All posts by Financial Independence Hub

The Dividend Aristocrats fight back

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

The Dividend Aristocrats are S&P 500 companies that have increased their dividends each year, for at least 25 years running. That is an exclusive group. Companies that have increased their dividends for 50 years or more are dividend royalty – they are dividend kings. The Aristocrats have underperformed over the last year and more. You won’t find an Apple, or Amazon or Alphabet (Google) or Tesla in that index. That made it more than difficult to keep up with the market. But those high quality Aristocrats are fighting back as value takes over from growth in 2021. With few dramatic high flyers, that might be its greatest strength in 2021 and beyond.

There is a US listed ETF for the dividend aristocrats ProShares NOBL. Here’s an overview from their landing page.

Here’s my previous post on the US and Canadian Dividend Aristocrats.

Rising dividends and equal weight magic

The Dividend Aristocrats offer a very simple one-two punch. We have that meaningful dividend growth history and the equal weighting of the index constituents. That compensates for a few of the key weaknesses of the S&P 500 cap weighted index. That is the most replicated index on earth, of course. A cap weighted index will follow the momentum of the market as more investors flow into the most popular stocks.

That can create a bubble based on enthusiasm over fundamentals.

Yes, you’ll find those cap weighted ETFs at work in the ETF Portfolio page. The methodology can work wonderfully until it doesn’t, such as in the dot-com crash of the early 2000’s. US stock markets and Canadian stock markets were crushed thanks largely to the over concentration in very popular tech stocks. Most of the US tech stocks had no earnings or very poor earnings. Of course, Canada went over the ledge thanks to Nortel. You can throw in the odd JDS Uniphase and a few other names as well.

You have a choice

None of the those tech stocks would have qualified as a dividend aristocrat in the year 1999 or 2000. The index side stepped much of the carnage. The dividend aristocrats greatly outperformed the S&P 500 through the dot-com crash and well beyond. It is an investment approach that beats the market with less volatility.

The first column is year, then Aristocrats, S&P 500, and then differential.

Incredibly, we see the Aristocrats offer positive returns in 2000 and 2001 while the cap weighted S&P 500 is two years into its three year venture of delivering negative returns. That began the lost decade for US stocks.

Are we about to enter another lost decade?

Many or most market commentators will offer that US stocks are in a bubble, again. The PE ratios, CAPE ratio and Buffett indicator all place today’s US stock market in dot-com crash territory. Continue Reading…

How to raise money-smart kids

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By Gaurav Kapoor, Founder, Mydoh

(Sponsor content)

Financial literacy isn’t an innate skill. Like most skills in life, financial literacy must be learned – the problem is who teaches it? Parents know they play a part, but they may lack the confidence, or the knowledge.

Helping your children develop good money habits as they enter their teen years is a great place to start their financial literacy journey. Teenagers are eagerly seeking out financial independence and may be earning money through an allowance or an after-school job.

As they look to spend their hard-earned money, it’s crucial to set them up for success. After all, money isn’t just about dollars and cents, it’s about the choices we make with it. Parents want to teach their children to be money-smart – to have skills to earn, budget and spend, but they also want to share the value, emotions and experiences that come with money.

This notion of early financial literacy is what motivated me to create Mydoh, the Smart Card for kids.

Check out my best tips below for raising money-smart kids with the help of Mydoh:

Leverage technology that helps your kids learn how to save, and spend, their money

Kids today are more tuned in to technology than ever before – so why not use tech to teach them financial literacy?

Mydoh is a Smart Card for kids that comes with a money management mobile app, available on iOS and coming soon to Android. Kids gain financial skills by earning money through tasks and an allowance (set up by their parents) and by making their own purchases (wherever Visa is accepted) using their Smart Card issued by RBC through the app, with a physical card coming soon. This gives kids the autonomy, competency, and confidence to make their own earning and spending decisions – learning values that help build a strong foundation for the future.

