Hub Blogs

Hub Blogs contains fresh contributions written by Financial Independence Hub staff or contributors that have not appeared elsewhere first, or have been modified or customized for the Hub by the original blogger. In contrast, Top Blogs shows links to the best external financial blogs around the world.

What are Cryptocurrency Loans and how do you get one?

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By Hristina Nikolovska

Special to the Financial Independence Hub

If you urgently need some extra money, a personal loan is the most viable option. There are various kinds of loans like mortgages, credit cards, or personal loans. Usually, you’d head over to banks or credit unions to get the funds. However, there’s another way to get a personal loan you probably haven’t considered. This article will explain what you need to know about crypto loans.

What are Crypto Loans? 

Cryptocurrency has evolved and entered multiple markets. That’s why you also have the option of getting a cryptocurrency loan, just like you would get one from a bank. However, there are some differences. 

Cryptocurrency is decentralized, meaning you don’t need an intermediary to deal with your financial transactions. The same applies to a crypto loan. There still is a platform you should register on, but you won’t be borrowing funds from it. Instead, you’ll borrow funds from other cryptocurrency owners. You also won’t need any credit checks. 

How do you borrow Crypto?

One thing you should know is that you’re required to over-collateralize a crypto loan to be eligible for it. This proves you have enough financial power to get the loan, and it protects both sides. 

Usually, you’ll collateralize your loan with some other cryptocurrency. Once you pay off your loan, you’ll get your cryptocurrency back. If you’re worried about the high volatility of cryptocurrencies, some platforms allow you to collateralize your loans with cars, real estate, or other off-chain assets. 

The cryptocurrency loan process is quick, and you’ll receive your money almost immediately. The first thing you need to do is verify your identity. Identity verification or know your customer (KYC) is there to protect the platforms and lenders from frauds, money laundering, terrorist financing, and similar acts. 

This identity verification is fast. Typically, you need to take a photo of one of your official documents and send it in for a scan together with your data. After this step, you’re required to deposit collateral. Depositing is as fast as the blockchain. 

Since this form of lending doesn’t require any assessment of your credit score, it’s a great choice if you don’t have any financial history, bank account, or you’re self-employed. It also allows you to switch between crypto assets and make your funds liquid without triggering a taxable event. 

What are the safest Crypto Lending Platforms? 

There are many crypto lending platforms out there that differ in fees, interest rates, withdrawal terms, and other aspects. 

The most famous platform is Binance. Loan duration lasts from 7 to 90 days. Daily interest rates are 0.0244%, while annual interest rates are 8.90%. Binance offers two types of lending, fixed deposits and flexible deposits, where the fixed one locks your funds, and the flexible one lets you withdraw funds whenever you want.  Continue Reading…

Retired Money: Has Purpose uncorked the next Retirement income game changer?

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Purpose Investments: www.retirewithlongevity.com/

My latest MoneySense Retired Money column has just been published: you can find the full version by clicking on this highlighted text: Is the Longevity Pension Fund a cure for Retirement Income Worries? 

The topic is last Tuesday’s announcement by Purpose Investments of its new Longevity Pension Fund (LPF). In the column retired actuary Malcolm Hamilton describes LPF as “partly variable annuity, part tontine and part Mutual Fund.”

We described tontines in this MoneySense piece three years ago. Milevsky wasn’t available for comment but his colleague Alexandra Macqueen does offer her insights in the column.

The initial publicity splash as far as I know came early last week with this column from the Globe & Mail’s Rob Carrick, and fellow MoneySense columnist Dale Roberts in his Cutthecrapinvesting blog: Canadian retirees get a massive raise thanks to the Purpose Longevity Fund. Dale kindly granted permission for that to be republished soon after on the Hub. There Roberts described the LPF as a game changer, a moniker the Canadian personal finance blogger community last used to describe Vanguard’s Asset Allocation ETFs. Also at the G&M, Ian McGugan filed Money for life: The pros and cons of the Purpose Longevity Pension Fund, which may be restricted to Globe subscribers.

A mix of variable annuity, tontine, mutual fund and ETFs

So what exactly is this mysterious vehicle? While technically a mutual fund, the underlying investments are in a mix of Purpose ETFs, and the overall mix is not unlike some of the more aggressive Asset Allocation ETFs or indeed Vanguard’s subsequent VRIF: Vanguard Retirement Income Portfolio. The latter “targets” (but like Purpose, does not guarantee) a 4% annual return.

