Saturday, December 28, 2013

January Shopping List

2013 was a great year for my passive income machine, but unfortunately must come to an end pretty soon.  A new calender year means I will have the opportunity to deposit fresh funds into my ROTH IRA account.  That's where my January deposit is headed.  I prefer to place real estate investment trusts and Canadian corporations in my ROTH.  REITs pay mostly ordinary (fully taxable) dividends while I can side step Canadian dividend withholding tax (15% last time I checked!) all together simply by opting to include those companies in an account designated as an IRA. 

HCP, Inc. (HCP)
HCP stock looks cheap right now.  The company expects to report 2013 FFO per share of $2.97 to $3.03.  Using the middle of that range, the P/FFO is smidgeon over 12 at the moment.  It has a very respectable dividend growth history of 28 years.  In addition, the next dividend increase should be announced in January which would push the streak to 29.  FFO per share grew approximately 8% this year leading me to believe stock holders might enjoy a 5-10% dividend boost.  Did I mention stock in this company currently yields 5.8% and is part of the growing healthcare REIT industry?  Quite a lot to like with HCP.

Two factors seem to have pushed share price lower recently: higher interest rates and a CEO change.  Interest rates are going up.  A 10 year US treasury bond currently yields 3.01%.  On 12/31/2012 bonds with the same duration yielded 1.76%.  Holy crap!
One year chart of the 10 year T-Note
I view FED tapering/higher interest rates as a valid concern for REIT investors.  Higher interest rates will affect cash available for dividends because existing debt has to mature eventually forcing companies to issue new debt at less favorable rates, plus new properties financed at higher rates might not be as beneficial to FFO.  On the other hand HCP has a better credit rating (investment grade) than most of its peers and rising rates usually means a healthy economy, perhaps complete with increased property acquisition potential.  I believe REITs will still provide income investors with dividend growth in a rising rate environment, but you have to wonder what will happen to share price.  Total return investors might want to look elsewhere.

Anyways HCP is a bit too diversified for my tastes (I don't want to invest in medical office/hospitals/life science buildings) a fact I can over look because rent is rent, the value is there, and its income generation capacity is strong.  If the current prices holds, odds are I grab some shares of this business next month.

----Canadian Equities----
Toronto Dominion Bank (TD) still appears undervalued and I'd be willing to pay up to $95 per share.  The share price is currently attractive in part because of exchange rates.  As the US dollar strengthens, it makes shares of foreign companies cheaper.  Great for new purchases, but also makes dividends smaller on the shares I already own.  I also like Bank of Nova Scotia here and think it might be even more undervalued than TD.  I'd be more inclined to go with TD simply because of portfolio weightings.  BNS is a higher % of my portfolio, plus I recently turned the BNS DRIP on so it will grow automatically.  Both have performed well as income stocks.  TD has the edge in dividend growth, BNS has the edge in current yield.  In fact TD announced three(!) dividend boosts this year.  TD currently yields 3.5%, BNS 3.8%.

Telus (TU) would be a nice addition because I haven't purchased a telecom since 2011.  I already own more than enough AT&T.  Verizon appears expensive plus there seems to be a lot of moving parts with the Vodafone deal.  I may be looking north to our good friends in Canada for my next move in the sector.  First of all TU yields about 3.9%.  That's nice and all, but I expect decent yields from telecoms.  What sets Telus apart from its dividend growth peers is that it plans to increase dividends twice per year through 2016 for a combined total around 10%.  This company is very open about it, refreshing!  It's difficult to find decent dividend growth in the telecom sector, TU indeed delivers.  It has good EPS growth prospects and a reasonable payout ratio to support it.  Telus isn't particularly levered and sports a solid capital structure compared to BCE, RCI, and VZ.  Pretty similar to AT&T is that regard.  Rogers Communications and Telus appear equivalent for dividend growth potential until balance sheets are compared.  TU is much more secure.

It appears Telus has a 9 year dividend growth streak in its native currency, yet it does not appear on the CCC lists.  Perhaps it slipped through the cracks due to exchange rates?  Anyways I'm open to starting a position around $33 so I'd need a small dip.

I hope everyone is enjoying the holidays!  Merry Christmas!


  1. That's funny, I like HCP because of it's broad diversification. There's better pure plays on some of the health care REIT subsets but for my first holding there I wanted a company that had been around for decades and had broad diversification. There's still so much of the ACA that has yet to be implemented and until things are fully up and running, trying to pick how the operations will go at some of the subsets seems difficult for me. So I went the diversification route. I picked up BNS not too long ago and it's my first of the Canadian banks, TD was also in the running but I went with BNS instead. Also, I think the Canadian withholding tax is 15%, if not held in a retirement account, not 25%. 25% would be a big difference, but 15% is fine as that's what I'll pay anyways. Have a great last few days of 2013! I can't believe that 2014 is almost here.

    1. Yes you are right the Canadian dividend withholding tax is 15%. I just looked it up, should have done that before publishing this post. Hehe I've never had to pay it! Anyways I'll fix it pronto.

      Yes I think BNS is a little bit better valued than TD, but attempting to figure it out can never be exact. I also like RY from the Canadian banks and might add that one sometime. I'm not going over 50 positions though. Have to picky from here on out.

      Happy holidays to you too!

    2. All excellent plays. I currently hold BNS and just started a drip last month. BNS is the most international of the Canadian banks - with business in over 50 countries and a large exposure to Latin America - should see some good growth on that front. TD is also great bank and lately they've been making major moves in the credit business.

    3. It would appear that interest rates are increasing but from a extremely low level treasury securities are paying very little still even with interest rates creeping up.The risk to companies that are highly leveraged is very high because the interest that they pay on any very short term loans or short term bonds could double from current levels. Companies with a poor credit rating and lots of short term debt could get hammered.

