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Smith Manoeuvre Portfolio June 2009 – The Rally Continues!

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.  I write an update every couple months or so to show new positions added along with any market gains/losses.  For more details, check out my modified smith manoeuvre strategy.

In the last update, I expected a pull back soon after the post, however, that hasn’t materialized yet.  I still expect some sort of correction at which time I will be deploying more capital.  Even without the pullback, there were some equities that were selling near their 52 week lows, like utilities.  Having said that, I initiated a position with Canadian Utilities (CU), TransAlta (TA) in addition to adding to my Fortis (FTS) position. Not only did I buy a few utilities, I initiated my position in Enbridge (ENB) and First Capital Realty (FCR) – a REIT dressed as a corporation.

I usually don’t sell within this portfolio as I would like to keep the dividend stream going for as long as possible.  However, there are times when companies change or get bought out.  In this case, I sold off my position in Petro Canada (PCA).  The reason being is that Suncor is in the process of merging with Petro Canada which will most likely result in a reduced dividend.  In addition, I already own Suncor within my RRSP.

The Portfolio as of June 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 150 $25.63 $3,843.98 $1.04 4.06%
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%
Teck Cominco TCK.B.T 100 $15.35 $1,258.99 $0.00 0.00%
TD Bank TD.T 50 $48.24 $2,412.23 $2.44 5.06%
Enbridge ENB.T 40 $37.36 $1494.39 $1.48 3.96%
TransAlta TA.T 50 $21.47 $1073.49 $1.16 5.40%
First Capital Realty FCR.T 100 $15.75 $1,574.99 $1.28 8.13%
Canadian Utilities CU.T 50 $36.40 $1,819.99 $1.41 3.87%

More Stats

  • Total Portfolio Book Value: $52,235 (total invested from HELOC including after tax interest)
  • Portfolio Value (Cash + Equities): $49,196.60
  • Total Cost Base of Equities (inc. fees): $41,970.95
  • Market Value of Equities (June 16, 2009): $39,125
  • Total Dividends / Year: $1,765.50
  • Portfolio Dividend Yield: 4.21%

Sector Allocation (based on market value)

  • Financials:    51.79%
  • Utilities:    16.79%
  • Energy:    20.00%
  • Resources:    4.96%
  • Real Estate:    4.52%
  • Other:     1.95%

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.

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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.

{ 40 comments… add one }
  • The Financial Blogger June 17, 2009, 8:17 am

    That’s a really interesting way to build your SM portfolio. I really like the fact that you are taking high paying dividend stocks!

    As long as the companies paying their dividends, you avoid having a liquidity risk as they are paying the interest for you ;-).

    With the interest rate being so low for another year, I wonder if I should go back in… just for a $5000 ;-)

    Good job!

  • Kirk S. June 17, 2009, 8:41 am

    Just a question, rather than researching individual companies within the TSX (or S&P etc.) is there a nice list where you can see the historical dividend yields for the companies (so you can get the overall list of what yields are the highest and then do investigations on the companies). I like your plan of investing for dividends, but with 300 companies in the TSX (and those are mainly large-cap companies) it is difficult to do an analysis of all of those to see what are the best!

    Any help would be appreciated!
    Kirk

    • FT FrugalTrader June 17, 2009, 9:11 am

      FB, thanks for the feedback!

      Kirk, the way that I pick most of my div companies is that they “should” be on the dividend achievers list. That is, they need to have a history of increasing their dividends. Having said that, I short list my favorites, and wait until their yield reaches a point which is attractive historically. Here is a list of some Canadian dividend achievers. Alternatively, you can look at the ETF CDZ and their individual picks.

  • Acorn June 17, 2009, 10:12 am

    TA and FCR are good calls. Remaining picks are about to break the major supports and go south… For example, my prediction for ENB is $25-27, for CU is $20-25. I hope I’m wrong, I really do… but charts are telling me so.

  • DavidV June 17, 2009, 10:23 am

    I’m going to be doing something similar. I have 100k in the market right now, and money for a downpayment for a house. So I’m going to liquidate the 100k and increase the downpayment, then get a mortgage for the needed amount (total price – downpayment) and then a ‘second’ mortgage for the extra 100k which I’ll invest back in the market.

    This won’t give me a total tax deductible mortgage but I will get a tax deduction on 100k and end up in the same spot (same total mortgage, same amount in the market). I’ll use the tax rebate to pay off the first mortgage, and then eventually the tax deductible one.

    I understand the value of the SM being to increase the investment loan when the mortgage goes down, but I don’t like debt. Therefore, I won’t be increasing my the investment debt when the house debt decreases. But I’ll get some extra tax deductions while being able to sleep well at night.

