Mike, Author at MOOSE MARKETS

Retirement Tax Optimization Basics

Tax optimization is an important aspect of retirement planning. Beyond saving, investing, and accumulating wealth, examine how you can reduce the amount of tax you pay when retired.

This article doesn’t go deep into tax issues because each situation is different, with different applicable rules and tax rates. However, there are situations we all have in common upon retirement. After your retirement strategy is outlined, i.e., your global asset allocation, risk tolerance, types of investments, etc., you’re in a good position for some tax tweaking. Don’t do it the other way around.

Why do I believe one should perform tax optimization only after you have set your investing strategy? Because while it’s good to trim your tax burden, you should not do it at the expense of the bigger picture. In other words, I don’t think it’s all that bad to pay withholding taxes on dividends received if it enables you to have a more diversified and better performing portfolio.

However, when it’s time to retire, the order and timing of withdrawals can greatly affect your budget. You can’t control your portfolio performance, but you can control a part of the taxes you’ll pay, or save, at retirement. Therefore, crunching numbers with a tax expert is likely to make a big difference in your lifestyle.

Canadians, learn about government retirement benefits. Download our CPP and OAS guide.

My take on tax optimization

I’m not a tax expert, but after doing hundreds of financial plans for my clients as a financial planner back in my banking days, here are my conclusions.

First, know that there are no magic tricks for optimizing taxes. Any strategies viewed as “too aggressive” by regulators will be rejected and you’ll get a slap on the wrist

The best tax advice I can give you is quite simple: spend a few thousand dollars with a fee-based financial planner and an accountant. They’ll do the hard work and offer you a customized plan to optimize your taxes. Make your appointment, develop a plan, and avoid potentially costly mistakes.

To know more ahead of consulting an expert, or if you want to skip consulting and do it yourself, learn about the simple 3 Ds of tax optimization: Deduct – Defer – Divide.

Deduct: maximize deductions, reduce your taxable income

Anything you can use to reduce your taxable income automatically lowers your taxes, especially if you live in a country with increasing marginal tax rates like Canada. Examples of deductions you can use to reduce your income at any age include contributions to your retirement plans, interest paid on loans used to procure non-registered investments, and healthcare expenses.

Defer: postpone paying taxes as long as you can

Here’s a tip for my Canadian readers (I’m pretty sure it applies to Americans too, but you should verify this first). It sounds counter-intuitive, but in most cases, deferring the moment when you withdraw money from your tax-sheltered account (such as your RRSP account) is worth it. Here’s why.

The longer you wait to withdraw money from a tax-sheltered account or to trigger capital gains, the longer your money is growing tax-free. At retirement, it’s usually preferable to let your tax-sheltered account grow while withdrawing money from regular investment accounts, if possible. Remember that all investment income coming from a taxable account, whether it is withdrawn or reinvested, is income in your tax declaration.

Some retirees are tempted to withdraw money from tax-sheltered accounts earlier to pay less tax, as they assume their marginal tax rate to be lower at 60 years of age than at 85, when they anticipate they’ll have to withdraw more money. However, when you withdraw money, you pay the taxes immediately. The money paid to the government can’t compound going forward. Withdrawing at a younger age means you miss out on years of growth on tax paid.

For example, if you need $7,000, you could sell shares in a taxable account and pay a small amount in capital gains. Perhaps you’ll have to sell for $7,500 to receive $7,000 net of taxes. You could also sell for $10,000 in your RRSP to receive $7,000 after taxes. That extra $2,500 paid in taxes won’t compound tax free inside your RRSP for the next 20 years. At a 7% investment return, each $2,500 turns into $9,674 in 20 years from now. That’s almost 4 times the original amount!

Divide: divide your income with a spouse

You can split assets or income sources with your spouse to keep each of your incomes in a lower marginal tax rate brackets. You’ll pay a lot less in tax if you split $100K of income 50-50 than keeping it solely under your name.

