A little over a year ago I began the transition from trader to dividend-growth investor. It has been an exciting educational journey and my holdings have expanded rapidly from the six trading stocks I held eighteen months ago, to over thirty. I have recently sold off a few that had quick gains or lacked the true characteristics of a large cap dividend-growth company and am continuing to fine-tune the type and number of assets I hold. As with many investors, my portfolio has done much better than I expected this year, exceeding the end-of-year total portfolio value target in the 2nd quarter.
I have been looking at my portfolio from several different angles lately and definitely have areas that need improvement. I do well with asset location, but asset allocation still needs some work. The snapshots of sector percentages, risk percentages, class percentages, and geographic percentages have been enlightening some of those weaknesses. I still have a couple of smaller Canadian oil and gas names significantly underwater from my trading days. However, every time I think that it is time to roll the funds over to dividend paying stocks, I am encouraged by the fundamentals of the companies and the possibilities they represent if the recovery in natural gas prices continue. So they remain, with one of the results being the dividend yield of the portfolio continues to be low.
One of the things I have been looking at is comparing my holdings to the current macro-economic trends asking, "Which stocks and sectors face significant headwinds for the coming year?"
My portfolio does not contain any utilities yet and now probably will not, for a while at least. Not by specific design: they simply never made it to the top of the buying list, and when I did initiate a small position in a utility after the summer quantitative easing scare, I ended up selling it after a few months, simply because I saw better opportunities for growth and dividend-growth elsewhere.
However, my portfolio currently contains four "interest rate sensitive" stocks; two telecoms, and two REITs. I am trying to decide if halving the positions in these names would be a prudent, protective move.
During the summer each of these holdings experienced a major drop, and I took the opportunity to double holdings in BCE (NYSE:BCE), RIO Can REI (OTCPK:RIOCF) and H&R REIT (OTCPK:HRUFF). I already had a larger position in Telus (NYSE:TU) - over 3% of my portfolio - so no funds were added to that position. In hindsight, it had the largest dip and largest recovery.
In addition to the summer weakness in most interest rate sensitive stocks, the Canadian telecoms experienced another kind of threat; Rumors of a foreign competition invading their oligopoly. As usual, the rumors were greatly exaggerated, and BCE has nearly recovered to its former highs, giving me a quick gain. The question I am asking now is, "Should I sell that recently purchased half, returning to my original share number, protecting those gains against share price softness due to future macro-economic events?"
BCE is a diversified telecom company. Apart from the phone and wireless business, they own television, radio and digital networks. This diversification is why I chose to double BCE this summer instead of initiating a position in Rogers (NYSE:RCI). Eleven out of eighteen analysts consider it a hold. The 5% dividend has a comfortable payout ratio of 56% compared to the industry average of 70%. Though it does not have an unbroken dividend growth streak, the average dividend raise over the last 10 years has been 11%.
BCE won Best Overall Corporate Governance Award - International in November and was rubbing shoulders with the likes of Johnson & Johnson (NYSE:JNJ) and Pepsi (NYSE:PEP). S&P gives it an A- for quality and Thomson Reuters gives it an average score of 8 out of 10, including 10 out of 10 for Risk.
This is the kind of company I still want to own. I will not be selling any shares, and if Mr. Market sees fit to give me another gift this year of the opportunity to buy more of this quality company at a substantial discount, I will not mind.
TU is the nearest rival to BCE and in many respects, the younger brother. The dividend is not as high at 3.9% with a payout ratio of 57%. Telus has a better dividend growth history than BCE, and tends to be slightly more volatile, which is why it was my first purchase in the sector. Despite reaching all-time highs recently, 12 out of 16 analysts rate it a buy, one a strong buy and the rest rate it a hold. S&P also rates it A- for quality and Thomson Reuters gives it an average of 7 out of 10, with 9 out of 10 for Risk with identical earnings and fundamental scores (7 & 8 respectively) to BCE. As there is nothing wrong with this company, I see no reason to sell away quality dividends to protect a modest capital gain (14%).
RioCan, named after its diversified, Canadian "Retail, Industrial and Office" holdings, is Canada's largest REIT and well-known as a quality holding. The monthly dividend has not been raised in several years, but stands at a generous 5.7%. Ed Sonshine was named Canada's Outstanding CEO of the Year for 2013 and has repeatedly expressed his commitment to not cutting the dividend, even during the most difficult years.
Five out of nine analysts consider it a buy with the others calling it a hold. The 5.77% dividend has a payout ratio of 47%. Thomson Reuters gives it an average score of 7 (relatively in-line with the market), but scores it higher fundamentally (8) and REI also receives 10 of 10 for Risk. Price momentum and relative valuation bring the score down, which signals to me a good time to be buying.
This is a stock I am not willing to sell or even trim a little. I actually bought just a few more shares last week adding another quarter position to my little pile. Additionally, the DRIP gets me extra shares every single month, very effectively dollar-cost-averaging without added transaction costs. I do not expect significant capital appreciation over the next few years, and I do expect a substantial drop when interest rates begin to rise, but I see that as an opportunity to buy even more for the future. I do not need the income now, and have ample time to wait for the next market cycle to enjoy capital gains. As the price tumbles, I will be adding more shares at approximately every 5 to 10%. If the share price begins a steady recovery, I will actually be a little disappointed. This is a foundational income holding for many Canadian retirees. I look forward to seeing how many shares I will own in 20 years when we turn 65.
H&R is another large diversified Canadian REIT with a nice dividend of 6.4%. It has been growing rapidly through acquisition this year with the purchase of Primaris in April and acquiring part interest in Echo Realty in August. The acquisitions have merged well, and the management cost savings have been significant. The most recent report was an upside surprise and six of eight analysts consider it a buy or strong buy. TD has a price target of $27 while the current price is $21.10. In the current macro environment, I doubt that price target will be reached soon, but a 25% upside added to the dividend would make for an impressive return.
Once again, Thomson Reuters has a risk rating of 10 out of 10 for H&R, but assigns it even lower price momentum and relative valuation scores, bringing its average to only 6, considered a "negative outlook." 'Earnings' and 'fundamental' score 8 and 7 respectively. Thomson Reuters' idea of a negative outlook does not match with mine, as I would rather pay less for quality companies! So, once again, I will not going to sell my position in H&R REIT. I will not be adding as aggressively as with RioCan though, unless it drops below $20.
I started this article leaning towards selling half of my positions in Telus and H&R REIT. In the end, I am now convinced that despite the likelihood of near-term share price weakness due to future rising interest rates and lowered stimulus packages, these are the kinds of companies I am looking for, for the long-term. The opportunity to reap reliable and growing dividends in large, low-risk companies, and to purchase more of these companies at a lower share price will be the motivation to continue to hold them.
Are you lightening-up on your "interest rate sensitive" stocks? If so, which ones and why?
Disclosure: I am long BCE, TU, OTCPK:RIOCF, OTCPK:HRUFF, JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.