Tuesday, January 9, 2018

Year End Review 2017 : After Five Full Years of Retirement

It has been 5.5 years since my husband Rich and I retired at age 48.  With 2017 coming to a close, it is time once again to analyze how we did on the year.  Where the TSX lost 11% in 2015, then soared 22% in 2016, 2017 ended in between with modest gains of 6%.  It was not as clear cut in determining how our portfolio performed in 2017, due to an unexpected influx of funds arising from the receipt of a modest inheritance.  We used part of these funds to add more dividend-paying stock to our portfolio in order to increase our dividend payments that we use as our source of retirement income (more on this later).  In order to have an "apples to apples" comparison to the previous year, I worked out our performance excluding the new investment funds.  Based on this calculation, we had a 14.9% increase in value over 2016 when including the dividends that we withdrew as income, and a 10.2% increase excluding them.  While it is nice to see the value of our portfolio grow in excess of the TSX, what we really care about is the amount of dividends that we generate.  Back in 2013/14, dividends were growing in double digits, but the growth has progressively slowed down since then.  In 2015/2016, our dividends grew between 6-8% but in 2017, they only grew by 4% (again, excluding our new investments).  I use the term "only" since this seems low relative to previous years.  But compared to the salary increases (or lack thereof) that I used to get while working, having an annual 4% raise is still pretty good.

I checked on the mix of our portfolio in terms of market capitalization and sector to ensure that we were still sufficiently diversified.  Since our strategy is to buy and hold for the dividends as opposed to buy and sell for value gains, we more or less held the same stock between 2016 and 2017 with a few minor additions and subtractions.  Therefore it is not surprising that the numbers are quite similar year to year.  Our relative percentage in large cap stock has grown a bit, mostly because some of the mid cap stocks that we owned in 2016 have grown in size and now are classified as large cap.  We are happy to see that our dividends continue to come from a variety of sectors and that we are limiting our exposure to riskier small companies.

When you come into unexpected funds that fall outside of your annual budgeted income, the tendency is to indulge a bit on discretionary extravagances that you would normally not consider.  We definitely did this, each selecting a few items that we have always wanted, but could not normally justify.  Before doing this, we made sure to first allocate money to rebuild our short and long term emergency funds, which had been decimated the previous year by major unexpected home repair expenses.  One of the extravagances that I wanted in particular was a TIFF Patron's Circle Gold membership, that would allow us to attend press and industry screenings of movies during the annual Toronto International Film Festival.  While our other purchases were one-time expenses covered by the one-time influx of extra funds, the membership would be a new major expense that would need to be added to our annual budget.  We continue to live by the adage that "if we can't afford it, we can't have it", so in order to support this ongoing expense, we needed to add enough new stock to pay out dividends to cover the amount each year.  This was all taken into consideration before determining how much we had left to spend on fun purchases.

I had an extra goal that I wanted to achieve when deciding which stocks to purchase in order to add dividends to our non-registered account.  As previously mentioned, we withdraw some or all of the dividends that we receive each month to use as income to pay our monthly bills.  Up until 2017, the dividends that we were paid in the first and third months of each quarter (e.g. January/March) far exceeded the ones we received in the second month (e.g. February).  While we made more than enough dividends in the first and third months to cover our average monthly expenses, the second month always fell short, thus requiring some planning to save up extra money for those months.  In 2017, we finally had additional funds to invest and so I was able to tackle this issue.  While making the payout of the three months equal is not reasonably achievable, I wanted to get to the point where the second month could at least cover a normal month's expenses.  I therefore focused on purchasing stock that I was interested in anyways, but which happened to pay in the second month, or at least monthly.

It has been our strategy since we retired to try to slowly reduce the value of our RRSPs so that we would not be hit with a huge tax bill when we turn 71.  In that pursuit, we converted our RRSPs into RRIFs right after retirement in 2012 and started withdrawing the legal minimum in cash each year.  As it turned out, the annual dividends generated from our RRIFs exceeded the minimums.  So despite these withdrawals and because of long term upward trend of stock prices, the value of our RRIFs continued to rise since we never reduced the capital.  Going forward from the 2018 RRIF withdrawal, we have implemented a new strategy.  Instead of saving up our dividends and withdrawing cash, we will move dividend stock "in-kind" from our RRIFs to our non-registered account at the beginning of each year.  This strategy achieved multiple purposes.  It effectively reduces the value of our RRIFs by reducing the amount of stock held there, and eliminates the dividends paid out by those shares.   In addition, by again selecting stock from our RRIFs that paid in the second month, I furthered my goal of smoothing out our monthly income flow.  Finally I no longer have to worry about maintaining enough cash flow to support the entire annual RRIF withdrawal.  I only need enough cash to cover any excess amount triggered if my stock transfer exceeded the minimum withdrawal amount, since we would be charged a withholding tax on that amount.  If we continue this strategy for multiple years, we should eventually generate a noticeable reduction in the value of our RRIFs and successfully move more of our income from being taxed at 100% (from the RRIF withdrawals) to the much more tax efficient dividend payouts from a non-registered account.

I had several reasons for choosing to move stock in-kind as opposed to selling in the RRIF, making a cash withdrawal and re-purchasing the same stock in the non-registered account.  I saved the two $9.99 transaction fees for the sale and purchase, but that was inconsequential.  More importantly, it was an easy process, taking a simple phone call to my discount broker Scotia iTrade to make the in-kind transfer happen.  If I had sold stock and then purchased, I would have to wait 5 days for each of the transactions for the trades to settle and could have missed out on a dividend payout in the interim.  And there was always the chance that after selling a stock, the price might soar and I would lose money trying to buy it back.  With the in-kind transfer, I controlled the price that was used for the transfer, being able to pick between the low and the high price that the stock reached that day, up to the point that I requested the transfer.  I chose the low price, so that I could transfer out more stock while still maintaining close to the minimum RRIF withdrawal.  The only thing I would do differently next year is to wait until later in the day to make the transfer, since it would give me  a longer period of time from which to choose a price.  I also found out that I could transfer more than one stock as part of my RRIF withdrawal, but the stocks had to be Canadian.  I could not transfer a US stock from my RRIF into my US non-registered account.

We had one more unplanned investment opportunity in our non-registered account which arose towards the end of 2017.  In 2016, HNZ Group (HNZ.A) cut their dividend payout and as a result, the value of our stock plummeted and we lost the income generated by those dividends.  We thought about selling the stock, but since we had lost over 50% the value of this holding, we were not going to be able to buy much with the proceeds anyways.  So rather than lock down the loss, we decided to hold onto the stock for a while to see if it rebounded.   Towards the end of 2017, we were notified that the president of HNZ Group was offering to buy up all of his company's stock at a much higher price than had reached for over a year.  Because of this forced sale, we recouped about 85% of our original value.  Now we had a new chunk of money to invest in dividend paying stocks, as well as a small loss that we could carry forward to a future tax year to offset a future capital gain.  With the inheritance investment, the RRIF transfers and the investment from the HNZ sale, I am happy to report that our second month dividend payout now is large enough to sustain itself for a normal expense month, without the need to borrow funds from a previous month.  Mission accomplished.

All in all, we continue to be in good position and ahead in terms of our retirement plan.  In 2018, I will turn 55 and will be eligible to collapse my Locked in Retirement Account (LIRA) and turn it into a Locked-in Income Fund (LIF).  Given that my birthday is at the end of the year, I will probably wait until the beginning of 2019 to do so, rather than add a new income stream so late in the year.  This will probably become a topic of discussion for next year's Year In Review blog.

