Smith Manoeuvre Portfolio – October 2008
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. For more detail, check out the modified smith manoeuvre strategy. It almost sounds like a giant mistake waiting to happen with the current market conditions.
I will be honest, the leveraged portfolio hasn’t been pretty the past few months and extremely volatile. I will admit that leveraged investing in this market volatility can make an investor queasy. In spite of the occasional dry heave, I think that sell offs are an opportunity for long term investors.
To put my money where my mouth is, instead of selling and going to cash during the sell off, I have been buying more dividend stocks. To be more specific, I added to my position in Husky Energy and Fortis in addition to initiating small positions in Petro Canada and Teck Cominco (thanks DAvid).
Here is my SM portfolio thus far:
| 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 | $1.25 | 3.56% |
| Scotia Bank | BNS.T | 75 | $46.20 | $3,465.23 | $1.96 | 4.24% |
| Manulife Financial | MFC.T | 75 | $38.03 | $2,851.99 | $1.04 | 2.73% |
| Fortis Properties | FTS.T | 100 | $26.69 | $2,669.49 | $1 | 3.75% |
| TransCanada Corp | TRP.T | 50 | $36.87 | $1,843.25 | $1.44 | 3.91% |
| 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 | $2.00 | 5.57% |
| Petro Canada | PCA.T | 50 | $30.57 | $1,528.49 | $0.79 | 2.58% |
| Teck Cominco | TCK.B.T | 100 | $15.35 | $1,534.99 | $1.00 | 6.51% |
Total Portfolio Cost Base (including commissions): $30,496.59
Portfolio Holdings Value (excluding cash) on Oct 28, 2008 : $25,451.82
Total Dividends / Year: $1,102.75
Portfolio Dividend Yield: 3.62%
Even though the portfolio value is currently less than my borrowed amount, I am still fairly happy with the progress of the Smith Manoeuvre because of the fairly high yields of the strong dividend payers. As you may have noticed, the portfolio is starting to get a bit diversified away from the financials where they represent about 62% of my entire portfolio now.
In hindsight, if I waited a bit longer before adding to my positions, I would have a lower adjusted cost base. I guess there may be something to the saying “never try to catch a falling knife.”
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How are you able to buy a few shares, less than 100, and not get dinged on the base commision?
How are you able to buy a few shares, less thann 100, and not get dinged on the base commision?
Qubikal, MBT has a good yield, but they haven’t increased their dividend since 2004. My focus is on companies who have a history of increasing their dividend and fairly low payout ratios. I just took a peek at their balance sheet, and it seems that they pay out more in dividends than their earnings produce which is another warning flag for me. I’m not sure if that’s a reporting error or if there’s more behind that story.
FT – thanks for sharing your transactions during the month/quarter. I enjoy following your progress and am moving towards modelling my portfolio like yours. Too many mistakes made picking some risky items over the last year for my SM portfolio.
I see that you don’t have any positions in the telecom industry. Comparing to the XDV ishares etf, they hold MBT that pays out a pretty good div rate. What are your thoughts?
peter, my portfolio is primarily focused on “strong” Canadian dividend payers as I’m invested for the income. If there is a strong dividend “alternative” energy ETF out there, I would love to hear about it. Do you know of any such security?
Hi FT,
what’s the reasoning behind being so financial sector heavy for your SM portfolio? I realize that the financial sector is high dividend yielding but right now it might be the best place to be in. Why isn’t there any investment in alternative energy via an ETF or some such? Are the yields not high enough?
pr
multifoldream, yes, you are right, i’m only borrowing a portion of my total available amount. Based on LTV, I still have about $40k in credit available, not including the cash just sitting in my leveraged investment account.
How far you go with your Smith Manoeuvre as investment leveraging vehicle?
I see that you leverage you home (mortgage & SM) up to 64%, if my calculations are right, but you can go up to 80%.
I don’t usually agree with people about taking on more debt, even good debt, for investing. That said, I looked at your particular investments and the majority of those companies look really strong and have been battered recently. Almost each of those companies will still be around 10 years from now and will be even stronger…
The biggest thing I’ve noticed is I have this tendency to invest my money AS SOON AS I GET IT, to avoid missing out on gains, but sometimes that causes me to buy an investment too soon and at too high a price… Sometimes it’s best to put a low ball limit order out there, and let it sit for a few weeks. You’d be surprised how much extra gains you will get in the long-run (or how much lower your losses may be). Even on days when the stock does go higher, it may trade up and down all day long, so the closing price isn’t necessarily the lowest price you can buy the stock for! So why pay the sticker price? The only reason is fear that the price will increase… and I’m slowly learning patience is a very useful thing… there are plenty of opportunities and if you miss one, there’s always another one around the corner – so NEVER overpay and NEVER pay the sticker price. I can’t underline how important a lesson this has been.
I now put out low ball bids on companies I like, and let it sit there for a week or so, and then I re-evaluate my limit price if the trade wasn’t executed. Example, even shaving $1 off a $20 stock might end up saving you 5% (or making you 5% depending on how you look at it, and that can be half a years profit based on the common expectation of 10% rate of return per year)… and even if that stock never closed below $20, I might be buy it at $19… I’ve been able to make my low ball bids at a big discount due to the massive ups and downs our current markets are experiencing at much higher discounts than 5%! So I’m hoping for much bigger gains on my newly invested money – maybe that will offset some of my losses? Oh well, I think my losses won’t be losses forever, so I’m not worried.
FT,
Thanks for the post. I, too, wish I hadn’t plunged into the market as quickly as I did but I take some solace in the fact that I’ve seen the experts on CNBC and BNN say that they couldn’t have predicted this. I’m sure that even now many are buying when the markets tank (typically on Monday’s) but still not convinced that the bottom has been hit.
However, there are some signs which suggest we may be in the process. We tested certain lows and managed to fight back quite nicely. Secondly, I’ve begun to notice that in spite of bad news, the markets still go up (e.g. look at the energy stocks today in spite of the price of oil; look at the Dow and S&P despite the GDP and consumer confidence numbers this week).
Your choice of Teck wasn’t one that I had considered before. According to 14 analysts, 1 rates it a strong sell, 1 a sell, 3 a hold, 5 a buy and 4 a strong buy. And, the biannual dividend will be paying out in January – assuming there is no disruption to it.
My portfolio is still at a 4.44% overall yield but the cost to service has gone down quite a bit (with LIBOR and the Bank prime rate). Not even considering tax advantages, the cost to service is 3.62%. By the time the interest rates start rising, I’m sure that the stocks, and the dividends, will also have risen. However, I’m expecting that the dividends will rise more slowly than the stock prices since these yields are unusually high.
So, although my stocks are 12% below book value, at least my dividends will more than pay me to wait… and wait… and wait…
What are you going to do as you feel comfortable to put more $ into investments? Buy some new stocks or invest in some of the worst performers (e.g. AGF)?