Saturday, 7 June 2014

I just spent $400k Into an Overvalued Market!



 The Market
We are into a 5 year bull run where the trajectory has been nothing but straight up. Everybody during that run looks like a stock picking wizard. P/E ratios are climbing signalling to an overvalued market. Why would anyone put over 400k into the market in the last couple months? But who knows how long this will last? Nobody has a crystal ball and this run might end tomorrow or in another 10+ years.


Bonds?
Where else would you put it? Bonds? With interest rates keen to rise you must be crazy! Why would anyone want to lock up their cash for five or ten years at this yield. Worse yet if you cash out after interest rates rise you will actually lose money.


Real estate?
Obvious Canadian real estate is in a bubble currently and serious correction bound to happen. Plus yields are currently quite low as well as liquidity. Also real estate is not very tax efficient as its taxed as regular income for yields and tough to hold in your registered accounts. Although US real estate is fairly valued right now the tax implications for owning foreign real estate is not very favorable.


 My Choice
So whats a guy with 400k to do? Why not just pay market value for a portfolio of dividend growth stocks. This guarantees me a return on my investment via dividends and pays me currently 3.55% and that number will rise every year in the future. Makes sense to pick aristocrat stocks with long histories of dividend increases. Also companies than continue their dividend increases throughout market corrections as well has handle those corrections fairly well compared to other non dividend paying growth stocks.

With that said in the past couple of months I went all in. Constructed a plan to have a well diversified portfolio across the sectors and companies around the globe, Although I am still too light on International exposure which will be addressed in the future. I went with a higher American based company rate because many of the companies are multinational. My portfolio only contains stocks that pay a dividend. Some low (Visa at .74%) and some high ( Bell Aliant 7.08%). They are not all growth stocks as some have a very high yield and payout ratio but they are countered with some high potential growth stocks like Visa, Dollarama and Suncor. Overall it is a good mix I am pleased with the overall results. I do intend to do some mild rebalancing but nothing drastic in the future. My portfolio does contain some REITs but I do not plan on adding to those positions. I intend to reinvest all my dividends into my current positions or at times open new ones. I hope to make a buy every month or two and will blog about the buy and reasoning for it.


My final buy of my portfolio and this month is Fortis FTS a Canadian 40 year dividend aristocrat. I doubled my position from 150 shares to 300. It currently yields about 4% and total forward yearly dividends 384. It has a high payout ratio of 81% but their business is very slow and steady. It is currently undervalued I believe and its a value play. Dividend growth rate has been 16% of the last 10 years. The stock was very resilient since the 2009 crash but has not had much upside since then so there is plenty of room to catch up. I like the company as I use their services as they have pretty much a monopoly in town. I was light on utilities and made it into one my core Canadian holdings.

                                                    FTS Last Trade - 32.10
                                                             Dividend Yield
(GAAP)*
Market Cap$6.9BBeta0.32
Revenue (TTM)$4.4BEPS$1.58
Shares Out.214.5MBook Value$28.15
Dividend Yield3.99%P/E20.3x
Annual Dividend Rate$1.28Price/Sales (TTM)1.6
Ex-Div Date8/13/14P/Cash Flow (TTM)7.6x
Pay Date9/1/14Operating Margin19.32%




Current Total Investments
In my overall Asset mix I am close to where I want to be with my investments. I am heavier than I would like towards real estate so any future investment will go toward my equity side to increase that ratio. I consider my real estate like a bond with a safe produced fixed income. I do not anticipate much capital growth with it and for the meantime I consider it a long term hold. I have set aside about 85k to go towards a start-up brewery. It is obviously a speculative investment which is at a much higher risk but it is under 10% of my overall investment assets so its a small portion. I have a good feeling about the brewery as a good steady investment. Also what I like about the brewery is that it is tied to some real estate where they are purchasing the building it will be run in so I have some insurance their on total loss. It will be run by well established guys in the business with a great reputation and in an undeserved and growing area.


Conclusion
So far things have been fun with my blog. I enjoy updating my holdings, dividends and net worth regularly. I would like to thank Rockstar finance located here  http://rockstarfinance.com/blogger-net-worths/   for adding me onto their net worth page and the traffic that it brings to me blog. Thank you guys I am grateful! Also for Modest Money adding my to their top finance blog list http://www.modestmoney.com/top-finance-blogs/.  I have recently acquired a new domain assetgrinder.com which at some point I will switch over to the future. I am still quite the novice to blogging and my web skills are sub-par. I am thinking of taking a course on WordPress or even having someone create a fancy website for me.  I plan upping the quality of my posts as well as adding some resources for people as I get more comfortable with everything.


