• What’s the worst thing that could happen to a retiree?


    a)      2 golf balls in the lake the same day

    b)      A Barista at Starbucks putting cinnamon topping with whole milk on his Non-Fat Vanilla Latte

    c)       Outliving his savings


    Once you retire, it’s finally time to enjoy life. It’s time to relax, do what you love most and stop stressing. Unfortunately, this definition of retirement is pretty rare. Most retirees still have to work to fill the hole in their budget and others worry about how long they can hold on to their savings before the well dries-up.


    The answer to this question is often answered by two factors you can control:

    a)      how much do you withdraw per year and;

    b)      how you are invested (asset allocation)


    For those who choose dividend investing; this is good news. If you have a well diversified portfolio, your dividend payouts should increase over time protecting your lifestyle from inflation. Plus, your capital shouldn’t move enough to worry you. But if you have chosen to put most of your investment in a “safe place” such as bonds; you might outlive them.


    The Bond that Will Kill You


    There is nothing safer than an investment in a bond, right? Pick a Gov’t bond which is guarantee beyond reason and you will never lose money. On paper, you are right about 99% of the time. If you buy a Gov’t bond at any level (even municipal), you are pretty sure that you will not lose your capital.


    But the issue at retirement is far bigger than protecting your capital; we are talking about protecting your lifestyle. I found some interesting stats on Canadian bonds that will show you we are not in the right place to invest for the years to come. This article is also good for Americans as we are in the same boat in terms of interest rates.


    What Happened Before and After 1981


    Funny enough, 1981 is the year of my birth. More importantly, this is the year where the world of bonds changed for a very long time. Between 1950 and 1981, the 10 year Canadian bonds yielded 3.8%. From 1981, the year when interest rates spiked higher than the Rockies, to 2013; the same 10yr Canadian bonds generated a 9.6% yield. By comparison, stocks did 9.2% for the same period.


    For 30 years (starting in the 50’s) the interest rates in Canada (and US) climbed a long mountain to reach its peak in ’81. Investors lost on bond value but gained on higher interest rate year after year. However, starting in 81, rates started to drop. I was able to find a 10yr Canada bond graph since 1995:

    10yr canadian bond yield

    The line is pretty obvious here: it has gone down big time. So the best move in the early 80’s was to buy long term bonds and watch them grow in value year after year. This is why bonds yielded so much during this period.


    What Will Happen in the Next 10-20 Years


    Since 2008, bond rates have kept on falling to the lowest level we’ve seen in a long time in 2012-2013. Now that we have reached the bottom, there is only one place to go: higher.

    10yr canadian bond yield02

    When you think about it; this means investors are stuck with 5 years of incredibly low yield in their portfolio and a big wave of dropping value ahead. There are no winning bids here: either you sell at loss, or you keep your low interest yield barely covering inflation for the next 10 years.


    The risk for retirees is here: chances are you will get stuck for a 10-20 years period where interest rates will rise or worse, will stabilize at a very low yield (anybody see what happened in Japan for 20 years?).

    10yr canadian bond vs japan bond

    So don’t think we only have a few years of low interest rates and this is going to end. Japan has been stuck in this turmoil for the past 20 years.


    What Can You Do if You Have Bonds


    You don’t have many choices;

    a)      make sure you don’t need much capital so you can count on the low interest yield and live happy

    b)      return to work again to compensate for the gap between the expected investment return and the real investment return

    c)       sell your bonds and move towards other types of securities (dividend stocks, real assets, non-traditional asset classes, etc)


    This won’t perform miracles overnight (after all, dividend stocks will also drop one day),  but, over time, you may end-up with a much higher yield  with stocks than with other asset classes such as bonds for the next decade at least!


    I’m 100% stocks right now and I’ll keep it this way, what are you going to do?

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    Since 2009, two Canadian sectors had proven to the world the Canadian market can provide strong dividend growth stocks. It’s not by luck that four out of the ten Best Canadian Dividend Stocks for the Next Decade come from these two sectors.


    Both sectors are quite similar on many fronts. They both oligopolies, this is a mature market, but natural growth is still available and federal laws protect them from other competitors (mind you, it has become less protected for telecoms in recent years). In my opinion, they are the backbone of dividend stocks in Canada and all dividend portfolios should contain at least one of these companies.