From a social aspect, we are still busy as ever, with no plans to slow down.  We still have not had the time to tackle many of the hobbies and activities on the original to-do list that we made when we first retired.  In 2017, we continued to be lucky in securing another home swap that allowed us to vacation abroad economically, this time spending 3 weeks in the spring in Belgium, including a 9 day home swap in Antwerp.  We did so much on this trip that it took me the rest of the year to blog about it.  We also took some shorter trips to New York City, Ottawa, Stratford and Cleveland that I have not written about yet, but pledge to complete before starting our 2018 vacations.  In addition to the interest courses that we take at Innis College as part of the Later Life Learning group, we have also discovered some excellent courses at Hot Docs including ones on Film Noir, Art Deco and the History of Design Styles.  Rich has picked up a few new hobbies including meeting with a group who share his interest in vintage watches.  In order to keep our minds sharp, we have taken to completing one or more crossword puzzles each day, taken from the free Metro paper, the Globe and Mail or the New York Times newspapers.  We look forward to continue pursuing our many interests through 2018, and maybe we can even check off a few more new items from our original list.

2016 Year End Review
2015 Year End Review
2014 Year End Review
2013 Year End Review
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Monday, December 25, 2017

Investors Group Podcast About Our Early Retirement

Around the end of August, we were contacted by a journalist requesting to talk to us for a podcast about early retirement that he was working on for Investors Group.  The podcast is the 4th of a six part series about retirement, which also includes topics like "What Happens When You Are Forced To Retire", "Working Past Retirement Age", and "What Will My Retirement Look Like".  In our case, the podcast would focus on why we wanted to retire early, how we achieved it and what we were doing now that we were into our sixth year of early retirement.  It was not easy to schedule a time for the interview, since our retirement days are packed with activities.  At that time, we were just gearing up for the Toronto International Film Festival and were in midst of watching early preview movies en route to a new annual record where we watched over 40 movies this year.  Luckily we were able to squeeze time in for the podcast, which you can listen by following the link below:


Sunday, March 12, 2017

Retirement and Income Tax: Moving Beyond the RRSP

As retirement savings plans go, the difference between the TFSA versus the RRSP epitomizes the concept of "pay me now or pay me later".  Sooner or later, the taxman gets you.  The RRSP  allows you to postpone paying income tax on any contributions made during your working years when your income is presumably higher.  But once you retire, it is time to pay the piper.  At that point, funds withdrawn from the plan are taxed at 100%.   By contrast, you do not get a tax deduction for contributing to the TFSA, but any funds withdrawn from it, including growth in value or income earned via dividends or interest payments, are tax free.

The short term allure of paying less income tax or even getting a refund as a result of making a RRSP contribution masks the long term implications to your tax burden in the retirement years. This made sense when life expectancy post-retirement used to average around 10+ years compared to 40+ years of working.  These days with people striving to retire earlier and commonly living to age 90 or more, it is quite possible and even likely for some people to have as many if not more retirement years compared to working years.  For example, my husband and I retired at 48 after working for 26 years.  We only need to reach age 74 before our retirement years start to outnumber our employment years. With so many potential retirement years ahead of us, it made sense to have a plan that balanced out the tax burden both before and after retirement.  Given this new normal, I believe that it is unwise to have all your retirement savings come solely from an RRSP, pushing off so much of the tax burden to the future.  We chose instead to spread out the allocation of our retirement savings to include the TFSA and even a non-registered account which receives extremely favourable tax treatment for Canadian eligible dividends by means of a generous dividend tax credit.

Let's look at an example of how $50,000 of retirement income is taxed when it comes out of the various types of accounts.  Not all of these cases are realistic options, but they highlight the differences between the tax owed from RRIF income vs. TFSA income vs income from a non-registered account that holds only Canadian eligible dividend paying stock.  I pumped each of these income scenarios into a 2016 tax calculator to determine the estimated tax owed.  Note the significant difference in tax burden for the income from the RRSP/RRIF  (taxed at 100%) as opposed to shifting some of that income to a TFSA (0% on withdrawal) and/or a non-registered account holding dividend-paying stock (reduced average tax rate due to dividend tax credit).  Imagine having to pay this tax differential throughout your retirement years.

The current conventional wisdom dictates that low income earners should choose the TFSA while mid income earners should pick the RRSP as their first savings vehicle of choice, and high income earners that make enough money should max out on both.  While this definitely makes sense if you are only looking at minimizing tax during the working years, there is more to the story when you look beyond that into the retirement years.  I believe that the RRSP is over-used as a retirement savings platform and that a more balanced strategy would be more beneficial in the long term. In 2013, I wrote an article detailing my strategy for contributing to an RRSP vs a TFSA.  I suggested that RRSP contributions should only be made to the point where you no longer have to pay more income tax beyond the amount held at source by your employer.  After that, all extra funds should be allocated to the TFSA or non-registered account in an effort to reduce your tax burden after retirement.

Implementing this plan of diversifying our retirement savings platforms during our working years gave us a good jump that we try to continue even after retirement.  We continue to strive for the goal of moving income sources from registered to non-registered accounts.  A tax strategy detailed in my book Retired at 48, One Couple's Journey to a Pensionless Retirement describes the advantages of collapsing our RRSP into a RRIF immediately after retirement and actively trying to reduce the size of the RRIF each year, or at least prevent it from growing too much.  So far we have tried to accomplish this by withdrawing the dividends generated from the stocks within the RRIF, saving us from drawing down the equivalent amount of this money in our non-registered account and stopping the RRIF from growing by the value of these dividends. But since we did not touch the capital within the RRIF, the value of our RRIF has continued to grow, as the bull run of the TSX over the last 8 years have caused stock prices to continue to rise.  This means we continually need to withdraw more income from our RRIF each year.  And despite that income being generated as Canadian eligible dividends, it is still taxed at 100% when it comes out of the RRIF, since the dividend tax credit does not apply.

Next year we will try a new tactic aimed at slowly reducing the actual value of our RRIF by shifting the capital to our non-registered account.  Rather than making our annual legislated minimum RRIF withdrawal in cash (i.e from paid dividends), we will transfer the equivalent value of stock shares "in kind".  The tax on the withdrawal should be the same since we are taxed at 100% of the value regardless of whether we take it in cash or in stock.  The shares that we transfer will start generating dividends in our non-registered account, while our RRIF will decrease both in value and in the amount of new dividends it is capable of producing.  There is no capital gain tax in the transfer, which will be made at the end-of-day fair-market value p ice of the stock on the day of the transaction.  The new adjusted cost base of the shares in the non-registered account will equal the price that it was transferred at.  This strategy works for us as long as we generate sufficient income from our non-registered account and don't need to spend the income from the RRIF.  If this turns out not to be the case, we can achieve the same result of reducing our RRIF capital and dividends by selling stock each year and withdrawing the cash.

In selecting which stock shares to transfer, we decided that we would not pick any of the income trusts that we have in our RRIF.  The reason that we put the income trusts in the registered account in the first place was so that we would not have to keep track of complicated adjusted cost base issues rising from return of capital, which would be the case if these companies were held in our non-registered account.  Next we determined that it would be more advantageous to transfer shares that have grown in value since we purchased them, as opposed to those that have decreased.  Since the new adjusted cost base of the shares will be based on the deemed fair market share price used for the transaction, transfering stock that has increased in value means that if we decide to sell this stock in our non-registered account later on, we would owe less capital gain or would generate a larger capital loss.

