Category: Investing

I’d like to find a listing of Canadian equities that have maintained or increased their dividend payments for the last 20 years. I know this would include all the big banks (I think one of them skipped a dividend payment in the early 80’s, maybe I can forgive them now 😉 ). Does anyone have / know of such a list? (basically all Canadian dividend payers and how long they have maintained / increased dividend payments)? If it was a free list that’d be even better.

Thanks in advance for any links!

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Emerging markets are supposed to be the ‘hot’ markets, the place where the adventurous can get more return for more risk which is a tenet of many investment books including Four Pillars of Investing.

I’ve noticed that there are quite a few funds particularly Latin American funds which are extremely volatile but don’t necessarily have “better” long term returns although they have very good recent returns.

I decided to try doing some extremely unscientific research on emerging market mutual funds, using GlobeFund.com – “emerging market funds” category.

When I did the query on the emerging market funds, there were 71 funds available. I sorted by 10 year returns to get all the funds that have been around for at least 10 years which does not include funds which no longer exist but should be counted in the study (survivorship bias).

I got the “since inception” return – this is not all that scientific since the dates are not the same but the idea is that if people bought at the beginning of the fund – that’s the long term return they would have. I took all these funds which have been around 10+ years and put the data on a spreadsheet. This group seems to be mostly Latin American funds.

I removed all the duplicates (ie US$ versions, different classes) and calculated the average return from inception which came out to 6.3%, if we add 2.75% mer that gives us approximately a 9.05% gross return.

Given the extreme ups and downs of this group – the returns don’t seem to match the risk whether you bought the index or a retail mutual fund. By way of comparison the TSX total return for the last 10 years is 10.33% and 15 yrs is 11.88% which is not only higher but with less volatility.  MSCI Europe (Cdn$) was 8.93% for 10 years and 11.78% for 15 yrs.  *S&P 500 Composite Total Return Idx($Cdn) was 5.56% for 10 years and 10.41% for 15 years.

Of course with emerging markets doing so well over the last 4 to 5 years it seems silly to worry about the long term returns but for someone who is thinking about starting an emerging market position now, they should be very cautious.

Are emerging markets worth their volatility? These markets are much more volatile than developed markets so if they don’t outperform over the long term then you are better off sticking with developed markets.

I’m still planning to have a portion of my equity in emerging markets but I plan to err on the side of caution and will go a bit underweight in this sector.

This is basically a summary of the last four posts where I described different parts of my portfolio using exchange traded funds.

For the equity/bonds split I decided to have 75% equity and 25% bonds. This is a reflection of my fairly long investment time horizon, I won’t be retiring for about 17 years and will hopefully live a long, long time after that. This was also the recommendation by Bernstein as the ideal percentage of equities to own in a portfolio. There will be quite a bit of volatility with this mix so hopefully my risk tolerance is up to the task!

In the bond section which is 25% of the portfolio,

XSB – 8% – short term bond ETF which I decided was a better choice than a long term bond ETF.

GICs – 7% – can’t get much safer than this.

Bond fund – 5% – MER is 0.65% so a reasonable deal.

Real return bonds – 5% – This will be implemented by buying the ETF XRB – the iShares real return bond ETF.

In the equities section which is 75% of the portfolio we have…

Canadian: 20% – low cost mutual fund + one lot of BMO

U.S. 33% – VTI – Vanguard US equity ETF

International: 33% – new Vanguard EAFA ETF (not out yet) + low cost Europe fund

Emerging Market: 8% – VWO – Vanguard emerging market ETF – I’m still thinking about this allocation.

Reits: 5% – XRE – iShares Reit index or possibly some Vanguard VNQ.

Total MER for the portfolio is 0.38% which is pretty good considering the current MER is about 1.2%. I will be tracking (pun intended) the tracking errors of the ETFs to see if that has a negative effect on the performance. The tracking error on ETFs is basically the difference between the index return minus the MER and the return of the ETF.

So there you have it, I still haven’t actually bought any of the ETFs yet since I’m waiting for the new Vanguard EAFE ETF, so if you have any suggestions for changes…it’s not too late!

I keep thinking there are some real opportunities to take advantage based on the idea of borrowing to invest (and the tax write offs revenue Canada offers for them).