    However not everybody thinks the same way. Many investors believe the growth potential for both banks and telecoms is gone for the years to come. Let’s take a dive into both dividend worlds and see if there is still potential for a new buy.


    Canadian Telecoms


     canadian telecoms

    Besides Rogers, the other three telecoms beat the S&P TSX60 over the past five years. Here, I’m not counting the dividend, so you can add a good 4-5% in yield per year to each of them. This is also a lot more than what the TSX60 pays. Rogers has been struggling for about a year now but it was ahead of the index for almost the entire period.


    There have been many fears from investors with regards to the obvious Government desire of enabling foreign competitors to enter into the Canadian mobile market. All telecoms dropped like a rock after the possibility of Verizon (VZ) joining the market during the summer of 2013. Fortunately for Telus & company, Verizon preferred buying back its shares from Vodafone than entering a new market. Since then, we all know it’s only a matter of time before another big player enters the market and puts additional pressure on margins. This could be good for consumers but a lot less for telecom investors.


    BCE (BCE) recently decided to buy Bell Aliant (BA) its sister company. BA is money making machine that will support BCE’s dividend growth over time. Bell’s diversification strategy among TV & entertainment (they also bought Astral not so long ago) can help them face any potential competitors in the mobile industry. BCE recently invested $600M in customer service to compete with Telus and Rogers. It seems to have paid off since their customer service surveys are going up. TV services (Fibe) and their media segments continue to go well with the integration of Astral Media posting operating revenue growth of 40.7% in this segment. BCE is undervalued compared to Telus. With a dividend yield around 5%, this could be your chance of adding a strong blue chip to your portfolio. BCE is a BUY.


    Telus (T) seems to be the super powered dividend stock we all look for. Revenues, earnings and dividend payouts are up, what more do you want? Strong from a 5% revenue jump and an 8.9% EPS surge, Telus decided to keep its good habit of increasing its dividend as the next payout will be 11.8% bigger. Both wireless and wireline segments were very strong during this quarter. Telus recently announced a $1.3B investment in infrastructure in Quebec. Strong from its position in Western Canada, Telus is now attacking both Ontario and Quebec battling with Rogers, Bell and Quebecor. T is a BUY.


    Rogers (RCI.B) was once able to follow the highly competitive telecommunication train in Canada but it seems to lag behind Telus (TSE:T) and Bell (TSE:BCE) of late. After posting disappointing results during the entire year in 2013, Rogers is keeping this bad habit for the first quarter of the year with a drop in revenues by 2% and missing analysts’ expectations on both earnings and revenue targets. Analysts are worried about its high debt-to-equity ratio (2.997 vs Telus at 0.98 for example). An aggressive stock buyback program combined with an increasing dividend payout will continue to erode Rogers’ cash flow. Telus is also hitting Rogers’ markets very hard. If I had to buy a telecom in Canada, I would turn around to buy Telus instead of Rogers. RCI.B is a



    Canadian Banks


     canadian banks

    There are two main fears around the Canadian banks and they are closely related: the high concentration of many banks in the mortgage industry combined with the ridiculous debt level of the Canadian population. There are several overheating housing markets in major Canadian cities and we all agree Canadians can’t sustain a 165% debt level forever. This is another reason why the Bank of Canada is highly reluctant to increase interest rates and prefers to increase borrowing rules to limit access to properties.


    Nonetheless, I believe some banks have more options than others and still believe there is growth for them.


    National Bank (NA) is the smallest Canadian bank but shows very interesting growth potential. First, 38% of its revenues come from their market segment (e.g. trading). As long as we are in a bull market, NA can take advantage of this concentration. Since I believe we are in a long term bull run, this bank will definitely continue to show growth. It also aggressively acquires clientele in the private wealth management segment. This is also another growth generator for this company. NA is probably the bank that is the least affected by the overheating housing market. NA is a BUY.


    TD Bank (TD) has shown the strongest growth across Canadian banks for the past ten years (NA is very close but TD is a lot bigger). On top of being a leader in Canada, TD is also the most productive Canadian Bank (e.g. more earnings relative to its risk-weighted assets). Its earnings volatility is lower than its peers due to a smaller exposition to capital markets. Finally, TD has deployed a very lean structure into its branches which benefits greatly from their expansion in Quebec and the US. TD Bank it is now known as “America’s Most Convenient Bank”. They recently beat analysts’ estimates once again. Their lean structure gives them one of the best customer service SCOREs across Canada. TD is a BUY.