Tax optimization take away

Unfortunately, there are no secret ways to make taxes disappear, other than those usually referred to as fraud or evasion. If you’re Canadian and dislike the OAS claw back, look at it this way: being asked to payback some of the OAS benefits you received is a good problem to have; it means you likely have plenty of money to enjoy your retirement.

Canadians, learn about government retirement benefits. Download our CPP and OAS guide.

An accountant can do a great job at drawing up a plan to optimize your taxes; the best way to approach tax optimization is to run multiple scenarios and see the impact of each choice. Don’t forget to always focus on your investment strategy first. Saving money in taxes is great, but making higher total returns is even better! Adding risk or reducing total return for the sake of taxes isn’t a good idea.

Retirement Cash Reserve: Surf the Market’s Waves

Having a cash reserve on-hand makes it easier to transition from your investment accumulation years to your retirement years and protects your portfolio during times of volatility.

Throughout your retirement, you’ll go through bull and bear markets. During a bear market, selling shares to generate your homemade dividend could hurt your retirement plan.

That’s when the cash reserve helps; it’s money that is not invested in the stock market anymore. It must be secure and easily accessible.

How to use the cash reserve

Your cash reserve bridges the gap between what your portfolio generates in dividends and your retirement budget; it prevents having to sell shares when it is not advantageous to do so.

If you need $50,000 per year and your portfolio generates $40,000, the gap is $10,000 per year.

The $10,000 gap could be filled by selling shares. Selling shares at a depreciated value could hurt your retirement, whereas dipping into a cash reserve keeps your portfolio intact. When the market recovers, you can sell additional shares to refill your cash reserve.

How much cash reserve is enough?

There’s no clear answer to this question. You want to mitigate the impact of market volatility on your withdrawal sequence, but you also want to maximize your portfolio returns.

A large cash reserve increases the short-term protection of your withdrawals but amputates your portfolio’s ability to generate higher returns on the market over the long haul.

Therefore, the amount of the cash reserve depends on the gap to fill and your tolerance to volatility. Some investors are comfortable without any cash reserve; they simply accept that they will sell shares yearly to complete their retirement budget, regardless of how the market is doing.

Others prefer a large cash reserve to cover all potential catastrophes. While most bear markets take around 24 months to recover, some have taken more than four years to fully recover.

Get some great stock ideas to build your portfolio and cash reserve with our Rock Stars List

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Create a cash reserve

To create a cash reserve, you can stop reinvesting your dividends a few years before retiring and let the cash build up in your account. It’s on autopilot, simple, but it could take a few years to reach the required amount; during that time, the cash doesn’t generate any meaningful returns.

To let your portfolio work at full speed until the very last moment, you could sell one- or two-years’ worth of your financial needs in shares on day 1 of your retirement. However, if you retire at the bottom of the market, you’d be selling at a very bad time.

Cash reserve example

Imagine you have a $1M portfolio, an average dividend yield of 3.5%, and a retirement budget of $50,000/year. Since the portfolio generates $35,000 in dividends ($1M X 3.5%), the gap between what you generate and what you need is $15,000.

To ensure you don’t have to sell shares during a bad year, you decide to create a cash reserve of four years’ worth of the $15,000 gap, so $60,000.

Create and manage the cash reserve

In this example, a few years before start of your retirement, you stop reinvesting your dividends to let them accumulate. A year before your retirement date, you have your $60,000 cash reserve on hand.

You manage your cash reserve through a three-year ladder of Guaranteed Investment Certificates (GICs), Certificates of Deposit (CD), and/or bonds that would look something like this:

$20,000 for 1 year at 3%
$20,000 for 2 years at 3.25%
$20,000 for 3 years at 3.30%

You also keep accumulating your dividends in cash rather than reinvesting them.

At the end of the year, you retire

As you retire, your 1-year GIC/CD is worth $20,000 + $600 (one year of interest). Since you stopped reinvesting your dividends 12 months ago, you’ve also accumulated $35,000 in dividends ($1M X 3.5%).

