Last Week in the Rear View

IMF growth forecasts for 2020 were released this week and were inclusive of the “momentous” and “remarkable” Phase 1 trade deal between the US and China.  It would appear the critics of the deal win the first round as China’s growth forecast for 2020 was revised higher by 0.2 percentage points to 6%, while that of the U.S. was marked down by 0.1 percentage points to 2.0%.  While I’m sure the diehard Trump supporters will discard this report as another in a long line of “deep state conspiracies”, one opinion worth reading is how China is retooling – whereas where are we? My thinking is the trade deal is at best a Pyrrhic victory for the US – tempered by a possible coronavirus black swan.

In a similar vein, is a recession in store for the trucking industry?  That is perhaps the implication of the 2H 2019 data. Trucking, shipping and freight are indicators I tend to keep an eye on and one possibility is recession – which I discount.  In my view, this slowdown is a return to normalization – coming off the sugar highs of the tax plan of 2017 followed by the tariff front loading of 2018. Others to watch in this space include CAT, CMI and NAV.  There are, however, opposing views, such as Larry Kudlow’s, “You’ve gone from 1.5% to 2% growth. We had it going at almost 4%, then the Fed tightened.” Oh yes, the infamous Fed tightening defense. Well sir, unless your boss can pull another rabbit from his hat, I doubt the ‘blame anyone else game’  has much longer to run.  There does come a point when your policies have to stand on their own merits.

In my inbox this image arrived.

Now, I own CLX, CL, PG, GIS, K, KHC, KO and PEP.  If you’re counting, that’s 8 of the 14 company owners of the 26 listed brands.  In an exchange telling of the times in which we live:

Me: So just because they sold themselves to a larger corporation now makes a product like Burt’s Bees less natural? Or am I missing your point?

Resp: They do tend to alter the original ingredients

Me: Well, I guess since there is no acknowledged standard, natural would be in the eye of the beholder.

Point is the definition of “Sold Out”.  My assumption being a merger or acquisition.  Obviously someone else saw this as a breaking of the “natural” covenant – of which there are no standards.  I cannot prove or disprove the “tend(ing) to alter ingredients” allegation. Another example of society’s ongoing inability to communicate.

The final act for the week was the Steve and Greta show.  In Davos, Mnuchin questioned her economic credentials in regards to climate change.  While he may have been technically correct, his flaws were to attack a school girl on an issue where the US has ceded any moral high ground.  He lost the round “bigly” on optics alone.

My opinion is that even if climate change could be denied, the planet and our environment would be better served by implementing many of the Paris Accord action items.  Greta’s zeal is both her charm and achilles heel. To blast the Paris accord as not being enough may well be correct, but at least it is a beginning.  My preference for the moment is to incentivize constant incremental improvement in the vein of Deming’s Law and to bring the ESG conversation to the forefront.  However, to ignore the realities of economics in this quest is begging for the Law of Unintended Consequences to bite you.  One example being a retooling of worldwide supply chains if plastic containers were outlawed.  Doable, yes – but at what cost and in what time frame. Another example is even more ghastly – Healthcare and Pharmaceuticals.  These two consume roughly 4% of petrochemical production although part of this could be attributed to packaging. Impacted products would currently include Aspirin, Heart valves, Hearing aids, Artificial limbs, Antihistamines, Rubbing alcohol, Cortisone, Anesthetics and more.  Two possible consequences emerge, 1) even greater increases in health care costs, and/or 2) Bringing back Sarah Palin’s (2009) death panel debate except the options today could be a heart valve for someones’ life today versus a possible future life. Oh, the conundrums we face.

As we swing into the final week of January, it’s time to break out the month end reports. For my part, my activity was abnormally high due in part to some initiatives previously discussed. Hoping your week is great!

My Lazy*** Goals

Actual book cover, JoeKarbo.com

In my younger days, I was fascinated with the notion of becoming wealthy with a minimal amount of effort.  To that end I scraped and saved enough pennies to become the proud owner of a copy of the late Joe Karbo’s best seller, The Lazy Man’s Way to Riches.  Imagine my disappointment when I realized that significant effort was still required, albeit in a different manner.  If the book were updated today, I would think it would gloss over the time and coding required to attain website SEO success and focus on the rewards – while ignoring the fact that only a few will reach that level.

