Question: Dividend Milestone I

In response to a recent post titled Dividend Milestone I reader Jeroen wrote,

"I was very impressed when I read your blog post and learned that you are currently receiving more than $8000 in annual dividends! Congratulations!  This is very inspiring to me as I am around the same age as you are.  At the same time, however, it raises questions. I currently get just over $X in annual dividend income...like you, I also decided to take on a conservative amount of leverage to take advantage of the many bargains that were out there during the painc at the end of 2008 and at the beginning of this year.

So my question really is 'How do you do it'?  Can you give me an idea of how much you invest per month/quarter/year?  Perhaps you can share some tips or give some advice on how I can also achieve such a goal?  How long have you been investing in your DivG portfolio?"

First I will admit that reaching this milestone in my Dividend Growth Portfolio (DivG) didn't occur overnight.  It look time, a lot of work, patience and an incredible amount of discipline taught to me by a number of individuals.

I do feel there is an important lesson hidden within my response to Jeroen's questions: "When investing we often look directly to the result instead of studying the process."

Warren Buffett is one of the greatest investors known in our time and he is a great example of far too much credit being given to the result of his investments instead of the process through which he got there.  Understanding what contributed to any successful investment or portfolio is the foundation through which I learned to become the investor I am today.

How I achieved this milestone is simple: I saved, invested and saved some more.  I had a certain amount of luck, skill and opportunities that others may not have had, but the key, as I tell everyone who asks, is the difference between what you make, what you spend and how much you can save.  My family and friends often laugh and call me "cheap" but in reality I'm frugal and proud of it.

The key, to any success in life, is often how hard you work at something.  My work ethic (whether as a business owner, Registered Nurse or investor) is very high and something I pride myself on.  Investing takes skill, luck and time but when you're young the power of saving is something that many people lose sight of.
 
ThickenMyWallet made reference to this recently in a post titled, Observations from an investment seminar where he made reference to the fact that he and a friend were by far the youngest (in their 30's) attending the specific event.  The scary truth is that far too many individuals wait until it's too late to allow compound interest (Rule of 72) to help advance their wealth in their own favour.
 
I started saving at the age of 11 or 12 when I began cutting grass in my neighbourhood for a number of elderly individuals.  I would charge $15-20 per cut and each summer make around $2,000 tax free.  By the time I began my business degree I was making enough money through a part-time job to support my living expenses and tuition while investing the money I had saved during all those summers.  When I began my nursing degree I had another part-time job that paid me nearly double my living expenses (which were very low) and all additional savings each month went towards my investments.
 
By the time I created my first Value Portfolio in 2006 I had $20,000 to start the portfolio and another $20,000 in savings.  For the first two years I was able to compound the investments in my Value Portfolio at an average of 65% leaving me over double what I started with when I closed that portfolio and created DivG.  In restrospect I was taking far too many risks with the time horizon and type of investments I was making and what I was doing is something I would have difficulty doing again with the type of risk adversion I have now.
 
When I started working fulltime as a RN my monthly expenses were only 20% of my income and all additional funds went into savings and investments.  Over the next year and a half my savings contributed nearly 30% of the new funds to my portfolio.  The huge factor in the growth of my investments, even if you take out the returns of my first Value Portfolio, was how much I was able to save.
 
I didn't live like a hermit, but I was making more then I was spending.  I drove a nice car, rented a room with a friend in a nice house and lived cheaper then I could afford.  I kept a monthly budget and tracked all my receipts (something I still do today) so I always knew how much I was spending and saving.
 
When the credit crunch rolled around in the summer of 2008 I began investing heavily into the companies I already owned or had studied for years.  I opened a line of credit (LOC) for $30,000 and used $25,000 to invest over the past year in companies such as Manulife (MFC), the Canadian banks I already owned (RY, TD & BNS) and a number of depressed preferred shares trading near $15 ($25 par value).  I invested on a regular basis in each of my holdings with some near their 52-week lows and others at fair value to keep my portfolio balanced with each holding comprising 3-5%.  I still owe a large sum on the LOC, but the dividends that are borrowed are paying off a considerable amount of my LOC each year moving forward.  50% of the dividends are invested directly back into the portfolio and the other half immediately used to pay back the outstanding balance on the LOC.
 
Having the intestinal fortitude, discipline and skill to invest in an environment of fear and chaos helped substantially, but any long-term investor needs to realize that what we've experienced in the last two years is normal and will happen again.  The severity may change, but panic creates opportunities and as long as you understand the risk the reward at times can be proportional.

Today I certainly don't take risks I did with my money when I was younger, but back then I didn't know any better and those choices, in retrospect, made me a better investor today.