Income on hand for year 1 of retirement

GIC/CD with interest	$20,600
Dividends	+ $35,000
Total	$55,600
Budget	($50,000)
Difference	+ $5,600

You reinvest that extra $5,600 for another 3 years to feed the ladder and keep it going.

If it’s a good year and your portfolio is up, you sell shares to have just enough money to “refill” your bond ladder. Then you have another $20K to invest for 3 years. With the extra $5,600 on hand, you only have to sell $14,400 of shares to reach $20K and complete the ladder.

Notice that $14.4K on $1M equals a 1.44% capital gain. On most years, you’ll be able to do that easily without chipping away at your capital.

What if the market is bad?

If it’s not a good year and your portfolio is down, you can easily wait 6 months or a year and see where the market is at that time before selling shares. Really? Yes, because you already have your income for the year and, at the end of year 1, you’ll have this on hand for year 2 of retirement:

2-year GIC/CD with 3.25% interest	$21,321
One year of dividends*	+ $35,000
Total	$56,321
Budget	($50,000)
Difference	+ $6,321

* This is the same amount as the previous year; by investing in dividend growers, it is likely that some of your holdings increased their dividends, so this could be higher.

If at the end of year 2 of retirement the market is still bad, you still have your 3-year GIC/CD worth $22,046, and another 12 months of dividends from your portfolio.

Of course, waiting to sell shares during a bad spell in the market means that eventually you’ll have to sell more to refill your cash reserve ladder.

Considering that most crashes happen over a few months or a year, after which the market starts recovering, and that the cash reserve ladder ensures you have over two years of buffer, you’ll be in a good position to refill the ladder using only or mostly your capital gains and dividend increases, thus securing your retirement for year to come!

DDM Stock Valuation to Compare Stocks

One of the most debated topics among investors is how to assess the value of a stock. I like to use stock valuation models like the Dividend Discount Model (DDM) to compare similar stocks I have already thoroughly analyzed and find interesting, to see which one might be the best deal.

I don’t use valuation to determine if the company is undervalued or not because, to be honest, your guess is as good as mine. If you put ten financial analysts in a room and ask them to determine the valuation of a company, you’ll likely end up with ten materially different answers.

They’re all smart folks, but each of them has a different perspective. However, using a valuation tool with the same perspective and applying it to two or more companies in the same sector makes it easier to identify which one is the best deal and the best fit with my investment thesis.

To clarify this process, let’s compare two Canadian banks: Royal Bank (RY.TO) and National Bank (NA.TO).

Analyzing RY.TO and NA.TO

Before looking at the fair value of Royal Bank and National Bank as per the DDM, any investor interested in them should analyze both; study their business model, look at their dividend triangle, evaluate the safety and growth potential of their dividend, identify their growth vectors and their risks. For details about what I do to analyze stocks, read this article.

Our diligent investor might summarize the analysis like this:

Business model:

Both RY and NA are regulated and diversified Canadian banks
RY is much larger than NA ($181B market cap vs. $35B)
RY is more distributed geographically than NA, which is heavily concentrated in Quebec

Dividend triangle, dividend safety and growth:

Both banks have a strong dividend triangle showing growth in revenue, EPS, and dividend
NA shows slightly faster dividend growth since early 2022 and higher growth numbers over 5 years for all three metrics
Dividend payout ratios are under control for both, with RY near 45% and NA near 37%

Growth vectors:

RY has diversified revenue streams and is increasing its activities outside Canada
RY targets growth in wealth management, capital markets, and insurance, with this trio already representing over 50% of its revenue
NA follows a growth by acquisition strategy, targets wealth management and capital markets
NA is more flexible and quicker to move due to its smaller size

Risks:

RY capital markets and insurance growth vectors are inclined to variable returns
RY has high exposure to Canadian housing market and the effects of rising mortgage rates
NA is dependent on the Quebec economy, although it has been expanding with private banking in western Canada and investments in emerging markets, such as the ABA bank in Cambodia
NA takes more risks to find growth vectors

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With all this analysis information on hand, our investor still hesitates between Royal Bank and National Bank and now turns to the DDM valuation to compare them.

