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5 Bullet Proof Metrics to Follow for All Investors

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About a year ago, I was about to receive a big fat check of $108K from my former employer’s pension plan. I decided to manage this money and build my own retirement portfolio following my dividend growth investing strategy. A lot of investors on this blog were sceptic about my decision.

Why would you invest all your money at the top of the market? They said.

I even went a little further. Since I saw lots of interest from you guys, I decided to publish my portfolio and update it month after month. On August 1st, my portfolio was showing a total value of $133,882.65. In less than a year, I made over $25K in profit. As of August 10th, my returns were even a little better as the earnings season is going well!

Source: Ycharts

I’m not posting those numbers to brag, I just want to show that you can invest in the market even when the valuation is through the roof and that the crash is imminent. Imagine if the stock market drops by 30% in the next three months. My portfolio would fall around 93K and I would be left with a “hole” of 15K compared to what I invested. It wouldn’t be that bad. Plus, each day going forward, my “worst case number” is slightly going up.

I wasn’t worried when I started investing this money and I am still not worried at all. The reason is quite simple; I’ve invested in companies that show bulletproof numbers in various metrics. As I can’t control what’s going on the market, I rather pick companies with these strong metrics. I know that if they show this solid core of metrics, they will go through the next storm and I’ll end-up a richer investor in the end.

Revenue

The Revenue trend is the first stepping stone of my dividend triangle approach. The first thing I want from my investment is a company that is growing. Sounds quite obvious to you? Well the market is filled with poor revenue growth companies. Would you rather invest in Visa (V) or in Target (TGT)?

Source: Ycharts

I obviously picked two extreme situations showing mediocre revenue growth (Target) vs incredible revenue trend (Visa). I’m well aware not all my holdings will be showing double-digit revenue growth for the past 10 years (and upcoming 10!). But companies that on such a roll are able to go through a storm. The revenue grow will decrease, but imagine what will happen to Target if their revenue CAGR was below 1% over the past 10 years when we hit a recession…

Earnings

Once I have found companies that are showing steady revenue growth, the second thing I want is to find companies making money out of those sales. This is a bit tricky since many factors are included in earnings and some of them don’t include real money! Since earnings are calculated using accounting principles (GAAP), we often get misled when looking at some graph:

Source: Ycharts

Do you really think Microsoft has a very bad 2018 where earnings dropped down the hole? Nah! I’m just kidding! You may be surprised that when you take out all the accounting “noise” around MSFT’s earnings, the company actually reported a non-GAAP EPS growth of 15% last quarter and beat analysts expectation by $0.05 (July 2018). You didn’t know that? Maybe you should think of using DSR PRO then ?.

Companies with a stronger earnings trend have a better chance of building a safety net for a challenging period. Chances are they will recuperate faster during the next crash as well. Strong revenue uptrend should lead to better earnings. Once you have both factors together, the next one should be dividend growth!

Dividend

The first two metrics are useful only if they lead to the peak of the dividend triangle; dividend growth. Many researches throughout the past 50 years have been conducted on dividend growers vs other companies. All of them show that dividend growers are among the best in kind on the market. Then again, the market will crash, I can’t do anything about it. However, I can pick companies that will not only keep their dividend alive, but will also keep increasing it.

Source: Ycharts

Fortis (FTS.TO) is a very boring stock with limited hype around it. However, I’m getting very excited when I see a steady dividend growth rate over more than 10 years like this one. Not all my holdings show such impressive consistency, but most of them show a 10 years+ dividend increase streak. I like getting paid during market downturns.!

Debt

If you really want to go bullet proof against the next market crash, another metric you must include is the company’s debt level. In an ideal situation, I want companies that are currently paying their debts. During a bullish market, many companies use leverage to acquire competitors, spend in R&D or any other strategies to grow their business. This is good as long as there is an appetite for debt on the market. When the lights go out, debt hungry companies may feel a huge hangover.

Source: Ycharts

This is why I tried to pick companies more like Gentex (GNTX). However, I did invest in Enbridge (ENB.TO) too, mostly due to the fact that the stock was in a slump and the dividend payment was promising. The point was not to aim at too many companies in ENB’s situation and find more like Apple (AAPL), Gentex and Microsoft.

Payout Ratios

Technically, if you have picked companies with growing revenues, growing earnings and growing dividend, their payout ratios should look good. However, as the regular payout ratio is based on earnings (and we just saw how this works out!), the number you are looking at might be misleading. For this reason, I also use the cash payout ratio to make sure the company has plenty of cash to distribute its dividend.

