MOOSE MARKETS

INVESTING THE CANADIAN WAY

Mike

Dividend ETFs, Are They Worth it?

How about dividend ETFs? I’ve been asked this question often during webinars. ETFs are useful due to their offering the investor immediate diversification along with minimal fees. To be honest, it’s the perfect solution for anyone who doesn’t want to put the time and energy into managing their portfolio and selecting their stocks.

However, in most cases, this also means you are likely to be leaving money on the table. Dividend ETFs could be too diversified. Having over 100 dividend stocks may hurt total return. I found out that investing in a small number of stocks brings better results.

I haven’t yet found a dividend ETF that shows only companies that I would like to invest in. If I look at the top holdings for XDV.TO for example, its largest holding is CIBC (CM.TO). While Canadian banks are great, CIBC ranks #5 in my Canadian Banks Ranking. The other thing I dislike is that they count all 6 banks in their top 10, which may lead one to believe they haven’t heard of the concept of diversification.

Canadian dividend ETF holdings

source: BlackRock iShares Canadian Select Dividend Index ETF

To get back to the question: are dividend-paying ETFs worth it? If you don’t have the time, knowledge or interest to manage your portfolio, ETFs could be a good strategy. Selecting individual stocks will help you reach your goals faster and stay closer to your investing values.

However, that doesn’t mean ETFs can’t coexist with individual stocks in your portfolio.

What Could be Really Worth it?

I can see several reasons why an investor would consider ETF investing. Here are a few good examples.

Benchmark

Since the beginning of DSR, we have been using VIG and XDV.TO as our benchmarks. The point of using benchmarking is to assess our strategy vs. an existing alternative solution. Why would I spend time managing my portfolio if I could quickly buy an ETF and make the same money? It only makes sense if I can do better than existing investing solutions.

The problem with benchmarking is we often become too focused on short term results. One must know that looking at any performance records under three years is pure noise. It starts to be meaningful after five years and is very meaningful once you have gone through a full economic cycle.

Start investing

Many asked me how I started my RESP, the account used in Canada to pay for childrens’ college tuitions. I started this account a long time ago with just a couple of hundred dollars. It was not enough to build a portfolio and the monthly systematic investment plan would add a lot of complexity if I had to pick a different stock each time. Therefore, for the first few years, I invested all that money in ETFs until I built a value above $10,000. I then switched this portfolio to the DSR investing methodology focusing on dividend growers.

As a first step in the investment world, ETFs will provide you professional support (ETFs are built and managed by experienced industry professionals), instant diversification (invest in 50-100 securities with a single trade), and peace of mind (no need to manage the ETFs composition). Therefore, it’s the perfect vehicle to use to start a new portfolio.  I’m currently showing this same strategy to my two teenagers (and soon to my 10yr old son).

Diversification

While I wouldn’t use ETFs to replace any of my individual stocks, you might improve your portfolio diversification by using them for other asset classes. You can invest in fixed income products such as bonds and preferred shares (we have over 80 bond ETFs and 18 preferred share ETFs in our screener). You could also invest in commodities, emerging markets, or cryptocurrencies through ETFs.

Searching by theme using the search box of our screener, you can rapidly find viable options to add to your portfolio. This additional diversification may help to reduce volatility (bonds / preferred shares), protect your portfolio against inflation (commodities) or hopefully improve the upside potential. Those assets won’t necessarily generate dividends, but they can bring something else to your portfolio.

Exposure to a sector without the work

It could also be a good strategy if you want to gain exposure to a specific industry that you don’t fully grasp. I’ve expressed my interest for the technology sector in the past. Some investors may be intimidated by new technologies and wouldn’t be comfortable analysing growth opportunities in this sector. Some others might have a hard time understanding big pharma’s pipeline development and patents while others might be lost trying to understand how life insurance companies work. Many times, Canadian investors have told me they were good at selecting Canadian stocks but would rather use ETFs to gain exposure to the U.S. markets.

If you aren’t comfortable with investing in a specific sector or market, you can use ETFs. You would benefit from an ETFs best quality (diversified, cheap and professionally managed).

Build a core portfolio

Finally, ETFs could be a good tool to build a core portfolio and then add some spice with individual stocks. Think of investing as cooking a good meal. You can use ETFs as your “core soup” while you make necessary adjustments with different spices by using individual stocks. A 50% ETF and 50% stock portfolio might bring you the peace of mind you may be looking for while you keep control of a good part of your money.

How to Select Your ETFS

As is the case with any investment products, ETFs may track the same asset or follow the same investing strategy, but they are not created equal. There are a few things you must consider before making your decisions.

Financial metrics

In the DSR ETF screener, you will find a good list of metrics to analyze ETFs. The year to date, 1yr, 3yr and 5yr returns will tell you much about the performance of the ETF. It is then easier to know what to expect from this product and make comparisons.

The expense ratio is also very important since you can then pick the cheapest (and hopefully best performing) ETF for a specific sector. If you can’t decide between two similar ETFs, pick the one with the cheapest fees. It is likely the one that will have the best chance of performing well in the future.

Volume and assets under management (AUM) will tell you more about the liquidity and the size of the ETF. It’s important to invest in assets that are liquid. You also want to avoid the latest flavor of the month.

The historical spread will also give you an idea on the ETF’s volatility (the wider the spread, the higher volatility). This could have a big impact on price fluctuations during a market crisis.  We saw how some preferred shares and bond ETFs plummeted in March of 2020.

The discount/premium to NAV (net asset value) will tell you if you are paying more than what the ETF is worth or if you are getting a bargain. In general, you want this number to be as close to zero as possible in order to buy at the right price.

ETF analysis

While you can easily make your selection based on basic metrics, but if you want exposure to commodities, or bonds, you must perform a few additional checks if you want an ETF that includes equities.

Once you have selected a pack of ETF that might work with your portfolio, you still have some work to do. The ETF analysis must include the comprehension of the investment strategy. You can usually find this information from the ETF manufacturer (the financial firm managing and selling the ETF). Here’s an example from VIG:

“The investment seeks to track the performance of the S&P U.S. Dividend Growers Index that measures the investment return of common stocks of companies that have a record of increasing dividends over time. The adviser employs an indexing investment approach designed to track the performance of the index, which consists of common stocks of companies that have a record of increasing dividends over time. The adviser attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.”

Some are obviously more complicated or opaque than others. Here’s ZWB.TO, a covered call ETF:

“BMO Covered Call Canadian Banks ETF seeks to provide exposure to the performance of a portfolio of Canadian banks to generate income and to provide long-term capital appreciation while mitigating downside risk through the use of covered call options.”