Comparing NA.TO and RY.TO Valuation

Here is the DDM valuation data for both Royal Bank and National Bank taken from their respective stock cards on the DSR website.

At the time of writing, National Bank was trading at about $103 per share and Royal Bank at around $131.00 per share.

Looking at this data to compare both banks, including the value circled in red for each bank, observe the following:

	RY	NA
DDM Intrinsic value	$190.80	$99.77
Current stock price	$131	$103
Stock currently trading at	45% discount	3% over its value

At 45% discount, RY looks like an amazing deal, a slam dunk, right? It certainly does, but…there is a crucial difference to understand here, which is the discount rate. The discount rate, also known as the “expected return”, represents the minimum acceptable rate of return that an investor expects to earn on their investment to compensate for the risk and opportunity cost of investing in that particular stock.

Compare Apples to Apples

Notice below that the discount rates used for the intrinsic value of RY and NA are not the same. Due to RY’s geographic distribution and revenue stream diversification mentioned earlier, we used a discount rate of 9%, whereas NA’s more audacious approach made us use a 10% rate.

If we compare both banks with the same discount rate of 10%, we see that the difference between the two is significantly reduced.

	RY	NA
DDM Intrinsic value	$143.10	$99.77
Current stock price	$131	$103
Stock currently trading at	9% discount	3% over its value

If you hesitate between RY and NA, a look at the DDM value confirms that your dilemma is between two really good stocks. RY might seem a better deal at current prices, but NA could be a better pick if you want more growth potential and are prepared to live with more volatility in the stock price.

I have both Royal Bank and National Bank in my portfolio because both fit my investment thesis. I appreciate National Bank’s significant growth potential and Royal Bank’s more stable and steady approach. As a reliable source of income that also shows growth vectors, RY.TO is also included in the DSR Canadian retirement portfolio model.

Stock Buying Process – Here’s What I Do

Hey there! Not sure which stocks to buy and feeling overwhelmed? Well, let me share my stock buying process with you. It might just help you out. Here’s how I do it, in a nutshell.

1 – Find stocks with strong dividend triangle

Using a stock screener, like the DSR stock screener, I find stocks with a strong dividend triangle. That means I look for companies that show trends of increasing revenue, earnings per share, and dividends. Ideally, I want to see continuous growth in all three areas. This is my initial buy list.

2 – Focus on stocks with strong 5-year dividend growth

I focus on stocks with solid dividend growth over the past 5 years. I’m a fan of dividend growers rather than high yielding companies with stagnant growth. So, I narrow down my list to those companies that have shown the strongest dividend growth over the past half-decade.

3 – Select only sectors I like and understand

I trim down my buy list further so that it only includes stocks in sectors I’m interested in and actually understand. It’s crucial to grasp the economic sector or industry in which you invest. This helps you feel confident out about your investments and lowers stress.

Each sector has its own ups and downs, although not at the same time during an economic cycle. Some are more resilient during a recession; others outperform the lot in bull markets. A market crisis hurts all sectors, but some more than others. We never know which industries will suffer the most though; banks in the 2008 financial crisis, oil & gas businesses in 2015, entertainment, travel, leisure, and retailers in the 2020 pandemic.

That is why I don’t put all my eggs in one basket. So, while I focus on industries I understand, I choose them in several sectors. I never invest more than 20% of my money in one sector; in doing so, I diversify my portfolio and minimize the impact of market drops on specific industries.

4 – Select stocks with strong dividend safety

Next in my buying process, I dig deeper into each company’s financials to make sure they have strong dividend safety. How specifically? I look for companies with not only healthy revenues and earnings, but also strong cash flow generation. Company financial reports and the DSR stock cards give me a good insight into a company’s cash flow from operations and free cash flow metrics.