So what do you guys think? Am I crazy for jumping into a heated market? Do you think I am well diversified too much or am I too heavy on American holdings? Your thoughts on bonds and real estate? Plus who like beer? I don't but I love profits!


Upcoming updates- Net worth in about a week as I aim to update the total every mid month

Till next update
Good Day and Grind On!

24 comments:

  1. AG,

    We are both in the same boat. Hopefully it is not the Titanic! LOL

    MDP

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    1. We will eventually hit an iceberg with our titanic portfolios but we have these little lifeboats called the s.s. Dividend to boat us back to saftey unlike that cruise shipwreck in Italy the costa concordia!

      Thank for droppin by MDP!

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  2. Thanks for the post Grinder. There are certainly worse things to do with $400k! While I'm holding, and will continue to hold a lot of cash, I can't fault your approach at all. The core of my portfolio is dividend growth stocks and they have served me remarkably well over time. I think the more pressing questions are:1) Where is your brewery? and 2) When should we stop by for a pint?

    You should know this blogging community is long on craft beer :)
    -Bryan

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    1. Thanks for droppin by Byran! Brewery will be close to the Victoria BC area. I wont say exactly where yet as the deal is not official just yet. Plan is to have beer flowing through the taps by early fall. Who knows I might organize a finance blogger meetup event there and then the run the taps free for us all in the future.

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  3. I'm fully invested myself with very little in cash savings. So I would have done the same in your shoes. One benefit of buying dividend growth stocks is the ability to borrow against them on margin at any time if required to. I believe investments provide liquidity, which is essentially the same as cash anyway, if only for the purpose to take advantage of new opportunities. When I realized I was too heavily exposed to real estate, I borrowed against my home to increase my fixed income portfolio. That allowed me to balance my asset allocation to where I wanted to be, without liquidating my actual property and losing out on potential future appreciation. Unlocking the value of assets this way has its benefits but also comes with certain risks which I'm sure you know :)

    When it comes to Canadian/U.S. stock allocation I tend to buy Canadian companies within sectors where most factors like profitability and valuation are equal. This is simply for tax efficiency. Canadian eligible dividends are taxed less than foreign dividends. There's more incentive to buy BMO or TD, than Bank of America or Citigroup if they all have the same expected earnings growth rate. So for the banking, oil, and mining industries, I hold more Canadian companies than U.S. ones. But I'm more heavily invested in U.S. technology, and pharmaceutical companies because we're not particularly strong and competitive in those sectors up here. This ends up being 50% CDN, 40% U.S. and 10% INT'L for my portfolio, but everyone has their own priorities since some sectors are more cyclical than others. And of course I try to keep my U.S. dividend paying stocks in my RRSP whenever possible. I will keep on grinding ^_^

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    1. Great post Liquid. You have a great asset allocation. I think I will do some mild rebalancing and get to my initial forecast of 50% American 40% Canadian and 10% International. I am about 3-5% to heavy in my American right now. The prob is I like my American holdings right now and I don't want to sell anything. So I am thinking any new investment will go towards Canadian or International to get my global asset mix just right.

      Thanks for droppin by buddy. Good Day and Grind On!

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  5. I can't give you any advice, I'm just here to learn. I have about 20K sitting in cash in my portfolio for the last six months and finally contacted my investment advisor last week, saying "Shouldn't we be doing something with this?".
    He's talking about buying some Preferred Shares in Enbridge and CPD exchange traded PS fund and selling Intact Financial and Crescent Point Energy. I wanna buy Dollarama. I'll mention the Fortis FTS and see what he says. He'll probably be wondering what I've been up to. I'll wanna say "More than you've been doing for me buddy."

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  6. Asset Grinder,

    I am heavily invested in the market as well. I think that as long as you stay diversified and focus on dividend growth stocks you will be fine. I would welcome a pullback right now soon.

    Keep grinding and you will reach your goals quickly.

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  7. Thanks for dropping by Debs and Swan. Debs if I were you and had 20k wanting to put in the markets I would look into etfs. For preffered stock you could go with XPF ishares north america preferred as it holds 50% in CDN and US preferred stock with a 5.24% yield right now. Look over the ishares website as they own 80% of the Canadian ETF market, also look at Vangaurds new low cost Canadian offerings. No adviser needed for any of those!

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  8. People keep saying market is so high it will crash soon. I am hearing this story for more than a year, but nothing happened so far. If I have more money, then I will put into the market for long term.

    I am in the early stage of investing. I am currently focusing to buy dividend growth stocks, and not worrying about the Mr. Market. I like to collect growing dividend regardless of market move.

    Best Regards,

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  9. I don't know if I could have invested that $400k quite as quickly as you did but I completely understand the reasoning. Plus with $400k invested at a 3.5% average yield that's $14k per year that you can invest if you're not needing the income right now so you can pick your spots better with the dividend income.