My quest for the laziest way to make money was not in vain as I stumbled onto dividend oriented investing forty years ago.  Essentially one can spend as much – or little – time and effort as they want in this regard. One person can use a set-it and forget-it strategy while another can be actively involved.  Or in my case, I’ve used both. While I recovered from my strokes, my portfolio was on auto-pilot accumulating dividends awaiting my return. For over a year – and it didn’t miss a beat. 

The complaint I’ve most often heard is that it takes too long to see results and this endeavor does require patience to get the snowball rolling – probably five to seven years.  But once it gains momentum it is a force to be reckoned with.

This is a meandering way to get to this weeks’ point. I’m really not that much into goals at this stage, but since I’m basically a let the portfolio do its own thing type of guy, there are times when adjustments just have to be made and framing them as goals could be beneficial.  For this year, perhaps you can refer to me as an active manager. The broader theme was my desire to reduce the number of holdings and so far I’ve dropped two (XRX and MSGN) but added two (FTS and TMXXF). Currently, this is a wash. On my monthly reports – with the exception of the new and sold positions – all of the activity nets out with an increase in the value of the stocks retained – which will probably be the case throughout the year.  

Scenario #1

Goal – consolidate all Canadian stocks across multiple accounts into the IRA

Rationale – the tax treaty between the countries allows most holdings to be exempt from the 15% Canadian tax withholding

Funding Source – the sale of PB from my IRA (leaving a slightly larger position in a taxable account)

Actions Required – 

  1. Ensure all have no Canadian taxed dividends
    1. RY, PWCDF are confirms
    2. BCE, CM, BNS, CP, CNI, TRP, TD, BMO, ENB, TMXXF, MFC, SLF, HRNNF, TU, RCI, FTS are pending confirmation
  2. If any are taxed, file appeals
  3. If appeal denied, review for possible sale
  4. If confirmed, add to TRP, TD, BMO, MFC, HRNNF positions
  5. Close out remaining taxable Canadian positions including NTR and AMTD (US)

Over the years I’ve received conflicting answers on the taxability issue.  With free trades I can get the real answer with the next dividend payment. I have 20 current Canadian positions plus AMTD (American, but I grouped it with the Canadians due to TD’s ownership stake).  NTR and AMTD (merger) will be closed positions – probably in April. End result will be more room for foreign dividends to stay under the Form 1116 filing cap.

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Scenario #2

Goal – Migrate a few issues from Motif to Webull

Rationale – Webull has a promotion too good to pass

Funding Source – petty cash to be replenished by the sale of the same issues in Motif (timed to avoid wash rule issues – if applicable)

My issue with Motif is that they are late to the party on free trades, so I’m beginning to take some money off their table.  Although not fond of Webull (they are in the same camp as Schwab with paying stock dividends as cash-in-lieu rather than fractionals), getting three free stocks is a return equivalent to an immediate 5% (or more).  As my moniker implies, I seek returns where I find them.

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Scenario #3

Goal – Add cash to spousal IRA

Rationale – Reduce tax liability

Funding Source – emergency cash to be replenished by the anticipated tax refund

For the first time in years, we have some earned income which enables us to contribute.  This will be done into the spousal one which is not subject to RMDs (yet).

Scenario #4

——

Goal – Address RMDs without liquidating stock

Rationale – Keep the snowball alive

Funding Source – accrued surplus dividends

Our planning for this event was done a few years ago when we reduced the holdings in two IRAs.  One contains all SBUX (cost basis of $6) and the other all AAPL. 2019’s RMDs were addressed by surplus accrued dividends.  In 2020 we may have to journal transfer a few shares of each to the joint account which happens to already have these issues in place.  RMD slam dunk – except for the wife who’d like the cash – hence the alternate funding source.

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So there are this lazy man’s goals for 2020 and it sure looks like more work than I’ve seen in awhile.  In my spare time I can see how my diverse and weird ideas panned out (or not) to determine the further portfolio reductions so I can return to being a future lazy man! As always, comments, thoughts and criticisms are always welcome.

