All posts by Pat McKeough

Buying Stocks without a Broker: Here’s how to pick the best investments on your own

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A growing number of  Investors like buying Stocks without a Broker because they’re able to  avoid possible Conflicts of Interest and Save on Broker Fees. However, it’s especially important to know what to Buy if you’re not using a Broker

Many investors assume their broker is honest and has their best interests at heart; if this proves to be untrue, they will shop for better stock trading advice from a new broker. Of course, many investors decide on buying stocks without a broker. That can be a successful strategy if you choose the best options for your investment temperament—using our Successful Investor approach.

Buying stocks without a broker: Why it might be a smart move for some investors

As any good stock broker or experienced investor can tell you, bad brokers are all too common. By “bad brokers,” we mean those who put their own interests above that of their clients. Keep in mind, however, that most bad brokers do this in a perfectly legal fashion, by catering to their clients’ whims and weaknesses.

Here are three main practices that bad stock brokers often practice:

  • Aiming for stability rather than growth
  • Double dipping
  • Stressing low-risk, low-return, high-fee structured products in client accounts

Additionally, you may have noticed that your broker sometimes uses unfamiliar words and phrases to describe investment concepts. Some of this stock broker jargon is simply shorthand that brokers use among themselves, to refer to familiar situations without having to go into any detail on the underlying concept. However, the concepts that these “broker-ese” words and phrases represent also serve to further the goals of the brokerage business.

If you find yourself thinking in broker-ese, you’ll naturally make assumptions that are in tune with the goals of your broker. They may be out of tune with yours.

Here’s one example: from time to time, your broker may advise you to sell a particular stock you own because it represents “dead money.” This doesn’t mean there’s anything wrong with the stock, or the company. Instead, your broker simply thinks the stock may only go sideways for a period of months or longer, producing no capital gains for you. So they naturally feel you should sell it and buy something with better short-term capital-gains potential. Continue Reading…

Real-Return Bonds and How They Compare to Regular Bonds

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Real-Return Bonds Pay A Return Adjusted For Inflation. But When You Buy A Real-Return Bond, You Are Only Protecting Yourself Against Unanticipated Rises In Inflation.

Real-return bonds pay you a rate of return that’s adjusted for inflation, but that’s not always as promising as it seems.

When a real-return bond is issued, the level of the consumer price index (CPI) on that date is applied to the bond. After that, both the principal and interest payments are typically adjusted every six months, upwards or downwards from that base level, to compensate for a rise or fall in the CPI. In general, Government of Canada real-return bonds pay interest semi-annually, on June 1 and December 1.

Look at this theoretical example to understand how a real-return bond works

The Bank of Canada issues $400 million of 30-year bonds maturing on December 1, 2049. The bonds have a coupon, or interest rate, of 2%.

If after six months from the date of issue, the new CPI level is, say, 1% above the level of the CPI on the issue date, then each $1,000 of bond principal is adjusted to $1,010 of bond principal ($1,000 x 1.01). The semi-annual interest payment is then $10.10 ($1,010 x 2% / 2).

If after 12 months, the level is 2% higher, then the bond principal is adjusted to $1,020 ($1,000 x 1.02), and the interest payment rises to $10.20 ($1,020 x 2% / 2).

Consider these three important factors to realize benefits with real-return bonds

  1. The price you pay for real-return bonds reflects the anticipated rate of inflation. In other words, if investors feel that inflation will rise 2% over the long term, the price of the bond will reflect that future inflation increase and its effect on the bond’s principal and interest payments. So, when you buy a real-return bond, you are only protecting yourself against unanticipated rises in inflation.
  2. When the inflation rate falls over a six-month period, the principal and interest payments of a real-return bond fall. In times of deflation, the inflation rate turns negative. In a prolonged period of deflation, the principal of a real-return bond could fall below the purchase price. Interest payments would fall, as well.
  3. As with regular bonds, holders of real-return bonds must pay tax on interest payments at the same rate as ordinary income. That income gets taxed at the investor’s marginal rate. In addition, holders of real-return bonds must also report the amount by which the inflation-adjusted principal rises each year, as interest income, even though you won’t receive that amount until the bond matures. That amount is added to the bond’s adjusted cost base.

Continue Reading…

Is a higher dividend yield better? Not Always. Learn how to spot the good from the bad to avoid this costly mistake.

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Investors Interested In Dividends Should Only Buy The Highest-Yielding Canadian Dividend Stocks If They Meet These Criteria—And Don’t Have These Risk Factors

Dividend yield is the percentage you get when you divide a company’s current yearly payment by its share price.

The best of the highest-yielding Canadian dividend stocks have a history of success

Follow our Successful Investor philosophy over long periods and we think you’ll likely achieve better-than-average investing results.