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  10. Yah I too am surprised how quickly I fully invested into the market. I have been in my office last two months straight everyday for at least 8 hours trying to formulate my plan and purchases. I can now breathe a lil bit! Market ups and down don't bother me that much. Too hard to time the market from everything I have read so why not jump in now. May crash tomorrow or in 10 years so might as well start the dividend train started!

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  11. A-G,

    Man! That's fantastic. I can only wish I'm one day in your position, where that type of capital is available to me.

    Congrats on not letting fear overwhelm you. I'm also happy to invest here, although not quite at the level you are! :)

    Keep up the great work.

    Best wishes.

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    1. Thanks for droppin by. I am honored. I try and not be a fearful investor. At least with these investments I can sleep at night. Others in the past had me sweating lol.

      Good Day and Grind On!

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  12. You just invested $400k???

    Geez.

    A bundle! :)

    I'm fully invested myself. No cash to do anything. I need to save more money. Nice call on FTS. They will increase their dividend again this year.

    I stay away from real estate, except for our home. I mean, I own REITs but that's it. I own more CDN than US stocks but working on changing that over time.

    Good luck with the investing! Stay in touch,
    Mark

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    1. Hey Mark, Makes more sense to be invested in domestic markets for Canadian due to the tax breaks. That said I am a little bit too heavy on my US allocation. I expect to inject more into the Canadian market and International market. I found it much easier to search for quality companies on the American side and I went slightly overboard. My next few puchases will definitely be Canadian. Been looking at Husky and Agrium as well as a few others for potential buys.

      thanks for droppin by again and Grind On!

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  13. I don't think you're crazy for jumping into this hot market, I think it's crazy if you're just sitting on the sidelines waiting to get in. Last year if you waited for a pull back you would have been kicking yourself.

    I do think it's good to have some money available for a good opportunity if it drops by but I still think it's better to be invested and to have an exit plan in case whatever you bought just doesn't work out.

    I like your site. Keep up the good work!

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  14. I was wondering why you believe it is better to avoid Canadian real estate ( they have been calling for a correction for 6 yrs now) but believe it is fine to buy equities at their all time high ( once again economists calling for a correction) They both throw off cash regularly whether in dividends or rental income. One is bricks and mortor you can see & feel while the other is a piece of paper with a board of directors, who you don't know, running your business. Both, in my opinion, are ripe for somewhat of a correction, but both will rebound over time. I believe in diversification too, but would like your thoughts.

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    1. Thanks Zee and anon for stopping by. anon I wouldn't avoid Canadian real estate but rather not put all my eggs ll in one basket. I own a commercial property and Reit stocks so I am not that timid about it. The problem is the yields right now on Canadian real estate is quite low right now. I think everyone should have real estate tied into their portfolio somehow. For me I have over 50% into real estate. A little higher than I would like but to me real estate is more attractive than bonds with the chance of capital appreciation. with overheated equity and housing markets 50/50 real estate to equity mix is good or a 50/50 bond to equity mix is also fitting. Nobody knows which one is going to crash first so best to invest evenly hedging you risk.

      Good Day and Grind On!

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  15. I'm a pretty conservative investor, likely too much so at times, so I find the all equities approach too risky. Lacks diversification and downside protection and assumes a certain level of expertise on the part of the stock picker that I suspect many investors don't possess. Yes, bonds are a tough buy with rates poised to rise, but seems there's as much concern these days about deflation as there is about inflation, and if that were true bonds would serve a useful role. Bonds would also hold up well in the event of a likely market correction. Regardless, all I know for sure about the future is that I don't know and nobody else really does either. As such, I follow the simple strategy of creating a portfolio of index ETFs that basically matches the asset allocation of the average Canadian pension plan (http://www.piacweb.org/publications/index.html.) I try not to overestimate my own investing prowess and would prefer to simply rely on the institutional expertise brought to bear by pension plans instead. Big believer that an investor is often his or her own worst enemy, so this strategy protects me from my own potentially dumb decisions as much as anything else. Best of luck!

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    1. Thanks for dropping by Juan. I agree that individual investors more than often do not beat the market. Index funds are great for passive investors. I am not saying I can beat an index funds performance but I can say I have more control of how much income I can receive from my investments via mostly conservative select dividend stocks. I really enjoy having a much more active approach when it comes to investing as oppose to mindless passive index investing. I very well may perform lower than index funds performance and I am very aware of such but its the price I pay to be self directed.

      I agree with you on Bonds Juan. If I didnt have a such a sizable investment real estate allocation I would put that total towards a laddered bond fund.

      Good Day and Grind on Juan!

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    ReplyDelete