For those of you just joining us, this is my portfolio that is leveraged with money borrowed from my home equity line of credit (HELOC). As the money borrowed is used to invest, the interest charged is tax deductible.  I write an update every couple months or so to show new positions added along with any market gains/losses.  For more details, check out my modified smith manoeuvre strategy.

In the last update, I expected a pull back soon after the post, however, that hasn’t materialized yet.  I still expect some sort of correction at which time I will be deploying more capital.  Even without the pullback, there were some equities that were selling near their 52 week lows, like utilities.  Having said that, I initiated a position with Canadian Utilities (CU), TransAlta (TA) in addition to adding to my Fortis (FTS) position. Not only did I buy a few utilities, I initiated my position in Enbridge (ENB) and First Capital Realty (FCR) – a REIT dressed as a corporation.

I usually don’t sell within this portfolio as I would like to keep the dividend stream going for as long as possible.  However, there are times when companies change or get bought out.  In this case, I sold off my position in Petro Canada (PCA).  The reason being is that Suncor is in the process of merging with Petro Canada which will most likely result in a reduced dividend.  In addition, I already own Suncor within my RRSP.

The Portfolio as of June 2009:

Stock Symbol Shares Avg Buy Price Total Div/Share Yield
Royal Bank RY.T 75 $47.62 $3,571.25 $2 4.20%
CIBC CM.T 45 $67.14 $3,021.25 $3.48 5.18%
Power Financial PWF.T 105 $35.14 $3,689.65 $1.40 3.98%
Scotia Bank BNS.T 105 $41.91 $4,400.52 $1.96 4.68%
Manulife Financial MFC.T 125 $33.12 $4,139.48 $1.04 3.14%
Fortis Properties FTS.T 150 $25.63 $3,843.98 $1.04 4.06%
TransCanada Corp TRP.T 100 $33.50 $3,349.74 $1.52 4.52%
FTSE RAFI US 1500 Small-Mid ETF PRFZ.US 20 $51.50 $1,029.99 $0.42 0.82%
AGF Management Limited AGF.B.T 50 $22.71 $1,135.49 $1.00 4.40%
Bank of Montreal BMO.T 25 $44.17 $1,104.24 $2.80 6.34%
Husky Energy HSE.T 85 $35.90 $3,051.28 $1.20 3.34%
Teck Cominco TCK.B.T 100 $15.35 $1,258.99 $0.00 0.00%
TD Bank TD.T 50 $48.24 $2,412.23 $2.44 5.06%
Enbridge ENB.T 40 $37.36 $1494.39 $1.48 3.96%
TransAlta TA.T 50 $21.47 $1073.49 $1.16 5.40%
First Capital Realty FCR.T 100 $15.75 $1,574.99 $1.28 8.13%
Canadian Utilities CU.T 50 $36.40 $1,819.99 $1.41 3.87%

More Stats

  • Total Portfolio Book Value: $52,235 (total invested from HELOC including after tax interest)
  • Portfolio Value (Cash + Equities): $49,196.60
  • Total Cost Base of Equities (inc. fees): $41,970.95
  • Market Value of Equities (June 16, 2009): $39,125
  • Total Dividends / Year: $1,765.50
  • Portfolio Dividend Yield: 4.21%

Sector Allocation (based on market value)

  • Financials:    51.79%
  • Utilities:    16.79%
  • Energy:    20.00%
  • Resources:    4.96%
  • Real Estate:    4.52%
  • Other:     1.95%

Leveraged Investing Disclaimer: There have been a lot of readers who have mentioned that they are interested in a leveraged portfolio.  Over the long term it may be lucrative.  However, over the short term, equities are volatile and can put the portfolio deep in the red.  My portfolio is a prime example of what can happen.  If you can’t stomach losing 20-30% in the portfolio in any given year, then your risk tolerance isn’t suited for leveraged investing.

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That’s a really interesting way to build your SM portfolio. I really like the fact that you are taking high paying dividend stocks!

As long as the companies paying their dividends, you avoid having a liquidity risk as they are paying the interest for you ;-).

With the interest rate being so low for another year, I wonder if I should go back in… just for a $5000 ;-)

Good job!

Just a question, rather than researching individual companies within the TSX (or S&P etc.) is there a nice list where you can see the historical dividend yields for the companies (so you can get the overall list of what yields are the highest and then do investigations on the companies). I like your plan of investing for dividends, but with 300 companies in the TSX (and those are mainly large-cap companies) it is difficult to do an analysis of all of those to see what are the best!

Any help would be appreciated!
Kirk

TA and FCR are good calls. Remaining picks are about to break the major supports and go south… For example, my prediction for ENB is $25-27, for CU is $20-25. I hope I’m wrong, I really do… but charts are telling me so.