Only then do I check out the infamous payout and cash payout ratios. But here’s the thing: I don’t rely solely on payout ratios right away. They can be misleading. Sometimes, high payout ratios are justified, for example when they are due to investments for future growth, and the company is still a solid dividend grower.

5 – Study the business model

Now that I’ve done my homework on the financial side, I dive into understanding each company’s business model to know how they make money and how they plan to grow in the future. For example, what do they sell, who do they sell to; is demand for their products cyclical, growing, stagnating; are the products and markets diversified; is the growth through acquisitions, innovation; is it a very competitive industry; and more.

If I can’t explain the business model in simple words a 12-year-old would understand, I don’t fully grasp it. I remove the company from my list and move on to the next one.

6 – Identify potential risks and growth

Now comes the fun part. I identify potential risks and growth prospects for each company. It’s important to be realistic and not get carried away by the positive aspects. I look at growth trends to see if they’re slowing down, review the evolution of company debt over the years, and consider potential downsides like vulnerability to inflation, interest, regulation, patent expiry, and competition. I read up on bear theses to understand why some investors might dislike a company. It’s important to know what I’m getting into and to be prepared for any challenge that may arise.

7 – Look at valuations: immediate buy or add to watchlist

Valuation is another factor I consider, but it’s not the be-all and end-all. I’d rather buy a stock with a strong dividend triangle, great growth prospects, and lots of potential for the next decade, even if it seems overvalued; I’d take Microsoft over AT&T any day. I might keep “overvalued” stocks on my watchlist and wait for the right opportunity. Quality takes priority over short-term undervaluation in my stock buying process.

I use two valuation methods. First, I review the PE ratio and the dividend yield over the last 5 years. This shows how the market values the stock over a sizeable part of an economic cycle; did the PE grow, i.e., the price grows faster than earnings, or was it stable year after year. Reviewing yield pinpoints opportunities when the yield is better than its 5-year average. For stocks yielding 3% or more, I look at the valuation from the dividend discount model (DDM).

8 – Write my investment thesis and click BUY

Finally, I write down my investment thesis for each company, laying out the reasons why I think it’s a great investment along with the potential downsides.

This helps me to stay focused on why I buy a stock and, later on, evaluate if my original reasons for investing still hold true. The market and companies change all the time—remember what Apple’s iPhone did to Blackberry, or how the pandemic-induced shift to remote working affected office space REITs—so it’s crucial to keep an eye on things and reassess regularly.

So, there you have it! That’s my stock buying process in a nutshell. By following these steps, you can make more informed decisions, focus on dividend growth, and build a well-diversified portfolio based on your understanding of different sectors and individual companies. Happy investing!

Buy List Stock – July 2023: CCL Industries (CCL.B.TO)

If you’re looking for a strong Canadian stock in the materials sector to add to your buy list, take a look at CCL Industries. The world’s largest producer of pressure-sensitive and specialty extruded film materials, CCL offers products and solutions to address decorative, packaging and labelling, security, loss prevention, and inventory management needs.

A global presence, CCL employs over 25,000 people in 200 production facilities in 43 countries. Its revenues come from North America (41%), Europe (32%), and Emerging Markets (27%).

CCL Business Model

Operating through four segments, CCL Industries sells its solutions to global corporations, government institutions, small businesses, and consumers.

The CCL segment converts pressure sensitive and specialty extruded film materials for a range of decorative, instructional, functional and security applications.
The Avery segment supplies labels, specialty converted media and software solutions.
The Checkpoint segment develops radio frequency (RF) and radio frequency identification (RFID) based technology systems for loss prevention and inventory management applications, and labeling and tagging solutions, for the retail and apparel industries.
The Innovia segment produces specialty and layered surface engineered films for label, packaging, and security applications.

Investment Thesis

An international leader with a well-diversified business that is based in Canada is a rare find. With its 2013 major acquisition of business units from Avery, the world’s largest label producer, the company set the tone for several years of growth. Bolstered by its earlier success, CCL also bought Checkpoint and Innovia, and it keeps making more acquisitions.