Source: Ycharts

Companies with low payout ratios are likely to keep up with their dividend growth policy even if it goes through a recession. Since my whole investing strategies is based on dividend growth investing, making sure companies can increase their dividend year after year is crucial, right?

There are many particularities around the payout ratio calculations. I’ll be hosting an exclusive webinar on how to see through this accounting mess and determine stock’s dividend safety score in September. But that will be for Dividend Stocks Rock members only…

Valuation? What Valuation?

Haven’t you noticed I just wrote a 1,000+ word article about investing at the tip of a bull market without talking about valuation methods? It’s because valuation doesn’t matter. Tell me the opposite, and tell me that you knew that the market wasn’t overvalued in (pick your year):

2015

2016

2017

And shortly 2018.

I recently received an email from a reader telling me he kept 70% of its portfolio in cash since 2015 because this was the “year of the crash”. It didn’t happen and he is still in doubt about when he should invest.

I decided to get rid of the doubt and focus on other strong metrics. When I invested my money last year, my goal wasn’t to tell you that I’m richer today. My goal is to be richer in 10, 25, 30 years from now. This is why the next crash won’t matter if you have selected your companies based on bullet proof metrics!

Disclaimer: I’m long V, MSFT, FTS.TO, GNTX, ENB.TO, AAPL. LAS.A.TO

As an Investor, You Control These Six Factors – Nothing Else

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Many investors are obsessed with the timing of their investments. They think they can predict what will happen with the stock market and will find the magic loophole that will make their investment profitable. I find this premise interesting because if there is one thing we don’t control as investors, it’s how the market reacts. Sometimes, there is great news that doesn’t affect the market at all and other times, missing analysts expectations could kill your stock even if the numbers were good. Between you and me, the market is going to do what the market is going to do. There is no rationale explaining why Microsoft (MSFT) went from $75 to $110 in less than a year. Once you have picked a company that you like and have written down your investment thesis, you can only wait and watch your portfolio. While you can’t control the market, there are things that are fully under your control. This is where you should put all your attention.

Your saving rate

The amount of money you save to invest in the stock market is probably the most powerful tool you possess to reach your investment goal (or FIRE!). The internet is filled with great example of bloggers who saved 40, 50, even 60% of their income to invest in the market and retired early. Want to reach $1M in your account? If you have 100K to invest today you will need to average an 8% return over 30 years to reach it:

Or you can start with $0 today and save $1,000 a month at 6.2% return (a lot more realistic) and get to the same amount in 30 years:

Source: Calculator.net

Now, imagine that you have the 100K and you save $1K per month today… yup, you’ll end-up a multimillionaire in 30 years.

Your asset allocation

During my financial planning career, I’ve met with many investors with sour investing stories to tell. Many of them got “fooled” and “lost almost everything” on the market. Stats on DIY investors tend to corroborate those horror stories where most investors are not able to match the stock market returns. But when you dig a little deeper you understand why:

  • They invested massively in tech stocks in 1999
  • They sold everything in January 2009 to put their money into gold (ah!)
  • They thought the energy sector was the greatest place to invest 50% of their portfolio

Do you see the point? The market has gone through various crashes and follows a cyclical trend. Each crash hurt a specific sector. If you are wise enough to control your emotions (stay invested) and diversify your portfolio across many sectors, you don’t have to fear anything. In 2008, my portfolio went as low as -27% while the S&P 500 was losing 50%. Then, in 2015 and 2016, we had quick dips of about 10-15% but I didn’t even feel it. Am I a genius or a market guru? Far from it. I just make sure that I pick companies I love in many different sectors. Therefore, there is always something going up while another industry is going down in my portfolio. Are you curious about my current asset allocation? You can check my pension account here.

Your investing strategy

Along with your asset allocation, another thing that is fully under your control is your investing strategy. I’m always surprised to see how many investors don’t have one written down. I have mine all written down and based on decades of experience investing along with numerous academic studies.

The most important point is to write it down and know why and when you invest. Once you have done that, the hardest part is to follow your plan no matter what is going on the market. There is no point in having an investing plan if you don’t follow it, right? Believe it or not, many investors forget about their own strategy when the market gets shaky.

Taxes you are going to pay

It is almost impossible to predict which kind of return your portfolio will show in 20 years. However, you know to the penny how much you will pay in taxes for each dollar withdrawn from your portfolio. This is why it is so important to have a withdrawing strategy once you retire. You can control when you will pay your taxes on your investment.

