Smith Manoeuvre/Dividend Portfolio Update – July 2013

For those of you just joining us, listed below 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 so often to show new positions added along with any market gains/losses. For more details on the strategy and procedure, check out my modified smith manoeuvre strategy and my comparison of online stock brokers.

It has been about five months since the last update (February 2013) with a bit of activity in the leveraged portfolio.  I added to a a number of existing positions along with initiating four new positions.

I added to existing positions:

  • Enbridge (ENB),  Mullen Group (MTL), Calfrac Well Services (CFW), Finning International (FTT) and Bird Construction (BDT).

New positions were initiated with:

  • Imperial Oil (IMO), Potash Corp (POT), Emera Inc (EMA), and BCE Inc (BCE).

Since this portfolio is focused on dividend growth stocks, which dividend paying companies increased their distributions since the last update?  I’m happy to report that several companies did, particularly the bank stocks.  In my portfolio, dividend increases came from:

  • Royal Bank, CIBC, Scotia Bank, Bank of Montreal, TD Bank, Rogers Communications, George Westin, Pason Systems, Finning International, SNC Lavalin, and Bird Construction.

My dividend watch list remains similar where I am looking to increase my positions in TRP, BMO, TD, FCR and possibly add new positions in TMX Group (X), Cineplex (CGX),  Canadian National Railway (CNR), Bell Aliant (BA), Shoppers Drug Mart (SC) and Indigo (IDG) when/if their valuations become attractive.

The Smith Manoeuvre Portfolio as of July 8, 2013 (prior to open) – note that any changes to the portfolio are indicated in bold.

Stock Symbol Shares Avg Buy Price Total Div/Share Yield
Royal Bank RY.T 100 $48.39 $4,838.99 $2.52 5.21%
CIBC CM.T 45 $67.14 $3,021.25 $3.84 5.72%
Power Financial PWF.T 155 $32.11 $4,976.64 $1.40 4.36%
Scotia Bank BNS.T 105 $41.91 $4,400.52 $2.40 5.73%
Manulife Financial MFC.T 125 $33.12 $4,139.48 $0.52 1.57%
Fortis Properties FTS.T 150 $25.63 $3,843.98 $1.24 4.84%
TransCanada Corp TRP.T 100 $33.50 $3,349.74 $1.84 5.49%
AGF Management Limited AGF.B.T 50 $22.71 $1,135.49 $1.08 4.76%
Bank of Montreal BMO.T 25 $44.17 $1,104.24 $2.96 6.70%
Husky Energy HSE.T 135 $32.53 $4,391.27 $1.20 3.69%
TD Bank TD.T 50 $48.24 $2,412.23 $3.24 6.72%
Enbridge ENB.T 130 $28.39 $3,690.38 $1.26 4.44%
TransAlta TA.T 50 $21.47 $1073.49 $1.16 5.40%
First Capital Realty FCR.T 162 $9.71 $1,574.64 $0.84 8.65%
Canadian Utilities CU.T 100 $18.20 $1,819.99 $1.94 5.33%
Ensign Energy Services ESI.T 200 $14.98 $2,995.98 $0.44 2.94%
Mullen Group MTL.T 200 $17.98 $3,596.97 $1.20 6.67%
Rogers Communications RCI.B.T 100 $34.39 $3,439.48 $1.74 5.06%
George Westin Ltd WN.T 50 $68.64 $3,441.99 $1.66 2.41%
Pason Systems PSI.T 200 $13.97 $2,793.98 $0.52 3.72%
Corus Entertainment CJR.B.T 100 $19.87 $1,996.99 $0.96 4.81%
Thompson Reuters TRI.T 90 $33.40 $3,006.18 $1.30 3.89%
Brookfield Properties BPO.T 150 $16.01 $2,401.23 $0.56 3.50%
Canadian Pacific Railway CP.T 30 $54.23 $1,626.99 $1.40 2.58%
Canadian Oil Sands COS.T 150 $19.14 $2,871.48 $1.40 7.31%
Leons Furniture LNF.T 200 $12.06 $2,412.98 $0.40 3.32%
Encana ECA.T 100 $18.82 $1,881.99 $0.80 4.25%
Transcontinental TCL.A.T 200 $11.32 $2,263.98 $0.58 5.12%
Calfrac Well Services CFW.T 150 $24.24 $3,635.98 $1.00 4.13%
Baytex Energy Corp
BTE.T 35 $42.98 $1,504.14 $2.64 6.14%
Finning International FTT.T 200 $22.95 $4,589.98 $0.61 2.66%
SNC Lavalin Group SNC.T 50 $38.55 $1,927.49 $0.92 2.39%
Crescent Point Energy CPG.T 50 $37.13 $1,856.49 $2.76 7.43%
Bird Construction BDT.T 250 $13.12 $3,280.98 $0.76 5.79%
Calian Technologies CTY.T 100 $20.88 $2,087.99 $1.12 5.36%
Imperial Oil IMO.T 50 $42.81 $2,140.49 $0.48 1.12%
Potash Corp POT.T 50 $40.13 $2,006.49 $1.40 3.49%
Emera Inc EMA.T 50 $32.27 $1,613.49 $1.40 4.34%
BCE Inc BCE.T 50 $41.68 $2,083.99 $2.33 5.59%