We will contact our discount broker to find out what steps we need to take and how much advanced notice we need to give in order to change the instructions for calculating our 2018 RRIF withdrawal.  Presumably we will need to provide exact details in writing as to which and how many shares we want transferred in-kind in order to come close to the minimum withdrawal amount and then make up the rest in cash.  There should still be no extra withholding tax if we only take out the minimum. Hopefully if we follow this new strategy for some number of years, we will accomplish our goal of slowly moving capital and the source of future income from our RRIF to our non-registered account.  Doing so will help keep our tax burden from steadily and dramatically rising as we are forced to withdraw a larger and larger percentage from our RRIF with each passing year, taxed at 100%.

Thursday, January 5, 2017

Year End Review 2016: After Four Full Years of Retirement

This coming May 2017, it will be five full years since my husband Rich and I simultaneously retired at age 48.  They say that time flies when you are having fun and that has certainly been true for us.  We have had a blast in the past 4.5 years (other than during my brief period recovering from health issues) and we have never encountered a dull moment when we felt bored or wondered what we could do next.  In fact, we have been so busy that we need to prioritize our interests.  We have settled into a routine where our fall and winter days are filled with indoor tennis, interest courses at U of T's Innis College, attending live theatre including our annual subscription to Mirvish Productions, trips to the Art Gallery of Ontario and other museums, as well as visiting or entertaining friends and family. We are so busy during this period that we don't have time to travel, which works out fine for us since we are not keen on "sun vacations".  Instead, we have been taking 4-7 weeks of vacation each year during the spring and summer, continuing to take advantage of the financial and cultural perks of home swapping.  Each year I think that we may not find a new swap opportunity, when out of the blue, another great offer arises.  Since retiring, we have traveled via home swap to the South of France, all around Ireland, Amsterdam, Venice and Paris.  This coming spring, we will be doing a two week swap in Antwerp, Belgium with side trips to Bruges, Ghent and Brussels.

So from an emotional and social perspective, we have no regrets regarding our early retirement and cannot conceive of ever wanting to work again.  We are just having too much fun enjoying our freedom and the luxury of time!  Now for a review of how we are doing financially, to ensure that we will not be "forced economically" to go rejoin the workforce in the future.

2015 was a tough year for the TSX, which lost 11% of its value relative to the previous year.  The value of our portfolio after dividend payouts ended the year at just about the same amount as the start of the year, which meant that excluding dividends, our portfolio was down just over 2%.  This was actually a good result for us when compared to the performance of the market as a whole.  More importantly, in spite of the across-the-board hit to stock prices, the total dividends paid from our stocks still increased by 8%.  Since our retirement income strategy (as described in our book Retired at 48 - One Couple's Journey to a Pensionless Retirement) relies primarily on these dividends, in effect, we received a pay raise in 2015 despite the poor year.

By contrast, 2016 was a tremendous year for the TSX, resulting in a gain of over 22% from the previous year.  Our portfolio matched this performance almost exactly, up 24.5% including dividends and 21.66% after removing our dividends for income.  Just as we were not too concerned with the decline in value of our stocks in 2015, we are not overly excited in what might be a transient increase in 2016.  As always, our focus is on the dividends which once again increased by 8% relative to the previous year.  There are signs of concern though since for the first time since we started investing in equities, two of our stocks (Husky Energy/HSE.T and HNZ Group/HSZ.T) actually eliminated their dividend causing their share prices to plummet, while two other stocks (Enbridge Income Fund/ENF.T and Corus Entertainment/CJR.B) failed to raise their dividend for the first time in over 5 years.  Is this a harbinger for a slow-down in the rate of dividend growth in Canadian stocks for the coming year(s?).  That would fall in line with the forecasts from multiple US market sources throughout 2016 regarding dividend growth slow-down in US stocks due to a corresponding slow-down in earnings.  Luckily our dividends have risen 34% since our retirement in 2012, so we are far enough ahead of the game to be able to withstand even an extended period of slower growth.  It is interesting to note that the dividends did better in the bad TSX growth year in 2015 than the good one in 2016.  Perhaps there is a time delay in reaction to the previous year's results?

While we withdraw just about all of the dividends from our non-registered account to use as income, we only withdraw the legislated minimum from our RRIFs.  Until we reach age 71, the minimum is calculated by the formula (1 / 90-age in current year) * Balance of RRIF on Dec 31 of previous year.  The government's intent is for the dollar amount of the minimum RRIF withdrawal to increase each year to provide an income amount that accounts for inflation.   This did not happen in 2016, since our 2015 ending RRIF values were actually lower than the previous year.  As a result, my RRIF minimum in 2016 was $28 less than 2015!   This situation has reversed itself with the huge stock value gains of 2016, resulting in my 2017 RRIF minimum increasing by 14% over the previous year.

For the most part, our discretionary expenses (entertainment, travel, dining) came in around the same levels as last year.  On the other hand, mandatory expenses climbed higher than the rate of inflation with electricity costs rising 23%, condo fees up 4%, and groceries up 9%.  But all that was a drop in the bucket compared to the huge, one-time unexpected expense that we learned about last year—this was the need to replace defective Kitec pipes in our condo.  While we had over 6 months warning to save up some money, the $13,000+ final bill still put a dent in our long-term emergency kitty fund.  We will need to slowly rebuild this kitty in 2017 and hope that no new major unexpected expenses arise this year.  So far since our retirement, we have been able to live off of our annual dividends plus our emergency cash funds without requiring to dip into our capital.  Having a healthy emergency kitty helps us prolong this goal.

All along, we have been monitoring the distributed value of our equities portfolio in terms of market capitalization and diversification of business sectors as a means of reducing risk.  Our goal was to not have too large a percentage of our holdings in any one sector, or in small-cap companies.  With this year's annual review, we have started keeping track of the same distributions in terms our dividends.  We wanted to make sure that our dividends are not stacked towards one sector such as oil and gas, where the industry as a whole might go through a rough patch, increasing the potential of companies lowering or stopping their dividend payouts.  We are fairly satisfied with the results of this exercise as we saw that most of our dividends come from large and mid cap companies and are reasonably spread out across the sectors.  Our percentage of small-cap holdings have shrunk over the past year, as several former small-cap companies have grown to the point where they are now categorized as mid-cap.

For this year's review, I finally hunkered down and did the calculations to determine the answer to a question that I have been wondering about since we retired.  It relates to when to start taking our CPP payments.  The government has put a heavy penalty of 6% per year for taking CPP earlier than age 65.  But the calculation of my annual CPP retirement benefit is also impacted by the number of years where I did not max out on CPP contributions, between age 18 and the year I start taking CPP.  Obviously once I retired at age 48, I stopped making any CPP contributions since I no longer generated any earned income.  So what would hurt me more, my growing number of years of zero CPP contribution or the penalty for taking CPP early?  If I took my CPP at age 60, I would save myself 5 additional zero years, but would this be worth it to offset the penalty of starting CPP early?

It is a long, convoluted calculation to determine what my CPP retirement benefits would be if I started taking them at age 60 vs 65 vs 70.  I followed the instructions of this Retire Happy Blog which walked me through the steps, creating a new spreadsheet (I love spreadsheets!) to guide me.  I'm not sure I have all the details exactly correct, but I completed enough of the the exercise to answer my question.   Although I would definitely receive less than the maximum possible CPP benefits due to my 17 extra years of retiring early and not contributing, I was still better off waiting until age 65 or later to take CPP, assuming I don't need the money earlier.  The impact of my elevated number of years of zero CPP contributions became inconsequential relative to the massive penalty of taking CPP early.  This is what I always suspected the results would be, but it was definitely interesting to definitively prove it.