Through the app, kids can manage their own money in the real world, making decisions to spend and earn, while parents get visibility to their spending and can have better money conversations. Continue Reading…

Fine Wine: The Alternative Asset for today’s challenges 

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By Atul Tiwari

Special to the Financial Independence Hub

The current market backdrop is making the case for alternative assets, such as fine wine, even stronger. Traditional financial asset classes have grown expensive and concentrated, and initiating or increasing an exposure to fine wine can provide important diversification and enhance potential returns.  

It is no secret that equity valuations are stretched. The massive levels of fiscal and monetary stimulus globally have propped up asset prices despite ongoing disruption from the COVID-19 pandemic. The S&P 500 price/earnings ratio exceeded 30 in mid-April, its highest level since the 1990s dotcom bubble, which did not end well for investors. With a potential economic recovery following vaccine rollouts largely priced in, prices appear to leave limited upside in the near term. 

Investors will also struggle to find attractive returns in the bond market. Even before the pandemic, yields globally were low, or even negative. Again, the downside appears to outweigh the upside as the recent selloffs in government bonds indicate.  Both fixed income and equity markets remain susceptible to a shift in the economic outlook or macro policy, which should prompt investors to consider alternative ways to diversify their portfolios.  

The increasing concentration of equity markets forms another reason why alternative assets make sense in the current backdrop. The sky-high equity returns of the past year have come overwhelmingly from the tech sector with the FAANG stocks — Facebook, Amazon, Apple, Netflix and Google (Alphabet) — significantly outperforming the wider market. Consequently, ETFs and other index-linked investments may not be as diverse as they might appear.  

This is where fine wine can help. As a real asset, fine wine prices are primarily driven by their own market dynamics, meaning they have low correlation to traditional asset classes and can help de-link an investment portfolio from swings in the wider markets.  

Fine wine’s limited and decreasing supply over time (as wine is consumed) alongside demand that goes beyond wine’s immediate benefit as a financial instrument can support wine prices regardless of the wider macro environment. Indeed, prior to the recent tech stock surge, fine wine often delivered better performance with significantly lower volatility over a range of backdrops going back to before the financial crisis.  

Healthy returns with low volatility  

Comparison of volatility and annualised return across financial assets 

 

Source: S&P, Bloomberg, Liv-ex & ishares. Data as of 31 Mar 2021  Continue Reading…

Mutual Fund Deferred Sales Charges designed to hide bad news

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By Michael J. Wiener

Special to the Financial Independence Hub

Mutual fund investors caught by deferred sales charges (DSCs) understand their downside.  They’d like to sell their funds but face penalties as high as 7% if they sell.
DSCs are set to be banned across Canada (but only restricted in Ontario) in mid-2022.  Until then, mutual fund salespeople masquerading as financial advisors can still sell funds with DSCs to unsuspecting investors.
[Editor’s Note: last week, Ontario announced it would be joining the other provinces in banning DSC as of mid-2022.]

Before DSCs existed, it was common for advisors who sold mutual funds to get a “front-end load,” which is a fancy term for giving some of an investor’s money to the advisor or the advisor’s employer.  So, an investor might invest $50,000 with an advisor, but the first account statement might show only $47,500.  The missing $2500 was a 5% front-end load offered as an incentive to the advisor to hunt for mutual fund buyers.

Not surprisingly, investors didn’t like to see a big chunk of their savings disappear like this.  Mutual funds had a problem.  They needed to give commissions to advisors so they would sell mutual funds, but investors didn’t like to see some of their money disappear.  The solution to this dilemma came in two steps.

Raising Annual Fees

Mutual funds charge annual fees to investors called the Management Expense Ratio (MER).  MERs are expressed as a percentage of invested assets, and while they seem small, they build up to intolerable levels over decades.  Many mutual fund investors don’t know about MERs and don’t notice their corrosive effects.

One way to cover the cost of advisor commissions is to simply raise a fund’s MER.  This works well when investors stay for the long term.  When investors stay longer than 5 years, a one percentage point  increase in the MER covers a 5% up-front advisor commission.

But what happens when an investor sells out of the fund after less than 5 years?  In this case, the mutual fund can’t recover the advisor commission.  Even, worse, advisors would have an incentive to move investor money frequently from fund to fund to collect more commissions, and investors wouldn’t mind because it wouldn’t cost them anything.