The asset mix is a fairly aggressive 47% stocks, 38% fixed income and 15% alternative investments that include gold and a real assets fund, according to the Purpose brochure. The geographic mix is 25% Canada, 60% United States, 9% international and 6% Emerging Markets.

There are two main classes of fund: an Accumulation Class for those under 65 who are  still saving for retirement; and a Decumulation class for those 65 and older. There is a tax-free rollover from Accumulation to Decumulation class.

There are four Decumulation cohorts in three-year spans for those born 1945 to 1947, 1948 to 1950, 1951 to 1953 and 1954 to 1956. Depending on the class of fund (A or F),  management fees are either 1.1% or 0.6%. [Advisors may receive trailer commissions.] There will also be a D series for self-directed investors.

Initial distribution rates for purchases made in 2021 range from 5.65% to 6.15% for the youngest cohort, rising to 6.4 to 6.5% for the second youngest, 6.4% to 6.9% for the second oldest, and 6.9% to 7.4% for the oldest cohort.

Note that in the MoneySense column, Malcolm Hamilton provides the following caution about how to interpret those seemingly tantalizing 6% (or so) returns: “The 6.15% target distribution should not be confused with a 6.15% rate of return … The targeted return is approximately 3.5% net of fees. Consequently approximately 50% of the distribution is expected to be return of capital. People should not imagine that they are earning 6.15%; a 3.5% net return is quite attractive in this environment. Of course, there is no guarantee that you will earn the 3.5%.”

Full details of the LPF can be found in the MoneySense column and at the Purpose website.

What can we learn by scrutinizing Warren Buffett’s portfolio?

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By Ian Duncan MacDonald

Special to the Financial Independence Hub

Warren Buffett has a reputation of being the most successful stock market investor ever.  What companies does he invest in? What do these stocks have in common? What can we learn by looking at his portfolio?

Once every quarter large holding companies like Berkshire Hathaway are required to disclose what stocks they hold. There  are 31 stocks in the Berkshire portfolio.  The value of the ten largest stocks of these 31 make up almost 90% of the portfolio’s total value.  One stock, Apple, makes up 40% of it . The other nine of the top ten stocks have values for Berkshire ranging from Bank of America worth 44 billion dollars  down to .$4 billion dollars invested in DaVita Inc.

Are all these 10 stocks headquartered in the United States?  No

Do they all make profits?  They do but the profits, as reflected in their operating margins, are not remarkable.

Do they all pay dividends?

Are they all paying dividends? No. Are those that do pay dividends paying remarkably high dividends? No.  Two of the 10 pay no dividends and 5 pay dividends of less than 1%.

Do they all trade millions of shares ever day?  No.  While six of them do have daily trading volumes exceeding a  million, one of them only trades fewer than 100,000 shares in a day.

Have the ten all increased their share prices since Berkshire Hathaway acquired them?  No.

Would any of them be considered to be a speculative investment?  Yes.

Do many of the share prices, as reflected in their Price-to-Earnings ratios and book values, appear to be inflated?  Yes,

Stocks that can grow steadily, not dramatically

There are 14,000 North American stocks that Berkshire could invest in. Many stocks could provide a better dividend income, and many have much greater potential for share price growth than these 10 stocks.  However, what most of these 14,000 lack is “survivability.” Buffett seeks stocks that he can depend on to produce reliable profits from their established, loyal customer bases for decades.  These are stocks that can grow steadily, not dramatically.

Berkshire Hathaway has invested 249 billion dollars in the following 10 companies [all US$]:

American Express Company (AXP) with $24 billion invested.

Apple Inc (AAPL) with $114 billion invested.

Bank of America Corp (BAC) with $44 billion invested.

BYD Co. Ltd (BYDDF) with $5 billion invested.

Coca-Cola Co (KO) with $22 billion invested

DaVita Inc (DVA) with $4 billion invested

Kraft Heinz Co ( KHC) with $14 billion invested

Moody’s Corporation (MCO) with $8 billion invested

US Bancorp (USB) with $9 billion invested.

Verizon Communications Inc (VZ) with $9 billion invested.

The wisdom of Buffet’s buy and hold investment strategy is reflected in some remarkable share price gains over the last 20 years:

American Express in 2001 could be purchased for $35.46 and is now trading at $157.95.

