• hp drops
    I’m always very interested to follow earnings season since it’s the perfect time to make sure that each stock I own is doing well. Quarterly results help me to keep up with all stocks and the management teams’ comments, often published by the CEO, give additional information on what happened and where the company is going. It’s not only a matter of numbers, it’s also a matter of strategy; business models.

    Now that I run 12 virtual portfolios for Dividend Stocks Rock, I simultaneously follow 45 to 50 companies. Let’s just say that the month of April was quite busy for me and I’m currently finishing the review of all the results. The fact I’m covering so many stocks at the same time allowed me to identify several trends. An interesting trend amongst others was to realize how analysts’ expectations drive the market.

    The Stock Goes Where the Analysts Call The Shot

    As a dividend investor, I focus on companies generating cash flow today and that will generate cash flow in the future. It is a simplistic vision of investing but it doesn’t have to be complicated to be efficient. I will follow trends in revenues (sales) and earnings (EPS) over the past three and five years. I will also combine these metrics with the company’s dividend payout management. This is why I follow the dividend growth and dividend payout. The combination of these metrics will tell me if a company is on the right track to make good business and generate enough cash flow. Then, I look at what the company is doing with its cash flow. I’m more interested in a company sharing its profit with investors through dividend payouts or stock buybacks than spending in mergers & acquisitions, R&D or marketing. These last three types of expenses do matter for the long term success of the company, but I want to make sure that the dividend payout is not left out of the equation.

    I’m well aware that I don’t see stocks as analysts do. This is why the market goes up and down faster than we can stand. If the company doesn’t deliver what analysts expect, regardless if it’s positive results or not, the stock will get hurt.

    The best example I can see is Helmerich & Payne (HP) which published EPS up by 14% compared to last year and revenues up by 6.5%. This was an all time record figure for revenues. The CEO also announced HP was doing well and continued to experience strong demand. In the same call, he also announced that HP entered in an agreement with 5 more exploration and production companies. My understanding: HP will continue to pay and increase its dividend.

    The result on the market?

    A 6% drop within one market session. Analysts expected more, they weren’t happy; they got rid of the stock like a rock stuck in your shoe. Does it mean you shouldn’t buy the stock or you even sell it? I hold on to my position.

    Why? You have to understand why analysts are not managing your portfolio but theirs. There is hype around HP as the stock is +73% over the past 12 months. An analyst who bought it a year ago could pretty much want to cash out some of his profit or simply liquidate his position. This is a very interesting return for an investor; you might want to jump onto another train that goes faster instead of staying on this one. But because the portfolio manager will sell millions of dollars of HP while you only hold a few thousand, he has an influence on the stock price, you don’t.

    Don’t forget portfolio managers also have their jobs to save from time to time. I know for a fact that some traders became a lot more insecure about their jobs! This changes their perspective of investing and influences their decisions. After all, they are humans before being traders!

    I’m interested to see what the company shows compared to analysts’ expectations to understand where the company is going and where the analyst thought it should go. However, missing expectations with positive results is definitely not the end of the world. IMO, what happened to HP just created a buy opportunity for small investors like me!

    Do you follow analyst expectations and recommendations?

    Disclosure: I hold shares of HP.

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  •  

     

    Last Monday, I mentioned the possibility of using a margin account to invest in a TFSA account. To my knowledge, only Questrade offer TFSA margin accounts. It’s kind of counter intuitive when you think about it: why would you borrow money to invest in an account where you can’t deduct the interest?

     

    The idea of leveraging in Canada is often linked to the fact we can deduct the interest from your investment income. I’m not a tax expert but the general concept is that you are allowed to deduct the interest from a loan when the money has been used to invest and there is a reasonable expectation of profit. For example, if you borrow 100K at 5% to invest in a bond paying 2%, you can’t really deduct the interest as it is pretty obvious you will lose money.

     

    However, this tax rule doesn’t apply when you borrow money to invest in a tax sheltered account (an RRSP or TFSA for example). So what’s the point of borrowing to invest in a TFSA?

     

    Because my Expected Return is Bigger

     

    If I invest $1,000 in my TFSA margin account and borrow another $2,000, I will have $3,000 to invest. I would pay 6% interest on $2,000, a cost of $120. This represents 4% of my portfolio. By selecting my stocks carefully, I can probably build a portfolio that will pay all interest within 12 months, maybe instantly.

     

    There are many Canadian stocks that would fit in this portfolio:

    Telus (T) 3.71%,

    BCE (BCE) 5.04%

    ScotiaBank (BNS) 3.85%,

    Corus (CJR.B) 4.39%

    Emera (EMA) 4.20%

    National Bank (NA) 4.05%

    Riocan (REI.UN) 5.21%

    Rogers (RCI) 4.19%

     

    This is a short list but it’s more than enough for me to build a $3K portfolio. I would probably buy 2 stocks at first and build on that. The idea is to pick stocks that will pay the interest with their dividend.

     

    Then, the dividend growth will be “in my pocket” along with the overall growth of the stock value. When I look at my current portfolio, my YTD total return is 7.4%. It is a great combination of dividend payouts and stock growth. This is what I would like to create with this margin account.

