General

Updating the Canadian wide-moat portfolio

Posted By |

 

By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It’s a trade-off. I hold a concentrated portfolio of Canadian stocks. What I give up in greater diversification, I gain in the business strength and potential for the companies that I own to not fail. They have wide moats or exist in an oligopoly situation. For the majority of the Canadian component of my RRSP account I own 7 companies in the banking, telco and pipeline space. I like to call it the Canadian wide moat portfolio.

(updated August 24, 2022) Like many Canadian investors I discovered over the years that my Canadian stocks that pay very generous dividends were beating the performance of the market. You’ll find that market-beating event demonstrated by the Beat The TSX Portfolio. Eventually, I moved to the stock portfolio approach.

Over longer periods you’ll see that BTSX beat the TSX 60 by 2% annually or more. And as always, past performance does not guarantee future returns.

For the bulk of my Canadian contingent I hold 7 stocks.

Canadian banking

Royal Bank of Canada, Toronto-Dominion Bank and Scotiabank.

Telco space

Bell Canada and Telus.

Pipelines

Canada’s two big pipelines are Enbridge and TC Energy (formerly TransCanada Pipelines).

My followers on Seeking Alpha or Cut The Crap Investing readers will know that I also own Canadian energy producers, gold stocks and gold price ETFs (holding gold) and the all-in-one real asset ETF from Purpose. I also own Canadian bonds and bitcoin.

For the U.S. component there is a basket of U.S. stocks. Here’s an update of our U.S. stock portfolio. That portfolio continues to provide impressive market-beating performance.

We hold our cash with EQ Bank.

The performance update to August 2022

Here’s the Canadian wide moat 7 from 2014 vs the TSX Composite, to the end of July 2022. I slightly overweight to the telcos and banks. The portfolio for demonstration purposes is rebalanced every year. When reinvesting I usually throw money at the most beaten-up stock. That would be a reinvestment strategy that seeks value and greater income, the general approach of the Beat The TSX Portfolio.

2021 was a very good year for the wide moat portfolio. It beat the TSX, but did underperform the Beat The TSX Portfolio model and Vanguard’s High Dividend ETF (VDY). The outperformance of the Wide Moat 7, over the market, is accelerating in 2022.

In 2022 the Canadian Wide Moat 7 is up 1.14%. The TSX Composite is down 5.56%. For the record, the Vanguard High Dividend (VDY) is up 2% in 2022 to the end of July.

Charts courtesy of Portfolio Visualizer

Annualized returns and volatility

The Canadian Wide Moat 7 has delivered greater total returns and with less volatility and less drawdowns in corrections. The market beat is somewhat consistent with the Beat The TSX Portfolio beat of over 2% per year.

And of course the portfolio dividend income is more than impressive. I did not create portfolio exclusively based on the generous and growing income, but it is a wonderful by-product. The following is based on a hypothetical $10,000 portfolio start amount. The starting yield is above 4%, growing towards a 10% yield (on cost) based on the 2014 start date.

In the above, the dividends are reinvested. For example, the Telus dividend is reinvested in Telus. While I will take a total return approach for retirement funding, the generous portfolio income contribution will add a dimension that will help reduce the sequence-of-returns risk. I am in the semi-retirement stage.

Performance update to the end of May 2022

In this chart I begin with the inception date of the Vanguard High Yield VDY, 2013. We see the Canadian Wide Moat 7 vs VDY and the TSX Composite – XIC.

The Wide Moat stocks have outpeformed for the full period, but that is thanks mostly to better returns out of the gate. The outperformance is also aided by lesser drawdowns in market corrections. We see that both the Wide Moat approach and VDY have beat the market, with ease.

Wide Moats with an energy kick

I also hold Canadian energy stocks in the mix. That energy allocation is near 10%. Here’s what it looks like over the last year with that energy kicker. The following table looks at from January of 2021 to the end of July 2022. Continue Reading…

5 factors for millennials considering their retirement

Posted By |

 

By David Kitai, Harvest ETFs

(Sponsor Content)

Millennials — the generation born between 1981 and 1997 — are beginning to enter their 40s. With the passing of that milestone comes a new consideration: retirement.