More Stats

  • Total Cost Base of Equities (inc. fees): $107,230.06 (vs. $91,652.20)
  • Market Value of Equities (not including dividends or cash): $124,043.60 (vs. $109,586.40)
  • Total Dividends / Year: $4,977.72 (vs. $4,212.34)
  • Portfolio Dividend Yield: 4.64% (vs. 4.60%)

Sector Allocation (based on market value)

  • Financials:  23.04% (vs. 26.42%)
  • Utilities:  8.57% (vs. 8.58%)
  • Energy:  32.94% (vs. 31.28%)
  • Resources:  0.00% (vs. 0.00%)
  • Real Estate:  4.42% (vs. 5.14%)
  • Consumer/Telecom:  13.82% (vs. 14.12%)
  • Other: 17.21% (vs. 14.45%)

Common Questions:

Why the high concentration in financials and energy?

With regards to sector allocation, you may notice that this portfolio is fairly concentrated in financials and energy.  Note though that this is one of my accounts where I treat all of my accounts as one big portfolio.  In other words, my international and other sector equity exposure are in other accounts.

Why don’t you use a dividend ETF instead?

Couple of reasons, first, most Canadian dividend ETFs hold stocks that distribute return of capital which can affect the tax deductibility of the investment loan.  Second, the MER eats into the dividend.  I keep the expenses in this portfolio very low through buying but rarely selling.

Should I start the Smith Manoeuvre?

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 during 2008 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.  Here is an article I wrote answering a reader question “Should I Start the Smith Manoeuvre?”

Disclaimer: The securities mentioned in this post are not recommendations to buy or sell and should be used for informational purposes only.

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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Nathan
8 years ago

FT,

I’m confused with the difference between the dividend payout and ROC.

If I use my dividends to pay down my mortgage faster, does that cause tax implications. I’m talking dividends from stocks not ETFs.

chuck
8 years ago

The yield of the portfolio wouldn’t change on paper. Normally when you calculate yield you’d use the acquisition cost of the stock since that’s the price you locked in at – not market.

A perceived long term spike in interest rates, and would imply that the risk free rate will increase as well. In most valuation models, that would call for a drop in stock prices. Consequently if you calculared yield vs the new lower market price yield actually goes up.

That being said, two of the risks of the smith maneuver is that interest rates will go up, and either you experience a (paper) capital loss on the portfolio, or the distributions are insufficient to cover the interest obligations of the debt.

Dan
8 years ago

from what I understand the smith maneuvre relies on 2 things: (1) low interest rates for a HELOC and (2) the div tax credit

so if prime went up from 3% to 5%, then the net yield of the entire portfolio is drastically reduced since the income is made in the spread between the interest rate paid and the net yield of the dividends……is this correct?

Dan
8 years ago

If div tax credit on eligible divs results in a 20% effective inclusion rate on div income, then you’re correct. I thought the rate was higher though, especially for hnw taxpayers.

http://www.ey.com/CA/en/Services/Tax/TaxMatters-July2013-Maximum-personal-marginal-income-tax-rates-for-dividend-income

I need to read more about the mechanics here. Thanks for clarifying.

Dan
8 years ago

Maybe I’m missing something here. If someone is starting off using the Smith Maneuver, & invests in a basket of stocks in a nr account, & aims to hold these stocks (ie, never sells), won’t the dividend income inclusion (after taking the dividend tax credit into consideration), basically offset the interest deduction each year? If the portfolio yield is say, 4.5%, & the heloc rate is say 3.5%, don’t the two virtually wash?

Emilio
8 years ago

Hi FT,

I am very interested to know when is BMO’s valuation attractive.
Their P/E ratio is only higher than CIBC (when looked at the major five banks)

What’s a good entry point into BMO considering today’s market?
I know this is relative for everybody, but I do value your qualified opinion.

Jay
8 years ago

Great read as always.

Have you considered DRIPS vs cash for this portfolio? Excellent way to increase the number of shares in your portfolio for free.

Keep up the great work.

J