Peeking Into The New Year

It’s that time of year when the pundits are outlining their 2020 top picks with assorted rationale to support their stance.  I find these exercises interesting at the very least and somewhat illuminating as well. I have to admit I am not immune to the siren song as I have participated in a few.  For instance, last year I participated in Roadmap2Retire’s and placed thirteenth. Not bad considering I was effectively out of the contest mid-year with my pick being acquired.

I also tracked sector picks of mine versus Kiplinger using SPDR as a baseline.  For grins I included Cramer’s Power Rankings and Catfish Wizard’s sector picks. Unfortunately, both of these didn’t complete the quest leaving myself and Kiplinger in a tie.

This year’s entrant was to the Dividends Diversify Investment Ideas for 2020 and Beyond panel.  One of my strengths (or weakness, if you prefer) is to view scenarios through a unique prism.  Of the 20 companies, 11 are already in my portfolio. Other than Visa, which generated one observation, these were ignored (why else would I own them?).  Tom grouped companies by segment (like ‘Energy and Oil’) where I chose sector as identified by Morningstar. The duplicate (Visa) was counted twice for my purposes.

  • Financials                  28.57% (6)
  • Technology                          19.05% (4)
  • Utilities                      19.05% (4)
  • Energy                9.52% (2)
  • Healthcare            4.76% (1)
  • REIT                4.76% (1)
  • Communication Services    4.76% (1)
  • Consumer Defensive        4.76% (1)
  • Industrials            4.76% (1)

Through this lens, a slightly different perspective emerged.  With volatility and stability key concerns, I found Financials being a “go-to” sector as interesting.  The following are my observations with the note they are strictly my perspectives. They should not be construed as a criticism of any of the individuals or selections.  Following is my typical, outside the box purview.

The observation on Visa is based on Tawcan’s rationale, “They also make money from users when they don’t pay the balance in full each month.”  The issuer absorbs both the risk and the reward on this aspect so no additional profits to Visa here.

One surprise was the Utility Sector.  

  • GenYMoney selected Fortis which has been on and off my watch list for awhile.  My issue with them has been their Caribbean dependence on diesel. I may need to review this with the advent of solar in the region.
  • Cheesy Finance selected Canadian Utilities.  My issue here is the ownership structure. CU operates as a subsidiary of ATCO (52% ownership) which in turn is controlled by Sentgraf (a Southern family company).  CU class A shares are also non-voting.
  • Brookfield Renewable Partners was the pick of My Own Advisor.  Most investors’ issue with them is that as a Limited Partnership they issue K-1s.  Although they have no UBTI history, some individual and corporate investors shy away from K-1s. 

Three selections were (in my opinion) a little contrarian.

  • The Rich Miser picked Ally.  This one I wouldn’t touch with a ten foot pole.  Yes they do pay a dividend, but only since July of 2016.  My guess is they were restricted by the TARP bailout. Now TARP in and of itself is not a show stopper for me but the fact that they were formerly known as GMAC – yes GM’s financing arm – gives me pause.  Now, ten years post bailout, they still derive 70% of their business through dealers – that is my issue.
  • MoneyMaaster chose  Artis REIT which recently cut their dividend knocking it off most DGI’s radars.  He does make a compelling case though.
  • Freddy Smidlap selected CDW which is a value added reseller.  The issue here is the possibility of margin compression in the event of an economic downturn.  Plus they have a limited track record since their second IPO.

The ones in my portfolio I’ll periodically add to during the year (except Power Corp which is already a little overweight).  One gets the nod to appear on my watch list, FTS.

And I have to commend Tom for the time and effort in putting this together so people like me can have some ammunition for alternative theories. Just for grins, I added these selections to a spreadsheet available on the main menu titled 2020 DivDiversity Panel. This should update automatically (as per Google standards).

2019 Year End Report

Looking back at last years’ End Of Year post, the concerns raised at that point all remain valid.  I have to admit that even with the evils of tariffs, rising deficits and US dollar strength the economy remained surprisingly strong.  I did nail one right – the administration’s claim that GDP growth can outpace the deficit was wrong. If it can’t be done when the economy is hitting on all cylinders – the question becomes ‘when can it?’

For the month, the S&P index rose 2.73% and my portfolio (excluding October and November purchases) rose 4.26%.  When those purchases are included, the monthly increase was 10.51%. Yes my gain would have been larger had I re-invested the dividends throughout the year but at least I was fully in the market during the last quarter run-up.  For the year the S&P rose 30.43% (depending on how it’s calculated) the best year since 2013. My Portfolio rose 34.54% allowing me to extend my claim of the 34th year (of 39) that I’ve beaten the index.