  • FT FrugalTrader June 17, 2009, 10:29 am

    Acorn, I’m a bit of a chartist myself. How are you seeing ENB going to $25-$27? or CU going to $20-$25?

    I’d be happy if you were right! I’ve only purchased my initial positions and looking to add when yields/prices are favorable.

  • Satin005 June 17, 2009, 11:04 am

    Hi,

    I`m new to the SM, but I`m interested in it. I`m reading the Fraser Smith book right now and I have 1 question : Does anyone know how the SM will influence the credit score? If the SM is done until the mortgage is payed off and the debt is not liquidated (so that the interest stay deductible), is that going to lower my credit score ?
    Thanks

  • Alex. June 17, 2009, 11:06 am

    Interesting… you mentioned a market pull back. I think it just began the last couple days ago and will continue. What is your estimate how long this will last FYPOV?

  • FT FrugalTrader June 17, 2009, 11:15 am

    Satin, credit scores are affected when the amount borrowed is close to your total credit available. So if you have $100k available, and invest $100k, then yes, your credit score will be affected (afaik). As to how much, you would need to consult with a credit pro like a lender.

    Alex, the past two distribution days look like the markets may go lower. How much, who knows? A lot of investors, including me, have been waiting for the pull back to deploy more capital.

  • Acorn June 17, 2009, 11:43 am

    FT,
    I can’t explain you my predictions in two words. It takes some time to train your eyes to recognize the charts and corresponding buy / sell targets. Try to compare this: takehttp://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:head_and_shoulders_t and 10 years monthly chart for ENB. There is a good chance that ENB is forming reversal chart with a strong support @ $35. If support is broken – the “buy price” target is @ $25 level.

  • Caitlin June 17, 2009, 12:26 pm

    Newb alert:
    What exactly is an “initial position”? Is it just the first set of shares you buy in a company/fund, or is it something more?

  • FT FrugalTrader June 17, 2009, 12:29 pm

    Caitlin, Yes it is exactly that. I have a tendency to “phase into” my positions instead of buying them all at once.

  • Caitlin June 17, 2009, 12:34 pm

    @FT
    I understand; thank you!

  • cannon_fodder June 17, 2009, 12:58 pm

    FT,

    Just for clarity, perhaps it would be better to remove the cash component of your SM portfolio. It gets a little confusing (at least the way I look at it) to compare the top 2 numbers with the next 2.

    I agree regarding the pull back. I invested in some BetaPro units that are bearish and it is only now that I’m seeing them above the price I paid. I thought the pull back would have happened earlier and more dramatic, but I just wanted to make some money on the downtrend before reversing position and digging in for the long, long haul.

    My hedge only represents about 12-15% of my overall portfolio and its in sectors that I want to make additional investments. When the TSX gets to below 9500 then I might think of changing my position. When I liquidate the hedges I will go long the market. I also want to investigate more about options as a way to get paid to wait until stocks I want to own trade at the lower range I’m willing to pay.

    Wouldn’t have been surprised to see you get out of Teck when it was above $19.

    Also see that you don’t have anything like BCE, Telus or Manitoba Telecom any of which would help diversify your exposure.

  • William June 17, 2009, 1:34 pm

    FT,
    Thanks for sharing your SM info and keeping us updated.
    I’ve got a few questions regarding fees.
    Which discount broker do you have your portfolio with and what’s the trading fee you’re paying?
    When buying stocks, do you limit the trading fee to be a certain percentage of the funds you’re investing (for example: limiting the fee to 0.5% of the funds means I’ll have to accumulate $5000.00 before buying a stock)?
    Do you pay a fee for transferring dividends back to your checking account?
    Thanks a lot!
    William

  • Tom @ Canadian Finance Blog June 17, 2009, 1:37 pm

    I agree with TFB, I love those yields! Makes it an easy decision when a strong company will pay your interest for you. And yes TFB, you should consider getting back into a SM, maybe once there is the correction we’re all expecting?

  • Michael June 17, 2009, 4:10 pm

    If anyone hasn’t seen/posted this already here link to a Canadian company that actually sets you on your way to having a tax deductible mortgage. I just read about it in the FP yesterday. I’m taking the webinar to learn more about it but from what I’ve read it sounds pretty solid. You be the judge.

    http://www.tdmp.com/index.php

  • FT FrugalTrader June 17, 2009, 4:13 pm

    Oh dear, another comment about TDMP. I’m going to have to write a full blown post about it. Stay tuned!

  • steve_jay June 17, 2009, 6:21 pm

    Technical analysis…thats modern day fortune telling.