Comparing our 2016 year end total against our original retirement plan, we continue to trend significantly ahead of plan and are well positioned to live out our retirement years without running out of money.  Thank goodness, since I have no intention of ever going back to work.  That would be no fun at all!

2015 Year End Review
2014 Year End Review
2013 Year End Review
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Monday, November 21, 2016

Strategy for Cashing In on the Next Stock Crisis Blip

Stock investors as a whole are a curious group. There is the general tendency for investors to panic with each financial, economic, or socio-political event that causes uncertainty either nationally or internationally, resulting in a temporary drop in stock prices.  Sometimes even just the anticipation of a situation can trigger a sell-off.  Be it the falling price of oil, the American fiscal cliff, the threat of Grexit, the economic slowdown in China, or the vote for Brexit, news of each of these events have induced an adverse reaction from the stock market.  Often an across-the-board dip does not last more than a few days and sometimes recovery happens even within the same stock trading day.  There seems to be no shortage of candidates for the next crisis including the long-term fallout from the Trump presidential win in November, the upcoming Italian referendum on Senate reform in December and the proposed Brexit trigger of Article 50 in March. 

With so many potential opportunities to pick up stocks on a temporary decline, it is a good time to build up excess cash in order to take advantage of the next mini-dip.  Unfortunately since we are retired and only earn income through our investment portfolio, there is limited opportunity for us to accumulate cash.  Our options are either to save up excess dividends or to sell stock shares in order to general a cash pool.  With this in mind, a while ago I decided to stop reinvesting my excess stock dividends via the Dividend Reinvestment Program (DRIP).  I also sold the shares of a stock in a registered account that hadn't increased much in value since purchase and didn't regularly increase its dividend.  This provided me with a modest sum of cash to play with.

Yet predicting exactly when the next stock dip will occur is not as easy as it sounds, given that we are not monitoring the stock market every day, let alone every hour of each day.  As well, stock prices do not always react as expected. After Donald Trump won the US Presidential election, we expected a fire sale in the worldwide stock markets.  A temporary panic did occur overseas while the North American markets were closed, but stock prices rallied and even rose by the time the Canadian and US markets opened. It was not until several days later that the TSX experienced a mini decline.

In order not to totally miss the chance to "buy low" on the next stock decline, my husband and I use the following strategy when we have some extra cash to invest.  First we decide which stocks we might be interested in buying, using target price, analyst recommendations, and other factors to guide us.  In many cases, we look to just add more shares to stocks we already hold.  Next we guess at a "low" price relative to the current share price and the predicted target price. I usually look at the performance of the stock over the last 3-6 months and pick a lower price somewhere along that spectrum.  Finally I submit a "limit buy" order for the stock at my selected price, choosing the longest allowable term (up to 90 days for my discount broker, Scotia iTrade).  Then we sit back and wait to see if the price hits.  Note that my chosen price is a total guess and the stock may never fall that far, or may fall significantly more.  But at very least, if the buy order executes, I will have purchased stock at a price much lower than when I placed the order and if all goes well, the price will eventually revert to that original level once the market re-stabilizes.

This strategy worked extremely well recently. I put a $60 limit buy order for Premium Brand Holdings (PBH-T) when the share price was just over $64.  I did not fully expect my price to hit but one day for no reason that I could ascertain, it did.  The dip only lasted for a couple of hours and by the end of the day, the price had risen back to its original level and beyond.  To this day, I still don't know what caused the stock to fall so dramatically for such a short period of time without any predictable event to point to as the cause.  I'm glad that I had my bid in to take advantage of it or I would have missed it.

In preparation for the results of the US election, I put in a couple of limit bids in the various accounts were I was able to accumulate cash.  When the stock prices surprisingly rose after the election, I just left my bids in place awaiting the next event.  A few days later, my $40.40 limit buy order for Fortis (FTS-T) executed.  The stock had fallen from almost $44 down to $39.58 before recovering a few days later at just over $40. As a result of the Trump victory and his intended inflationary policies, bond prices have fallen, driving up bond yields relative to stock yields.  The Fortis stock succumbed to this pressure, falling over 5%.  This time I did not successfully predict the "low", but I still picked up the stock at a relatively good price since the long term target price remains over $46.

My limit buy bids in a couple of other stocks have not executed so far because these stocks have not fallen to my desired price.  I will just leave the buy orders in play until they expire, in hopes of catching a price drop with the next event, or unless I happen notice a better opportunity.  It is too bad that Scotia iTrade does not provide the term option to leave my order open until I decide to cancel it.  So if I want my bid to continue beyond the 90 days, I need to remember to update my order to extend the date before it expires.

The other issue I need to worry about on a limit buy bid is the partial fill of an order that is not completed by the end of the trading day. This occurs when there are not enough shares offered at my limit price to complete my order.  For example, I recently tried to buy 102 shares of a stock but only 100 shares were available, leaving two shares unfilled.  The next day, the final 2 shares were filled but because the trades occurred on two separate business days, I was charged the $9.99 commission on each day!  This was pure carelessness on my part. I usually remember to cancel the remaining part of the order at the end of the day in order to avoid paying an extra commission on such a small purchase. This was a reminder to me to be more careful next time.

Thursday, November 10, 2016

EQ Bank and free Interac Email Transfers

As part of our banking strategy, we use President's Choice Financial (PCF) as our primary bank, since there are no service charges for deposits, withdrawals, writing or cashing cheques, bill payments and most other regular banking transactions, as well as no requirement to maintain a minimum balance in order to have fees waived.  My one beef with PCF is that it still charges $1.50 for each Interac Email transfer, even though many other banks have reduced their fees to $1.00 or less.

But looking closer at the chequing account offerings at each major bank, it became obvious that the lower (or free) Interac fees were more than offset by monthly fees or the need to maintain minimum balances.  For example, Royal Bank advertised unlimited free Interac e-transfers on chequing accounts, but the cheapest account that I could find had monthly fees of $4.95 per month without any option to have the fees waived with a minimum balance.  This fee negates the whole advantage of having free e-Transfers (which I don't use that often).  It was a similar story with the other major banks.

I noticed the advertising blitz for EQ Bank in the subway system and decided to check it out. EQ Bank is a CDIC-protected online bank with no physical branches that offers a Savings Plus account that provides free deposits, bill payments and electronic transfer to linked chequing accounts at other banks.  In addition, the first five Interac e-Transfers per month are free ($1.50 after that).  This more than satisfies my Interac needs.  To sweeten the deal, the currently offered savings interest rate is 2%, calculated daily and paid monthly, one of the highest rates offered by any financial institution.  Now I am not naive enough to think that this rate will be available forever.  It is obviously a teaser rate meant to attract new members.  But as long as EQ Bank maintains this rate, or at least one that is comparable to other institutions offering "high interest savings accounts", then I would be more than happy to use it as my new emergency fund savings repository.  I have since opened an EQ Bank Savings Plus account and linked it to my PCF chequing account.  I moved most of our emergency fund savings from my previous high interest savings account at Canadian Tire Bank (currently paying 1.3%) to EQ Bank.  If EQ Bank eventually does significantly lower its interest rate, I can transfer surplus money back to Canadian Tire Bank, but I would still keep some in EQ Bank to take advantage of the 5 free Interac transactions per month.