Apple is even more remarkable: in 2001 the share price was 33 cents. It is now at $126.90. Like most of these stocks, there have been some share price declines: Bank of America could be bought in 2001 for $29.20.  It can now be bought for $47.05  However, in 2006 it was at its highest price of $53.85.  In 2017 it was only $22.41.  There are many bank stocks whose share prices have had better gains than Bank of America and paid dividends more than double Bank of America’s 1.71% dividend yield.

BYD Company Limited is an unusual stock for this portfolio.  Berkshire has invested almost $5 billion in it. It is a Chinese electric vehicle manufacturer.  Fewer than 100,000 shares are being traded daily, which is small when compared to  the 15,935,074 Verizon Communications shares traded daily or the 11,915,739 Coca-Cola Shares. With a Price-to-Earnings ration of 97.5x the current $42.05 share price for BYD appears to be inflated.  In 2017 its share price was $5.95. This is barely above penny stock status. Its current operating margin of 4.14% would be typical of a speculative investment. This is one of the two foreign stocks among the 31 stocks in Berkshire’s portfolio.

Isn’t it interesting that Buffett invests in BYD instead of Tesla?  Could the contracts BYD is signing with long established car manufacturers to get them into electric vehicles be the attraction? Competition is fast approaching Tesla.

Coca-Cola has provided Berkshire with a solid investment foundation for decades.  Coke is the kind of established brand leader you expect Berkshire to invest in.  In 4 years, its share price has grown by $9.00. In 20 years, it has grown by $22.  Its dividend yield of 3.07% is the second highest of the 10 stocks (only Verizon paying 4.44% is paying a higher yield). Coke’s operating margin of 27.48% was the third highest after Moody Corporation and US Bancorp.

DaVita Inc. is another stock that arouses curiosity as to how it ended up in the top 10 of the Berkshire investments  It provides kidney dialysis services through hundreds of sites in 9 countries. Even though its share price has grown nicely, only one analyst currently recommends it as a buy In 2001 the share price was $7.15, by 2017 it was up to $77.32 and it is now at $120.94. DaVita pays no dividends.

Is there a pending increased need for dialysis services that the rest of the world is ignorant of? Perhaps Buffett just sees DaVita as a steady, profitable, growing stock with an ever increasing potential as the population ages?

Kraft Heinz Company is more typical of the big name, stable, reliable stocks that Buffett favors. However, the current price of $44.15 is significantly below what he paid for it a few years ago.  It is also well below the $99.20 it reached in 2017. Does the Price-to-Earnings ratio of 124.0x indicate that the current  price is greatly inflated?  The operating margin of 3.26% seems leave no room for a dividend these days. There was a 55 cent dividend paid in 2015.  What long term potential does Buffett see for Kraft Heinz?

Moody Corporation is the most profitable of the ten companies.  Its operating margin of 46.63% is much higher than Berkshire Hathaway’s 6% operating margin. Moody’s is a long-established leader in the financial risk information industry. With a small dividend yield of 0.75% the profits are not being paid to shareholders.  Four years ago, the share price was $118.45.  The current price is $332.85. This is a winner for Mr. Buffett.

US Bancorp did not have the highest dividend yield nor was it the highest priced stock nor did it have the highest operating margin, but its financial figures were good in all areas.  It scored a 70, which was the best score of the ten stocks.  The highest score I have ever calculated was 78.  The lowest score was 8.  I personally avoid investing in stocks scoring less than 50. The scoring system was designed to identify the best high dividend paying stocks with the potential to realize ever increasing share prices (The stock scoring software is emailed buyers of my investment books when requested).

Verizon Communications is the second highest scoring stock. Its dividend yield of 4.44% was the highest of the 10 stocks.  Like Moody, it also had good financial figures. It is another example of the solid, well established businesses Buffet wants in his portfolio.

The following are the 10 stocks sorted in descending order by desirability score:

  • US Bancorp – 70
  • Verizon Communications – 66
  • Bank of America Corp – 65
  • American Express – 62
  • Coca-Cola – 60
  • Apple Inc – 58
  • Moody’s Corp – 56
  • DaVita Inc – 51
  • Kraft Heinz – 43
  • BYD Company – 38

You will notice that these top 10 stocks do not include industries negatively impacted by the COVID-19 pandemic and recession, such as hotel chains, cruise lines or air lines. As well, Steel mills, mining companies, oil companies, construction companies or other industries whose fortunes often rise and fall on world price fluctuations have no presence. However, financial organizations like US Bancorp, Bank of America Corp, American express and Moody’s are well represented in the top 10.

