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Wednesday, January 11, 2017

Invest and Retire before you Die - two years later

In the Invest and Retire before you Die series I came up with a basic, dividend growth oriented portfolio of Canadian stocks that I thought would do well in the long run with minimal supervision. I myself hold all those ten companies (including Canadian National Railway) in my own account, plus a few other companies as of this writing (FTS.TO, GWO.TO, RY.TO) as disclosed in my recent Investing - 2016 Results article.

But, leaving my own account aside, I want to revisit just the ten companies profiled in the original Invest and Retire before you Die series and see how a hypothetical portfolio made up of just those ten companies would have done in 2014 and 2015. So, let's dive into it.

The companies are:

The Bank of Nova Scotia (BNS)
Emera Inc (EMA)
RioCan Real Estate (REI.UN)
Potash Corp. of Saskatchewan (POT)
Enbridge (ENB)
TransCanada Corporation (TRP)
Suncor Energy (SU)
Toronto-Dominion Bank (TD)
Telus Corporation (T)
Canadian National Railway (CNR)

For this, I'll be using the "Performance" tab of the Morningstar.ca website. Something like the example below querying for The Bank of Nova Scotia:

(Click on image to enlarge)

As we can see, BNS's returns were -10.44% in 2015 and +38.79% in 2016. These returns include quarterly dividend payments, which is great because now we don't have to go through all the additional math to figure out the exact final returns. It's all there.


2015 was a tough year for the Canadian markets. In fact the Canadian TSX Index lost 26.48% of its value from the 15,685.13 high of September 3, 2014 to the 11,531.22 low of January 20, 2016. Those were 16 brutal months. But, considering 2015 alone, the TSX index was down 11.09% for the year. In 2016 the TSX index was up 17.51% (from the Dec 31, 2015 close of 13,009.95 to the Dec 30, 2016 close of 15,287.59).

This means, that the little LT Canadian Portfolio has done decently well. But, to be completely fair, the TSX's price movement does not include dividend payments of the companies it contains. So, let's have a look at XIU (the ETF proxy that tracks the TSX Composite).

According to Morningstar.ca, the performance of XIU in 2015 was -7.81% and in 2016 it was +21.21%. But of course, from there, there is a Management Expense Ratio (MER) and "Other fees" to deduct. Looking at the ETF's profile on the BlackRock site, we see a 0.15% MER plus 0.02% of "Other fees". So, roughly a 0.17% annual drag for the investor. Not too bad, but something to take into account. For those just starting out with little capital, investing in XIU for instant diversification is a good option. Once you have more capital, you may want to take opportunities in selected companies within the index that are more undervalued than others, at times when the ETF itself may be overpriced according to its own historical valuations.

A couple of thoughts about the companies included in the original series:

- RioCan (REI.UN.TO) is not a dividend growth company anymore. The dividend has been frozen since 2014. I'm fine not adding more capital to this company for the time being.

- Potash (POT.TO) had very tough times and cut its dividend. So, by definition not a dividend grower at the moment. Also multiple consecutive years of declining revenues. I personally hold it, but with no interest in adding to it. The other big Canadian fertilizer Agrium (AGU.TO) seems healthier but a little overpriced (19.6 PE Ratio vs historical average of 13.2), plus a couple of years of declining revenues. So, it is not a rosy picture for the Canadian fertilizers at the moment.

Other than that, no real concern with the other companies for capital additions* at attractive valuations.

Cheers,
LT


*As I recently mentioned, since my move from Canada to the US, the annual contribution room in my TFSA account (Roth IRA equivalent) is frozen as part of the Tax Treaty between the two countries. I now accumulate contribution room in IRA and Roth IRA, but not in Canadian retirement accounts.


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