You know they will use covered call options. Unfortunately, you won’t know much about how their option writing process works with this information. If you are curious, you can also read more in the ETF prospectus also found on the company’s ETF website.

The second step is to check the ETF’s top holdings. It will quickly determine if this ETF could fit in my portfolio or not. By looking at the top 10 holdings, you will see what drives this investment. If you cringe on one or two company names, you might want to skip this one and select an alternative ETF.

The third step will require you to look at the ETF sector allocation. At DSR, we are currently able to give you the ETF sector if it’s a single sector ETF, but we can’t ventilate several sectors. To do that, you must go to the ETF’s website and look at the graph provided by the financial firm. Looking at how the ETF is invested throughout various sectors will allow you to better predict the impact on your portfolio’s volatility and upside/downside potential. This extra step requires more calculations, but it is crucial for you to include your ETFs allocation in your portfolio.

Finally, I wouldn’t over complicate things when it comes down to ETF investing. ETFs have been created to be efficient and simple to understand. Once you have selected the asset exposure you desire, look at a few financial metrics. Then, confirm your choice by looking at what’s inside the hood. Don’t attempt to track each ETF movement and change in allocation. You may spend as much time as you would have if you selected individual stocks. The power of ETF investing resides in the simplification of your strategy. Therefore, adding a dozen ETFs doesn’t necessarily improves your portfolio quality or simplicity.

Warning: Canadian Dividend ETFs’ Dividends Aren’t Stable

You read right: dividend ETFs don’t pay a stable dividend. It creates lots of confusion and frustration among investors! Let’s take a look at how the iShares Canadian Select Dividend ETF (XDV.TO) rewarded its investors.

ETF dividends

Dividend ETFs will receive dividends from the company they invest in. They may also reward investors with additional distributions generated by capital gains or other profits generated by the liquidity or other investment vehicles inside the ETFs.

As you can see in the previous graph, the dividend eventually goes up. Unfortunately,  it will not be steady from quarter to quarter.

Final Thought

I am not considering investing in ETFs any time soon. However, I consider this product to be a great tool for investors. The fact that you can quickly diversify your portfolio at a ridiculously low price makes ETFs an investors friend. It’s the perfect fit if you want to invest in a sector but don’t want to do the extra research attached to stock picking.

If you are happy with individual stocks like I am, please do not feel the need to add ETFs to your portfolio. If your strategy is working already, there is no need to fix something that is not broken.

Smith Manoeuvre – A Tax Deductible Mortgage Strategy

The Smith Manoeuvre is a Canadian strategy that is designed to structure your mortgage so that it is tax deductible.

Since the Real Estate market has gone up in value significantly over the past few years, I’ve decided to use some of that equity sleeping in my house to invest in the stock market.

For Canadians, this means I’m doing the Smith Maneuver (transforming the interest paid on my mortgage into a tax-deductible expense). For all other investors, this article will talk about leverage in general. Should you borrow to invest? What’s the possible outcome? What are the risks? How to start investing with borrowed money? These are the subjects we will discuss today!

Why do a Smith Manoeuvre?

First things first, the Smith Manoeuvre includes leverage. This means borrowing money to invest. This is not for everyone (more on that later), please do your due diligence and make sure you have the right risk profile before using leverage.

All right, now that we have the disclaimer out of the way, here’s some background information from yours truly. In 2003, I completed my bachelor’s degree with a double major (finance & marketing). I started a job at National bank in the credit department for partnerships with Power Corporation. My goal was to help financial advisors build credit applications for their clients who wished to use leverage to provide capital for investments. In other words, I was the architect behind millions of dollars of investment loans.

I also used the Smith Manoeuvre for several years back then with great success. I saw the best and the worst of this strategy throughout those five years. I’ve seen investors build enormous wealth and others have burned down tens of thousands of dollars on a margin call. I can’t stress this enough; leverage can bring the best out of the stock market and can also destroy your wealth. Please use this strategy with caution.

Wealth generation

Why did I decide to use such a “dangerous” strategy? Because I have time, knowledge and an incredibly high-risk tolerance on my side. The math behind leverage is quite simple. If you can borrow money at a 3-4% interest rate and then invest it at a 6-7% return, you can create wealth out of thin air.

With conservative numbers and $333.33 per month ($4,000 / 12), you can create more than half a million dollars in 30 years.

Imagine borrowing $100K at 4% for the next 30 years. The cost out of pocket would be $4,000 per year, or $120,000 for the entire duration of this loan. Keep in mind that the $4,000 doesn’t move (unless your interest rate changes). This means that $4,000 in 20-30 years from now isn’t that much if you factor inflation.

Now if you take that $100K loan and you invest it at a 6.5% average annual return, 30 years later your investment would have grown to $661K. You could then pay off your loan and end-up with more than half a million dollars. Over 30 years, you turned $120K into $561K (more than 4.5 times your investment). With leverage, the advantage is that you turned a 6.5% return into 9.1% (you must achieve a 9.1% investment return on a yearly investment of $4,000 to reach $566K in 30 years.

Using a 6.5% expected return is quite conservative (see the chart of the S&P 500 and the TSX on the following page). I could potentially talk about 8.5% return and how you could transform the same $120K in interest payment into more than $1M net of debt.

But that’s daydreaming and you must also consider taxes applicable to this strategy. Now that you understand the wealth generation ability, let’s talk a little bit more about the dangers inherent in this strategy.

S&P 500 and TSX total return

The danger of leverage – This is not for everyone

While I used conservative numbers (a 100% equity position should generate an annualized return of 6.5% over a 30-year period), this is still a positive scenario. If you borrow $100K today and your investment goes down by 30%, you then have $70K invested and you are still paying interest on a debt of $100K. You could also get sick or need additional money for many reasons. These perspectives are enough to make a lot of investors sick. At best, leverage should be a complement, not a “all-in” strategy. It could turn even worse if you have a margin call.

If you use your investment as collateral, there is a good chance that the bank will set a minimum value for your portfolio to maintain the loan. When your portfolio goes down too low too fast, the bank will “call you” and ask you to put more money in the portfolio. If you don’t have liquid assets, the bank would simply sell your investments and use the proceeds to cover the loan (or a part of it).

Because I want to slowly build my leveraged portfolio and I don’t want to get squeezed by a margin call, I’ve decided to use my house as collateral for my leverage strategy. Here comes the Smith Manoeuvre!

What’s the Smith Manoeuvre?

The Smith Manoeuvre is a Canadian strategy that is designed to structure your mortgage so that it is tax deductible. A financial planner named Fraser Smith introduced this concept where you borrow money against the equity in your home, invest it in income-producing entities (dividend paying stocks), and use the tax return to further pay down the mortgage. It’s not that impressive for our fellow Americans since their mortgage interest is already tax deductible. But it’s a big thing for Canadians since we don’t have this advantage!

