For all the procrastinators out there the deadline is near. In fact, this year I was one – completing mine yesterday. This season brings to mind some of the best practices compiled to minimize – or delay – the tax hit, thereby maximizing disposable income published by the Dividend Diplomats. Though geared towards wage earners, I can be considered a poster child of these practices as one migrates from the accumulation phase of investing. Over the years the use of many of these strategies have resulted in continued savings well into retirement. Case in point being a 2017 Federal effective tax rate of 8.04% on a six figure Adjusted Gross Income ($156 of which was earned income). Take advantage of all of the breaks provided in life as early as possible to reap the rewards (true in investing as well).
It has been said many times before that attempting to time the market is a fool’s errand. One approach common with Dividend Growth Investors the one taken by DivHut which is to “…invest in a consistent and systematic manner. Over the long haul, being invested and staying invested in the stock market gives you the best long term odds of success.” The benefits are consistency, removing emotions and dollar cost averaging while the disadvantages – particularly if fully invested – is the reduced ability to take advantage of “one day sale events” which are becoming more common.
Each week I catch up on blogs, comment on a handful and generally learn a thing or two. On occasion I take issue with a post (or a portion thereof) – and provide a (hopefully) meaningful comment. The most recent being Lanny’s post which included, the lines:
I don’t know about you, but the dividend increases keep coming in hot, right off of the Tax Cuts, Jobs Act! and Let’s just say tax reform has continued to be nice, as it relates to dividend increases.
The rationale for my comment being – assuming all of his US company increases were a result of the tax plan, this would be a 12.45% increase. Not shabby by any means but a far cry from his reported total of 20.13%. The difference being his foreign holdings which weren’t beneficiaries of a tax cut but of strength in ore prices and China shipments. My quibble is not the numbers – only the presentation of the tax bill being a panacea for businesses. It may well be, however the rules are still being written and the jury is still out.
There have been many times where my opinion of cryptocurrency and blockchain have been sought. My thoughts have always been – and continue to be – that blockchain holds promise while Bitcoin and most of the other cryptocurrency contenders have little merit. Point of fact being I did add to my blockchain centric investments last month while refusing to play in the pure cryptocurrency sandbox. With the current euphoria I decided this week to at least frame my position a little while noting I could be either wrong, premature or both.
In a recent conversation with a friend of mine, the topic of cryptocurrency arose as he has started accepting Bitcoin in his business. Though more enamored over the possibilities of wealth through hoarding and/or trading, he began to look under the hood to figure out why I had a greater fondness for Blockchain over any cryptocurrency. His insight surprised me: “You’re like the sluice box salesman in the California Gold Rush.”
I choose to think of myself as a shortstop hitting singles rather than a home run hitter going for the fence, but his analogy was apt. I prefer to get a slice of many transactions as opposed to getting the big one. I play the percentages. He was able to visualize I place a greater value on the tools (mining), transport (exchanges) and utility (ancillary applications) rather than the commodity itself. Meaning, I’d rather sell the Levi’s than look for (and mine) the gold vein.
It appears the revisions to the tax plan being discussed will be slightly less draconian than previously announced resulting in a little lead time for portfolio adjustments. My guess (pure speculation) is the first half of 2018 will be relatively good but a little choppy. The last half I suspect we’ll be seeing a weaker dollar, a little uptick in inflation and minimal tangible results from the administration’s policies. Anyway, an emphasis on appreciation over dividends in a rising tax environment may result in tax deferral possibilities. This belief is the basis for next years’ strategy as subsequently outlined.
- Continuation of the primary portfolio strategy in regards to moving closer to the defined target allocations. One example of this was my first December purchase, KMB which is an Anchor holding of mine.
- With the tax bill still in an uncertain status, load the maximum allowable contribution to the IRA. These funds have been allocated and will be moved by month end. A small Canadian holding in my taxable account has been identified as my new IRA purchase which will probably be made in January (pre ex-div). A by-product of this will be a temporary overweight status in this issue. Since I don’t like redundant holdings across accounts, my smaller taxable holding will be sold post ex-div. This should shield more income from taxation (under current tax).