Canadians are living longer and longer, retirement at or around age 65 may need to last 30+ years. Millennials in their 30s and early 40s are ideally placed to plan for their eventual retirement. In those typically peak working years, millennials can take major strides towards a stable financial future and the achievement of their retirement goals. Preparing for retirement, though, is more than just putting a magic number away in a bank account. There are myriad factors a millennial should consider as they begin to plan for retirement. Below are five of those factors.

 1.) Understanding RRSPs and RRIFs

Registered Retirement Savings Plan (RRSP) accounts are a key tool Canadians can use to save for retirement. Their mechanism is simple: contributions to these accounts within the annual limit are tax-deductible. Income earned by investments held in the RRSP is also tax exempt, provided that income stays in the account. RRSPs give you an annual tax incentive to save for your retirement.

When RRSP holders turn 71, however, those RRSPs turn into Registered Retirement Income Funds (RRIFs). These accounts are subject to a government-mandated minimum withdrawal, on which some of the deferred tax from these contributions is paid. You can learn more about the problems with RRIF withdrawals, and how to navigate them here.

Millennials considering their retirement should look at how RRSPs can give them a tax benefit for saving now, while also planning for how the eventual transition to RRIFs will change their financial realities.

 2.) How the Canada Pension Plan factors into retirement

Canadians between the ages of 60 and 70 who worked in Canada and contributed to the Canada Pension Plan (CPP) can elect to activate their CPP benefits. Those benefits will be paid as monthly income based on how much you earned and contributed during your working years, as well as the age you chose to begin receiving benefits.

The longer you wait before turning 70, the higher your CPP benefits will be, though that appreciation doesn’t go beyond age 70. Millennials planning for retirement at any age could consider how they’ll finance their lifestyles while maximizing their CPP benefits at age 70. It’s notable that even the highest levels of CPP benefits pay less than $2,000 per month in 2022. That won’t be enough for many Canadians to live on, and millennials considering retirement may want to think about other sources of income.

3.) Equity Income ETFs

One of the issues that retirees have struggled with over the past decade has been the extremely low yields of traditional fixed income products like bonds. In 2022 those rates rose somewhat, but only following record inflation eating away at the ‘real yields’ of an income investment.

Many equity income ETFs pay annualized yields higher than most fixed income and higher than the rate of inflation. These ETFs hold portfolios of equities — stocks — but pay distributions generated through a combination of dividends and other strategies. Harvest equity income ETFs use an active and flexible covered call option writing strategy to help generate their monthly cash distributions.

These ETFs still participate in some of the market growth opportunity a portfolio of stocks would, while also delivering consistent monthly cash flow for unitholders. The income they pay can help retirees finance their lifestyle goals and help millennials as they prepare themselves to retire.

4.) Tax efficiency of retirement income

Tax is a crucial consideration for any younger person thinking about retirement. Aside from the tax issues surrounding RRSPs and RRIFs, any income-paying investments held in non-registered accounts, or any income withdrawn from a registered account, will be subject to tax. Dividend payments and interest payments from fixed-income investments are taxed as income. Continue Reading…

Beware the Retirement Risk Zone

Posted By |

I often recommend deferring CPP until age 70 to secure more lifetime income in retirement. It’s also possible to defer OAS to age 70 for a smaller, but still meaningful, increase in guaranteed income.

While the goal is to design a more secure retirement, there can be a psychological hurdle for retirees to overcome. That hurdle has to do with withdrawing (often significant) dollars from existing savings to fill the income gap while you wait for your government benefits to kick in.

Indeed, the idea is still to meet your desired spending needs in retirement – a key objective, especially to new retirees.

This leads to what I call the retirement risk zone: The period of time between retirement and the uptake of delayed government benefits. Sometimes there’s even a delay between retirement and the uptake of a defined benefit pension.

Retirement Risk Zone

The challenge for retirees is that even though a retirement plan that has them drawing heavily from existing RRSPs, non-registered savings, and potentially even their TFSAs, works out nicely on paper, it can be extremely difficult to start spending down their assets.