The following are the other 21 companies appearing in the Berkshire portfolio of 31 stocks:

AbbVie Inc (ABBV)

Amazon.com, Inc (AMZN)

Aon PLC (AON)

Axalta Coating Systems Ltd (AXTA)

Bank of New York Mellon Corp (BK)

Biogen Inc (BIIB)

Bristol-Myers Squibb Co (BMY)

Charter Communications Inc (CHTR)

Chevron Corporation (CVX)

General Motors Company (GM)

Globe Life Inc (GL)

Itochu Corporation (ITOCF)

Johnson & Johnson (JNJ)

Kroger Co (KR)

Liberty Global PLC Class A (LBTYA)

Liberty Global PLC Class C (LBTYK)

Liberty Latin America Ltd Class A (LILA)

Liberty Latin America Ltd Class C (LILAK)

Liberty Sirius XM Group Series A (LSXMA)

Liberty Sirius XM Group Series C (LSXMK)

Marsh & McLennan Companies Inc (MMC)

Mastercard Inc (MA)

Merk & Co Inc (MRK)

Mondelez International (MDLZ)

Procter & Gamble Co (PG)

Restoration Hardware Holdings Inc. (RH)

Sirius XM Holdings Inc (SIR)

Snowflake Inc (SNOW)

SPDR S&P ETF Trust (SPY)

StoneCo Ltd (STNE)

Store Capital Corp (STOR)

Teva Pharmaceutical Industries Ltd (TEVA)

T-Mobile Us Inc (TMUS)

United Parcel Service Inc (UPS)

Vanguard 500 Index Fund ETF (VOO)

Verisign Inc. (VRSN)

Visa Inc (V)

Wells Fargo & Co (WFC)

If your objective is to build a financially strong portfolio that will endure and grow for decades, then choosing the kind of stocks that Warren Buffett chooses would be a proven, effective strategy.  In my last investment book, ”Safer Better Dividend Investing,” the highest dividend paying stocks in the USA (and Canada) were scored and sorted in descending order.  These charts would help you find outstanding stocks to add to your portfolio.

You do not need hundreds of stocks in your portfolio. The number of stocks Berkshire invests in is thirty-one.  My recommendation is always twenty. This gives you an easily manageable number of stocks while providing safe diversification. Unlike Warren Buffett, you do not have billions to invest but a carefully chosen portfolio can, in time, provide you with generous reliable income and eventual financial independence.

After graduating from McMaster University, with $100 left in his pocket (but no student debt), Ian Duncan MacDonald hitch hiked home to Sudbury to work four months as a labourer in International Nickel’s smelter. In four months, he had saved enough to seek his fortune in the big city.

In Toronto, he was immediately hired by Dun & Bradstreet as a credit reporter. While he had expected to be a reporter for the rest of his life, D&B had other plans. Within four years, he was General Manager of their Marketing Services Division. Three years later, at the age of 28, he was responsible for the sales, marketing and advertising for all three divisions of the company.

At 32, he left D&B to build Screening Systems International Ltd, for a large conglomerate, which led to his interest in collections.  Moving to Creditel of Canada Ltd. he became  Senior Vice President. Subsequently bought by Equifax, he remained there until his retirement in 2005. In anticipation of his retirement he incorporated Informus Inc. to sell his art, his publications and consulting services (www.informus.ca.) 

His investment books “Income and Wealth from Self-Directed Investing” and “Safer Better Dividend Investing” provide a detailed system, scored charts of all high dividend stocks traded on the NYSE, NASDAQ and TSX, plus stock scoring software. They arm someone who has never invested with the knowledge and tools  they need to successfully and safely generate income and wealth for the rest of their lives

  

 

3 tips to House Flipping success for Seniors

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By Jim McKinley

Special to the Financial Independence Hub

If you’ve been looking forward to trying something new in retirement, flipping houses might be the ticket. If you want to be a successful house flipper, follow these steps from Financial Independence Hub to get your business off on the right foot.

1.) Figure out Funding

Funding for house flipping generally comes from two places: investors or hard money loans. Each way has its benefits and drawbacks.

Investors can be a great option because you are bringing someone into the business who wants it to succeed. The money investors give you can also be used more freely than funds from a loan. Auctions, for instance, are an excellent place to pick up homes for cheap, but they often require cash. Most loans won’t cover auction purchases, so investors are an excellent way to open up the world of foreclosed auction homes for you.