To set this strategy up, you need a home equity line of credit (a source of revolving credit). Then, each month, you pay off a part of your mortgage (imagine $500 in capital). Right after you pay off that capital on your debt, you use the home equity line of credit (HELOC) and borrow that same $500 and invest it.

Month Mortgage HELOC Interest paid Investment Account Net Wealth Creation
0 (start) -$200,000 $0 $0 $0 0
1 -$199,500 -$500 $1.66 $502.70 $1.04
12 -$194,000 -$6,000 $130.04 $6,215.50 $85.46
360 -$20,000 $180,000 $108,300 $556,084 $267,784

 

Following this chart, I could transform $180K of debt into a tax-deductible mortgage by simply using $500 a month for my leverage strategy. You could go a lot faster by increasing the amounts. Obviously, if you boost the amount invested or increase the percentage of expected return, the strategy looks even more attractive.

The largest advantage of leverage (on top of the tax deductibility) is the power of compounding interest. While the interest you pay monthly doesn’t compound, the amount invested is compounding. Throughout time, a small difference of 2.5% (4% interest vs 6.5% investment return) creates thousands of dollars even if you start small.

All about long-term

The point here isn’t to make you dream about riches, but rather to show you how even a conservative leverage strategy could create incremental wealth. The plan I’m about to discuss applies to the start of my Smith Manoeuvre (with $500 a month) but could be applied to a larger leverage amount either using a monthly investment or a lump sum payment.

Keep in mind that the basic rules of leverage will apply on a $500 or a $500,000 loan. The way you build your portfolio and how you should approach this strategy remains the same. Numbers are just growing with zeroes, but they react the same to the power of compounding interest.

In the next two parts of this article, I’ll share with you my plan and the portfolio model I wish to build in the coming years. I will show you how to use DSR tools to build your own leverage strategy.

The Smith Manoeuvre Plan

The purpose of this exercise isn’t to make you follow my plan and invest the same way. I want to provide you with a guideline as I am building this wealth creation strategy. As I successfully built my pension portfolio using exclusively Dividend Stocks Rock tools, I’m doing the same thing for the Smith Manoeuvre portfolio. Numbers and details could change depending on your financial situation, your age, and your risk tolerance. Again, do your own due diligence.

Opening a margin account allows options

First things first, which type of account should you use to invest using leverage? Since I’m a bit crazy, I’ll be opening a non-registered margin account. To make your leverage strategy successful, having a non-registered (meaning a taxable account) is mandatory. One of the perks of leveraging is to be able to use the interest you paid on your loan against the investment income you generated. Therefore, using the 4% interest rate and the 6.5% expected returns numbers, the first 4% return of the portfolio is “tax free”.

Margin account

Opening a margin account instead of a regular non-registered account is to give me additional flexibility. My goal isn’t to use margin on top of borrowing money. That’s what we could call a “double-dip”. However, if the market drops drastically, I’d like to have additional liquidity ready to be deployed. Imagine if my pension plan was in a margin account during March of 2020. I could have easily borrowed $50K and boosted my positions into amazing companies like Canadian Banks, Telcos, Utilities and Tech stocks.

My margin account also allows me to trade options. Since the goal of this portfolio is to generate investment income, I would also leave the door open to writing covered calls in the future. This would obviously not happen right away, but I would rather be set with the most flexible investment account upfront. Then, I don’t have to worry about any other paperwork.

Setting a budget

Once I decided to open a margin account allowing option trading, it was time to determine how much money I wanted to borrow each month (or a lumpsum amount if you have lots of equity sleeping in your house). Keep in mind that leveraging should be a complement to your wealth generation plan. Your financial plan should not rely solely on leverage.

The reality of a business owner is that there are always a thousand things going on in my financial life. Therefore, I don’t want to go “all-in” with my Smith Manoeuvre for now. For this reason, I thought of starting with $500 per month. This enables me to keep my financial flexibility (and continue to support my children as they go to college!). I will revisit this amount separately each year.

If you intend to use a larger amount for your leverage strategy, I’d suggest you consider two things. First, the amount of interest that must be paid monthly on that loan. It’s fun to imagine the compounding interest on a $250,000 investment over the next 20 years, but this requires cash flow in the meantime. At $250K, we are talking about a very nice car payment $833.33/month at 4%. To make sure the leverage strategy works, the most important thing is to have time. Therefore, you must ask yourself if you can afford a “BMW payment” for the next 20 years or so.

Investment rules

As you know already, I like to keep things simple. There is no need to have a complex investing strategy because you have borrowed money to invest. However, there are a few more rules to observe for this specific approach.

#1 Follow the DividendStocksRock methodology

When you borrow to invest, you want to reach a balance between generating an interesting total return and making sure you don’t put your portfolio at risk. Taking “bets” would end-up badly in a leveraged portfolio while focusing on dividend growers will achieve this balance. The DSR methodology to pick stocks will apply perfectly to this strategy (but I’ll add rule #4 in my stock selection process).

#2 Invest for the long term (minimum 20 years)

I’m currently 40 and I plan to use this strategy for the next 30-40 years. Since it’s a compliment to my wealth generation plan, I will be able to keep my leverage strategy above 70. The idea with leverage is to use compounding interest to your advantage. You can only do that over a long period of time.

#3 Invest 100% in Canadian stocks

I’m not your tax guy, but if you are Canadian and you want to play around taxes, it would be a good thing to invest in Canadian stocks to benefit from the preferential Canadian dividend tax treatment. Only Canadian corporations will pay eligible dividends. Therefore, I’ll keep my love for U.S. dividend growers in my tax-sheltered pension (LIRA) and retirement (RRSP) accounts exclusively.

#4 Generate a minimum yield of 5.5%

Right now, my HELOC interest rate is set at 5.4%. Therefore, my portfolio must generate at least 5.5% in dividend income. Again, I’m not your tax guy, but if you are Canadian and you wish to deduct the interest you pay against your investment income, it can’t be used against capital gains (e.g., it must be interest or dividend income). Then again, it doesn’t mean that all stocks in your portfolio will offer a 5% yield and above, but the total generated by the portfolio must be in that range.

 

Smith Manoeuvre Execution – Portfolio Model

To select the companies “worthy” of my leveraged portfolio, I will get inspiration from the Canadian Retirement portfolio and the 100% Canadian portfolio models. I’m looking at stocks offering a decent yield (minimum of 3%) but with some growth opportunities as well. I used the DSR stock screener, the watch list (PRO feature) and the portfolio builder (PRO feature) to build my portfolio model. If you can’t use the DSR stock screener, you can look at the Dividend Rock Stars List here.

