6. Our investments

We have 14 stocks in our portfolio, and no single holding more than 10% of the total. Most of the companies are fairly typical of a Canadian retiree’s portfolio, but there are a few quirky elements that came out of recommendations that I got from a relative when I was setting up the portfolio. (Statistics as of late January 2016.)

Utilities (24%): Innergex (INE-TSX), Algonquin Power (AQN-TSX), Brookfield Renewable Energy (BPF.UN-TSX), Scottish and Southern Electric (SSEZY on the US over-the-counter market)

These four companies offer dividends in the 5-7% range at the moment, and all have grown their dividends over time.

Real estate (19%): Dream Office (D.UN-TSX), Dream Industrial (DIR.UN-TSX), Dream Global (DRG.UN-TSX).

These real estate investment trusts are offering 9%-15% yields (yowza!). They have not increased their distributions over time, but did I mention the 9%-15% yields they are offering now? We have some diversification, but not enough. I like being diversified between office property in Canada (D), industrial property in Canada (DIR), and office property in Germany (DRG), but I am concerned about having all of our real estate eggs in one management basket. I just cannot bring myself to give up on Dream’s glorious yields. Their adjusted funds from operations (AFFO) ratios, which are used to measure the sustainability of cash flow for REITs, are high, but are not dangerously so. This is probably, however, the biggest risk to my financial plan. I have seen speculation about D cutting its distribution. See my comments about stress-testing the plan below.

Retail (19%): Boston Pizza (BPF.UN-TSX), A&W Canada (A&W.UN-TSX), and Liquor Stores (LIQ-TSX)

The first two are restaurant royalty trusts that offer about 8% and 5.5% yields respectively. Boston has raised its dividend in the recent past, while A&W had not for years, but did so in October 2015 – a nice surprise!  Liquor Stores operates in Alberta, BC, Alaska and Kentucky. I like the fact that it is growing by opening new stores, and has a range of formats, which I think makes it flexible in adapting to changing markets. The stock has been battered because it is perceived as being an Alberta company, so its yield is now around 15%. The people who speculate about these things are speculating that LIQ will cut its dividend.

Telecom (17%): Bell Canada (BCE-TSX) and AT&T (T-NYSE)

These should be stable parts of a portfolio, and they grow their dividends. I have bought and sold both as they’ve gone up and down. BCE’s yield is below 5% now, while AT&T’s is closer to 6%. I am trying to train myself to trade less, so I am holding onto these.

Finance (5%): Bank of China (BACHY on the US over-the-counter market) and China Construction Bank (CICHY on the US over-the-counter market)

This is the more exotic part of our portfolio. I believe in China’s long-term prospects despite the uncertainty this year, and have held on as these stocks have lost value. Our positions are not large, but they have yields of 6.5-7% and have grown them over time.

Spouse’s defined contribution employer pension plan (15% or our portfolio) is invested in four mutual funds. Job 1 when he leaves the company is to roll that over into his existing locked-in retirement account and invest it in the companies we already have.

Our geographic diversification is not as good as it should be: we are over-weighted in Canada (71%), in part because of the desire for tax efficiency: Canadian dividends qualify for better tax treatment. But that’s not a good enough excuse. As with many investors, familiarity with the Canadian market has led me to invest more at home. We have 20% in the US, 3% in Europe, and 5% in Asia/other.

So this portfolio provides an excellent stream of income for us. But what happens if companies cut their dividends or distributions? I stress-tested the plan for a 40% cut in D.un distributions, and a 40% cut in LIQ dividends to see what would happen. The plan was still sound, but the margin for error was reduced significantly. I have discussed with Spouse that if things fall apart,

Fire and brimstone coming down from the skies! Rivers and seas boiling! Forty years of darkness! Earthquakes, volcanoes… The dead rising from the grave! Human sacrifice, dogs and cats living together… mass hysteria!

We would have to revisit the spending side of the equation and tighten our belts for a while until things blow over. I think there is enough slack in the spending side that we could do that without giving up things that are really important to us, like travel.

Thank you for reading. Comments are welcome.

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6. Our investments

2 thoughts on “6. Our investments

  1. So Dream Office (D.UN) did cut its dividend, by one-third. It hurt, but as I mentioned, I had stress-tested the plan for cuts by D.UN and Liquor Stores, so we’re okay. I’ve now changed the plan to reflect the D.UN cut, and I have also assumed a one-third cut by LIQ. On the other hand, I reduced some of the other prudence I had built in (i.e., assumed reductions in future returns), because one Big Bad Thing has already happened, and I am now just assuming that another Big Bad Thing will happen.

    On the other hand, in February, Brookfield Renewable increased its dividend by 7.2%, and Boston Pizza did so by 6.2%. And D.UN has risen about 30% in the last month, mostly since the distribution cut.

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  2. And now Liquor Stores (LIQ) has cut its dividend by two-thirds. Base don speculation in the media, I had assumed a one-third cut, so this hurts, but it doesn’t derail our plan. LIQ is only 4% of our portfolio.

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