Our first rule tells you to buy high-quality, mostly dividend-paying stocks. These stocks have generally been succeeding in business for a decade or more, perhaps much longer. But in any case, they have shown that they have a durable business concept. They can wilt in economic and stock-market downturns, like any stock. But most thrive anew when the good times return, as they inevitably do.

Over long periods, you’ll probably find that a third of your stocks do about as well as you hoped, a third do better, and a third do worse. This is partly due to that random element in stock pricing that we’ve often mentioned. It also grows out of the proverbial “wisdom of the crowd.” The market makes pricing mistakes and continually reverses itself. But the collective opinion of all individuals buying and selling in the market eventually beats any single expert opinion.

Canadian dividend stocks and the dividend tax credit

Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends can be eligible for the dividend tax credit in Canada. This dividend tax credit—which is available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA—will cut your effective tax rate.

That means dividend income will be taxed at a lower rate than the same amount of interest income. Investors in the highest tax bracket pay tax of around 29% on dividends, compared to 50% on interest income. At the same time, investors in the highest tax bracket pay tax on capital gains at a rate of about 25%. Continue Reading…

Why this portfolio manager isn’t buying Bonds, and hasn’t for decades

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Recently a friend asked, “Pat, I see that several prominent Canadian investor advisors recently wrote articles that said it’s a bad time to buy bonds right now. Do you agree?”

He was surprised when I told him I haven’t bought any bonds for myself since the 1990s. I haven’t bought any for clients in the last couple of decades, except on client request.

In the 1990s, I used to buy “strip bonds” for myself and my clients, as RRSP and RRIF investments. This was the Golden Age of bond investing. Back then, high-quality bonds yielded almost as much, pre-tax, as the historical returns on stocks. In addition, they provided fixed income that simplified financial planning.

Bonds have tax disadvantages, of course. But you can neutralize those disadvantages by holding your bonds in RRSPs and other registered plans.

The big difference back then was that bond yields and interest rates were much higher than usual. That’s because we were still coming out of (or “cleaning up after,” you might say) the inflationary bulge of the 1970s and 1980s.

In the 1980s, government policies pushed up interest rates and took other measures to hobble inflation, and it worked. But interest rates stayed high for a long time after the government polices broke the back of inflation: kind of like finishing the antibiotic after the infection goes away.

High-quality stocks vastly superior to Bonds

Long-time readers know my general view on the stocks-versus-bonds dilemma. When interest rates are as low as they have been in recent decades, high-quality stocks on the whole are vastly superior to bonds. (See below for a further explanation). However, you have to understand the differences between the two. For one thing, stocks are more volatile than bonds. But volatility and safety are two different things.

Volatility refers to sharp price fluctuations, often due to short-term uncertainty and the randomness of short-term market movements. Safety refers to the risk of permanent loss. Continue Reading…

Why Canadian Small Caps should be a small part of your portfolio

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We think that small caps should not make up the bulk of your diversified portfolio — but you can benefit from making the best Canadian small cap stocks a smaller part of your holdings.

We generally feel that most investors should hold the bulk of their investment portfolios in conservative securities from well-established companies. This means holding a total of 15 to 25 well-established, dividend-paying stocks, chosen mainly from our “Average” or higher ratings, and spreading your holdings out across most if not all, of the five main economic sectors.

However, some investors choose to add more aggressive or speculative stocks to their holdings in their pursuit of bigger, faster gains. That can involve holding some of the best Canadian small stocks.

Understanding how we look at the best Canadian small cap stocks

We recommend a number of small-cap stocks in our Power Growth Investor newsletter, and we comment on others in our Inner Circle mailings, in response to questions by members. We also recommend some higher-risk investments in our Spinoffs & Takeovers publication.

Our Aggressive Growth Portfolio selections in The Successful Investor and Wall Street Stock Forecaster tend to be more highly leveraged and more volatile than our Conservative recommendations, and they can give you bigger gains and bigger losses. Their higher risk may be due to financial leverage, or to the risks facing their industry or particular situation. Still, our Aggressive Growth stocks are typically less aggressive than the picks in, say, our Power Growth Investor newsletter.

We can be wrong on any of our stock recommendations, of course. When we’re wrong on an aggressive stock, losses are likely to be larger than on a well-established stock.

Ultimately, the percentage of your portfolio that you should hold in either conservative or aggressive investments depends on your personal circumstances. An investor with a longer-time horizon or without the need for current income from a portfolio can afford to invest some money in aggressive stocks.

We look at many stocks before singling out our aggressive favourites, and we try to choose those with as much underlying value and as many hidden assets as possible. This is the best way to cut risk for conservative and aggressive investors, alike. Continue Reading…