    Royal Bank (RY) is another bank that did very well in the US. Since 2008, it has benefitted from the crisis to grow outside Canada. It has also a very strong market segment generating about a third of its revenues. Royal Bank has shown very strong earnings beating analysts’ estimates on a regular basis. This is not an easy task right now considering Bay Street’s heavy appetite. RY obviously has a strong mortgage market share and this should be a concern for new investors in this stock. However, the largest bank in Canada has also one of the most solid balance sheet and it can better endure a lending crisis than its peers.


    I Don’t Think the Party is Over for Banks and Telecoms


    Telecoms have started to diversify their services in order to benefit from their strong wire and wireless phone segment as a cash cow to open their business in other industries. A similar movement is happening with banks going after specific niches to avoid being too much at risk with mortgages.


    This is why I believe both industries will continue to grow and pay solid dividends. I agree with you that the easy money is probably gone, but this is the case with most sectors at the moment anyways. For any Canadian dividend investors, an investment in banks and telecoms still remains a good play.


    Disclaimer: I hold shares of NA, BNS & T

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    All right, I must warn you; this is a little bit of a weird post. I’ve been thinking about this scenario for about two months now. Maybe it’s the sun beating on my head too hard, or maybe it’s just a funny thought that will evaporate into thin air in a few weeks. Or… maybe I’m really tired about this whole crazy lifestyle where you have to run from 5am in the morning till 10pm and hope to have a good weekend to recharge for the next week. Anyhow, I wanted to have your feedback on this crazy plan.


    Where I’m at right now

    But before I share my plan with you, I need to tell you where I am at in my life. I’m turning 33 this fall, married and have three kids (2, 7 and 9). I work for a big financial firm, making slightly over 100K per year with a fully funded pension plan. Technically, I have nothing to worry about as my financial future is well assured.


    My investments look like the following:

    $8,000 in a RESP (kids’ savings)

    $2,000 in a TFSA (Tax Free Savings Account)

    $52,000 in a RRSP (my RRSP + my wife’s)

    Total of $62,000


    If I sell everything I have (mostly my house! Lol!) and pay all my debts, I will have around $100,000 in cash. I’m not counting my pension plan in the equation as I wouldn’t be able to withdraw from this account.


    Yes… this is what I’m thinking; selling everything I have and change my life forever… After all, I’ve told all my friends I would retire at the age of 35… it’s about time to think of a plan! Lol!


    Selling Everything and Go Live in an RV


    By selling my house, I would have enough to buy a used RV big enough to meet my family’s needs. I don’t need much comfort or luxury as my dream would be to go across Canada, then the States and finally go down South and settle in Costa Rica.


    Living frugally, I could probably only use my website income to pay for my few bills. The best part is that I could work 3-4 hours a day on my website and increase this income month after month to eventually make a substantial income from my site and still have very small expenses.


    I’m not too excited about living in an RV to be honest, but I’m really into hiking and travelling. This year, I went to Hawaii for 10 days and all we did was drive across the island, hike and look at paradise in front of us.


    The Plan


    It’s far from being a well-designed plan so far as I’m just thinking of it while writing this post! I’m thinking of doing this in maybe 2 years. This would give me enough time to save more income and put it aside for my project.


    I would use a 50K investment account to sustain this new lifestyle in addition to my website income. With 50K, I could generate additional dividend income (maybe $100-$150 per month) without touching my capital. I hope to avoid touching my RRSP account as any withdrawal would be taxable. Starting next year, I might consider investing 5K/year in my TFSA instead of my traditional RRSP contribution. This would help me to fund the 50K I will need.


    If I could setup my RV with 50K, there will be another 50K to invest. This would be the best case scenario; I would have 100K invested in dividend stocks on top of my retirement account. The more I write about this project, the more I get excited.


    I know my kids can do school at home with my wife and I. They would benefit from an amazing experience to learn history and geography on the ground; they will speak 3 languages (we already speak French) and they will learn to adapt to anything in life.


    What do you think of this first draft?


    Do you think I’m crazy or do you think it’s something that is feasible? I’m really looking forward your thoughts on this!


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