Stock selection using DSR stock screener

stock screener smith manoeuvreThe first step in finding interesting stocks is to go to the Canadian Retirement portfolio and the 100% Canadian portfolio models’ pages and select companies with a minimum rating of 3 for both the DSR PRO rating and the Dividend Safety Score. I also added a minimum dividend yield of 4% as I want to make sure I can use the full 5%+ interest rate that will be charged on my loan by the end of the year. Right now, I’m at 5.4% on a variable rate. That helped me to select a few stocks, but it wasn’t enough to build a complete portfolio. I wanted to double-check across our entire stock library.

Then I used the same filter with the stock screener. I don’t want to start too narrow. This simple set of filters gave me a list of 75 companies. To build a diversified portfolio, I’d like to have about 20 stocks. The plan is to buy one position each month over the course of almost two years. Having to investigate 75 stocks upfront seems a bit overwhelming.

So, here’s my trick: I kept the filters in place and looked at each sector one by one. After all, there is no point in looking into 10 stocks in the same sector. If this happens, I can always add more minimum metrics or select stocks with a rating of 4 for the PRO rating or the Dividend Safety Score.

I then selected my favorite 3-4 companies per sector to see how many companies I could rack up. Between both techniques, I got to a short list of 22 stocks that might make a good fit for my portfolio.

Deep dive with the watch list

Before I started my research with the stock screener, I emptied my watch list. The watch list enables you to see only the stocks you have selected in the screener. This is great to create a group of companies you like and want to follow going forward.

I selected each stock that looks interesting by clicking on the star button on the left side of the stock screener. Those selections are then automatically reported to the watch list.

Why would I bother to add all those stocks to a watch list? For two reasons:

#1 I will invest in new companies each month for a long time. I want to keep a close eye on my prospects.

#2 I can then look at my favorite stocks and download the excel spreadsheet with all data

While I love our stock screener, when you look at 30 financial metrics, it’s not that easy to see them and sort them as you want. Excel is a better software to use to make an additional triage among the list of your potential stocks. Then, I can read each stock card and start building my portfolio! Will I go ahead and buy the 22 stocks? Let’s build a fake portfolio to see what it looks like, shall we?

Sector allocation verification with the portfolio builder

The last thing to do before pressing the buy button is to check to see if the portfolio makes sense. I won’t have to make ~20 buy decisions today, but it helps to have an idea of where I’m going with my purchases. Therefore, I’ve built a fake portfolio using the portfolio builder. Good news: in a few months, you’ll be able to select which portfolio you want in your consolidated reports. You will select which portfolio(s) you want and generate as many reports as you wish!

Here’s the list of all the potential stocks after the review:

Symbol Name Sector Pro Rating Dvd Safety Dvd Yield Fwd
AP.UN.TO Allied Properties REIT Real Estate 4 3 6.74%
AQN.TO Algonquin Power & Utilities Utilities 4 4 6.81%
ARE.TO Aecon Group Industrials 4 3 7.72%
AW.UN.TO A and W Revenue Royalties Income Fund Consumer Discretionary 4 3 5.63%
BEP.UN.TO Brookfield Renewable Utilities 4 4 4.34%
BEPC.TO Brookfield Renewable Utilities 4 4 4.14%
BIP.UN.TO Brookfield Infrastructure Utilities 4 4 4.04%
BMO.TO bmo Financials 4 4 4.35%
BNS.TO ScotiaBank Financials 4 4 6.22%
CM.TO CIBC Financials 4 4 5.31%
CNQ.TO Canadian Natural Resources Energy 4 4 4.12%
CRT.UN.TO CT REIT Real Estate 4 3 5.44%
EIF.TO Exchange Income Industrials 4 3 5.47%
EMA.TO Emera Inc Utilities 4 3 5.63%
ENB.TO Enbridge Inc Energy 4 3 6.39%
FTS.TO Fortis Inc Utilities 4 4 4.30%
GRT.UN.TO Granite REIT Real Estate 4 4 4.13%
GWO.TO Great-West Lifeco Financials 4 4 6.48%
KMP.UN.TO Killam Apartment REIT Real Estate 4 3 4.28%
NET.UN.V Canadian Net REIT Real Estate 4 4 5.50%
PKI.TO Parkland Corp Energy 4 3 5.12%
POW.TO Power Corp. Financials 4 4 5.98%
SYZ.TO Sylogist Information Technology 4 3 8.74%
T.TO Telus Communication Services 4 4 4.92%
TD.TO TD Bank Financials 5 4 4.03%
TPZ.TO Topaz Energy Energy 4 4 5.13%
TRP.TO TC Energy Energy 4 3 5.99%

I’m not saying this will be my final portfolio. However, it’s a great start and it gives me a very strong buying list to look at. Each month, I’ll go deeper in a specific stock and adjust along the way. Remember, investing is like hiking, you don’t get to the summit or get a great view during the first 100 meters.

Why Using Leverage? Should You Do It At Any Age?

I’d like to end this article on a very important topic; at what age leverage becomes irrelevant? I’ve highlighted the point of risk tolerance several times. If you can’t sleep when your portfolio is down 10%+ or because interest rates are rising, leverage isn’t for you. Not now, not at any age. Period.

As a banker, we used a few rules to qualify investors for an investment loan (on top of having a very high-risk tolerance). I’ve modified them a little:

Smith Manoeuvre Rules

#1 Don’t borrow too much. I believe the rule back then was to not borrow more than 50% of your liquid net worth (liquid = investments, no houses or rental property)

#2 Make sure you can afford to make the loan payment. The investment and growth parts are fun, but if you can’t pay the loan from your regular income, don’t go there. You don’t want to squeeze your budget with another loan.

#3 Invest for 20 years or go home. The rule was more to do it at least for 10 years, but it seems a bit short to my taste. The idea is to go through a full economic cycle (recession + expansion). If you can let your investments ride through several economic cycles, you will realize the full power of compounding interest. In other words, it comes down to: Don’t borrow what you cannot afford and let your investment run for a long time.

If you can withstand fluctuations (and you keep your eyes on the long-term horizon), using leverage before 50 is a very smart move. I’ve used leverage several times in the past and it paid off nicely. Using leverage for 20-40 years seems like a no brainer. But is it the case when you are 50 or even 65?

Should you use leverage at 50? Over 65?

Assuming your life expectancy is somewhere between 85 and 95, if you start a leverage operation at 50, this means you have a good 35 to 45 years to make it bloom. This should be enough to generate wealth for the next generation (and hopefully for your grandchildren too!). Therefore, it would make sense (assuming, again, that you have a high-risk tolerance).