CCL is still able to generate organic growth (roughly 4-5%) on top of its growth through acquisitions. You can rest assured that management’s interests are aligned with yours since the Lang family still owns 95% of CCL’s A shares with voting rights. We appreciate CCL’s capital allocation that includes a mix of dividend, share buybacks, acquisitions, and CAPEX. With its attractive PE ratio, CCL can generate more growth through acquisitions.

CCL’s Last Quarter and Recent Activities

CCL reported a strong first quarter in 2023; revenue up 9% and EPS up 12%, with organic growth of 1.4%, acquisition-related growth of 3% and a 4.2% positive impact from foreign currency translation. Sometimes, doing business across the world works out! By segment, CCL sales were up 7.5%, Avery was up 44%, Checkpoint was up 3.6%, and Innovia was down 14%. In constant currency, the company saw high single-digit growth for revenue and earnings. It is looking good for the rest of the year!

In less than 30 days, in June and July 2023, CCL made three small acquisitions:

It bought Pouch Partners for $44M in an all-cash deal. Pouch Partners supplies highly specialized, gravure printed & laminated, flexible film materials for pouch forming, including recyclable solutions, with sales of $104M in 2022.
It announced the acquisition of Oomph Made for $7.1M. CCL said Oomph had sales of C$6.7M in 2022. This adds to Avery’s growing portfolio of access control, badging and credentials technologies, products, and brands focused on the retail, hospitality, live events, and conferencing markets.
It bought privately held Creaprint S.L., a specialist producer of In Mould Labelling (IML) with sales of $17M in 2022, for a debt and cash-free purchase consideration of $38.1M. This acquisition brings IML technology and expertise to global CCL Label operations.

Want other stock ideas for your watch list? Download our Dividend Rock Stars list!

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Potential Risks for CCL.B.TO

We often see rising stars such as CCL yielding a high return over a short period. In 2014, the stock traded at approximately $15, steadily rising to $62 in 2017, peaking at $72 in 2021, and now around the $66 mark. CCL is a leader in many sectors, but double-digit growth will be hard to achieve going forward.

The possibility of a recession is affecting investor interest for this stock. CCL used leverage for its acquisitions many times in the past few years. Further acquisitions to support growth might be riskier as many expect a global economic slowdown. CCL also faces inflation headwinds as the cost of raw materials continues to rise.

CCL.B.TO Dividend Growth Perspective

CCL shows a nearly perfect dividend triangle over the past 5 years, with strong revenue and dividend growth. However, earnings are beginning to slow down.

CCL’s business model is built on repeat orders generating consistent cash flows. With their low payout ratios, investors can expect dividend growth for many years. After a smaller increase in 2020, CCL roared back with yearly dividend increases of 17%, 14%, and 10.4% from 2021 to 2023. It will be interesting to see how CCL will grow its payouts going forward with EPS not growing as fast. With a payout ratio of 25% and a cash payout ratio of 35%, there is nothing to worry about.

Final Thoughts on CCL.B.TO

I look at CCL.B.TO as an educated guess; it’s almost perfect but I expect price fluctuations and I know the risks. As it operates in the cyclical materials sector, CCL faces potential headwinds from a looming recession and increased raw material prices. That being said, the dividend is safe, and the company can sustain dividend growth for several years.

If you are looking for a company focused on growth by acquisition, and you can live with fluctuations in this uncertain economic environment, CCL might be for you. Or you can keep CCL on your watch list while you wait to see how the economy evolves over the next months and quarters.

Never Again! How to Avoid Loser Stocks in your Portfolio

I’m sorry to say there is no foolproof method to avoid loser stocks in your portfolio. It’s impossible to not make occasional mistakes as investors. If you can’t bear the thought of losing 30%, 40%, 50% of your investment in a stock, you should probably not invest in equities.

However, you can minimize the risks. In fact, you can reduce the number of times it happens, and you can also reduce the impact of those rotten apples in your portfolio. This starts by acknowledging our mistakes.

