The theme often discussed by the talking heads on television, and here in print last summer, was "flight to safety," a label given to fear-driven moves to larger, more stable companies. The theme for my portfolio recently has been "flight to quality."
My clear 'Prime Directive,' as Chowder analogized, which has been stated in my recent articles, is that the only purpose of my investing is to be able to afford to retire at a reasonable age (65-ish) 20+ years from now, and to be able to live off the dividends and income from those investments without needing to spend the principle. I am not investing for the purpose of having pampered vacations, luxury cars, a boat, or a big R.V., and my thousand square foot bungalow already requires more cleaning than I am willing to provide. (Hey, these things are fine, just not part of my plan.)
Aside from this straightforward goal and a few clearly articulated strategies, I have not really written out a portfolio business plan as such. I am still working on that. What I do know is that I have specific targets, have switched to a dividend-growth format and am on the search for quality companies that will partner with me in reaching those goals. My flight to safety has nothing to do with fear, and everything to do with a prudent strategy that will meet my long-term goals.
A. Targets: After first reading about DGI, I laughed. I thought it was impossible for a modest middle class family like ours to be able to create a portfolio large enough to live off the dividends, especially starting at age 42, so I created a spreadsheet that tallied realistic goals (4% growth, 4% dividends) and substantial monthly contributions. I was shocked to find that the portfolio at the end might actually produce enough dividend income for our needs. This spreadsheet is now my guide and inspiration, providing quarterly targets in dividends, growth and contributions. This is what I am aiming for. Unlike many of the retired and near-retired dividend investors whose focus is only on the income, I cannot ignore total portfolio value. These growth targets must be met if I am to meet my goals.
B. Dividend-Growth Format: My portfolio is primarily a dividend-growth one. However, being Canadian changes things a little. As we only have three investing accounts at the moment, (one retirement, and two TFSAs (akin to Roth IRAs). If I wish to avoid irretrievable withholding tax, I am limited to purchasing American securities in the retirement account, which limits the amount of funds I have available for quality U.S. companies. This leaves me very choosy when crossing the border, and has me looking mainly in areas where I do not have access to similar companies available on the Toronto Stock Exchange; technology, healthcare, industrials, and very large cap. In some cases, such as McDonald's (MCD), though we do have a similar company, Tim Hortons (THI), there simply is no comparison in quality and international exposure. In addition, the recent change in the currency rate has made looking at U.S. companies more difficult.
As part of the transition, it was recommended that if I still want to trade I should limit the amount and do so in a separate account. This has been very wise and helpful advice, and reduces the temptation to trade. My taste for trading is dramatically lessening each quarter, especially as I see that I am not yet earning the target 4% in dividends and there is not a guarantee that the growth in no- or low-dividend stocks will cover both the dividend and growth target amounts. At this time I am exceeding my dividend targets still, because our contributions have been more than expected. More dollars at a lower dividend rate is still producing the desired effect, but I do not want that to be the case for the long term. I am also discovering that generally the growth in many dividend-paying stocks is sufficient to meet my needs. This is not just based on the return of the unusual first-quarter of this year, but that the stability the dividend provides to the share price often provides downside protection for these slower growth companies.
C. Quality companies: During my trading days, I rarely traded small-cap companies, but jumped in and out of mid- and large-cap companies if I could foresee a 20% upside in the near term. Often I would grab 10% in a few days or weeks and exit to find another company that had recently pulled back. A near-term 20% upside is definitely not characteristic of many of the usual DGI names and I can see now that I have been afraid to pay up for quality. The transition to being willing to pay for quality may have been one of the slowest transitions for me, but I think I am finally getting there.
In my article, "Transitioned to a Dividend-Growth Portfolio," I requested feedback on my concern for Western Union (WU) as it has recovered nicely, and is approaching technical resistance. Though it fits the profile of a DGI company, I purchased it with the 20% upside in mind. (Yes, I was still transitioning!) With all the helpful comments, goal and soul searching, and fundamental analysis, I have decided to hold on to it, but watching carefully.