Governments give you plenty of various investing account types coming with different tax rules. Make sure you understand them all and know how to optimize them. If you are bored by numbers, investing 1K to 2K in a fee-based financial planner will be worth it. He will write down a withdrawing plan and help you save thousands of dollars in taxes.

Fees you are going to pay

On top of taxes, there is something else you have control of; management fees! If you are still in mutual funds, chances are you can save several thousand dollars simply by replicating your asset allocation with 5 ETFs. This is called the couch potato strategy. You simply move your money away from mutual funds charging 2%+ in MERs (management fees) and you pick ETFs doing exactly the same thing, but for 0.20% (or less!).

If you are like me and you enjoy managing your money more actively, going DIY with an online broker account like Questrade for Canadians will let you save money too! At $5 per trade, you can definitely save lots of money on transaction fees!

Final Thought

You may want to play the market or think you can outsmart other investors, that’s your right. On my side, I make sure I control those six factors first. Each of them is actively contributing to my success through my investing journey.

3 Reason to Keep a 100% Equity Portfolio Until You Die

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Last week, I shared my latest dividend income update. I used to be highly against tracking down my dividend income because I’m more interested in my total return than anything else. However, I thought it would be a great idea to show investors that you can invest at the “top” of a bull market and build a dividend growth portfolio. I want to show that the “top of the market” is always relative. Frankly, it doesn’t really matter what time period you invest your money.

I received an interesting comment from a Seeking Alpha reader. He mentioned that he was a bit afraid for me since the account in question was my retirement plan. He was nervous that the market would eat-up a good chunk of my money during the next market crash. This is especially true because I invest 100% of my money in stocks. I’ve been following this strategy since the age of 23 (I’m 36 now). In fact, I’ll keep this strategy for the next 50 years. In other words, I’ll keep my 100% equity portfolio until I die.

When I think about it there are at least 3 very good reasons to hold off on investing in the market now:

  • Tariffs will push inflation higher and reduce consumer buying power.
  • Rising interest rates will put additional pressure on consumer (think of the automotive industry for example).
  • Government debts haven’t been under control since the last financial crisis.

Still, I maintain my 100% equity portfolio approach as the storm is obviously approaching. Here’s why.

#1 A Crash… 3 years later

The very first reason why I invest all of my money on the stock market is that crashes aren’t that bad. When you look at past market crashes (2008, 1999, 1987, etc), most of them fully recuperate within 18 to 24 months. But let’s get very pessimistic here and let’s focus solely on 2008.

Source: Ycharts

It took about 3 years for the S&P 500 to fully recuperate (total return includes dividend) from the worst yet crash in market history. Considering I have almost 50 years to invest in the market, I can definitely spend 6% of this time waiting for the market to get back on track. Also, keep in mind that no matter which index you track  you can build a stronger portfolio than the market. For example, while the S&P 500 dropped by 50% from its highest point in 2008, my portfolio never hit worst than -27%.

By reading this recent article of Market Watch, you will understand that you can build a better diversification than the current S&P 500 composition where the top 5 companies worth more than the bottom 282 in term of market cap:

Source: MarketWatch

As you can see, the S&P 500 is now highly dependent on tech stocks. This means that if you build a more diversified portfolio, chances are you’ll do better than them if the tech stocks drop at one point.

#2 I’m going to make more money

Interestingly enough, most investors will agree that investing is all about playing the long game. However, there are legions to talk about the “timing” of investment. If you are investing for the next 50 years, why would you bother focusing on where you are at right now? Okay, you are 65 and you are in  for “only” 15 to 25 years. So… chances are you are going to ride two more bull markets… and two bears!

I don’t know if or when the market is going to crash. All I know is that my portfolio will be worth a lot more 10 years from now if I continue to be fully invested. The stock market has proven “market timing strategies” wrong many times in the past and this will continue. You don’t believe me? Look at what the market looked like over the past 25 years. Even the 2008 market crash looks like a small speed-bump now.

Source: Ycharts

#3 Cash is King

It’s obvious to everybody and sounds too simplistic; but cash is king. As long as I hold dividend growth  paying stocks that share their profits with me, I’ll be making money over the long run. Real dividend growth companies continue to not only pay dividend during market downturns, but they keep increasing it. When you look at the 2008 crisis with a different perspective, you don’t see what went wrong. Here’s how some of my holdings reacted throughout the largest market storm of history:

Source: Ycharts

How can you go wrong when you get more and more cash in your account as dividends grow? Are you ready to miss a 20-60% dividend growth plus potential capital appreciation just because “the end is near?” I’m pretty sure I read that the end was near last year, the year before, and 4 years before. This seems like a lot of dividend payments missed.