Finally, The “last chance” to do a leverage operation is probably when you get close to 65-70. I really focus on that 20-year period to make sure the investment grows and blooms. I don’t think it would be useful to start leverage in your 70’s as it would likely bring on more stress than anything else. Again, some people want to generate additional wealth for generations to come and this strategy provides a vehicle for that incremental growth.

I hope this article has given you some food for thought. I’ll be covering my Smith Manoeuvre in my portfolio newsletter update going forward. You’ll be able to follow my progress.

Canadian Depositary Receipts (CDRs)

Canadian Depositary Receipts (CDRs) are an investment product enabling Canadian investors to invest in U.S. stocks without currency risk. Even better, CDRs often trade at a smaller nominal price so Canadians participate in big US companies’ growth.

Are CDRs the 8th wonder of the world? For many years, we have been used to the term ADRs (American Depositary Receipts) which were stocks issued by companies based outside of North America, but that wanted to access the U.S. markets. We cover a few of them at DSR, but we prefer investing in North America for several reasons. Earnings reports aren’t produced following the same calendar, information could be in a different currency, and there is usually a better (or as good) option on North American soil.

But CDRs are a bit different since they are U.S. based companies now trading on the Canadian market. Financial firms sweeten the deal by offering investors a hedge against currency fluctuations on top of buying fractional shares. In other words, instead of buying one share of Amazon at $3,000 USD, you can now buy one fractional share of Amazon on the NEO stock exchange for $19 CAD! So far, so good!

CDRs are offered by CIBC but can be bought through any online broker. CIBC doesn’t charge any management fees on CDRs, but there is a currency hedge fee capped at 0.60%. It’s not much, but this is something to consider. As you can see, there is a small difference in price fluctuations:

AMZN.NEO Canadian Depositary Receipt

However, the biggest difference lies within the currency fluctuation. As you can see, since AMZN Canadian Depositary Receipt was launched, the U.S. dollar gained almost 8% in value versus the Canadian dollar. In this situation, your currency hedge made you lose that 8% gain.  CDRs’s currency protection goes both ways…

 

Do you get the dividend?

Yes, if you purchase CDRs, you will be entitled to the dividend paid by the company. Keep in mind that since you hold fractional shares, you will be entitled of the dividend in % (yield), not the dividend “per share” as declared by the company. For example, when Microsoft (MSFT) pays a dividend of $0.62/share for a 0.85% yield, you will receive the equivalent of 0.85% of your investment, not $0.62 per fractional share.

For tax consideration, dividends should be treated the same way as if you hold the original U.S. shares. Be sure to have the applicable W-8 form on file for the account holder.

What’s the catch on CDRs?

Honestly, it’s a great product and there is no catch. However, this will not change your entire life either.

Besides the hedging fee discussed previously, there are no real downsides of buying CDRs. Keep in mind the list of available companies is limited and it doesn’t include many dividend paying stocks. The complete list can be found here. If all dividend paying US stocks were available (as opposed to a little more than a dozen), I would be tempted to have only one Canadian account and buy only CDRs. Right now, I am still stuck with a USD account for most of my US holdings. Therefore, adding CDRs to my portfolio isn’t that revolutionary in my case.

ADVANTAGES DISADVANTAGES
Simple (keep it in your CAD account) Limited Choices (you will likely need a US account anyway), less liquidity
Small amount of money required (fractional shares) CDRs realize any dividends and capital gains in U.S. dollars. We believe the same would apply to CDRs depending on where the security is held. (W-8 form).
Currency hedged 0.60% fees

An exclusive list of dividend growers with more potential…

Moose Markets presents the Canadian Dividend Rock Stars list: a selection of Canadian companies showing income and growth. You guessed it; we prefer a combination of dividend growth and dividend yield. The Canadian Rock Stars List is a selection of the safest dividend stocks in Canada.

GET THE LIST NOW

Canadian Dividend Stocks Paying a USD dividend or Trading on a US Market

Dividend Canadian stocks are fascinating. Many of them operate in small niches and pay handsome dividends. Some even trade in U.S. dollar on an American market (either the NYSE or the NASDAQ) and some others pay a dividend in USD. Should you invest in a Canadian stock in USD? What is the advantage of having US dollars paid by a Canadian company? Are there withholding taxes on USD dividends?

In this article, we’ll answer all those questions. We’ll also cover Canadian companies paying a dividend in USD for my Canadian fellows that want to enjoy a sunny retirement down south without having to worry about currency fluctuations.

One question that keeps coming up since the creation of Dividend Stocks Rock in 2013 is:

“As a Canadian, should I invest in the U.S. stock market?”

This is usually followed by…

“I’m asking because the currency rate isn’t good right now”

Is it really?

Let’s look at the Canadian Dollar vs. the US dollar since the 70’s:

cad to usd exchange rate

 

So, what we see is that we used to trade close to par in the 70’s (remember, it wasn’t a glorious decade for our southern neighbors). Then, it’s a rollercoaster ride going between $0.65 to $1.05 depending on the decade. Now, let me work some magic with this graph and present another perspective:

ad to usd exchange rate in percentage

Over the past 50 years, the dollar moved by 26%. If you put that back in annualized return, we are talking about the equivalent of an “expensive” ETF fee (0.456). The largest movement went from 2002 to 2007 (remember the oil boom with oil income trusts?) where our dollar surged by 71%. The difference between the bottom in 2002 and today is a 16% upside fluctuation.

Here’s the range of risk regarding CAD vs USD: over a short period of time, one investment in “bad” currency could make you lose a lot (71% between 2002 and 2007). However, if your investment horizon is over five years (seriously, if it’s 5 years or less, stop investing in equities right now), chances are the impact of currency fluctuations will be less than 1% per year.

Right now, we are not close to a historical high or a historical low. Therefore, your risk of losing massively in investing in USD for Canadians or in CAD for Americans isn’t that important all things considered.

However, the risk of not investing in those unique opportunities for each country is great. Americans, you won’t find better banks, telcos, pipelines and utilities outside of Canada. Canadians, you will not find better exposure to international markets, new technology and the world’s most popular brands outside of the U.S.

If you can combine both markets to your advantage, you will build the most powerful (and stable) dividend growth portfolio. You’ll be well on your way to achieving your retirement dreams.

I’ve discussed at length my interest in U.S. dividend growers. I’m pretty sure I’ve convinced most of my fellow Canadians to consider U.S. exposure in their portfolios. However, I haven’t fully covered the advantage for Americans to invest in Canadian Stocks.