Say I owned my house free-and-clear, and pay a 40% marginal tax rate (20% on dividend income). I could get a fixed-rate mortgage for 80% of the value of my home for 5.75% right now (3.3% after taxes, since I’m borrowing to invest and this is deductible). If I can safely get a 4.125% after taxes dividend-yield on my investment, then my dividends will pay for my mortgage.

Say instead, I deliberately sacrifice some yield and buy equal amounts of the big-6 banks (average dividend yield on them is around 3.25%, 2.73% after taxes in this case, right now I think). I’m now paying 0.57% on my mortgage (and the dividends are covering the rest). This is certainly a loss (since the 0.57% is coming out of my pocket), and people always say “don’t lose money just to spite revenue canada”, which makes good sense. HOWEVER I haven’t considered any capital gains or dividend increases in this situation. As long as the AVERAGE increase on these 6 bank stocks is greater than 0.57% a year (very likely if I’m holding for the long term), I should come out ahead. I will have to pay capital gains when I sell, but that will hopefully be at a point when I’m earning less income (or else why would I be selling?). Additionally, since I’m in a fixed rate mortgage, hopefully the dividends will increase (but the interest rate can’t), so if the dividends go up a little bit then I’m not out any money any more.

You could maximize this “risk protection” by going with a longer mortgage term (currently you could get a 10 year mortgage for 6.04%).

On a $200,000 mortgage this would cost $1140 / year, a nice little investment for $100 / month.

Obviously I’d be paying taxes when I sold the stocks (capital gains) or when the dividends increased, but that seems to be shifting my tax burden into the future (the same way an RRSP would), which people generally seem to feel is a good idea.

The risk to this is that the banks cut their dividends and all go bankrupt, then you’re back to paying a mortgage from scratch (as if you’d just bought the house). That would certainly suck, but I think the chance of *all* the banks dropping significantly is pretty small.

If I accept this risk, and want to get even more aggressive, I could choose a cash-back mortgage which would increase the interest rate (and hence the deduction) and provide more cash to buy dividends with (I would be counting on an increasing dividend / capital gains to compensate for this). This would cost more right now on a monthly basis, but that’s what I want (to shift income and taxation into the future). Getting EVEN MORE aggressive (I’m scaring myself now) would be to get the mortgage with the cashback, then buy the stock, then buy even more of the stock on margin (E*Trade would allows you to buy 70% on margin for stocks valued above $5). In theory you could buy $363,800 worth of bank stock (with a 200K mortgage, 7% cashback and 70% on margin). The stock could drop 41% before there was a margin call (and if you were earning a good income or had other liquid investments you could probably meet the call if this happened).

You could (if you had the extra income and wanted to maximize the future income) even keep buying additional stock (on margin) with the dividends and pay the mortgage payments with your income (assuming you could afford the full mortgage payments). This would be more a forced-savings / dollar-cost-averaging strategy rather then a taxation strategy though.

The “reasonable expectation of profit” that Canada Revenue insists on is certainly there (it wouldn’t be unreasonable to expect the stocks to go up 1% over the next year in the least aggressive situtation detailed above).

Does this work as I understand? Why don’t people do more of this (buying on margin / on mortgage for tax purposes instead of for leverage purposes) once they’ve maxed out their RRSP’s?

Thanks in advance for any thoughts or pointers to relevant books / articles!

I’d been looking for something like this and just found it: http://cdndrips.blogspot.com/

Its basically a listing of all the Canadian DRiPs, along with the discount (sweet!) they offer for shares purchased through the DRiP.

Say I get paid a dividend (perhaps from my ROC that’s due mid-month) and its paid into my E*Trade account. That account has a negative balance (since I’ve been trading on margin). That interest paid on that negative balance is tax-deductible.

How is that affected if I withdraw the dividend payment and use it for something else? Say I withdrew it and applied it to a principle residence mortgage (non-deductible debt). From Revenue Canada’s perspective, would I have paid back part of my margin loan, then re-borrowed the money for non-deductible purchases (and thereby “contaminated” the margin loan), or would their view be that as long as I withdrew EXACTLY what was deposited, then I didn’t really repay any of the loan (it just traveled briefly through my account)?

If the mingling is bad, can/should I get E*Trade to make dividend payments directly to me?

Thanks if anyone knows! A pointer to a sites dealing with this issue would be greatly appreciated!