Wednesday, February 24, 2016

The Ins and Outs of Home Swapping

Given that accommodations make up one of the largest components of our travel expenses, we use home swapping as a means to reduce these costs, listing our condo on several home swap websites.  We first dabbled in home swapping while we were still working, but could not take advantage of the full potential of this strategy until we retired and had the flexibility of time and schedule to devote to this.  While we still had work obligations, we were extremely restricted in when and how long we could travel for.  In spite of that, we were still able to arrange a 5 day exchange for an apartment across from Grant Park in Chicago, and a 10 day stay in a quaint flat with a small garden in the Montparnasse district of Paris.

Since retiring, we have taken our home swapping vacations to a whole new level.  We now have both the flexibility to swap any time without interference of work obligations, and we can swap for longer durations.  In 2014, we traveled for 7 weeks around the Loire Valley and the southeast part of France, including five and a half weeks living in a renovated home that was built into a 9th century city wall.  Our 6 week vacation in 2015 included a 2 week exchange for a flat in Amsterdam followed by a 4 week stay in the outskirts of Dublin, which we used as our home base from which we toured both Southern and Northern Ireland.  I blog extensively about our vacations which you can read about or look at more photos at my travel blog http://arenglishtravels.blogspot.ca

Having successfully completed 5 exchanges with plans for a 6th one this coming spring–an 11 day stay in a Venice apartment with a stunning view overlooking the Lagoona, we feel that we are now seasoned home swappers and can share some of our experiences.

Home Swap Services
There are a growing number of home swap services out there, varying in price, features and depth of customer base. Just about all of them provide the same basic functions including the ability to set up home profiles with photos and descriptions of the home and the owners, a search facility to find potential homes to swap with, and a mechanism to communicate with prospective swap opportunities.  Picking a home swap service seems akin to selecting a dating service–your potential matches are limited by the volume and quality of the candidates in the pool.  And as with most things, you get what you pay for. The higher priced sites try to offer unique features to justify their additional costs. 

Some of the common criteria to look for and compare between various home swap services include:
  • Price
  • Customer Base
    • Number of homes listed
    • Quality of homes listed
    • Number of countries represented
  • Map of the neighbourhood and general location of the home
  • Swappers' reviews and ranking of homes
  • Ranking of members' rate and speed of response to swap requests
  • Search and filter options
    • Location - search by country? province/state/county? city?  neighbourhood within a city? 
    • Number of bedrooms, max number of travelers allowed
    • Type of accommodations - e.g. urban, rural, beach, mountains, vacation property available for non-simultaneous swap
    • Type of exchange - e.g. simultaneous, non-simultaneous, rental, hospitality
    • Kid friendly or not?
    • Pet friendly or not?
    • Smokers allowed or not?
    • Available amenities - e.g. WIFI, air conditioning, garden, balcony, parking
    • Reverse search - who wants to come to my location
  • Specify home availability dates
We first decided to try home swapping by joining a free service called Geenee.  While the price was certainly right, we found that most people who signed up were not serious about swapping and did not even bother to answer a swap request.  At the time that we retired in 2012, Love Home Swap was just getting started and offered a 30 day trial for $1.  We ended up signing up with them and paid between $150-$170 CDN annually for the next 3 years.  In the interim, Love Home Swap was growing through mergers and adding more features.  Unfortunately as a result, their rates also increased dramatically.  When it came time to renew at the end of 2015, we were shocked to find out that the fee for the next year would be $276 USD which came to $367 CDN.  This is more than double the cost of the next most expensive site on our radar, which is Home Exchange at $170 CDN annually. This was also before the value of the Canadian dollar tanked, so the price differential would be even more now. So we are doing some evaluation this year to decide whether we should stay with Love Home Swap (where we have had much success) or switch to one of the less expensive services.

If we do decide to switch, we have come to the conclusion that the best time to sign up for a new home swap service is at the beginning of the year and not at the end.  Experience has taught us that most people do not start thinking about their annual vacations until the start of a new year, so why pay for a membership sooner than this.  Most of the sites offer a free trial period of 2-4 weeks so we may try out a new exchange service prior to officially switching. Another tip is to design your home listing prior to signing up for the paid service or even for the trial period.  You want to have your listed up and available for swaps as soon as possible so as not to waste time on your membership period.  Most sites allow you to browse listings for free, so you can get some ideas of what an effective and appealing home listing looks like.

Our Home Listing
We thought about which details are important to us when we are looking for home swap possibilities and tried to apply them to our own listing.  These included:
  • Plenty of flattering photos of our home, taken from wide angles to show as much of each room as possible.  Highlight potential selling points like a king-sized bed, sunken bathtub, walk-in shower or large outdoor terrace
  • Clearly introducing ourselves including a recent photo and descriptions of who we are, our family composition, what we do professionally and some personal interests
  • Explanation of where our home is relative to tourist attractions and ease of access via walking or transit
  • Dates that our home would be open to offers, available for a non-simultaneous swap (because we are vacationing somewhere else) or definitely not available 
  • After successful swaps, we have asked our swap mates to review our place while we do the same for them.  Good reviews instill confidence with future swappers who are considering our home 
This is a sample of some of the details from our listing on Love Home Swap.
Choosing and Vetting a Potential Swap
When evaluating home swap options, we have learned to confirm the exact location of the home, as opposed to the location advertised in the listing.  Otherwise we might end up in some suburbs far from the core of the city where we actually wanted to be.  This is like saying we are in Toronto when we actually live in Mississauga or Burlington.  We try to choose homes that are within a 25 minute walk or 20 minute transit to the tourist areas that we want to visit, with the transit itself being within a 5 minute walk from the home.

By the same token, when deciding whether to join a home swap service, you need to realistically consider how appealing your location might be to a potential tourist. Generally downtown locations are preferred over suburban ones.  If you do live in the boonies but also own a vacation property such as a lake-side cottage or a ski lodge, that could be a good swap option and would be even easier to get a match, since you could do non-simultaneous trades.

Allowing someone to come stay in your home requires a degree of mutual trust.  I think that there is a greater feeling of responsibility and consideration in a home swap than a rental.  You always remember that while you are in someone's home, they are also in yours and you try to treat their home with the care and respect that you would like them to treat yours.  Some services offer "contracts" that can be filled by both parties.  I doubt that these are legally binding but at least they provide a common understanding of what is expected in the exchange.  Security deposits or trip insurance are also offered for sale by some sites.  So far, we have not found the need to adopt any of these extra measures.

Instead we try to vet swap potentials based on their personal profiles, photos and descriptions of their home, as well as positive swap reviews.  Being on a service that charges a non-nominal fee is itself an effective initial screening criteria. Once we agree on an exchange via email, we try to arrange a video Skype chat with our swap partners.  This gives both parties an extra level of confidence since we can actually talk to each other "face to face", as well as getting a chance to "tour" each others' homes.  By the time we actually swap with the other party, we usually no longer feel like we are interacting with strangers.