Deferred Sales Charges (DSCs)

Someone had the bright idea to charge investors penalties when they leave a fund too soon.  Today, it’s common for DSC funds to charge investors as much as a 7% penalty for withdrawing their money in the first year.  This penalty typically declines each year until it’s gone after investor money has been in a fund for 7 years. Continue Reading…

CRA can now compel Oral Interviews

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By Anna Malazhavaya

Special to the Financial Independence Hub

I  never met anyone who said they enjoyed being interviewed by an auditor with the Canada Revenue Agency. For sure, CRA audits can be stressful and disruptive to a business, but this is the price we pay to maintain the integrity of our tax system. The CRA’s audit powers are already quite broad and now they are about to expand even further. Anyone who must file a tax return in Canada (and, therefore, can be audited) should pay attention.

The 2021 Federal Budget announced on April 19th includes a proposal that gives CRA officials a new power to compel oral interviews of “persons.” This means you, me, your employee, your neighbour and virtually anyone else who may have information relevant to determining and enforcing someone’s Canadian tax liability.

The current rules

How are the proposals different from the existing rules? The CRA already wielded the power to examine taxpayers’ documents or property that may be relevant to determine one’s tax obligations. As the CRA examines the documents or property, they have the power to ask questions about the documents or property. However, there is no general power for the CRA to compel oral interviews. In practice, this meant CRA auditors still used oral interviews when conducting selected types of audits, but it didn’t happen often.

In fact, a good portion of CRA audits were handled without much face-to-face interaction at all between auditors and taxpayers and/or their employees. Taxpayers’ authorized representatives, which means accountants and tax lawyers, handled most of the audit “heavy lifting” on behalf of their clients: they attended on-site meetings, had phone calls, answered questions, and provided documents. Taxpayers generally had the opportunity to answer the auditor’s questions in writing. This means that people had time to review their records, consult with their representatives, and keep a record of their specific answers. This trend of written audit questionnaires has become more pronounced during the COVID-19 pandemic as the CRA auditors tried to minimize in-person contact with taxpayers for safety reasons.

What prompted the Federal Budget change?

The most likely cause of the proposed change is a two-year-old Federal Court of Appeal decision in MNR v. Cameco Corporation (2019 FCA 67). On its website Cameco calls itself “one of the largest global providers of the fuel needed to energize a clean-air world.” That fuel is uranium. Based in Saskatoon, Saskatchewan, Cameco has offices in Canada, the United States, Switzerland, Kazakhstan, and Australia.

As part of the audit of Cameco, the CRA asked upwards of 25 employees of Cameco (including those of foreign subsidiaries) to attend oral interviews.

Notably, that was the CRA’s second time requesting to interview Cameco’s employees. The first came as part of another, earlier audit and Cameco complied with the earlier request. Later, it found that the auditor’s notes of the interview differed from the recollections of Cameco employees. The dispute over results of that earlier audit was about to reach the Tax Court of Canada.

So, when the CRA asked for oral interviews again during a subsequent audit, Cameco refused, offering to provide only written answers. Cameco argued that the CRA has no general power to compel oral interviews. Cameco was concerned that the oral interviews can prejudice the upcoming Tax Court litigation relating to the previous audit.

The CRA brought an application seeking a compliance order first to the Federal Court, and then to the Federal Court of Appeal. Both those courts sided with Cameco, stating that the CRA had no general power to compel oral answers to its questions. Fast forward to 2021, and the Federal Budget proposes to override the Cameco decision.

What’s next?

 If the proposal is adopted, we will see more oral interviews with CRA auditors and the scope of interviews will be much broader. Of course, it’s too early to tell exactly how the CRA plans to use its newfound powers, but the following concerns are already obvious:

First, taxpayers’ answers during oral interviews can expose them to penalties or criminal prosecution. There are several tax rules where the taxpayer’s experience, knowledge of certain information, or taxpayer’s intentions are important. Some questions may trick you into admitting something that it is not entirely true, but your answer can later be used to impose penalties or even initiate criminal proceedings. Continue Reading…