I can't stress enough the importance of living within your means and focusing on savings.  When you're young its very easy to spend wildly and not take account of how much is going out.  I've travelled the world and spent a lot of money on a beautiful home in the process, but my priority even now in life is saving for the future.  We have a discretionary spending budget each month that accounts for 7.5% of our combined income.  Setting a limit on spending and sticking to it makes a big difference.  I walk to work each day (8-12 min) so we only need one vehicle.  There are many changes anyone can make to their monthly budget to save even $100 that over the course of a year leaves you with $1,200 to invest for the long-term.

Remember that, "when investing we often look directly to the result instead of studying the process" and if you embrace that knowledge you'll find that your successes when investing over the long-term will increase considerably.

Disclosure: I have common share positions in all stocks mentioned in this post.

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Barriers to Investing: Price

Over the weekend I found myself reading a thread on an investment forum I frequent (Financial Webring) where a number of members began discussing their views on How to determine a “Reasonable Price” for stocks.?

When I invest I tend to use a number of criteria when selecting a target price for a buy or sell as I’ve outlined in past posts. Determining price is a balance between the qualitative factors contributing to the operating environment of a business and its quantitative performance. The beauty of the markets is that at any given time there are individuals who believe a company is undervalued, fair valued and overvalued all at the same time. Those opinions make the market what it is and it’s our responsibility as investors to determine an opinion on an investment and invest accordingly.

When Charles first befriended me a number of years ago he would often give me an example when I struggled with determining a price for a company I wanted to own,

“Picking a price is like asking a hot girl to the prom; you can wait for the right moment but if you wait long enough someone else will take her and you’ll find yourself dancing solo to the last song of the night.”

I always think back to this analogy when my stubbornness takes over and I’m determined to stick to a target price only to miss out on an opportunity to own part of a great company.

Investors often hear the opinions of others or say themselves, “not at that price,” in a stubborn response to the current price of an investment. As a value investor myself I try my best to get the best possible discount to the intrinsic value of a company I can whenever I make a purchase. What I have to be conscious of is the realization that as a shareholder I am part owner of a business and begin participating in the operations, successes and profits of that company the day I buy my first share. A great company, one with enduring characteristics, sells services or products that have sustainable demand and may not be cheap on any basis for a number of years. As an investor I can choose to either participate directly in the financial success of that company or wait for an opportunity that might never come.

Investors need to be aware that everyone loves a deal, but price can be the ultimate barrier for making a smart long-term investment. A fellow member of the FWF (Taggart) made reference to the criticisms of Warren Buffett on frequent occasions. Buffett buys companies at a premium to what others view the current value of a company to be, but it’s the long-term value, earning power and competitive advantage those companies hold where the true value is rarely realized in the present.

Just as in life there are times as an investor when you sometimes get what you pay for and there’s often no replacement for quality.





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Dividend Income Milestone I

Today when I increased my common equity position in Sunlife Financial (SLF) in my Dividend Growth Portfolio (DivG) I achieved a targeted milestone for dividend income in that portfolio. 

Late 2008 and early 2009 were full of opportunity for investors with the dedication, discipline and focus for long-term investing.  I was fortunate enough to successfully initiate a leveraged dividend strategy in my Canadian portfolio as well as make some very disciplined purchases of depressed investments when the market was full of panic and fear.

Earlier this year I had set a milestone for the yearly generated dividend income in my DivG portfolio at $8,000/yr with the intent to achieve that level by the end of 2010.  Using a conservative amount of leverage, key purchases and a balanced approach to the management of my portfolio I'm happy to say that today was the first day that I broke through $8,000 in yearly dividends for my portfolio income even with cuts to the dividends of some key companies I hold (Manulife, Russel Metals & Husky Energy).  The exact amount, for those interested, on an annualized basis at current dividend levels is $8,015.03 spread amongst 31 investments (common equity, income trusts & preferred shares).

The goal of this portfolio is to eventually achieve financial independence where the passive income generated by dividends supplements my working income to achieve greater financial flexibility.  Ideally the increase in dividends will outpace the rate of annual inflation preserving my purchasing power as a consumer.

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Tough Job Market Tips:

Carl Lavin, managing editor for Forbes.com, posed a question to a group of bloggers asking the following question,

“Recently, the U.S. Bureau of Labor Statistics reported a jump in the unemployment rate to 10.2%.  Some economists think we could be looking at 10.5% by early next year. 

Given these grim forecasts, how do you counsel recent college graduates and others entering the job market for the first time in this employment climate? Is there any advice or strategies you find particularly useful?”

When I graduated from university and received my license to practice as a Registered Nurse I had no problem finding full time employment due to the clear and obvious shortage of nurses that exists within the healthcare system today.  But as a business graduate in 2004 I clearly remember the pressures many in my graduating class faced when attempting to find fulltime employment that was both meaningful and rewarding.