- Implemented (December 14th) my side strategy for 2018 titled Sluice Box which is a reference to the Gold Rush days. This represents about 1% of the portfolio and was created (and bought) in my Motif account (shameless plug). The emphasis is on Bitcoin, Blockchain, Growth and my first Swiss stocks with a couple of beaten down issues thrown in.
My 2018 strategy research began in earnest when I encountered Fortune magazines’ November 1st article, In Search Of ‘Vital’ Companies. Of the fifty companies listed, my selection process drilled into the dividend payers – albeit at low yields. Then on November 7th, Investor Place published The 10 Best Growth Stocks You Can Buy Now. I chose to ignore The Dividend Guy’s August 23rd launch of Dividend Growth Rocks as I tend to shy away from paid sites particularly when operated by one person with multiple pseudonyms. Besides, only one of his selections (Nordson – NDSN) was either not owned already or replicated in the other analyses.
Once the data was combined, I removed issues already owned and ones I had no inclination to buy. Basically I had to be convinced of the opportunity and that the price (subjective argument) remained reasonable.
The following table presents my 2018 picks and the primary reason. All but one are dividend payers and I front-loaded my purchase to 2017 to ensure receipt of CME’s special dividend (ex-div Dec 28).
|SLUICE BOX (Motif: 2018 Growth)|
|NVIDIA Corporation (1,2)||NVDA||7.30%||0.32%||Bitcoin chipset|
|CME Group Inc||CME||7.30%||1.76%||Bitcoin Futures|
|Cboe Global Markets Inc||CBOE||6.70%||0.86%||Bitcoin Futures|
|Intercontinental Ex. (1)||ICE||6.80%||1.14%||Coinbase investor|
|Microsoft Corp. (2)||MSFT||6.80%||1.98%||Blockchain (Azure, Ethereum)|
|JPMorgan Chase & Co. (2)||JPM||6.80%||2.68%||Blockchain (hyper ledger)|
|Veritex Holdings Inc||VBTX||5.90%||0.00%||emerging growth co. (JOBS Act)|
|Ottawa Bancorp, Inc.||OTTW||6.10%||1.10%||2-step conversion (growth)|
|Newell Brands Inc||NWL||6.50%||3.02%||Brands|
|Energizer Holdings Inc||ENR||6.50%||2.44%||Brands|
|Cognizant Technology (1)||CTSH||6.50%||0.84%||Future 50|
|Intuit Inc. (1)||INTU||6.70%||1.00%||Future 50|
|Novartis AG (ADR)||NVS||6.70%||3.21%||possible Alcon spin|
|ABB Ltd (ADR)||ABB||6.70%||2.91%||purchased a GE segment|
- Future 50 (also currently own: MA, V)
- Investor Place 10 (also currently own: V, SQ)
- Other Bitcoin/Blockchain indirect investments include: GS, IBM, WU, AMTD
At the very least it will be interesting to observe the Crypto phenomenon in more of a supporting role. I also need to acknowledge Dividend Diplomats whose research on NWL was enlightening.
Over the past few months I’ve visited several blogs when one topic in particular has been addressed. For the past year or two I’ve been expanding my international holdings to my current mix which is highlighted below. Time In The Market got me thinking with his comment. Although he tends to be more an ETF investor, he was experiencing similar trends as I. Then there was Bert’s CM purchase. He was agnostic to the CAD/USD correlation probably because the US and Canadian markets are usually tightly correlated with exchange rates. Then there was Tawcan, illustrating his top five. In his post he mentioned his use of ETFs for international diversification. Finally there was The Dividend Pig musing on portfolio hedging.
My endeavors in overseas investing have delivered an education of some obscure items that hopefully will benefit an investor looking out of country.
Create a Strategy
Before starting, perform your due diligence and run an issue through your screening algorithm. Then ask the question, “Is my home currency overvalued?”. In the case of US investors, the simpler question is “Do you believe Trump’s policies will result in a stronger or weaker dollar?” and secondarily, “To what degree?”. I like to use foreign exchange as a tailwind. But by investing in dividend stocks in the event I’m wrong the sting is mitigated.