At the same time, I realized that I needed to take a more careful look at all my holdings with the goal of quality in mind, and I am still carefully combing through them in more detail than ever before, in order of earnings report date. And so began a renewed flight to quality.
Each of my holdings is being challenged on a fundamental level as to why they are being held and how they fit into the portfolio from the perspective of my Prime Directive and a quality DGI approach. The majority are, without question, staying right where they belong and some of those have proven fundamentally strong enough to deserve a larger position, such as Johnson & Johnson (JNJ). In many areas, I hold 'best-of-breed' companies and they will also stay. But there are a few companies that have become suspect in the quality department.
The first stock on my list, the first to report earnings, on July 11th, was Corus Entertainment (OTCPK:CJREF) or (TSE:CJR.B). Chuck Carnevale, creator of FAST Graphs featured Corus in an article on February 28. The graph shows a price line bumping along underneath a consistently increasing earnings line. A 4.2% dividend combined with healthy fundamentals made this a good Canadian choice for my portfolio - plus I like the radio stations! But the earnings announcement caused me significant concern. (article: Concerning Corus) A 20% drop in earnings, both YOY and from the analysts estimates, mean I have already moved on and up. I am most likely to stay in a similar sector and add to current holdings in BCE or Telus (TU, or TSE:T) definitely the best-in-breed companies. An attractive entry point may come in the next couple of weeks.
Goldcorp (GG) or (TSE:G) is another decision I need make. I was not surprised when someone asked what that was doing in my DGI portfolio, but alas, it is another (though best-in-breed) slip into trading mode. Earnings are announced on July 25th, so I have some time to dig around. Seasonally, according to equityclock.com, gold stocks are strongest July 12 to August 9th, so now is not likely the best time to exit. If I decide to, I will likely wait until the end of September. I intend to allocate the funds from this future sale to widening my position in the Canadian banks. Since it is still a few months away I do not yet know whether this will mean buying more of the three I already own TD (TD), Royal Bank (RY) or Scotiabank (BNS), or add another such as National (NA).
Altagas (OTCPK:ATGFF) or (TSE:ALA) is the next holding I will need to make a decision on. It is well liked by the portfolio managers I follow, but I have always had fundamental concerns with it. I got in at a good price and have some capital gain and the 4% dividend has treated me well. I have nothing to complain about, but nothing to be excited about either. The problem is that I have not yet found a Canadian utility that impresses me more. I would really appreciate suggestions.
The last four of my questionable holdings are all in my trading account and were purchased with only short-term share price growth in mind. Each of these were bought for a purpose with a specific target in mind, two of them before I transitioned to DGI. When those targets are met, likely by Christmas, I may keep the funds as trading funds, but I just am beginning to doubt it.
Agrium (AGU) was a more recent purchase this quarter; a deliberate trade in the trading account. Agricultural stocks are seasonally strong from August to December and AGU has had a major, nearly 30%, correction. I do regret not allocating those funds to high quality dividend stocks, which demonstrates to me a dramatic change in my attitude. The AGU purchase is exactly the sort of trade I used to make and it no longer interests me. I am not worried about capital loss (and my concern is not because I have one, as it is less than $100 currently), but I will not mind too much if my goals are met quickly so I can re-allocate the funds to DGI names. As I said, my desire for trading is waning. I am looking forward to having only dividend-growth stocks in the portfolio in the future, which is something I would not have said, even a month ago.
My flight to quality also includes, for the first time, purchasing more of a position I already hold. Until now, I have been very focused on diversification, but I am finding that some of my favorite dividend stocks are the ones I already hold.
When I do divest myself of these trading names, I will need quality to turn to. I am heading back to the drawing board, or, more appropriately in this case, to David Fish's CCC lists. On his website, dripinvesting.org, you will find the updated CCC lists as well as a Canadian Dividend All Star List and a plethora of other helpful dividend information.
How about you? Have you filled your portfolio with the best quality you can find? What are your favorite quality companies?