Since we are talking about currencies, I’ll cover three topics in this newsletter:

  1. Canadian dividend stocks trading on U.S. markets for Americans to benefit from our best sectors.
  2. Canadian dividend stocks paying dividends in USD for Canadians to retire in Florida or Arizona.
  3. Canadian Depositary Receipts (CDRs) for Canadians to obtain a currency hedge and buy US stocks at a lower price.

Canadian Dividend Stocks trading on the NYSE

Good news, the list of Canadian dividend stocks trading on U.S. markets isn’t exhaustive. I’ve compiled a complete list to the best of my knowledge.

You can download the list here.

Fortunately for you, there are several great options on this short list.

Canadian Banks (RY, TD, BMO, CM, BNS): Canadian banks are highly regulated, but also highly protected. They are comfortably doing business in a small oligopoly. If you haven’t considered Canadian banks yet, now is your chance. While most stocks trade today at very high PE ratios (even after the small drop we are having now), the big 5 are trading at 11-12 times their earnings. RY and TD are my favorite from this group (more on National Bank later). A special mention to Brookfield Assets Management (BAM) which is an asset manager and not a bank. Still, this is a company you should consider. You can view our complete Canadian banks ranking.

Life insurance companies (MFC, SLF): Canadian Life Insurance companies could be interesting now that interest rates appear to be increasing. My favorite is Great-West Lifeco which is not part of this list (unfortunately). SLF would be my pick instead.

Telecoms (BCE, TU, RCI, SJR): Like Canadian Banks, telecoms operate in a small oligopoly where 90% of the wireless market is controlled by BCE, TU and RCI. BCE and TU are long-time dividend growers. The former will offer you a stable yield while the latter will offer you a great combination of growth and yield.

Utilities (FTS, AQN, BEP, BIP, TA): If you look them up at DSR you will notice they all have strong ratings, but TA. AQN, BEP and BIP also pay their dividends in USD. Therefore, there is no reason to not consider those great dividend growers!

Energy (ENB, CNQ, TRP, SU, IMO, PBA, CPG, ERF, OVV): While there is a wide range of choices in this category, I would cut the selection to only include dividend growers. ENB and TRP are probably the most reliable pipelines in North America while CNQ and IMO (which is partially owned by XOM) are two other great dividend growers. They have proven (especially in 2020), that they can weather any storms and keep their promises to shareholders.

Industrials (TFII, CNI, CP, STN, WCN, TRI): This is clearly a widely diversified group, but they should be considered, nonetheless. CNI and CP are among the strongest railroad companies in North America. WCN pays a small yield and is a very stable business. Thomson Reuters shows 28 years of consecutive dividend increases. TFI International is one of the fastest growing trucking companies in North America.

Materials (FNV, NTR, GOLD, AEM, WPM, PAAS, MX, TECK, CCJ): You know I’m not a big fan of materials, but FNV is in another class. This is a rare gold-related company showing several years with dividend increases. Nutrien is also an interesting pick if the demand for potash remains strong.

Various (MGA and OTEX): Magna International (MGA) is an amazing company. You can surf on the car industry along with the EV trend through Magna without having to take the risk of another automotive crash. The company is one of the largest auto parts sellers in the world. It’s a cash flow machine! As for Open Text, this is a SAAS business with over 100,000 customers around the world. However, I must admit that you will have better choices on the US market if you are looking for a solid tech stock!

If you are American, I’d say that investing in Canadian banks, telecoms and utilities would add a lot of value to your portfolio. We have many choices in the energy & materials sectors as well, but I’m not a fan of those sectors.

What about pink sheets?

You will notice in the stock screener that we have a few pink sheets. Pink sheets are listings for stocks that trade over the counter (OTC) rather than on a major U.S. stock exchange. They are usually companies that can’t meet the requirements for listings on the major markets. They usually have a “bad reputation” as many of them are penny stocks with limited liquidity. As a dividend investor, this is not exactly what you want to add to your portfolio.

However, you will also find amazing Canadian stocks that are listed as pink sheets such as National Bank (NTIOF), Emera (EMRAF), Power Corporation (PWCDF) and Alimentation Couche-Tard (ANCTF). Those are far from being penny stocks. Emera is the smallest company among this list with a market cap over $15B. While there is less volume for those companies, you can add those shares to your portfolio if you have a long-term horizon. Feel free to read our stock analyses on the Canadian side if you have doubt about a pink sheet stock.

Canadian Dividend Stocks Paying USD dividends

Some Canadian companies have decided to pay their dividend in USD. This decision usually comes after a business analysis where the company shows most of their revenues are made in the United States. By paying their dividend in the same currency as they generate their revenues in, they reduce the risk of currency fluctuation. We have a recent example with TFI International (TFII) where they changed their CAD dividend to USD after the integration of a massive acquisition in the U.S. (UPS freight was purchased for $800M).

Is there a tax implication?

In most cases, dividends paid in U.S. dollars by Canadian companies are eligible for the dividend tax credit (source).  It’s always a good practice to verify this information in the dividend section of the company’s investors’ website. The dividend may also be deposited in your account automatically in CAD. Again, it depends on the company. Those are questions you can ask your broker to ensure you receive the right dividend in the right currency!

What’s the advantage?

In general, the advantage of a USD dividend is more for the company generating most of their revenues in USD as explained earlier. For investors, it could be a source of headaches or frustrations (you don’t want your broker making a sweet 2% conversion rate fee on your dividend, right?). However, if you plan a vacation or retirement in the U.S., having Canadian stocks paying their dividend in Uncle Sam’s dollar is a natural hedge against currency fluctuation. You can build a part of your portfolio with those Canadian stocks along with other US stocks and you’ll be set to never have to worry about converting your money “at a bad rate” in the future.

The list of Canadian stocks trading on the NYSE counts 63 companies and the Canadian stocks paying USD dividends is relatively small (35companies), but you will find some common names.

You can download the list here.

From CAD to USD With No Fees – A Guide to Norbert’s Gambit

Norbert’s Gambit strategy is the most effective way to convert CAD to USD (Canadian Dollar to U.S. Dollar) or vice versa without paying expensive Canadian banks’ conversion fees. In this article, I’ll show you how I save ~2% on all my conversion fees with Norbert’s Gambit strategy. This currency conversion technique is:

#1 Risk-free, you don’t assume any costs or risk doing it.

#2 Easy to understand and easy to apply. You only need a few minutes and an online brokerage account.

#3 Working all the time. What you do with Norbert’s Gambit is that you cut the middleman. You just save fees you shouldn’t pay in the first place!