    When you buy a stock you are buying a piece of a business.
    Buy a good business and the stock will go up in the long run.

  • LisainSK June 17, 2009, 6:46 pm

    I just want to add my comments about how much I love the MDJ blog! We are in the process of setting up a leveraged investment strategy (sort of a mini smith manouevre) after reading countless articles about the smith manouevre, leveraged investing, reading Smith’s book and CD and consultation with our financial planner.

    We plan to start the new strategy in a month or so once we get a few things ironed out. At first our plan was to be 100% mortgage and debt free in 5 years and then start to invest but that could potentially be a $700,000 mistake! Of course there’s risk but we are in it for the long run…no matter what! We have 20 plus years to invest and have lots of equity in our home.

    Although my husband and I (32 and 30 respectively) are financial novices we have learned so much from everyone that contributes to this site and also to the fact that my parents are near retirement and they realize that they are equity rich, no debt and have a decent nest egg…but the nest egg could have been turbo charged with leveraged investing 15 plus years ago. So all of these factors made us change our financial strategy.

    Thanks to MDJ and all your regular contributors for introducing us to the smith manoeuvre and the concept of leveraged investing!

    Best of luck to all…

  • Stephen June 17, 2009, 7:27 pm

    I agree with Tom and TFB, love it when the interest is paid for you.

  • Finance Guy June 17, 2009, 8:31 pm

    As long as you’re sticking with profitable companies with low debt levels, it’s going to rebound when the market recovers. There are certainly deals to be had, although no one knows how long this bear will really last.

  • Ms Save Money June 17, 2009, 8:56 pm

    steve_jay – fortune telling is suppose to tell u about the future.

    technical analysis only gives you trends from the past.

  • Georumble June 19, 2009, 1:24 am

    I have started a SM Portfolio recently

    Inorder to save on comissions, I am resorting to focusing on RBC Direct Investing IPO center. The come up with great offers there, you submit an interest in an offering and if you get lucky you get what you want or less shares than you requested, this does not incur any trading fees.

    One thing for sure, you have to be very patient and always keep an eye out for new offerings by subscribing to noitfications on the IPO center.

  • Gaby A. June 20, 2009, 8:00 pm

    I was wondering (and apologies if you’ve already addressed it), but can you use the Smith Maneuver with a Tax Free Savings Account (TFSA)? Because of the lack of penalty of moving money both in and out of a TFSA, wouldn’t it be suited to leverage in the form of options for example. Also, instead of using dividends (not sure how much $5000 in stocks would provide) use the sale of the higher price stock to pay of your mortage faster?

  • FT FrugalTrader June 20, 2009, 10:34 pm

    Gaby, the largest problem with leveraging to invest in a TFSA is that the investment loan will not be tax deductible. Why not just use saved cash to invest in the TFSA and withdraw any capital gains to pay down the mortgage?

    As well, using capital gains is an idea, but what if the stock doesn’t go up? At least dividends from strong dividend companies are a more reliable source of income.

  • Ed Rempel June 21, 2009, 3:52 am

    Hey FT,

    Your results look good. Your were at $39,900 in the March portfolio. That is a 23% gain in 3 months. Is that right? That would be slightly more than the TSX Composite from March 31-June 16. Nice going!

    Are you concerned about lack of diversification? Do you feel it is risky being 52% in one sector and I think that is 98% in Canada?

    Do you find the charting helpful? I have to admit, I’m with Jay in classifying charting in the same category as astrology. Humans like to see patterns, even if they don’t exist.

    For example, there is a sale of the century going on with many companies all over the world at extremely low prices compared to normalized earnings. Discounts from 50-80% are very common. Meanwhile, however, charting has you focused on whether or not there will be a small pullback. Do you not find that charting converts you to a short-term thinker, instead of an effective investor?

    Ed

  • FT FrugalTrader June 21, 2009, 9:51 am

    Hey Ed!

    Yep, since my port is mostly financials, it has gained proportionally with the financials rebound. As I mentioned before, I take all of my accounts into consideration, so my SM is basically my Canadian exposure where my RRSP covers my international and fixed income.

    With regards to charting, I don’t let them influence my long term picks too much. With my long term div stocks, I pick based on yields compared to their historical yields. Charting is definitely not a sure thing, at least not for me. But I find that it does increase the odds of picking the right direction. I use charting for my play money.

  • Blogging Banks June 21, 2009, 10:53 am

    Wow, you do have a high allocation to financials. I hope CDN banks do not follow their US counterparts in cutting dividends and getting TARP money.