That makes sense, because one of the biggest fears that retirees face is the prospect of outliving their savings. And, even though delaying CPP and OAS helps mitigate that concern, spending down actual dollars in the bank still seems counterintuitive.

Consider an example of a recently divorced woman I’ll call Leslie, who earns a good salary of $120,000 per year and spends modestly at about $62,000 per year after taxes (including her mortgage payments). She wants to retire in nine years, at age 55.

Leslie left a 20-year career in the public sector to work for a financial services company. She chose to stay in her defined benefit pension plan, which will pay her $24,000 per year starting at age 65. The new job has a defined contribution plan to which she contributes 2.5% of her salary and her employer matches that amount.

Leslie then maxes out her personal RRSP and her TFSA. She owns her home and pays an extra $5,000 per month towards her mortgage with the goal of paying it off three years after she retires.

Because of her impressive ability to save, Leslie will be able to reach her goal of retiring at 55. But she’ll then enter the “retirement risk zone” from age 55 to 65, while she waits for her defined benefit pension to kick in, and still be in that zone from 65 to 70 while she waits to apply for her CPP and OAS benefits.

The result is a rapid reduction in her assets and net worth from age 55 to 70:

Retirement risk zone example 55-70

Leslie starts drawing immediately from her RRSP at age 56, at a rate of about 7.5% of the balance. She turns the defined contribution plan into a LIRA and then a LIF, and starts drawing the required minimum amount. Finally, she tops up her spending from the non-registered savings that she built up in her final working years.

When the non-registered savings have been exhausted at age 60, Leslie turns to her TFSA to replace that income. She’ll take that balance down from $216,000 to about $70,000 by age 70. Continue Reading…

9 Housing Market Predictions for the next 5 Years

Posted By |

What is one prediction you have for the housing market in the next five years?  

To help you stay abreast of developments in the housing market, we asked real estate professionals and business leaders this question for their best predictions. From more people heading south to buyers shifting toward simple and functional homes, there are several insightful predictions that may help inform your decisions as a buyer, homeowner, developer or other stakeholder in the housing market within the next 5 years.

Here are nine housing market predictions for the next 5 years:

  • People Will Be Heading South
  • Expect a Good Degree of Stabilization
  • Lending Requirements Will Get Tighter
  • Home Values are Steadily Rising and Stabilizing
  • Look for Sell-Off by Big Owners
  • More Smaller and Affordable Houses
  • Expect More Use of Digital Tools to Promote Sales
  • Home Prices Will Continue Upward but Much More Gradually
  • Tastes Will Shift Toward Simple and Functional Homes

 

People will be Heading South

With remote work becoming the norm, we’ll continue to see people fleeing big cities for more land, warmer weather, and better amenities. Southern states such as Florida, South Carolina, Alabama, and Tennessee will see an increase in home buyers. Fewer people will be moving to the Northeast in favor of a lower cost of living, mild winters, and the ability to be outside 365 days of the year. — Isaiah Henry, Seabreeze Management

Expect a good degree of Stabilization

I think the market will stabilize somewhat, short of any significant downturn. Prices have shot up dramatically in recent years, so if they come down a bit now, that’s not a crash, it’s just a return to Earth. Anyone fearing something like the crash of 2008 should rest easy, as the same conditions are simply not there in terms of inventory, unemployment, and subprime lending. Expect prices in the near future to be somewhat closer to normal, but not dramatically so. — Marcus Hutsen, Patriot Coolers

Lending Requirements will get Tighter

One prediction I have for the housing market is that lending requirements will become tighter. This is because, after a period of loose lending standards, there has been an increase in the number of people defaulting on their mortgages. Lenders are becoming more cautious, and as a result, it will become harder for people to get mortgages. This could lead to a slowdown in the housing market, as fewer people will be able to buy homes. However, it could also create opportunities for investors who are willing to buy properties and rent them out. In any case, the housing market activity is likely to slow down in the next few years. — Lorien Strydom, Financer.com