It takes time and persistence to find a swap match in terms of desired location and timing. We have received many rejections (or no response) to our requests and have rejected our share of requests as well.  Some tactics that we have used to try to increase our chances of a match include:
  • Sending out requests to multiple potential homes in our desired location
  • Being flexible as to which dates we can swap
  • Performing a "reverse search" to isolate people who have indicated that they want to come to our location
  • Looking for non-simultaneous swap opportunities, especially with listings that are secondary vacation homes
 Preparing Our Home for the Swap
One of the main details to sort out is how we will get and return the home key(s).  It is easy on our end since we live in a condo building with a 7/24 concierge service.  We simply leave with the concierge an envelope addressed to our guests which contains our keys plus a return envelope addressed to me.  On the other end, we have received the keys in multiple ways including having them mailed to us, having a neighbour waiting in the home to let us in, or picking the keys up at the concierge or some other administrative office.  Some of the steps we take each time we prepare for a swap include:
  • Giving our place a thorough cleaning
  • Clearing out space in our closets and dressers for our guests
  • Putting freshly laundered sheets on the bed
  • Leaving freshly laundered towels, new bars of soap, shampoo
  • Clearing our fridge of all perishables
  • Locking up or putting away valuables or breakable items
  • Leaving a welcome gift such as wine, cheese, chocolate, etc.
  • Canceling our newspaper delivery
 Before our first swap, we prepared a "House Book" which explained how appliances and electronics worked, where to find things in our home and around the neighbourhood.  Some of the major components in this book included:
  • Our address, phone number, email contact
  • How to get to our home from the airport (via taxi or transit)
  • Emergency Phone Numbers (doctor, dentist, concierge, neighbours)
  • Services (taxi, car rental, dry cleaner)
  • Neighbourhood (groceries, bank/ATM, restaurants, coffee shops, pharmacies, post office)
  • How things work
    • Appliances (oven, stove, microwave, dishwasher, washer/dryer, vaccuum, etc.)
    • TV, stereo
    • WIFI password/access 
    • Smoke alarm
    • Garbage disposal
    • Fuse box
  • Where to find things
    • extra linens, towels, blankets, place mats, napkins, coasters
    • ironing board, iron
    • hair dryer, bandaids, flashlight, tools
    • kitchen utensils, pots & pans
    • mops, brooms, cleaning supplies
    • sundries: laundry supplies, toilet paper, garbage bags
    • fire extinguisher
    • condiments available for use (spices, sugar, butter, oil, etc.)
  • Requests for our guests to perform minor tasks during their stay like picking up the mail or watering plants
I also created a "Toronto Book" that describes the various places and events that might interest a tourist in Toronto including restaurants, shopping, art galleries, museums, farmers markets, parks, hiking trails, live theatre, sporting events, tourist attractions and annual festivals.  For each attraction or event, I list the hours of operation, costs if any, address and how to walk or use transit to get there from our home.

The house book and Toronto book were a lot of work to set up for our first swap, but once they were done, only minor tweaks have since been needed to keep the information up to date.

Leaving a Home Swap
Before leaving a home swap, we try to give it a good cleaning and tidying including doing all the dishes, tossing any perishables that we had purchased, tossing out the garbage and recycling, stripping the sheets off the bed and putting them into a laundry hamper along with the used towels, and putting new sheets on the bed if they have been provided for us.  The same has been done by the people staying in our home and we occasionally come back to find our place cleaner than when we left it and wondering how they got our floors so shiny?

Home swapping is not for everyone and it comes down to a matter of outlook.  If your first thought is concern that strangers will be in your home, sleeping in your bed and touching your stuff, then home swapping is probably not for you.  If instead you feel this is a chance to save money on travel, make new friends from around the world and have the opportunity to live like locals in a foreign location, then you are well suited for this endeavour.

Saturday, February 6, 2016

Canadian National Railway - A Case Study for Dividend Growth

Following our retirement income generating strategy that I describe in my book Retired At 48 - One Couple's Journey to a Pensionless Retirement, our goal has been to pick solid Canadian companies that are paying a dividend of at least 3% or more at the time of our purchase.  Obviously that yield will rise or fall as the share price decreases or increases respectively, especially if the company does not raise (or lower) its dividend payout.

We made a major exception to this rule when we purchased shares of Canadian National Railway (CNR) in January 2012.   (Note: due to a 2 for 1 stock split that occurred in 4th quarter 2013, all share prices and dividend yields prior to this have been halved so that we can have an apples to apples comparison).  At the time of our purchase, the yield on this stock was around 1.92%, which was below our 3% threshold.  But this was such a solid, blue chip stock in a different industry from our many Financial sector holdings, so we wanted to add it to our portfolio nevertheless.

Looking back at what has happened to our CNR shares entering our fifth year of holding this stock, we can easily see that we have been vindicated with this purchase.  Every year since our purchase, and for many years prior to that, Canadian National Railway has been raising its dividend every January, in time for their first quarter payout in March.  These increases have not been token 1-2% raises like some other companies have offered (just so that they can say they raised their dividend), but good healthy double-digit raises of 15-25%.  Considering that the dividends from our stocks represent our retirement income which replaces the employment income that we used to earn while we were still working, you could say that CNR is one of the best employers that we have ever had.

Since our 2012 purchase, not only has the dividend per share risen steadily, but the share price has risen as well.  As a result, the dividend yield relative to market price has remained more or less the same over the years–hovering between 1.7-2%.  Yet look at the dividend yield relative to our initial purchase price.  By 2015, it had exceeded our old 3% threshold and continues to climb each time CNR raises its dividend again.  The 20% raise in dividend announced January 2016 (despite overall rocky market conditions in 2015) bumps our yield to 3.85% relative to our original purchase price.  And had we had the forethought to buy this stock back in 2009, our relative yield would be almost 7% by now.

Canadian National Railway has turned out to be a perfect buy and hold stock for our portfolio.  It was good that we did not allow ourselves to be turned off by the initial impression of a "low yield", but instead, bought for the long term.  If CNR keeps increasing its dividend at this rate, the sky's the limit for the future.  This is a lesson that we need to keep in mind for any further stock picks.

 We are not even taking into consideration the enormous rise in the value of our stock since we bought it, since the share price has almost doubled over the past four years. Given how the share price is transient and could fall at any time, we don't want to put too much weight on its current value.  Still it is good to know that if we ever were forced to sell these shares, unless the price really tanks, we could make a tidy profit.  Hopefully we never get to that point though, because then we would literally be selling the goose that lays the golden egg.

Saturday, January 9, 2016

Year End Review 2015 - After 3 Years of Retirement - Surviving the Economic Downturn

The conclusion of 2015 marks the end of our third full year of retirement.  It is time once again to review how my husband Rich and I did in the year and to track our progress against the retirement plan that we created as a benchmark when we retired in May 2012.  I described our process for this annual review in significant detail in the previous years so I won't repeat it now.  If you are interested, I have included links to the earlier blogs at the end of this one.

2015 was a brutal year for the value of stocks as share prices tanked across the board.  For the first time since we retired, after taking out our annual income requirements, the year-end total of our portfolio was lower than it was at the beginning of the year.

Before removing dividends and RRIF payments to use as income, we just about broke even with an increase in value of less than 1%.  This is compared to almost 15% increases in our portfolio totals at the end of the previous two years.  After removing our annual income, our 2015 year-end balance was 2.2% lower than our total was at the start of the year.  This result is actually not so bad when compared to the TSX as a whole, which was down 11% for the year.  We were buffered from the worst of the carnage because we have limited exposure to the oil and gas industry, which comprises of only 6% of our holdings.