Dividend cuts were the big obstacle for the year as I endured five in total.  Frankly, it wasn’t until December that my Dividend Goal (10% annual increase) was in the bag.  This is typically attained in late October or early November. 

I have only three new companies on my watch list with limit orders in place on two.  All are foreign with Canada, Hong Kong and Japan tagged. I have a few I’m willing to shed with a couple more needing repositioning due to mergers.  For the first time in probably five years I’m in a position to reduce my holdings while beefing up my Anchor and Core positions.

Thirteen countries were represented in my portfolio (18.5% of my dividends), losing Ireland but gaining Japan via a merger.  The top countries were Canada (9.77%), UK (2.61%), Singapore (1.21%) and Sweden (1.02%). I’m continuing the migration of Canadian companies from my taxable accounts to my IRA to take advantage of the tax treaty (no Canadian tax withholding for most issues).

Continuing with the Monthly Recap in its newest iteration, I’m still finding pieces that require some elaboration in order to rationalize it.

For instance, the net purchase expense threshold is not a pure indicator of my cash position.  I’m thinking it’s in the 2-3% range as my cash position increased last month despite the purchases.  The Incr/Decr from the market — yes, 99.2% of the increase in portfolio value was due to the market.  A slight disappointment is the Dividend Raises. They weren’t enough to even round up to 0.01% (more a reflection of portfolio size than wimpy raises).

Dividends:

  • December delivered an increase of 40.87% Y/Y with most of the increase attributable to the Oct/Nov purchases, the OMI fiasco of last year aging off and a weaker US dollar (finally).
  • Dividend increases averaged 10.11% with 68.28% of the portfolio delivering at least one increase (including 5 cuts.  Basically a lackluster performance.
  • 2019 Dividends received were 13.78% greater than 2018 dividends and exceeded last years’ total on December 1st.  It would have been over 15% had there been no cuts.

Note: I updated my Goals page to provide a visual of these numbers.  Based on Mr All Things Money’s instruction set with a conversion to percentages.  My code only updates when the monthly Y/Y number is exceeded.  Otherwise, the prior year actual is used.

Spinoffs:

On Oct 4, 2018 MSG filed a confidential Form 10 to spin the sports business which remains in progress.

Mergers:

Spirit MTA REIT (SMTA) voted on Sept. 4th, 2019 to approve the liquidation of the REIT. I am awaiting the final settlement payout and as of December 31, this issue was delisted. I fully expect a profitable outcome for one of my most speculative positions.

SCHW to acquire AMTD for 1.0837 sh SCHW to 1 AMTD.  My only surprise with AMTD being taken out was the suitor – I had expected TD.  Regardless, I have three concerns over this deal, 1) profit margin compression with the onset of $0 fee trades, 2) possible liquidation of a partial TD stake to reduce their ownership share from 13.4% to 9.9% (the same issue Buffet regularly faces) and 3) 10 year phase-out of AMTD/TD cash sweep account relationship.  The third one means TD has a low cost (albeit, decreasing) source of deposits for the foreseeable future. After the first of the year, I’ll probably cash in AMTD and increase TD a little further.  

Although XRX is officially off the list with their Fujifilm settlement, Icahn & Co. couldn’t wait for the ink to dry before stirring things up with HPQ.  As of now, I am considering exiting my XRX position.

Splits and Stock Dividends

Although splits are agnostic, I consider them a positive with reverse splits a negative.  Two of my companies split this year – PWOD and FFIN with no reverse splits to report.

Five companies showered me with shares of stock ranging from 3% to 5%.  I do love stock dividends and this year the benefactors were: CBSH (5%), HWBK (4%), LARK (5%), AROW (3%) and CVLY (5%).

Summary

As we slide into tax season, we’ll see if my readjustments panned out.  My goal was to achieve the 0-10% tax bracket by taking a one year tax hit.  The first part was completed so the results will be evident in the next month or so.  Overall, not one of my better years but I did attain (at least) my minimum objectives.   

Hopefully your year was great or at least in line with the market.