  • FT FrugalTrader June 21, 2009, 10:56 am

    Blogging Banks, me too. :) In all seriousness though, Canadian banks are relatively conservative and right now, they are viewed as the “model” for banking around the world.

  • Ed Rempel June 23, 2009, 11:08 pm

    Hi FT,

    You’re right about Canadian banks being relatively safe. However, do you not think it is still risky to have so much there?

    We define diversification as investing so that no one idea can either make us a killing or kill us. We would consider it very risky to borrow to invest in a global financial services fund, because of the narrow focus. Focusing on Canadian banks is a a subsector of financial services plus a tiny country focus. It is a universe of less than 1% of the universe for a global financial services fund.

    In short, it is a subsector (banks) within a tiny region (Canada) within one sector (financials).

    It is not hard to come up with a scenario where this would backfire. If Canada opened up banking to international competetition (which is likely at some point), the Canadian banks are horribly noncompetitive and would get massacred. Warren Buffett won’t even buy banks, because they have potential for undisclosed risks with off-balance sheet investments. And any sector will have ups and downs over the years.

    The perception of them being the safest banks in the world also makes them the most expensive banks in the world.

    I realize you like the nice dividends and that your RRSPs are invested differently, but do you not think that more diversification would be safer and have more growth potential, especially since this is leverage investments?

    Ed

    • FT FrugalTrader June 24, 2009, 9:30 am

      Ed, also note that when I say financials, that includes larger insurance holding like MFC and PWF, not just the banks. As well, if you look at the Canadian index, it’s over 30% financials.

      But you are right, I am still heavy in financials. I’m looking to purchase some railways, retail, and a telecom when the valuations are attractive.

  • cannon_fodder July 7, 2009, 11:15 am

    FT,

    A Desjardins analyst just upped his 12 month price target for TCK.B to above $29 from around $27. This was based on their deal with a Chinese company on Friday.

    You may want to keep TCK.B just for capital appreciation.

    I’m keeping it in my SM portfolio. As things improve, I would expect TCK.B to reinstitute a dividend perhaps in 2011.

  • FT FrugalTrader July 7, 2009, 11:41 am

    Hey CF! I’ve already sold my position in TCK.B within my SM portfolio but I’ve been seriously looking at it again since the news about the Chinese company purchasing a portion of it.

    What other picks do you have your eye on for your leveraged portfolio?

  • Matt July 8, 2009, 9:49 am

    FT, a couple of questions:

    1) Why no income trusts? There are a few paying some pretty good distributions with strong balance sheets. From what I can gather, income trusts are going to be treated in the same manner as corporations – so why the fuss? If they convert back to a corporation they will be treated like all other corporations and if they stay as a trust they will be taxed like a corporation. If the trust is paying out a dividend that is 50% higher than a corporation and taxes of 30-34% are introduced upon it, I’m pretty sure you still come out ahead of “normal” corporations in the end. Would someone else care to elaborate as I feel I might have over simplified this.

    2) Increasing dividends each year, having a high yield, and being a part of CDZ are certainly major criteria for selecting a dividend stock. However is there any consideration given to consistent earnings growth, future prospects/growth, or the ratios: debt/equity ratio, price/sales, price/equity TTM, forward price/equity, price/sales, price/cash flow?

    3) Do most users of this investing strategy follow dollar cost averaging or do you wait for a strike point? As an aside to make my question, anyone who got in on BMO at $25 with a 10% dividend in would be sitting pretty right now.

    4) How do you determine the weighting of each stock in your portfolio? My rule of thumb is each stock gets an equal dollar amount, for example in starting up my portfolio, each stock gets $2000 (or whatever) and each new addition would get the same.

    Sorry, looks like I had more than a few questions.

  • Matt July 8, 2009, 9:54 am

    In the ratio question above I left out price/book.

  • FT FrugalTrader July 8, 2009, 10:02 am
  • Matt July 8, 2009, 10:12 am

    Thank you. There are a few points there I did not consider there on income trusts.

    What about the other questions, in particular #2?

  • Jared July 14, 2009, 4:18 pm

    Have you added anything else to this recently? I see Telus is almost at a 52 week low and has about a 6% yield right now. Seems like it could be a good time to buy, if you think they can maintain the dividend

  • Sean November 16, 2009, 2:05 am

    How have things gone with the taxman? I have a coworker that has been having a bit of a battle with CRA and it sounds like he has been doing things right. CRA insists it is a mortgage and not a line of credit and therefore isnt eligible. He has a homeline plan with RBC and bought through RBC to keep the paper straight forward and it is still an issue. I want to start the SM next year but I am now a little nervous.

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