Final Thought – Total Return Will Always Win

At the time of writing this article, my pension accounts showed 21% (CAD) and 27% (USD) total investing return since I started in September 2017. With a total value of roughly $135K, I could lose 20% of my portfolio tomorrow morning and I would still be at the same place I started a year ago ($108K). I’m rapidly protecting my portfolio from the next crash. Thinking the market is going to tumble by 50% once again is looking for the apocalypse. I’m not saying it’s not going to happen, but it is unlikely (try to find how many times the market crashed by 50% over the past 100 years and you’ll see that it doesn’t happen very often).

Each month, my portfolio grows through both dividend payment and capital appreciation. At one point, I’ll see my portfolio value going down during the next market crash. All I will have to do then is to remember how quickly my portfolio grew when I started investing. A couple years later, the same portfolio will go down the same growth path and I’ll still be showing strong total return. In the meantime, I’ll just use dividends I receive to buy more shares! I don’t see how another strategy including keeping lots of cash aside could bring better return in the next 25-50 years. Do you?

My Favorite Quote – This Time is Different

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Two weeks ago, I noticed a “flash news” showing the Bitcoin price and I thought “OMG! This thing is going down now!” To be honest, I wrote one piece on Bitcoin back in September 2017. I’m not an expert in blockchain technology and I don’t pretend I know everything. However, when pro-Bitcoin investors get my favorite quote as their main argument, this is where I start to get very cautious. What’s the quote?

“The thing is, we have never experienced anything like this before”

Or if you prefer the shorter version:

“This time, it’s different”

Back in September 2017, the Bitcoin was surging out and was about to reach the sky.

Source: Ychart

The magical coin was the most interesting investment ever and then… a few months later, interest for the currency faded as new competitors arose and other kinds of technical problems arose…

Source: Ycharts

Now, before you want to hit me with your “you don’t understand what a blockchain is”, I want to make things clear: I’m not discussing the coin as the technology here; I’m discussing the coin as a potential investment. In that regard; a coin is just like a US dollar or an ounce of gold; something that has value only if someone else agrees with its value and with the owner.

This Time is Different, Flashback From 1999

Do you remember what happened before the tech bubble? Yes, people were saying “this time, it’s different”. They were also saying: “it doesn’t matter if there are no sales, it’s the internet, you just don’t get it”.

And then, many tech apostles were telling the world how the internet would change everything.

They were complaining that most people didn’t understand the impact of this new technology.

They were saying that everybody will use internet in the future for things that we can’t even imagine (in 1999).

They were right on all three points… but many techs crashed and never bounced back; why? What happened back then is happening again with cryptocurrencies. Back in 1999, what was different is the internet coming into our life. The “new economy” didn’t mean that pages views and clicks would replace profit. It meant that consumers would make transactions in a different manner. 20 years later, we can get a full grasp of what internet changes (and keep changing) in our daily lives. But the core of the investment proposition wasn’t different; all companies that were showing a “dot com” name with millions of pages views with no sales didn’t live long. All crypto currency showing “coins” names with millions of miners still show no sales or profit… guess what? They will end-up pretty much like the dot coms…

Then again, I’m going to write it again to make sure you get it; I’m not talking about the blockchain technology. This technology will be used by many companies in various sectors for the greater good. The problem in 1999 wasn’t the Internet, it was the fake companies that surfed on the trend.

Mike, will you write again when the Bitcoin hits $50,000 in value?

Some will just wait until, maybe one day, the Bitcoin bounce back to a ridiculous number again to call me out. That would be fair and I’ll definitely write again if the Bitcoin even just goes back to its highs of $14K’s USD. It would still be pure speculation.

For those who dream that the Bitcoin (or any other cryptocurrency) becomes the new “gold standard”, I see a few problems I would like you to solve for me.

We all know that there is a finite number of coins that can be “mined”. Therefore, the total amount of money is known and is not controlled by any government. That makes many people wanting to “free the world from government” and use the Bitcoin as a main payment standard.

First, the coin is divisible, therefore, it’s like printing new money. If you can divide a coin to 0,0000001 Bitcoin and this is enough to pay for a bus ticket, it’s pretty much like printing new money. The solution is easy; just increase the bitcoin value and your 0,0000001 Bitcoin now worth enough to pay for a pizza instead of a bus ticket. So how do we solve this problem?