 As documented in our book Retired at 48 - One Couple's Journey to a Pensionless Retirement, our portfolio is primarily made up of Canadian dividend stocks since our strategy is to live off the dividends while preserving the capital for as long as we can.  Being retired with almost no fixed income goes against most conventional wisdom,  although the old rules of increasing the amount of fixed income as you age has been softened by most experts given the dismal rates of return over the past few years.  Since we mostly care about the dividends and not the transient value of the stock, this lessens the risk significantly, but holding only equities is still a relatively risky prospect.

Accordingly, as additional contingency we purposely chose very conservative parameters for our retirement plan.  We picked a relatively low annual investment rate of return while specifying a higher retirement spending than what we initially planned to spend.  This would allow us to grow faster than plan during the good bull market years, building up excess value that would be used to buffer the bear market years that were sure to come, as historical trends show. 

This is exactly what happened over the past three years.  By the end of 2013, we were 12.4% ahead of our original plan and by the end of 2014, this value had climbed to 25%.  The dismal results of 2015 ate slightly into this significant cushion so that we ended the year at 22.5% above the original plan.  So we can absorb a few more bear market years and still stay on track or even be ahead of the game relative to our retirement plan.  Based on how the start of 2016 has been going, we may need to use more of this cushion before the year is done.

Much more important than the value of our portfolio is the amount and the reliability of the dividends that we receive, since we count on these dividends for our annual income.  Surprisingly, despite the weak performance of the stock market in 2015, our total dividend payout still increased, abet by less than in previous years–by 8% as opposed to 14 and 17%.  Imagine the chance of getting an 8% raise from your employer at all, let alone in a poor performing year?

Out of our 35 different stocks, 27 raised their dividend this year (which is actually more than last year), with 10 of them increasing their dividends more than once. The sizes of the dividend raises must have been smaller to account for the lower rate of dividend increase overall.  Also, many of the companies raised their dividends early in the year, before the apex of the stock crash was reached.  So unless the markets improve, it is possible that dividend growth will continue to be reduced in 2016.

Luckily, none of our stocks have cut or eliminated their dividend payments so far, unlike several of the smaller oil and gas stocks that we don't own.  The closest we have come to a dividend reduction is with Husky Energy (HSE), who has announced that for the next dividend payout, to preserve capital, it will pay dividends in shares as opposed to cash–in other words, a forced DRIP.  This decision will be reevaluated at each quarter depending on how things go for the company.  As an aside, many companies are reducing or eliminating the discount that they offer on DRIPs as a further cost cutting measure.

I hold Husky Energy in my RRIF where I need to maintain sufficient cash flow to support my monthly RRIF payments, so losing the quarterly HSE dividend will be a slight blow.  Luckily the average yield from the stocks in my RRIF is over 5% while my minimum RRIF withdrawal last year was 2.5%, so my remaining dividends should still cover the monthly withdrawal requirements.  One side effect of having the value of my RRIF account decrease is that the new minimum withdrawal for 2016 decreased as well.  At the beginning of each new year, the new amount is calculated by  "1 / (90-age) * value of account at the end of Dec. 31 of previous year)".  The expectation of this formula is that the RRIF withdrawal amount should increase each year to account for inflation, but this year the value of my account decreased so much that the RRIF withdrawal amount is actually a few dollars less than last year.

Just in case any other stock decides to cut its dividend, we plan to carry a larger amount of excess cash within our RRIF accounts.  While it is tempting to use the cash to buy more "bargains" while stock prices are so low, common sense dictates that we should build up our emergency cash reserves instead.  We can then use this cash as contingency in case we encounter more unexpected expenses like we did last year when we found out that we had to replace defective Kitec pipes in our condo.  Last year, we each took out an extra RRIF withdrawal from some of the excess cash that was building up in our RRIF accounts and allocated the money to our long-term expense "kitty" where we are saving up money for the pipe repairs that will occur towards the end of 2016.

Overall, our spending for 2015 came in about the same as 2014, despite non-discretionary expenses like our condo fees, electricity bill and property taxes continuing to rise.  Considering that we planned for 2% inflation increases each year, we're doing well in keeping the expenses down.  We were lucky last year that our 2005 Toyota Matrix still ran smoothly with no major repairs required, but it will only be a matter of time before that changes.  Our appliances are all over 10 years old now so we are keeping an eye on them as well.  Our discretionary expenses (vacations, dining entertainment) came in about the same as the previous year as well, and there is plenty of room there to cut back if we need to tighten our belts for 2016.

So after three full years of retirement, we are still doing well financially, and due to a solid retirement plan that included good contingency strategies for bad market years, we were able to roll with the punches to survive 2015.  Let's see what new challenges 2016 brings us.

2014 Year End Review
2013 Year End Review
Get our Retirement Planning Spreadsheets

Friday, December 25, 2015

Choose your Discount Broker Wisely

The Globe and Mail recently published their 17th annual ranking of online brokers.  Twelve brokers including all the major banks plus other members of the Canadian Investor Protection Fund (CIPF) are ranked based on the following criteria:

  1. Client Experience/Website User Interface
  2. Cost
  3. Account Reporting and Maintenance
  4. Research and Tools
  5. Innovation
Comparing the Globe and Mail rankings over the past three years, the trend has been for the three largest independent (non-bank) brokers, Virtual Brokers, QTrade and Questrade, to consistently lead the pack, driven mostly by their lower trade costs and user-friendly web interfaces.  Being smaller companies with less overhead, they are also more nimble and able to quickly implement a constant stream of innovation in terms of new tools and offerings.

When we first selected a discount broker over 10 years ago, our portfolio was relatively small and we felt comfortable in choosing the independent broker e-Trade, which at the time was offering the cheapest trade commission fee on the market at $9.99 as opposed to $29.99.  Since then, e-Trade has been taken over by Scotiabank, was rebranded as iTrade, and is no longer the leading choice when it comes to ranking discount brokers.  In the past three years, Scotia iTrade has ranked somewhere in the middle of the pack with a consistent B rating–not the best, but not the worst either.

This year we decided that we should at least investigate the pros and cons of moving to a higher ranked broker.  Regardless of the excellent track records of the top three independent brokers, now that our investment portfolio (which is also our retirement income nest egg) has grown beyond the $1-millon protection limit that the Canadian Investors Protection Fund (CIPF) provides, we are no longer comfortable going with a smaller broker. It feels so much more secure and comforting to know that our retirement savings are being managed by a discount broker that is owned by one of the blue-chip Canadian banks.  While the chance of these three smaller discount brokers going under is probably slim, the chance of the banks doing so is likely closer to none. 

So that left us to compare the rankings and offerings of the brokers from the five major banks.  In terms of progress, TD Direct Investing has made the biggest and steadiest improvements over the past three years, moving from a last place C-ranking shared with constant cellar-dweller CIBC, to leading the bank-backed brokers with a B+ ranking by the end of 2015.  Scotiabank iTrade lost marks for its fees, which are now amongst the highest of all the brokers by charging $24.99 per trade for portfolios under $50,000 and higher commissions on most ETFs.  But since our holdings exceeded that minimum and we did not own any ETFs, these extra fees did not apply to us and did not influence our decision.

Where we found iTrade the most insufficient was in their lack of support for US registered accounts, which would allow us to trade in US stocks and be paid dividends in US currency, thus eliminating the fees and fluctuation of currency exchange. While most of the other banks and independent discount brokers have offered US accounts for RRSPs, RRIFs and TFSAs for several years now, iTrade so far has shown no intention of providing a comparable product.  This deficiency was annoying enough to prompt us to seriously look into what would be involved in moving to a new discount broker. 