I’m going to be doing something similar. I have 100k in the market right now, and money for a downpayment for a house. So I’m going to liquidate the 100k and increase the downpayment, then get a mortgage for the needed amount (total price – downpayment) and then a ‘second’ mortgage for the extra 100k which I’ll invest back in the market.

This won’t give me a total tax deductible mortgage but I will get a tax deduction on 100k and end up in the same spot (same total mortgage, same amount in the market). I’ll use the tax rebate to pay off the first mortgage, and then eventually the tax deductible one.

I understand the value of the SM being to increase the investment loan when the mortgage goes down, but I don’t like debt. Therefore, I won’t be increasing my the investment debt when the house debt decreases. But I’ll get some extra tax deductions while being able to sleep well at night.

Hi,

I`m new to the SM, but I`m interested in it. I`m reading the Fraser Smith book right now and I have 1 question : Does anyone know how the SM will influence the credit score? If the SM is done until the mortgage is payed off and the debt is not liquidated (so that the interest stay deductible), is that going to lower my credit score ?
Thanks

Interesting… you mentioned a market pull back. I think it just began the last couple days ago and will continue. What is your estimate how long this will last FYPOV?

FT,
I can’t explain you my predictions in two words. It takes some time to train your eyes to recognize the charts and corresponding buy / sell targets. Try to compare this: takehttp://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:head_and_shoulders_t and 10 years monthly chart for ENB. There is a good chance that ENB is forming reversal chart with a strong support @ $35. If support is broken – the “buy price” target is @ $25 level.

Newb alert:
What exactly is an “initial position”? Is it just the first set of shares you buy in a company/fund, or is it something more?


I understand; thank you!

FT,

Just for clarity, perhaps it would be better to remove the cash component of your SM portfolio. It gets a little confusing (at least the way I look at it) to compare the top 2 numbers with the next 2.

I agree regarding the pull back. I invested in some BetaPro units that are bearish and it is only now that I’m seeing them above the price I paid. I thought the pull back would have happened earlier and more dramatic, but I just wanted to make some money on the downtrend before reversing position and digging in for the long, long haul.

My hedge only represents about 12-15% of my overall portfolio and its in sectors that I want to make additional investments. When the TSX gets to below 9500 then I might think of changing my position. When I liquidate the hedges I will go long the market. I also want to investigate more about options as a way to get paid to wait until stocks I want to own trade at the lower range I’m willing to pay.

Wouldn’t have been surprised to see you get out of Teck when it was above $19.

Also see that you don’t have anything like BCE, Telus or Manitoba Telecom any of which would help diversify your exposure.

FT,
Thanks for sharing your SM info and keeping us updated.
I’ve got a few questions regarding fees.
Which discount broker do you have your portfolio with and what’s the trading fee you’re paying?
When buying stocks, do you limit the trading fee to be a certain percentage of the funds you’re investing (for example: limiting the fee to 0.5% of the funds means I’ll have to accumulate $5000.00 before buying a stock)?
Do you pay a fee for transferring dividends back to your checking account?
Thanks a lot!
William

I agree with TFB, I love those yields! Makes it an easy decision when a strong company will pay your interest for you. And yes TFB, you should consider getting back into a SM, maybe once there is the correction we’re all expecting?

If anyone hasn’t seen/posted this already here link to a Canadian company that actually sets you on your way to having a tax deductible mortgage. I just read about it in the FP yesterday. I’m taking the webinar to learn more about it but from what I’ve read it sounds pretty solid. You be the judge.

http://www.tdmp.com/index.php

Technical analysis…thats modern day fortune telling.

When you buy a stock you are buying a piece of a business.
Buy a good business and the stock will go up in the long run.

I just want to add my comments about how much I love the MDJ blog! We are in the process of setting up a leveraged investment strategy (sort of a mini smith manouevre) after reading countless articles about the smith manouevre, leveraged investing, reading Smith’s book and CD and consultation with our financial planner.

We plan to start the new strategy in a month or so once we get a few things ironed out. At first our plan was to be 100% mortgage and debt free in 5 years and then start to invest but that could potentially be a $700,000 mistake! Of course there’s risk but we are in it for the long run…no matter what! We have 20 plus years to invest and have lots of equity in our home.

Although my husband and I (32 and 30 respectively) are financial novices we have learned so much from everyone that contributes to this site and also to the fact that my parents are near retirement and they realize that they are equity rich, no debt and have a decent nest egg…but the nest egg could have been turbo charged with leveraged investing 15 plus years ago. So all of these factors made us change our financial strategy.

Thanks to MDJ and all your regular contributors for introducing us to the smith manoeuvre and the concept of leveraged investing!

Best of luck to all…

I agree with Tom and TFB, love it when the interest is paid for you.

As long as you’re sticking with profitable companies with low debt levels, it’s going to rebound when the market recovers. There are certainly deals to be had, although no one knows how long this bear will really last.

steve_jay – fortune telling is suppose to tell u about the future.

technical analysis only gives you trends from the past.