Be Aware of Monthly Deviations
Currency fluctuation will result in either positive or negative moves in both portfolio value and dividend amounts. As an example January to August 2017 saw the US dollar depreciating against most currencies. One example is the Euro which has appreciated 8.95% since last October – making US exports cheaper and imports more expensive. One anomaly with the currencies I track – the relative value has been stable when compared to each other whereas the US dollar has been the outlier. Also many companies pay annual dividends or interim/final (with variable amounts) dividends. Some are capped at a percentage of profits.
Be Wary of Tweetstorms
In recent months, fluctuations have occurred as the result of Presidential tweets. Most recently was the posturing on NAFTA. This was a buying opportunity for Canadian and Mexican issues. Conversely, dividends received took a hit.
Understand the Tax Implications
The US engages in tax treaties on a country by country basis which establishes the withholding rate and the application of said rate. Ones that I’ve found with caveats include Canada (15% unless in an IRA and a part of DRS – then no withholding), Australia 15% (unless reduced via franking), Singapore – verify on a company basis whether dividends are qualified (may impact the decision to place in a taxable or tax-deferred account) and Switzerland (15% if registered, 25% if not – check your broker). The good news is that at tax time foreign withholding can be credited (with some limits) under current law.
Stay Abreast of Local Events
This can be issues not normally aired in the US such as the Australian deflation discussion (generally groceries) or the Customs workers strike in Chile. These wildcard issues have the ability to impact the profitability of the investment.
The lessons I’ve learned have been many and these are but a few. However, foreign investing can be rewarding as long as there is an awareness.
The general upward trend continued in July with major indices again hitting new highs. With my strategy shift in place, I did deploy new capital but only in a positioning move ahead of a spin. The S&P ended the month up 1.93% while my portfolio trailed with a gain of 1.77% largely due to the financial sector lagging the market. For the year, I’m ahead of the index by 4.86%.
Headlines impacting my portfolio (bold are owned):
- 7/5 – YUMC indicates reviewing possible dividend payout
- 7/7 – MET acquires FIG’s asset management business
- 7/10 – CM acquires Geneva Advisors
- 7/11 –BR acquires Spence Johnson Ltd
- 7/12 – ABM acquires GCA Services
- 7/12 – AAPL adds PYPL as appstore pymt option
- 7/13 – MFC reportedly reviewing sale or IPO of John Hancock
- 7/17 – CHD to buy waterpik
- 7/17 – China places restrictions on loans to Wanda (AMC)
- 7/18 – MKC to buy RBGPF’s food business
- 7/18 – CCI acquires Lightower
- 7/19 – HRNNF (H.TO) to acquire AVA
- 7/20 – SRC considering spinoff of Shopko properties
- 7/21 – BX and CVC Capital offer $3.7B for Paysafe (PAYS.L)
- 7/26 – SHPG rumored to be takeover target
- 7/27 – Ackman discloses stake in ADP
- 7/28 – IRM acquires Mag Datacenters LLC
- 7/31 – BX (w/ ETP 50.1%) buys 49.9% of holding co. that owns 65% of Rover pipeline
Note: my comment of July 21st on AMC (Dividend Diplomats) remains prescient in light of their warning on August 1st. I believe now is a viable entry point if cognizant of possible risk to the dividend particularly as related to lender covenants. EPR may have a slight risk as well.
- Added to MET (spinoff positioning)
- July delivered an increase of 2.14% Y/Y with the vast majority of the increase being attributable dividend increases.
- July delivered a decrease of 8.85% over last quarter (Apr) with TIS (dividend suspension) and foreign cycles (interim/final) being the culprits.
- Declared dividend increases averaged 10.81% with 61.02% of the portfolio delivering at least one increase (including 2 cuts and 1 suspension)
- YTD dividends received were 69.81% of total 2016 dividends which if the current run rate is maintained would exceed last years’ total in early November
MET has declared their spinoff – Brighthouse Financial (BHF) – effective August 4th. Holders as of July 19th will be entitled to 1 share for each 11 MET shares owned.
AGU/POT (Nutrien), SGBK/HOMB remain pending
Overall another positive month with the only disappointment being the Q/Q dividend decline – which was expected. The primary metric (annual dividend increase) remains on target and well ahead of inflation.