      Just would like to make a point to all dividend investors never be tempted to reach for double digit yields by buying into any stock or reit with a double digit yield unless its some kind of special dividend or something double digit yielding stocks are a warning in red. Seldom will a company pay a double digit yield on their common stocks Its the best indication that the company could be having some very serious problems.High yielding stocks should almost always in the non investment grade category .

  2. Another year and another Roth deposit. I'll be doing the same in the next few weeks. I own very few Canadian companies, so I should probably take a look at that. I'm with you on placing REITs in your IRAs, my wife and I do the same. How much further do you think the 10 year will climb in 2014? My guess is 25 to 30 bps, but with or without the FED I feel rates are going higher. I was fortunate to hold off on REIT purchases over the past 6 months, but now I need to get back in there.

    Here's wishing you an amazing 2014!

    1. I don't know where markets or interest rates are heading. I just happen to think interest rates will rise as QE winds down. Rates went up a TON this year, Ideally it would be a be slow upward trend going forward. At 4-5% I'm going to start thinking about adding more bonds/fixed income. We'll see.

      Best wishes to you as well!

  3. All great picks, CI. I've been keeping an eye on those companies myself.
    Question: Do you pay withholding taxes for Canadian companies when held under 401k and/or Roth accounts? Do the same rules apply when you buy shares on TSX vs. NYSE?

    1. I have a ROTH IRA and have never paid withholding taxes on my Canadian equities (I own 3). However, it is my understanding that it only applies to Canadian corporations as opposed to royalty trusts or REITs, but it also applies to a traditional IRA. I don't know about 401k's, the plan we have doesn't include individual stocks only funds. Also Fidelity is my broker and they are on top of it! It might be possible that other brokers don't get it right.

      It also works in reverse for Canadian investors who want to avoid US dividend withholding taxes. I think for a RRSP account but not a TFSA. I'm American and only have a crude understanding though. Please seek advise from a tax professional or someone who knows from experience. Quite a few helpful Canadian dividend bloggers out there, I'd ask them.

      I only have experience buying Canadian stocks on the NYSE and don't want to spread bad information. However Telus has a different ticker here. It's T in Canada. TU is the US. T the ticker for AT&T in the US which might explain why it had to change.

      Happy Holidays!

    2. Thanks for the update, CI.
      You are right that we have the equivalent account types in Canada - RRSP is the equivalent to the 401ks and TFSA are similar to IRA (although I dont understand the diff between Roth and traditional - i should look that up). I was asking that question just for the sake of knowledge, but I guess I should read on what exactly the account types mean in the US.

      I use RRSP for all US-based equities as I dont pay any withholding taxes on them. For Canadian equities, I use both RRSP and TFSA account types (again, no withholding taxes).

      I have been contemplating of starting a DRIP for Telus lately, but that will mean a non-registered account. I'd rather avoid the taxes and am thinking of buying in TFSA instead.

      Happy Holidays to you as well.


    3. Ok that's good to know I wasn't 100% sure.

      The ROTH IRA grows tax free and withdrawals are also tax free past age 59.5. A traditional IRA grows tax free, but taxes must be paid when funds are withdrawn past 59.5. However with a traditional IRA an investor can deduct contributions in a given year off their tax bill (i.e. it lowers your current taxes) meaning an investor could save more with it.

      Personally I choose the ROTH variant because I can withdraw money I put into any time without penalties or taxes, not true for the traditional. That will be handy if I happen to reach financial independence before age 59.5. Also, I'll likely be in a higher tax bracket down the road because of an inheritance.


  4. Thanks for good and intresting reading! I think Citigroup is a intresting case. Somebody here that think so here? :) / Pär, Sweden

    1. I'm happy that you stopped by all the way from Sweden. That's awesome!

      Take care

  5. CI,

    I like the picks. HCP is one that I'm going to be researching here very shortly. I like O as well here, although it's a totally different REIT.

    I looked at TU a while back and concluded it was solid. It actually made a watch list article of mine earlier in the year, along with BNS and TD. I bought the latter two, but TU slipped through the cracks.

    TGT is also on my list after the recent fall, although I was expecting a bit more. PM is attractive, but I already have as much as I'd like right now.

    I'd also like to add to KO. Not particularly cheap, but I'd like an increase in allocation there. We'll see.

    Have fun shopping!

    Best wishes.

    1. Yeah I thought TGT was going to dip down in the 50's with the security breach... guess not. Agree with you about PM, but I cannot justify increasing my overweight position at this time either. I grabbed some KO a few months back at 39 knowing it wasn't a bargain. You gotta pay up for that company, same with UL which I've also been researching.

      HCP is currently my top choice, and I'd be very interested in Telus if it drops a few bucks. I'm saving TGT, UL, SO, and other attractive US c-corp stocks for my next taxable account purchase.

  6. I like HCP and TD, but haven gotten to investing in it yet. At least I can keep it in my watch list for next moves.

    I agree the 2013 was a good year and hope 2014 will be even better. If not we have to get ready to make it better.

    Happy new year!

    1. I'm expecting next year to be solid whether the market goes up or down. 2013 was almost a straight line up, hard to imagine that trajectory lasting another year. Best wishes!

  7. I hold some HCP and am definitely looking at increasing my position.

    I only own a tiny bit of BNS, so I'm looking at that, as well. It's currently slightly above my cost basis, but my position is very small.

    1. I think HCP will be my newest and also final REIT. Just have to hope the current price holds a little bit longer! I'm doing my January deposit on the 1st of the month... I won't have room for additional REITs past HCP, will have to look at buying more shares of the ones I already hold.