I have started a SM Portfolio recently

Inorder to save on comissions, I am resorting to focusing on RBC Direct Investing IPO center. The come up with great offers there, you submit an interest in an offering and if you get lucky you get what you want or less shares than you requested, this does not incur any trading fees.

One thing for sure, you have to be very patient and always keep an eye out for new offerings by subscribing to noitfications on the IPO center.

I was wondering (and apologies if you’ve already addressed it), but can you use the Smith Maneuver with a Tax Free Savings Account (TFSA)? Because of the lack of penalty of moving money both in and out of a TFSA, wouldn’t it be suited to leverage in the form of options for example. Also, instead of using dividends (not sure how much $5000 in stocks would provide) use the sale of the higher price stock to pay of your mortage faster?

Hey FT,

Your results look good. Your were at $39,900 in the March portfolio. That is a 23% gain in 3 months. Is that right? That would be slightly more than the TSX Composite from March 31-June 16. Nice going!

Are you concerned about lack of diversification? Do you feel it is risky being 52% in one sector and I think that is 98% in Canada?

Do you find the charting helpful? I have to admit, I’m with Jay in classifying charting in the same category as astrology. Humans like to see patterns, even if they don’t exist.

For example, there is a sale of the century going on with many companies all over the world at extremely low prices compared to normalized earnings. Discounts from 50-80% are very common. Meanwhile, however, charting has you focused on whether or not there will be a small pullback. Do you not find that charting converts you to a short-term thinker, instead of an effective investor?

Ed

Wow, you do have a high allocation to financials. I hope CDN banks do not follow their US counterparts in cutting dividends and getting TARP money.

Hi FT,

You’re right about Canadian banks being relatively safe. However, do you not think it is still risky to have so much there?

We define diversification as investing so that no one idea can either make us a killing or kill us. We would consider it very risky to borrow to invest in a global financial services fund, because of the narrow focus. Focusing on Canadian banks is a a subsector of financial services plus a tiny country focus. It is a universe of less than 1% of the universe for a global financial services fund.

In short, it is a subsector (banks) within a tiny region (Canada) within one sector (financials).

It is not hard to come up with a scenario where this would backfire. If Canada opened up banking to international competetition (which is likely at some point), the Canadian banks are horribly noncompetitive and would get massacred. Warren Buffett won’t even buy banks, because they have potential for undisclosed risks with off-balance sheet investments. And any sector will have ups and downs over the years.

The perception of them being the safest banks in the world also makes them the most expensive banks in the world.

I realize you like the nice dividends and that your RRSPs are invested differently, but do you not think that more diversification would be safer and have more growth potential, especially since this is leverage investments?

Ed

FT,

A Desjardins analyst just upped his 12 month price target for TCK.B to above $29 from around $27. This was based on their deal with a Chinese company on Friday.

You may want to keep TCK.B just for capital appreciation.

I’m keeping it in my SM portfolio. As things improve, I would expect TCK.B to reinstitute a dividend perhaps in 2011.

FT, a couple of questions:

1) Why no income trusts? There are a few paying some pretty good distributions with strong balance sheets. From what I can gather, income trusts are going to be treated in the same manner as corporations – so why the fuss? If they convert back to a corporation they will be treated like all other corporations and if they stay as a trust they will be taxed like a corporation. If the trust is paying out a dividend that is 50% higher than a corporation and taxes of 30-34% are introduced upon it, I’m pretty sure you still come out ahead of “normal” corporations in the end. Would someone else care to elaborate as I feel I might have over simplified this.

2) Increasing dividends each year, having a high yield, and being a part of CDZ are certainly major criteria for selecting a dividend stock. However is there any consideration given to consistent earnings growth, future prospects/growth, or the ratios: debt/equity ratio, price/sales, price/equity TTM, forward price/equity, price/sales, price/cash flow?

3) Do most users of this investing strategy follow dollar cost averaging or do you wait for a strike point? As an aside to make my question, anyone who got in on BMO at $25 with a 10% dividend in would be sitting pretty right now.

4) How do you determine the weighting of each stock in your portfolio? My rule of thumb is each stock gets an equal dollar amount, for example in starting up my portfolio, each stock gets $2000 (or whatever) and each new addition would get the same.

Sorry, looks like I had more than a few questions.

In the ratio question above I left out price/book.

Thank you. There are a few points there I did not consider there on income trusts.

What about the other questions, in particular #2?

Have you added anything else to this recently? I see Telus is almost at a 52 week low and has about a 6% yield right now. Seems like it could be a good time to buy, if you think they can maintain the dividend

How have things gone with the taxman? I have a coworker that has been having a bit of a battle with CRA and it sounds like he has been doing things right. CRA insists it is a mortgage and not a line of credit and therefore isnt eligible. He has a homeline plan with RBC and bought through RBC to keep the paper straight forward and it is still an issue. I want to start the SM next year but I am now a little nervous.