It became quickly apparent that the pain involved in moving brokers, in terms of cost, time and aggravation, significantly outweighed the benefits.  First there are the transfer-out fees charged by the current broker, which typically cost $150 per account.  We have 8 accounts with iTrade (2 RRIFs, 1 Spousal RRSP, 2 TFSAs, 2 LIRAs and a non-registered account) for a total of $1200.  I read that it may be possible to negotiate with the new discount broker to cover these fees but there have been numerous horror stories of brokers reneging on the agreement after the fact, or stalling for many months before finally coughing up the reimbursement.  Then we considered the onerously long forms that we had to fill out to create our iTrade accounts in the first place and dreaded the prospect of potentially having to repeat that process with a new broker.  

Another concern for us would be the time period during which portions of our portfolio would be in limbo.  Typically the transfer takes 5-10 business days but there have cases where significantly longer delays occurred  or not all funds transferred properly.  Once our funds are properly transferred, we would need to link the new broker accounts back to our bank account, which would cause a further delay.  We depend on the regular flow of dividends to cover our expenses and monthly RRIF payments and might not have access to them during the transfer period.  We could use our emergency funds to temporarily cover our expenses while waiting for accounts to settle with the new broker, but I'm not sure what would happen to our monthly RRIF payment if the cash from the RRIF account was not available when the payment comes due?

We considered the fact that we would lose all investment history of past purchases, sales, capital gains and losses that we have accumulated for over 10 years.  We would also lose all of the Dividend Reinvestment Programs (DRIPs) that were set up with the old broker and would need to reapply to have them reinstated with the new broker, assuming that new broker supports the same DRIPs.  Not all brokers have the same DRIP coverage.  

 Scotia iTrade actually has excellent DRIP support, offering broker DRIPs on more Canadian and US stocks than most if not all of the other brokers.  Its Web interface also allows you to request to enroll in or withdraw from a DRIP for a stock within an account or across all accounts that hold that stock, without the need to contact customer support.  For those corporations that do not offer a discounted DRIP for their stock, iTrade offers the Dividend Purchase Plan (DPP), which reinvests cash dividends commission-free.

 Although it did not score the highest for innovation and has not increased in ranking for the past 3 years, Scotiabank iTrade has added a few new features that are useful, such as the calculation of "Realized Gains and Losses" within an account, which helps calculate annual capital gains and losses for tax reporting purposes, and "Income Details" for an account, which provides historic and projected annual and monthly distributions from equity or fixed income holdings that pay a distribution.  The Income Details view also splits out distributions paid out in cash versus those that will be reinvested in DRIP or DDP programs.  iTrade is also holding surveys to poll client interest in potential future improvements, including a few that I really hope they implement.

What we learned from this exercise of comparing discount brokers and investigating what it would take to move brokers is that you need to choose your broker wisely based on the factors that are important to you, because it is a painful, costly and non-trivial process to move between discount brokers later.
But keep in mind that things change and these competitors will continuously try to one-up each other.  So unless a much more pressing impetus arises in the future, for now we are sticking with Scotiabank iTrade as our discount broker, but will continue to lobby for them to finally start supporting US currency registered accounts.

Thursday, August 27, 2015

The Rewards of Patience in the Buy and Hold Strategy

In these tumultuous times where stock prices have been sinking like stones across the board in every sector, it takes patience and nerves of steel to not panic and to hang tough with the game plan to "buy and hold".  The strategy of choosing quality stocks that pay a good dividend and hanging onto them as long as there are no dividend cuts has served us in good stead over the years.

Take for example our shares of Exchange Income Fund (EIF-T), which we bought for around $25.3 back in January 2012.  It was paying an annual dividend of $1.68 for a yield of over 6.6% and seemed like a good buy at the time.  For the next few months, the stock price continued to rise, closing as high as $28.84 in March 2013.  Then an adverse acquisition caused the stock to plummet, and for the next two years, the price stayed depressed.

It was tough watching the market value of this holding continue to fall and the red loss numbers under $ Change and % Change continue to rise.  At its lowest, the stock closed at $15.49 in October 2014.  We had to keep reminding ourselves that it was just a "paper loss" as long as we didn't sell, and more importantly, the dividend payout never wavered, although it also did not rise over this down period.  Rather than dump the stock, we took advantage of the lower price to buy more shares, using EIF's Dividend Reinvestment Program (DRIP), which offers a 3% discount on the market price for DRIP purchases.

After hitting that lowest point, the EIF stock started to rally at the end of 2014 and has continued to do so through 2015.  After two years of waiting out the dip, EIF has finally rebounded and is now trading for more than our purchase price.  It has a consensus "Buy" rating from the financial analysts and a target price of over $29.  But best of all, rather than lowering its dividend, EIF has now raised its dividend twice since November 2014.  So throughout this period of waiting for EIF's share price to rally, we were actually rewarded by being paid more and more dividend income and were able to grow our number of shares by DRIP-ing while the price was low.

Our Sunlife Financial (SLF.T) stock provided another example where patience was required.  We bought our shares in September and October of 2010 for an average cost of $25.32 per share.  SLF was paying $1.44 in annual dividends for a yield of over 5%.  It had a good run through most of 2011, hovering between $29-31,  once closing as high as $33.91.  Then Sunlife specifically and insurance companies in general ran into a rough patch caused by the poor economy.  There were fears by financial analysts that Sunlife would not have sufficient cash flow to maintain its dividend payout.  It was bad enough that the price dropped to the $19 range at the end of 2011, falling as low as $18.07 on one closing.  But the threat of the dividend cut was much more concerning to us, since we rely on this dividend for our retirement income.  Yet we did not want to realize a loss on our SLF holding on the mere possibility of a dividend cut.

Here is where patience, faith and a bit of luck paid off for us.  Given that Sunlife is a good solid large-cap company, we decided to stand pat and hope for the best.  As it turns out, SLF never cut their dividend and by the end of 2012, the share price had rebounded and continued to rise to its current average today of over $40.  In 2015, for the first time in 7 years, SLF finally raised their dividend to $1.52.  At the current significantly higher share price, the yield on this stock is 3.6%.  But since we held onto our stock, which we bought at a much lower price, our effective yield is around 6%.  Buying and holding onto this stock has really paid off for us.

We recognize that we will not always make the right call by holding onto a company that may be temporarily in trouble.  It was pure guesswork that led us to hold Sunlife as opposed to Manulife, who did cut its dividend in 2009, causing its stock price to dive even further.  It seems though that in general, large blue-chip companies will do whatever they can to avoid reducing their dividend payouts, since doing so signals weakness and failure and is a self-fulfilling prophecy.  On average and in the long run, we think our "dividend-stock buy and hold" strategy will succeed more times than it fails.  We can also absorb the rare dividend cut since we get dividends from so many different stocks that the net impact of a single cut will not deplete our income.   Our patience is currently being tested by one of our REIT stocks which has lost 37% of its book value and shows no sign of rebounding in the new future.  But the consistent effective dividend yield of over 6% that we receive eases the pain.

Through the past several brutal days this week, when stock prices were ravaged by news of China's flailing economy, our total portfolio fell by almost 10%.  We gritted our teeth, confirmed our dividends were solid and looked away.  By the end of the week, we have recouped more than half of the paper losses.  Better yet, we learned that three more of our stocks (CIBC, RBC and BNS) announced upcoming dividend raises. We continue to firmly believe that good things come to those who wait.