How to convert CAD to USD

You may want to convert some of your loonies into U.S. dollars for a trip to California or you think it’s better off to invest a part of your money in the U.S. market (and you are right doing so). In both cases, you will need to convert your CAD into USD at your bank or a currency exchange office.

Once you get to the counter, the agent will wrongly tell you there are no fees in converting money into another currency. The conversion fee is hidden in the rate you get. You don’t believe it? try this trick:

If you pull out your phone and Google “CAD to USD”, you will get a completely different rate than what you are offered at the counter.

CAD to USD rate

It’s only normal that your bank or the currency exchange agent offers you a conversion rate between 1.5% to 3% lower than the real one. This is how they make the transaction profitable for them.

Now I know you are frustrated because you just realize your banker kept money in his pocket each time you bought U.S. dollars (or worst, when you got hit twice if you converted back the money you didn’t use during your trip!). There is good news, someone found a way for you to save fees. His name is Norbert Schlenker.

What’s Norbert’s Gambit Strategy?

A financial advisor named Norbert Schlenker from Libra Investment Management, a B.C. investment firm found a solution for his clients. According to the online “legend”, this creative advisor established a strategy to skip the middleman and not pay conversion fees. Here’s how it works:

Some companies trade on both Canadian and U.S. stock markets. You can think of Canadian Banks for example. Therefore, if you purchase shares of Royal Bank (RY.TO) through your online brokerage account, you can then call your broker and ask him to journal (transfer) the shares over to the same listing in the foreign currency, at the market exchange rate, and then sell the shares in the currency you want to end up with.

This strategy would convert money invested in Canadian dollars in Royal Bank shares into U.S. dollars once you sold the same shares on the U.S. markets. The only fee paid would be the one charged on the buy and sell transactions. Depending on the amount converted, the transaction fee would be minimal.

Now that this strategy has been spread around Canadians, there are cheaper ways to apply Norbert’s Gambit strategy. Here’s how I convert my CAD to USD or vice versa:

How to Use Horizons US Dollar Currency ETF (DLR and DLR.U) to Convert Your Currency

The stock market is filled with great minds ready to make a buck on a good idea! This is how Horizons created two ETFs which sole purpose is to be used to convert CAD and USD.

  • Horizons US Dollar Currency ETF (DLR.TO)
  • Horizons US Dollar Currency ETF (DLR.U.TO)

Therefore, whenever you want to convert Canadian dollars into U.S. dollars, you can do it without paying any conversion fees!

First, you must first open two non-registered online brokerage account: One in Canadian dollar and the other one in U.S. dollar. You can open them within literally 15 minutes with Questrade (watch my step-by-step tutorial). You must also have two bank accounts (one in CAD and the other one in USD).

Your CAD bank account must be linked to your online CAD non-registered brokerage account. Same for your USD accounts.

Can I use Norbert’s Gambit with my RRSP?

I’ve received this question many times: “Can I use Norbert’s Gambit to transfer CAD into USD in my RRSP account or does this strategy only works with non-registered accounts?”

You can use Norbert’s Gambit with an RRSP account. The principle is the same: you would need a CAD and a USD account and you follow the steps explained in this article. The only difference is that you don’t withdraw the money from the account at the end (you use your CAD to buy American stocks in your USD account for example). Keep in mind that dividends paid by US-based companies remain tax-free in an RRSP (as opposed to a withholding tax of 15% applied on dividends paid by a US-based company in a TFSA account).

You can also use Canadian Depositary Receipts (CDRs) to buy US stocks with a currency hedge.

Then, follow these steps to convert CAD to USD with no fees

#1 Transfer your money into your non-registered online brokerage account in Canadian dollar.

#2 Buy DLR.TO for the amount you wish to convert. DLR.TO trades like any other ETFs, you simply buy the number of shares times the price. For example, DRL.TO trades at $13.45 and you wish to convert $1,345. You will then buy $1,345 / 13.45 = 100 shares of DLR.TO.

Wait for the transaction to settle. This is the same process for any stock transactions.

#3 Transfer your position from DLR.TO to DLR.U.TO. Many brokerage services allow you to do it online. Some others will request a call or an online message through their contact form. The broker will give you exactly 100 shares of DLR.U.TO at a price in U.S. currency.

#4 Go in your U.S. non-registered account and sell your shares of DLR.U.TO

#5 Transfer your U.S. Dollar into your U.S. bank account.

Voila!

If you want to transfer USD into CAD you simply follow the exact same steps, but start with your U.S. account and buy DLR.U.TO first.

Please note the conversion could take about 5 to 6 business days between the time you send your money to your brokerage account and you receive it back in the other currency.

Norbert’s Gambit Real-Life Example

You may wonder if it’s worth your time to open two brokerage accounts and wait a few days for both transactions to settle right? I ask myself the very same question. Here are real my results using a transaction of transferring $7,003.04 USD into CAD in my business account (my business made sales in U.S. dollars and I needed to convert it into Canadian dollars).

First, I went to my U.S. bank account and tried to convert a small USD amount into CAD to see the rate. As you can see, the rate offered was 1.3003 (while they clearly show the real rate at 1.3254 at the bottom of the page).

Converting CAD to USD

I decided to skip the middleman and applied the Norbert’s Gambit strategy: I then sent my $7,000 USD into my USD online brokerage account on February 12th 2020 and bought 692 shares of DLR.U.TO and I waited.

DLR Horizon USD ETF

A couple of days later, I called my broker and ask to transfer those 692 shares of DLR.U.TO into 692 shares of DLR.TO in my Canadian dollar brokerage account. That was literally a 2 minutes call.

The same day, my Canadian account shows 692 shares of DLR.TO for the amount of $9,265.88.

I waited again for the transaction to settle and I sold my 692 shares a few days later. I then have the total amount transferred to my Canadian dollar business bank account.

On February 20th 2020, I had $9,265.88 deposited in my bank account showing a conversion rate of 1.3231 on my money (7,003.04 * 1.3231 = ~$9,265.88). If I had called my bank to convert on February 20th, they would have given me $1.2996 for each dollar. That’s a difference of 2.35% or $164.73.

Norbert's Gambit

Norbert’s Gambit takes a few days to operate

As you can see in my example, the conversion is not done instantly. This is probably the strategy’s biggest drawback. In times of high volatility, this is not ideal. You could be waiting and the currency you want could increase by 2% in a single day. On the other side, the 2% you save on the conversion rate makes a solid margin of safety.

Final thoughts

As a business owner, you can guess that I have to use Norbert’s Gambit on a regular basis to change my money from USD to CAD.

So far, it has paid off to save roughly 2.3% on each currency conversion.

I haven’t run into any major problems and I’m glad to keep saving so much money in currency conversion! What about you? Did you ever used Norbert’s Gambit?