Second, imagine that a company like BlackRock (BLK) with over 6 trillion USD in assets under management decide to control the Bitcoin by buying a bunch of those. How would you stop that? Instead of having the US Government controlling the US dollar, you would have BlackRock, Apple or Microsoft controlling 20% of the currency. This would be enough to create market swings form one side to another. Welcome hyperinflation!

Then again, the blockchain technology might change our life the way internet did 20 years ago, but that doesn’t mean that all coins are worth something! Always invest in something making money, not growing in value based on pure speculation.

Should You Compare GIC Rates with Dividend Yield?

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*This article is for more beginner investors, but it was inspired by many emails I received.

If you follow this blog from time to time, you have already noticed how much I prefer dividend growth stocks on top of high yielding companies. Some may think that it’s because of my age (36) and that I have about 50 years to invest my money. But the real reason is because I rather focus on my total return than my yield. In the end, if my portfolio yields 7% but has lost 25% of its value over the past 3-4 years, I’m not a winner. When I discus stocks that show great potential but very low yield such as Visa (V) at 0.62% or Microsoft (MSFT) at 1.66%, I often receive comment that they are nice stocks, but not interested. Recently, one of those comments caught my attention;

“A 2-year GIC currently yields about 2.6%.  The principal is federally insured. It doesn’t get better than that.   If I am going to invest in a company, then I expect a premium for taking that risk.”

Hence my question: Should You Compare GIC Rates with Dividend Yield?

Investing as a source of income

When you look at financial theory, the investment expected return is a combination of the interest paid on a “risk-free” investment (such as a 30-day US T-Bill) and the risk you are taking (e.g. the possibility of not getting your money back). In its most simplistic way, a GIC offers a “risk-free” investment. If we take the example of an fed insured 2 year GIC at 2.6%, the most important risk the investor takes a risk of liquidity (hence the higher rate then a 30-day T-Bill). This means the investor can’t have access to his money before 2 years. Some banks will allow a withdrawal or to break the contract, but there will be penalties. The second risk is obviously inflation. But over 2 years, this is not a big one.

Now, if you invest in dividend-paying stocks and intend to live off those payments, you may be tempted to compare your GIC yield (risk-free) to your portfolio. But I’m not sure it’s fair to compare investing $10,000 in Microsoft (MSFT) at 1.66% vs investing in a GIC for 2 years at 2.60%. On one side, your $10,000 could worth a lot less (or a lot more) in 2 years as the GIC will show the same value. Also, MSFT will pay its dividend quarter, if you hold a GIC, you will need to wait for a least a year (if interests are paid annually) or even 2 years (if you have chosen a compounding interest). Therefore, you can’t really use a GIC as a steady source of income unless you split your money into multiple expiry dates and make a huge GIC ladder out of it.

Even the yield is not safe

The other way around is also true. An investment in a REIT paying 6% yield is not a good base to compare it with a 2-year GIC. Some REITs are incredibly solid (here’s the REIT list you are looking for), but some of them may cut their dividend at one point in time. Keep in mind that it’s not because a company pays a dividend that it is safe. Talk to Cominar (CUF.UN.TO) shareholders for fun…

source: Ycharts

Why do you separate the yield out of the total return?

There is one concept that I never understood; some investors don’t care about their total return, they just focus on their yield. In other words, they rather have a portfolio paying 6% yield and showing a total return of 7% than having a portfolio paying a 2.85% yield but showing a total return of 10%.

As an investor, my goal is to maximize the return on my investment. I don’t really mind if it’s coming from dividend or if it’s coming from capital appreciation. I just want to make sure I make money on my hard-earned bucks!

Market fluctuations will happen from time to time and be focusing on total return over a short period of time is a mistake. Your portfolio can lag the market for 3-4 years and that’s totally fine. One should not chase returns. However, when you look at a 5-10 years horizon, you should be able to generate more than a dividend yield out of your portfolio. If you can’t, you are wasting lots of time and energy for nothing. It’s like running 5K and eating a burger with fries right after!

Conclusion; the GIC rate has nothing to do with the dividend yield

There are so many differences between a stock and a GIC that I’m shocked one investor would make a direct comparison. We are talking about investing return, fluctuation, liquidity, etc. But if you really insist on comparing both, you should compare the total expected return. Therefore, while the GIC expected return is quite obvious, you should also try to determine at which pace the company would grow in the next 2 years (not that hard) and apply the same PE ratio. You would get a better idea of where you should invest.

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