Recognizing our mistakes

I’ve made mistakes in my investment journey. For example, with Algonquin (AQN):

I let the company narrative take too much importance in my analysis and ignored the financial numbers. Who doesn’t like a good story, right? Always rely on company fundamentals and metrics; they either back the narrative or reveal it as fiction.
Wearing pinked-colored glasses, I hoped for the best outcome and minimized the impact of the worst-case scenario.
I put too much faith in company management, thinking it would keep paying the dividend. Obviously, the dividend wasn’t a priority for AQN’s management team.

Other common investing mistakes are:

Being seduced by a high yield: investors often concentrate too much on the generous dividend yield in their decision to buy or keep a stock. Appealing as a high yield might be, it is often a warning sign.
Underestimating the potential downside of a company. No company is invincible. Being aware of the risks is a good defense; knowing about a company’s dependency on the housing market will alert you to watch its results when interest rates rise. Just as risk awareness helps to spot a problem stock, it can also prevent bad buying decisions.

Another mistake that adds to the pain of having a loser stock is investing heavily in a single stock, thus granting it too much weight in your portfolio, without considering the effect a dropping stock price will have on your portfolio.

An ounce of prevention: portfolio review to detect loser stocks

Always review of all your holdings quarterly so that you can detect when you have overweight sectors or stocks, verify that growth is still in the cards by consulting the dividend triangle, identify red flags, and investigate them properly.

During your quarterly review:

Identify your core holdings, educated guesses, and falling knives
Make sure your core holdings represent most of your portfolio; rebalance if needed.
If you see a dividend yield above 5%, consider it a red flag and investigate that stock further; does it still fit your investment thesis? Does the company have growth vectors? Are the revenue and EPS growing consistently? Is the dividend growing, has its growth slowed down?
Be more demanding about the stocks you keep, for example, look for stronger dividend triangle, a low payout ratio, companies meeting expectations and not lowering their outlook.
Do not hesitate to sell a loser stock, even if it hurts.
Resist the appeal of exciting, sexy, growth stories. Go for boring, yet consistent and recession-resilient investment narratives.

Have a replacement list ready

When a $10,000 investment is now worth $6,500, I try to get the $10K figure out of my head and focus on how I can most efficiently invest what is left.

Make a list of stocks you’d like to have but don’t have money to invest in yet. Choose companies that have good growth potential and a strong dividend triangle in different sectors. Not sure where to start? Download our Dividend Rock Stars list!

DOWNLOAD THE LIST HERE

Comparing two stocks

Equipped with my replacement list, I look for a decent replacement in the same industry as the loser stock I’m considering selling. Then, I compare both stocks, analyzing six factors:

The business models

Review the business models to understand how each company can make money and to find similarities and differences between them.

The dividend triangle

The dividend triangle is an overview of a company’s metrics and the trend of its revenue, EPS, and dividends. Two companies in similar environments would have similar growth metrics.

Dividend safety & growth potential

How of the dividend going to evolve? Double-digit or mid-single digit growth? Low growth, no growth, or cut? Dividend safety and growth potential is assessed by analysing the dividend triangle, the company’s payout ratios, and potential risks.

Growth vectors

Growth vectors point to how a company should grow in the coming years. Reviewing a company’s business model and studying revenue and earnings trends can give you a good idea. Two companies in the same industry can show similar growth vectors.

Potential risks

Review the risks the companies face; are they particularly vulnerable to interest rates, commodity prices, increased regulation? Do they carry a high debt load? Are they in an expanding market? Companies in the same industries might face similar risks.

Valuation

To compare two companies, assess the value of each one’s stock value. Valuation methods include the P/E ratio trend over several years and the Dividend Discount Model (DDM).

Dividend Stocks Rock (DSR) members can find all of the information needed on the stock cards and compare two of them side-by-side. Other sources of information are the investor relations section of each company’s website, and stock reports by third-party financial analysts.