To state that this is a difficult employment environment is a bit of an understatement when many new graduates haven’t had difficulty finding employment in the past.  Today they face a climate for employment that has them attending multiple resume seminars, pounding the pavement seeking job opportunities and adding their resumes to a growing pile of competition.

In my consulting business I’ve had the opportunity to work with a number of self employed individuals who started their companies out with nothing more than some savings and an idea.  What I’ve learnt is that an idea, for a business or a career, can be a powerful tool in securing your financial future now and in the years ahead.

What I’ve decided to include in my response to the question posed by Forbes.com is to highlight five successful characteristics that I and many of my clients share in their individual and business successes.

Market Yourself

Just as Fortune 500 companies know the importance of marketing their products and services to their customers the unemployed of today need to learn the art of marketing.  Learning how to market you as a valuable asset is just as important as how any company tries to sell itself to others.  Marketing yourself is more than just how you dress, talk and walk; it’s the presentation of what you bring to a potential employer and how valuable that might be to their competition.  Talent is a fiercely pursued commodity among companies and if you can succeed in marketing yourself as something valuable within an industry or group of companies then you stand a much better chance of securing employment over the short-term.

Innovate

The world moves far too fast with today’s technology and mobile capabilities for businesses (and their employees) to be caught standing still.  Innovation is an important tool to the corporations of today and they seek employees with the tools to innovate independently and collectively with others.  Products, services and competitive advantages are fiercely protected in the competitive landscapes of today.  The ability of any individual to innovate or offer something innovative to a company raises their employment value tenfold.

Direct

As a young man my grandfather always told me that if you want something you have to directly pursue it with determination. 

The employers and businesses of today don’t have the time or resources to waste on figuring out what you want as a potential employee.  If you want to do, plan to do or know you can do something then tell them.  Far too often in business the less direct you are the less successful you will be in what you plan to accomplish. 

One of my core practices in business is to follow what I term as my 4-D Approach; Desire, Drive, Determination and Discipline.

This approach is derived from my belief of, “Think it, Say it, Want it, Do it.”  If you want a job with a prospective company you need to be direct enough to tell them what you want and can accomplish as their new employee now and in the future.  Demonstrate that you have the motivation to improve, succeed and achieve your goals.  Show you have the passion and enthusiasm to attain your fullest potential.  Dedicate yourself to persevere through adversity and uncertainty to achieve success.  Explain you are committed to learning, you have the patience to lead and the control to accomplish what you want.

Work Ethic

Part of my reasoning for being direct is to demonstrate to a potential employer that your work ethic is above all other candidates.  Very few people attained success in business without putting in the work and determination to get there.  Large and small companies want hard working people who are committed to excellence because they know that their customers pay a premium for quality.  They don’t want a job to be done at 80% efficiency and what businesses want, look for and spend huge financial resources on are finding their leaders of tomorrow.

Leaders of Tomorrow

Andrew Carnegie once said, “No man will make a great leader who wants to do it all for himself, or to get all the credit for doing it.”

Leadership is about achieving results through others.  Possessing, understanding and portraying your skills in leadership to a prospective employer increases both your worth and usefulness to a company.  Employers want to see an employee that demonstrates maturity, intellectual curiosity, knowledge and humility.  Any employee has a steep learning curve once hired into a new corporate culture, industry or role.  Companies want individuals who are flexible, adaptive and humble enough to know that learning is part of the journey.  Great leaders never know everything but they do have the insight to know that achieving a goal is dependent on the performance of those they oversee.  The ability to handle stress within a team, to follow direction and contribute in a meaningful way are all traits that companies look for in prospective employees.

Brad Ferris is President of Triage Capital Management Incorporated.




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Mail Bag: CML Healthcare (CLC.UN)

In a blog comment posted in August reader Steve C asked,

“Is CML Healthcare on your watchlist?  The trust hasn't done much YTD.  It pays a solid 8% and its cash flow is steady and predictable.  I would like to get your opinion on this stock since you are in the healthcare profession.”

CML Healthcare Income Fund (CLC.UN) is a Canadian operated income trust that is involved in the business of diagnostic services (laboratory and medical imaging) in five Canadian provinces (Quebec, Ontario, Manitoba, Alberta & British Columbia) and two states (Delaware & Maryland).  In addition the company is currently closing an acquisition of Quarry Lake which will add to its operations in Maryland and expand their business into Rhode Island.

I am familiar with the company having researched it in the past, but at a quick glance I noticed a few newer items I’d like to highlight for readers:

The trust has come off from the lofty $17.30’s seen in early 2008 to currently trade in the $13-14 range over the past six months with a YTD return of 4.12% (not including distributions).  The company pays out a monthly distribution to unit holders of $0.08927 ($1.071 annually) which yields an even 8% on a closing price of $13.38 (as of October 30^th).