     

    You Have to be More Aggressive

     

    A margin account is not for the faint of heart. If you don’t want to go “all-in”, it’s better off not doing it at all. I was surprised to find over 100 stocks on the Canadian market showing both EPS and positive revenue growth over the past 5 years and paying over 4% in dividend yield. Then, it’s a matter of researching deeper and look carefully at each company. The short list I just pulled for this article is coming from stocks I know well and that were part of my quick stock filter research.

     

    Let’s say I wouldn’t have any problem building a “bank & telecom” portfolio with my TFSA. This could be a good idea to maximize both dividend payouts and overall growth of the portfolio. I’m not completely done with the idea of investing on margin but I must admit this is getting serious in my mind right now.

     

    Please note that I didn’t mention any US stocks in this article because dividends paid by US companies in a TFSA are subject to withholding taxes (30% if you don’t do anything, 15% if you take care of it). I explain how you can save 15% withholding tax in my book; Dividend Growth Freedom Through Passive Income Canadian Edition.

     

    What do you think? Should I go ahead and use the power of leveraging?

     

    Disclaimer: I own shares of T, BNS, NA

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  •  

     

    For the past four years, I’ve been thinking about investing differently with my dividend stocks. In fact, as soon as I started dividend investing, I thought of adding this strategy to my portfolio. But I couldn’t. It wasn’t the right time for me. This summer could be the right time. This is why I’m sharing my new dividend investing strategy with you today.

     

    I’m Going to Buy on Margin

     

    As you know already, the bulk of my portfolio is an RRSP (a Canadian tax sheltered investment account) where I can’t use margin borrowing. Starting this summer, I should have some extra cash to invest outside my retirement plan. This is why I thought of starting to use a margin account. The margin allows you to borrow money based on the value of your holdings. In other words, we are talking about leveraging. I know, this is an evil world in the investment industry. Most people think that the concept of leverage was created by financial advisors for financial advisors. When you think about it, if a client who doesn’t have money can borrow (so the advisor makes money off the interest) and invest (so the advisor makes also money on the investment fees), it’s the best of both worlds… for the advisor! But I’m not an advisor trying to sell you leveraging, I’m just going to explain how I intend to put my strategy in place.

     

    How a Margin Account Works

     

    A margin account works in a simple manner. Your broker is willing to lend you money at a variable interest rate to increase your buying power on the stock market. The more you invest, the more you can borrow. Most brokers will establish different categories of investments and give you a % of its value for each of them. For example:

    Penny stocks (under $2): broker will give you 50% margin

    Regular stocks (over $2): broker will give you 70% margin

    Mutual funds (any kind): broker will give you 50% margin

    Bonds (municipal, gov’t): broker will give you 90% margin

    Etc.

     

    If you invest $1,000 in Johnson & Johnson (JNJ) which qualifies as a “regular stock”, the broker will allow you to borrow 70% of this amount to invest in the stock market. Therefore, you will benefit from an additional $700 to invest.

     

    The Magic Doesn’t Stop Here

     

    When you think about it, after using the $700 to buy more shares of JNJ, your account will show the following:

    Net account value: $1,000 ($1,700 – $700)

    Stock value: $1,700

    Margin: -$700

    Available margin: $1,190 – $700 = $490

     

    Where the $1,190 is coming from? It’s coming from the margin account rules. The Broker allows you to margin 70% of whatever is invested, no matter where the money is coming from. But what happen if you invest the additional $490 left on the margin? Silence….

     

    I wanted to start with this example to show how many people get it wrong: You must not start with the 70% of what you invest. In this example, what you should understand is that the broker requires you to invest 30% and borrow 70%. Therefore, the maximum you can invest with $1,000 in cash is…. $3,333.33. You can either divide $1,000 by 30% or you can keep doing the calculation by investing what is left from the margin each time to invest from it and you will get to the same number.

     

    If you want more details, there is an excellent explanation on the Questrade website about margins and how they work.

     

    Get the Dividend to Pay for the Interest

     

    According to the Questrade website, their interest rate for a small margin account is prime + 3%. Therefore, you are paying a 6% interest rate at the moment to borrow money from them. The interest is charged on the amount borrowed. Let’s assume you borrow the maximum from your $1,000. This makes a margin of $2,333.33 (will discuss margin call in another post). The yearly interest on this amount is $140.00. If you take the $140 and divided by the total amount you have invested ($3,333.33), it requires a dividend yield of 4.20% after tax to pay for your interest.

     

    When I think about it, I understand that this year, my leveraged portfolio will probably fall short in dividend yield to cover the interest. On the other hand, my current portfolio is paying about this yield in dividends after only 4 years. The interesting point about leveraging is that the dividends grow faster than the interest rate!

     

    I’ll go deeper into my strategy in the next article but I wanted to hear from you about the idea of leveraging first.

     

    What do you think?; am I going to make lots of money or simply throw my hard earned cash into a deep hole and never see it again?

     

     

     

     

    Disclaimer: I own shares of JNJ

     

     

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