I would add a REIT, but I feel that I have sufficient real estate exposure with the principle residence and the rental property.

    DAvid: Look me up in 2010!

  • Finance_Addict August 29, 2008, 12:27 am

    Re Mike: I’m in agreement with your post. I don’t know anyone who scored big trying to mimic and index fund. If the portfolio had an extra zero then fine spread it out. With 20K to work with I would argue that FT’s portfolio is “less risky” than picking up 1 name in say 5 different sectors.

    FT, I too plan use TFSA’s to hold something that spits out a higher yield or trust to make some extra monthly cash. Over the years I suspect the type of investments will have to evolve as the contribution space grows.

  • jd August 29, 2008, 1:21 am

    is that most of your net worth?

    how long are you planning to reach a million?

  • FT FrugalTrader August 29, 2008, 7:21 am

    Finance_Addict, what makes me nervous about buying trusts is that they will be facing corporate tax soon which will likely result in a distribution cut which usually leads to the share price dropping. There are some trusts that seem fundamentally sound though, like some of the bigger oil players, and of course some REITS (whom will face no corporate tax).

    jd, check out today’s post for my net worth update. The goal is to reach 1 million in net worth by the age of 35. I turn 29 this year.

  • Dividend Growth Investor August 29, 2008, 10:58 am

    FT,

    I think that REIT’s can provide diversification if it focuses on commercial, office space, business segments of the real estate market ( I assume that your real estate exposure is tied to residential real estate).
    A reit can also provide a diversified exposure to the Canadian real estate market as a whole and not concentrated in a single province or city..

  • PhilC September 9, 2008, 12:09 pm

    Frugal: Today is your chance to buy more Husky. It’s back at 42$

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