Home Values are steadily rising and stabilizing

While we can’t magically forecast the future of real estate, it’s pretty safe to assume that home values are going up steadily just as they historically have. That doesn’t mean we won’t see the typical peaks and valleys that result from economic and other variable factors, rather confirm that the housing market fluctuates slightly over time which is normal. Those concerned the 2008 crisis could repeat can be at ease when considering the regulatory measures taken since to avoid straining our economy. It seems unlikely we would see such an event in the US again, and though buyer trends have been irregular in recent years, the data would support steady home values for the foreseeable future. — Tommy Chang, Homelister

Look for Sell-Off by Big Owners

One prediction I have is that the big companies that have been paying outrageous amounts for homes will suffer financially and need to sell them off. The idea behind these conglomerates, which some are foreign-owned, is to buy up private properties and either rent them or flip them for a profit. That is what has caused rents to soar and has pushed many would-be homeowners or independent house flippers out of the market because they can’t compete with the bid price.  Continue Reading…

The Alternative Bonanza

Posted By |

 

Photo courtesy Creative Commons/Outcome

By Noah Solomon

Special to the Financial Independence Hub

 

Over the past 20 years, there has been a propensity for both institutional and individual investors to diversify aggressively no matter what the consequences. A major part of this push has involved increasing allocations to alternative investments, ranging from hedge funds to private equity to venture capital to private debt to real estate.

In my latest commentary, I analyze both the hedge fund and private equity (PE) industries, which have been large beneficiaries of the shift into alternative investments. Specifically, I will discuss whether they have been successful in producing their intended objectives. Importantly, I recognize that there has and will always be a tremendous difference in performance between individual funds and investments and have limited my observations to generalizations on these asset classes as a whole.

Hedge Funds: from Alfred Winslow Jones to $4.8 Trillion

While writing an article for Fortune Magazine in 1948, investing pioneer Alfred Winslow Jones had the unique idea of managing the risk of holding long stock positions by selling short other stocks and using leverage to boost portfolio returns. In 1949, he raised $60,000 from four friends, added it to $40,000 of his own money, and began the first “hedge fund.” In 1952, Jones opened the fund to new investors. He also added a 20% incentive fee as compensation for himself as manager whereby he would receive 20% of any profits generated by the funds (this idea was based on the practice of Phoenician merchants who kept one-fifth of profits from successful voyages).

Hedge funds have come a long way since Jones’ time. They have been a large beneficiary of the shift into alternative assets. According to BarclayHedge, over the past 20 years ending December 31, 2021, hedge fund assets under management grew from $370 billion to $4.8 trillion.

The Emperor has No Clothes

Given the explosive growth in hedge fund assets, most people would be surprised by the investment performance of the hedge fund industry. As the following table demonstrates, on average hedge funds have neither produced attractive returns nor have they provided effective diversification from public equities.

Hedge Fund Returns: Past 20 Years Ending July 31, 2022

 

Over the past 20 years ending July 31, 2022, the HFRX hedge fund index had an annualized rate of return of 1.8%, as compared to 8.5% for the MSCI All Country World Stock Index. Moreover, the HFRX Index lagged the 3.3% annualized return for the Bloomberg Global Aggregate Bond Index while producing similar volatility.

Hedge funds have also come up short from a diversification perspective. The correlation of the HFRX index to global equities has been 78.8% while that of bonds has been only 22.9%. In other words, over the past 20 years bonds have provided both higher returns and better diversification than hedge funds.

With standard annual fees of 2% of assets and 20% of profits, hedge funds distinguish themselves more as a compensation structure than as an asset class. According to Warren Buffett, “A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors.”

Private Equity: Not as Advertised

Another big beneficiary of the push to enhance returns and/or lower overall portfolio volatility has been the private equity industry.  Investors are told that these private equity funds produce superior returns, while providing portfolio diversification. As a result, private equity has become the hottest home for a variety of sophisticated institutions and individuals. Since 2017, investors have poured more than $1 trillion into PE funds. According to McKinsey, this amount dwarfs the amount of cash directed to venture capital, real estate funds, private debt, hedge funds and just about any other form of alternative investment.

Like hedge funds, PE firms have been hard-pressed to deliver their stated objectives. Michael Cembalest, the chairman of market and investment strategy at J.P. Morgan Asset Management, stated, “Since the financial crisis, the industry has had a tougher time outperforming public equity benchmarks.” Continue Reading…