Published September 20th, 2018 by Dale Roberts
This guest contribution is by Dale Roberts, the Chief Disruptor at Cut The Crap Investing.
For my personal retirement portfolio I hold only 7 Canadian dividend payers. Yes that is certainly a very concentrated portfolio and it will carry the risks of a concentrated portfolio. Or will it?
In an attempt to find my own version of “sure dividends” I simply looked for a long history of business success and a wide moat. It was an attempt to find dividend security and behind that of course, we need business success. Whether we are a dividend investor or a momentum investor or a value investor; at the end of the day we need enough of those companies to grow revenues and hence cash flow and earnings. No business success = no growing dividends.
That said, I hold more than Canadians stocks, for my US stock component I skimmed the Dividend Achievers Index (VIG) in early 2015 and purchased 15 of the largest cap Achievers. You can read about that venture in the following article: Buying Dividend Growth Stocks Without Looking. Now certainly I did no further evaluation, but the index certainly looked good. And I’d suggest that it takes a very good high quality company to become a leader in its sector, pay increasing dividends for 10 years or more, and pass the dividend health screens of the index.
An Overview of Canadian Oligopolies
Let’s take a look at the Wide Moat 7 and those big juicy dividends.
Canadian banking is dominated by the Big 5:
- Toronto Dominion Bank (TD)
- Royal Bank of Canada (RY)
- Bank of Montreal (BMO)
- Scotiabank (BNS)
- CIBC (CM)
The Telco space is dominated by the Big 3:
Canada’s two massive energy/pipelines are:
All of these companies exist in an oligopoly situation. For Warren Buffett that would be the ultimate wide moat.
The Big 5 Canadian Banks
Those 5 Canadian banks dominate the industry grabbing some 80% of all retail and business and investment banking activity in Canada. Due to the regulatory environment those banks are largely protected from serious competition. More than that, Canadians are loyal to their bank or banks of choice. Canadians like to complain here and there, but they stay put. One tragic example is that Canadians pay the highest mutual fund fees in the developed world at an average of a 2.2% management expense ratio. At that rate over 3 and 4 decades a Canadian will fork over some 50% of their investment wealth. And while there are many sensible low fee options available (Canadians can see my site for that) Canadians stick with their high fee funds. And Canadians usually go to their big bank to access those funds. They trust the big banks, too much.
It is not widely known but the Canadian banks have beaten Warren Buffett at his own wide moat game. This is the only large cap subsector to beat Berkshire Hathaway for total returns over the last 2 and 3 decades. I hold only the top 3 banks of Royal, TD and Scotiabank given that they have more oars in the water and each has greater international diversification compared to CIBC and BMO. It’s often suggested in Canada that the Big 3 are just ‘better run’ banks.
From a recent Seeking Alpha article here’s my 3 biggest banks vs Mr. Buffett. Portfolio 1 is my 3 Banks, Portfolio 2 is BRK.B. The chart is courtesy of portfoliovisualizer.com
Yes that is quite the thrashing. With the Canadians banks we also seem to be able to buy them at what I would call a ‘perpetual discount’. Now I’m not for much by way of stock evaluation, I just look for a simple and obvious trend, but I was curious as to how the above could (continue to) happen and that perpetual discount theory appears to hold true. We can usually buy those big banks stocks at a current earnings yield that is much more generous than the overall broad based market (EWC). And there’s usually some very generous dividends to go along for the Buffett Beating Ride.
The current dividend yields are still in that total return sweet spot for high dividend yield investing. According to Webbroker the current yield on Royal Bank is 3.8%, TD is 3.4% and Scotiabank offers 4.4%. The figures for yields are for Canadian listings and paid in Canadian Dollars. The dividend growth rates are in the area of 8%.
Canadian Telco Stocks
There also exists a very generous wide moat and oligopoly situation in the telco space in Canada. Once again, regulations provide some or much of that moat. American telco’s have considered moving up here. But they sniff around, discover ‘it ain’t worth it’, and head back over the 49th. This sub sector provides another obvious trend. Canadians, like most who live in developed nations, are addicted to their devices and they NEED that wifi and the generous data packages for their smartphones and at home for their ipads and other devices. It seems that North Americans are more than addicted. They’d choose wifi over food in the hierarchy of needs.
I like the moat, I like the consumer trend. I chose Bell and Telus due to a familiarity with those companies. In my previous life as an advertising writer and creative director I worked for many years on each of those brands. And being a former ad guy I appreciate the stronger brand of both Bell and Telus compared to Rogers. The industry scoop was also that those two companies were the superior choice for management, vision and execution. The current yield for Bell is 5.8%, the yield available for Telus is 4.4%.
Canadian Energy Pipelines
And I have to admit that Enbridge and TransCanada made it in on default, or let’s say by merit. I have held those companies for a decade or more and they taught me a bunch about buy and hold and add, and DON’T LOOK! When I looked at why they had treated me so well it became obvious that they too have that wide moat. They move the majority of oil and gas across Canada and into the US. Those contracts are long term. And who’s going to build a pipeline beside them and attempt to compete? Likely, not happening.
And now that Enbridge has purchased Spectra Energy Partners (SEP), it is now the largest transporter of oil and gas in North America. Enbridge now operates the largest pipeline system in the world at over 17 million miles. That’s 17 million miles of tolls. Gotta love those traditional utilities. Gotta love those new utilities in telco’s such as Bell and Telus. The current yield on Enbridge is 6.0%, for TransCanada 5.1%.
The Wide Moat 7’s Performance
Here’s the dividend growth history of the Wide Moat 7 team from portfoliovisualizer.com, based on a hypothetical initial investment of $10,000.
In 2013 the starting yield was 4%. By the end of 2017 the yield generated with dividend reinvestment would be an impressive 7%. And here’s the total return performance using an appropriate benchmark the Vanguard High Dividend Yield Index from January of 2013 to end of August 2018.
With my Wide Moat 7 I have greater income than the appropriate index benchmark and a history of outperformance with respect to total returns. As always past performance does not guarantee future returns. Please be aware of the concentration risks.
If investors are looking to add more companies they might include the other big Canadian banks, add telco’s Rogers and Shaw (SJR.B), find a few of the other pipelines such as Pembina Pipelines (PBA), Inter Pipeline (IPPLF) and energy name Fortis (FTS) and find other candidates in that Vanguard index or the MSCI Canadian High Dividend Index.
Please also know and understand all tax implications. It is often best for US investors to hold Canadian stocks in their registered accounts such as ROTH and 401k to avoid the withholding taxes. The US and Canada have reciprocal tax treaties for certain registered accounts.
Thanks for reading and thanks to Ben for allowing me to introduce myself to the Sure Dividend readers.