High Yield Canadian REITs

REITs are companies primarily engaged in Real Estate and source most of their income from rents. To qualify as REITS (tax purposes) they need to distribute more than 90% of their net income to shareholders. This amongst other factors makes REITs a great option for income seekers looking for stable and decent dividends. At DSR we track 47 Canadian REITS! From that list, today we will be covering some of the higher-yielding companies (over 5% dividend yield). Although this might sound very appetizing make sure you do your due diligence because high yield is not always the same thing as high quality.

  1. Make sure you find a healthy dividend growth rate in the last few years (at least 5 years). If the company is increasing dividends at a rate lower than inflation, it means every single year you are getting a smaller paycheck.
  2. Some of these higher-yielding companies could also be dividend traps just looking to attract investors and their dividend is not sustainable, that is why you need to make sure you take a close look at the payout ratio (remember with REITs you use funds from operations (FFO) and not net income).
  3. Last but not least take a look at their track history, have they cut dividends in economic downturns? If they have how fast did they recover? This could give you an idea of what to expect next time things get rough for these companies.

For more REIT investing guidelines, please refer to the Canadian REITs Beginner’s Guide.

BTB REIT (BTB.UN.TO)

Market Cap: $271M

Dividend Yield: 9.14%

Subsector: Diversified (Retail, Office, and Industrial)

BTB high yield REIT

BTB Real Estate Investment Trust (the Trust) is a Canada-based real estate investment trust (REIT). The objective of the REIT is to generate stable and growing cash distributions on a tax-efficient basis from investments in a diverse portfolio of income-producing properties, with a primary focus in Quebec; to expand the real estate asset base of the REIT and increase its income available for distribution through an accretive acquisition program, and to enhance the value of the REIT’s assets and maximize long-term Unit value through the active management of its assets. The Trust owns approximately 75 properties, representing a total leasable area of approximately 5.9 million (M) square feet. It is an owner of properties in eastern and western Canada. It also offers a distribution reinvestment plan to unitholders. The Company operates through three segments, namely Industrial, Off downtown core office, and Necessity-based retail.

In September, BTB REIT reported strong revenue growth (+11%), but failed to reflect this performance in its AFFO per unit (-7%). Revenue growth was driven by strong rental activity and recent accretive acquisitions. Furthermore, BTB’s net operating income increased by 13% and its leasing efforts improved the occupancy rate of the properties by 1.6% compared to the same quarter of 2021. AFFO per unit was down due to a one-time additional recovery of $2.6M and an indemnity collection thereby increasing the revenues for that period last year. The dividend is safe with an AFFO payout ratio of 65.5% for the quarter and 67.8% for the first six months of the year.

Slate Grocery REIT (SGR.UN.TO)

Market Cap: $783M

Dividend Yield: 9.20%

Subsector: Retail (Grocery)

SGR.UN Canadian REIT

It is known that we are not fans of brick-and-mortar REITs at DSR. However, Slate Grocery REIT focuses solely on grocery-anchored commercial properties, which are generally buffered against the competition from e-commerce. The REIT counts Walmart (6.2% of base rent) and Kroger (8.1%) as its top tenants. We also like SGR’s geographic diversification across Florida (15.5%), North Carolina (14.1%) and Pennsylvania (10.4%). This combination of strong tenants and good geographic diversification has led to a high rent collection rate in 2020. Slate Grocery boasts a defensive portfolio of tenants including 64% of its base rents linked to groceries (38%), essential services (14%), or medical and personal services (13%). Despite its strengths, this REIT still has a weak dividend growth policy.

In August, Slate Grocery REIT reported good growth this quarter (revenue up 18%, AFFO per unit up 5%). This brought the AFFO payout ratio from 100% last year to 98%. On July 15, 2022, the REIT completed the acquisition of 14 properties for $425 million, which represents a low acquisition basis of $174 per square foot with below-market rents. The Portfolio increases the REIT’s exposure to the rapidly growing Sunbelt Region of the U.S. and includes a wide range of high-performing grocers, including Publix, Ahold Delhaize, Albertsons, and Walmart Occupancy has increased by 20 basis points since the most recent quarter to 93.4%.

Smart REIT (SRU.UN.TO)

 Market Cap: $4.37B

Dividend Yield: 7.20%

Subsector: Diversified (Retail, Multifamily, Office, and Self-Storage)

SmartCentres REIT

SmartCentres’ strengths lie in its long-term partnerships with retail giants such as Walmart, Canadian Tire, TJX and Loblaws. We like how SRU has integrated drugstores and grocery stores into each mall. This ensures a constant flow of customers for all the other retailers. SRU doesn’t just count on its strong relationships with stellar tenants to ensure growth. Management has recently increased its focus on 5G towers, EV charging stations, and pickup services (to compete against e-commerce). SRU also has an “intensification plan,” where it will develop various property types (residential, hotels, office buildings, etc.) in fast-growing cities. SRU is in the midst of an ambitious expansion and diversification project where a total of $15B will be invested. This is a great way to ensure diversification away from large retailers going forward. SmartCentres’ intensification program is expected to produce an additional 58.6 million square feet of space.

In September, SmartCentres reported a good quarter with revenue up 2% and FFO up 6%. The payout ratio for the quarter is at 90%, down from 99% last year. If the REIT continues on this track, we could talk about a distribution increase next year. Shopping centre leasing activity continues to improve with occupancy levels, inclusive of committed deals, increasing to 97.6% in Q2 2022, representing a 40 basis points increase from Q1 2022. SRU received zoning approvals for over 3.8 million square feet of residential development in the second quarter on 3 projects in the Greater Toronto Area.

Truth about REITs

As you can tell, finding the perfect REITs for your portfolio is not an easy task. Especially when looking for high-yield REITs, there are a lot of factors that you need to consider in order to be able to sleep well at night. You want to add to your portfolio a stable business with enough growth to at least beat inflation. If you get down to the weeds, looking at the actual portfolio and its growth might be a good resource to look into the future. At DSR we give you the tools to make sure you put your money to work with stable and growing companies so you can enjoy your passive income on the things that matter most!

Those REITs are great, but there is more!

We are now in market correction territory, and the fear of losing more money is growing. What will happen if we keep up with continuous high inflation?

If you look at past performances, Real Estate Income Trust is one of the best performing classes during high inflation periods since the 70s. Unfortunately, not all REITs are created equal and you must do adequate research to make sure you buy the right ones.

In this webinar, I will answer questions like:

  • How about REITs paying a 10% yield
  • How to make sure the REIT’s distribution is safe
  • Which metrics to consider during my analysis?
  • Should I consider mortgage REITs?