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 started this portfolio in 2008 (at the height of the market) and write updates every quarter (or so) 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 brokerages.
Since the last update (August 2014), oil prices have plunged about 50% which has heavily impacted this portfolio (see numbers below). While I realized that this portfolio was heavy in energy stocks, what I didn’t pay much attention to is how much of my portfolio was in energy “services”. Companies in my portfolio like Ensign Energy, Calfrac Well Services, Pason Systems and Mullen Group, are all in that category, which were hit the hardest from the energy market sell off.
What am I going to do? While some investors would sell off energy services stocks, they have maintained their dividend (so far), which means I will continue to hold. In fact, I’ve added to my Pason Systems position. What allows me to be patient during times like this is my focus dividend income rather than portfolio value. While it still hurts to see the portfolio fluctuate manically to the downside, I believe that it will recover over time.
- No new positions in this portfolio. I have been initiating new positions to my corporate dividend portfolio instead.
- I added to my Pason Systems position.
Since this portfolio is focused on dividend growth stocks, the portfolio did not disappoint where a significant number of dividend paying positions increased their distributions since the last update. The dividend increases came from:
- CIBC (CM), Bank of Montreal (BMO), Royal Bank (RY), TD Bank (TD), Scotia Bank (BNS), Fortis Properties (FTS), Manulife Financials (MFC), TransCanada Corp (TRP), Enbridge (ENB), First Capital Realty (FCR), Canadian Utilities (CU), Ensign Energy Services (ESI), Rogers (RCI.B), Pason Systems (PSI), Corus Entertainment (CJR.B), Thompson Reuters (TRI), SNC Lavalin (SNC), Potash Corp (POT), Emera (EMA), and BCE Inc (BCE).
One thing I do not like to see in this portfolio are dividend cuts. Some energy stocks had high yields even before the oil correction, so some dividend cuts were inevitable. Some of these cuts include:
- Canadian Oil Sands ($1.40 to $0.20);
- Baytex Energy ($2.88 to $1.20); and,
- Major Drilling Group ($0.10 to $0.04).
My dividend watch list remains similar where I am looking to increase my positions in CU, IMO, SNC (pricing is starting to get attractive), TD and possibly add new positions in Cineplex (CGX), and Canadian National Railway (CNR) when/if their valuations become attractive (let me know if there are any ideas that I’m missing out on).
Despite the large dividend cuts and no new capital added to the account (cash generated from dividends are used to reinvest), as of today, this portfolio generates about $5,635 / year in Canadian eligible dividends, compared to around $5,603 in the fall.
In the near future, I may provide portfolio income updates based on all portfolios to get a better idea of our journey towards financial freedom.
The Smith Manoeuvre Portfolio as of March 9, 2015 (prior to open) – note that any changes to the portfolio are indicated in bold. Also note that the yield displayed below is the “yield on cost” which is the current dividend rate on my original cost. I display this to illustrate the power of dividend growth over time.
|Stock||Symbol||Shares||Avg Buy Price||Total||Div/Share||Yield|
|AGF Management Limited||AGF.B.T||50||$22.71||$1,135.49||$1.08||4.76%|
|Bank of Montreal||BMO.T||45||$54.97||$2,473.83||$3.20||5.82%|
|First Capital Realty||FCR.T||222||$11.72||$2,601.03||$0.86||7.34%|
|Ensign Energy Services||ESI.T||200||$14.98||$2,995.98||$0.48||3.29%|
|George Westin Ltd||WN.T||50||$68.64||$3,441.99||$1.68||2.44%|
|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||$0.20||1.04%|
|Calfrac Well Services||CFW.T||300||$12.12||$3,635.98||$0.50||4.13%|
|Baytex Energy Corp ||BTE.T||35||$42.98||$1,504.14||$1.20||2.79%|
|SNC Lavalin Group||SNC.T||50||$38.55||$1,927.49||$1.00||2.59%|
|Crescent Point Energy||CPG.T||50||$37.13||$1,856.49||$2.76||7.43%|
|Major Drilling Group||MDI.T||450||$7.71||$3,467.98||$0.04||0.52%|
- Total Cost Base of Equities (inc. fees): $124,486 (vs. $121,996)
- Market Value of Portfolio: $153,981 (vs. $164,701)
- Total Dividends / Year: $5,635 (vs. $5,603.03)
- Portfolio Dividend Yield on Cost: 4.53% (vs. 4.59%)
- Portfolio Dividend Yield: 3.72%
Sector Allocation (based on market value)
- Financials: 24.03% (vs. 23.12%)
- Utilities: 9.63% (vs. 7.79%)
- Energy: 25.51% (vs. 30.38%)
- Resources: 3.10% (vs. 4.04%)
- Real Estate: 2.88% (vs. 2.56%)
- Consumer/Telecom: 14.98% (vs. 13.19%)
- Other: 19.87% (vs. 18.91%)
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, I consider this account to be my Canadian exposure (which is mostly financials and energy) and my US, international and other sector equity exposure 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 occasional 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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