In the most recent quarter, ended June 30^th 2009, the payout of the trust (calculated as total distributions as a percentage of distributable cash) was 92.5% for the first six months of the year versus 85.9% for the entirety of 2008. 

The company’s Long-term Debt to Equity (D/E) has risen to 0.56 for 2008/2009 versus 0.40 in 2007.  That’s not bad for a trust that is looking to expand through acquisitions but in this current credit environment I was not able to determine the price for the acquisition (or the financing) of Quarry Lake which when completed will likely impact this ratio further.  Operating expenses were a key concern I had when looking through the company’s numbers this time around.

Operating expenses (operating, general & administrative) have increased 33% YoY in the most recent quarter after a 70% rise from 2007 to 2008.  For a company expanding operations an increase would be expected as operations are added and more costs are incurred, but the concern I have (as I mention in my full SAML analysis of Coca-Cola) is with the pace of revenues for the company. 

Operating expenses have risen faster than the pace at which revenues have risen and that trend, in any industry, is not something that is sustainable.  Revenue for CML Healthcare only rose 48% from 2007-2008 versus 70% for expenses and revenue rose 24% YoY in the past quarter of 2009 versus 33% for expenses.  This demonstrates to me initially that the company is having difficulty managing expenses in the face of lower revenues and begins establishing an unsustainable trend where expenses outpace revenues.  The result is a compression on the company’s margins which management discusses in their most recent quarterly analysis.  As frequent readers and readers who had access to the Coca-Cola analysis know margins are paramount in a company’s ability to secure a competitive advantage and at this time CML Healthcare looks to be undisciplined in this area.

The company’s management however does do an excellent job of explaining and outlining their growth strategy for the trust and are currently executing well on growth through accretive acquisitions.

To answer SteveC directly though CML Healthcare does not appear on any of my watchlists though for two important reasons; the first dealing with my Sustainable Demand Model and the other involving their exposure to external political risks.

My Sustainable Demand Model is a tool I developed and use when I analyse healthcare or consumer stocks for my portfolios.  The basic principle of this model is closely tied to my guiding principle of Enduring Value and is best represented by Warren Buffett’s thesis for investing in Coca-Cola (KO).  That thesis follows the basic principle that if Coca-Cola products are consumed 1.5 billion times today, were consumed 1.5 billion times yesterday and were 1.5 billion times the day before what are the odds that they will be consumed 1.5 billion times (or more) tomorrow?  The odds are very good.  Why?

Coca-Cola offers what consumers want or need on a sustainable scale.  Sales may dip +/- 5% from quarter to quarter based on certain economic forces, but demand for their products is strong, growing and enduring. 

I, as an investor, have two options for investing; I can choose to invest directly in the company or indirectly through a secondary investment.  For my portfolios I choose to invest directly in companies that fit this Sustainable Demand Model because I wish to participate fully and to the fullest extent of an excellent company over the long term.

CML Healthcare I consider to be a secondary investment in this model because through its operations it uses diagnostic equipment and laboratory supplies manufactured by companies that I can purchase direct investments in.  Companies such as Becton Dickinson (BDX) or General Electric (GE) provide products that CML Healthcare needs to purchase and use to meet client needs that provide sustainable demand.  In this instance I would rather invest directly and diversify into these individual companies that supply the consumer demand for CML Healthcare than directly invest in CLC.UN.

As one example CML Healthcare operates 125 specimen collection centres across North America where BD products are likely used and in Canada as a whole it is estimated that over 35 million diagnostic medical laboratory tests are conducted each year in Canada (source: CLC.UN 2009 Annual Report).  GE is a global leader in the development and sale of CT and MRI equipment for medical imaging.  By investing in BDX I gain exposure to CML Healthcare’s client services, but also to the hundreds of other companies, clinics and laboratory uses of BDX products around the world.

CML Healthcare’s exposure to political risks is another reason why the company does not appear on my watchlist.  When I conduct any Situational Analysis I first look to identify and compare any or all internal strengths, weaknesses, opportunities & threats with external political, economic, social or technological trends.

CML Healthcare operates within an industry that is heavily regulated, subsidized and overseen by various levels of government.  As I wrote about recently in a post on Shoppers Drug Mart (SC) government involvement in spending or cost cutting can have either a direct or indirect impact on the profitability and operations of private companies.  CML Healthcare may currently have a favourable operating environment in partnership with governments but the way they do business today may not be this way forever.  Funding may change in response to difficult economic pressures and governments may be forced to reassess priorities in healthcare by either centralizing or further decentralizing various care centres or services.

Disclosure: I hold common equity positions in Coca-Cola (KO), Shoppers Drug Mart (SC) & Becton Dickinson (BDX) as well as a fixed income position in General Electric (GE)

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