The downside to investors is that because they also have an investment in the business, you might have less freedom than you would if you were on your own. Their opinions become as weighty as yours, and you may have to bend to their will when your opinions differ on what to do because they have the money.

Hard money loans are another option for business financing. Instead of basing their approval on you, lenders consider the potential value of the house after repair, called the ARV. If approved, they’ll give you not just the purchase money for the house but what you’ll need to flip it, too, and if the loan goes south, they can get their money back by selling the property. The main drawback to these loans is steep interest.

2.) Know what to look for

The ideal house for flipping is located in an up-and-coming neighborhood, meaning young families and professionals are looking to buy there. It’s located on a good street with low crime and is near nice schools.

According to HGTV, the best houses have areas that can be improved immensely simply by painting. They have solid builds with an attractive layout and unique pieces that give them character. Although it can be tempting to choose homes that could use extreme renovations, those kinds of fixes can take significant time. It’s important to remember that every month you spend working on the house is time that you’re losing money through your loan or paying bills to keep the house up and running. Continue Reading…

Tax rates likely to rise: what to do about it

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By Eva Khabas

Special to the Financial Independence Hub 

The Covid pandemic has led to unprecedented government spending with a deficit that has reached record heights.

Sooner or later someone has to pay for this and that usually means the taxpayer. Don’t look now but when you start your tax planning it’s probably best to assume that tax rates are going up in Canada.

However, even before Covid the federal government was talking about increasing the capital gains tax.

Capital gains inclusion rate could go back up to 75%

Currently, only 50% of capital gains are, in fact, taxable but this was not always the case. In fact, from 1990 to 1999 75% of capital gains were subject to tax! It’s logical to assume that tax revenues will be increased through a higher capital gains portion that is taxable, since capital gains are perceived as ‘passive’ income from investments. In theory, this means taxes should be generated by wealthier taxpayers.

Loss of Principal Residence exemption?

Also, the big fear of every Canadian is that government will remove the principal-residency exemption. Currently, taxpayers can sell their primary residence at a gain and not pay any taxes.  Many taxpayers rely on the appreciation in value of their homes as their main source of retirement income. The impact of making gains on principal residency taxable would be devastating to many, if not most, Canadians.

Before discussing what to do about all this, let’s make sure we understand what capital gains are, how they are different from your other income, and when these gains become taxable.

So, what exactly is capital gain? In a nutshell it’s the growth in the value of an asset being held for investment purposes, so that asset is not for resale. A long-term holding period would indicate that the gain is capital. Currently, only half of the capital gain is taxable, while most other income is fully taxed.

In most cases the capital gain is subject to tax when the asset is sold, but there are also times when you may have to report capital gains without an actual sale occurring. For example, at the time of death there is the deemed or assumed sale of all assets, with any capital gains included in the tax return of the deceased. This would, of course, affect beneficiaries.

It’s important to note that increases in personal tax rates will also result in you paying more tax on capital gains. This is because the tax rate on capital gains is applied at the same tax rates in Canada as on employment and other income. In addition, reporting a higher overall total income would also result in more tax because a higher income puts you in the top tax bracket.

Defence # 1: Timing

So, now we see that many tax-reducing strategies primarily revolve around two things – 1) timing, and 2) reducing your taxable income. First, let’s look at timing.

If you have higher overall income from various sources in 2021, and expect lower taxable income for 2022, consider disposing of the asset(s) in 2022 wherever possible so the gain attracts a lower marginal tax rate for you.

You can also use time to advantage by deferring the cash outflow – the tax you pay to the government – and disposing the assets early in the year. Your tax bill is due April 30th of the following year, so if you sell the capital asset in January of 2022 you still have 15 months until tax must be paid on that.

Staggering gains over multiple years

Now, let’s assume you have a large capital gain. How can you stagger that gain over several years? One strategy is to defer cash receipts from the sale over multiple years. The Canadian Income Tax Act allows you to spread that gain over five years (and in some cases over ten years), provided you receive proceeds from the sale over a number of years. For example, if you receive 20% of the proceeds in 2021, you only need to include 20% of the gain in your taxable income as it can be spread over five years.

RRSPs and TFSAs

All these strategies are of a short-term nature. If the assets are disposed of in the long term, consider holding them inside your RRSP. You don’t have to declare those assets as income until you make a withdrawal. Likewise, you can use your TFSA so some of the gains are not subject to tax at all. Either way, your tax advisor can help determine if assets can be transferred to your RRSP or TFSA. Continue Reading…