Recent Buy: CLF, BNS and RY

Recent BuyBuy Low and Sell High is a great investment tenet. One of the biggest dilemmas with this investment doctrine, is when markets are down, it doesn’t always mean you have the funds to invest. Case in point, in May 2012 the TSX hit its 52 week lows. Although I have no way to know where market tops or bottoms are, I would love to have bought into some great stocks at that time. If I am already fully invested, and don’t have any investment capital, then it really makes no difference whether markets are down or up. While I don’t like buying equities in a rising market, I certainly don’t see the benefit of sitting on cash either. I like to get my distributions, dividends, and any potential for gains working for me sooner than later!

For this reason I deploy capital when I have it available, rather than worrying about whether I am paying too much or getting a bargain – in other words I dollar cost average my positions over time. My good friend the Dividend Mantra, who purchases nearly every month, also takes the same approach. He pointed that out in his recent post Finding Value in the Market. (Welcome back Mantra!)

Recently I had some capital to invest in my RRSP, and I decided to top-up my current holdings. There were only a handful of great companies out there, at reasonable prices. I decided instead to top-up three of my current positions. There are two important reasons why I felt topping up can be beneficial over buying a new position. First, I can dollar cost average my position over the long term. Second, by adding more shares to my current holdings I can increase the amount of dividend income I generate, and compound my DRIPs for further growth.  This is the real power of a dividend investing strategy. ;)

On My Watch List

Ideally I would have preferred to purchase U.S. companies, as the funds are in my RRSP. However, so many of these U.S. blue chips have had phenomenal price gains this year.  It’s pretty tough to buy stocks in a frothy market that have already had enormous gains, and trade at their 52 week highs.

Once company that peaked my interest over the last while was Sysco Corp. (SYY). I was very tempted to buy 125 shares at the $28.50 price point. I also had Canadian companies under the Power Financial brand such as POW and PWF, on my watch list.  Some oil stocks were looking like pretty good buys as well. However in the end, I decided I would continue to top-up my current holdings.

What I Bought

Here is what I finally decided to top-up with last week:

CLF – iShares 1-5 Year Laddered Govt. Bond ETF

I added 150 shares of CLF to my holdings. This ETF is a 1-5 year laddered bond fund, which holds primarily Govt. of Canada bonds. It is about as safe as you can get without holding cash. Unlike cash it pays a nice coupon yield each month of around 4.56% 4.11% – which is why I own it.

The YTM (yield to maturity) is only 1.54%. My average price on CLF is around $20.05 per unit, plus DRIPs. so I’m getting very close to 4% yield as my total return. CLF is currently trading below my average purchase price, so my current annual total return is around the YTM rate of 1.5%. I am able to DRIP this ETF monthly, which provides me a steady stream of monthly income and ability to increase my shares (added 9/3/12). While bond ETFs such as XBB and even CBO have a higher total return, my focus is on keeping my bonds short.

I’ve written on CLF before on the Dividend Ninja. At my age, asset allocation and portfolio stability is more important to me than the potential for higher returns with added volatility. The merits of bonds in a portfolio vs. a 100% equity portfolio is an issue that could be debated for hours, but it’s what lets me sleep at night. I covered this point in a previous post, Why Should I Invest in Bonds? Having already been through the 2008 to 2009 financial crisis with a cushion of bonds, I’ve never forgotten why I own them in the first place.  It’s also part of my long-term plan to create a stable income generating portfolio for retirement – which is exactly what CLF does. I covered this in one of my most popular posts, Building My Portfolio for Retirement, with Dividends and Bonds.

BNS – Bank of Nova Scotia

I also added 50 shares of BNS. The Bank of Nova Scotia is Canada’s third largest bank with a market capitalization of 59.3 billion dollars. It pays a current dividend yield of 4.23%, with a payout ratio of 47.9%. It has a whopping 30.8% profit margin. Also of note, of the Canadian Banks BNS has the most exposure to Asia.

Andrew at She Thinks I’m cheap, wrote a great post recently on why he is Buying TD Bank. He presented an interesting chart of the 10 year total returns for the big 5 Canadian banks. BNS had the second highest 10 year total return of 121%. Between TD and BNS, the Bank of Nova Scotia would seem better value at the current share price with a slightly higher profit margin. BNS will be a keeper well into my retirement years. ;)

RY – Royal Bank of Canada

I also added 25 shares to my current holdings of the Royal Bank of Canada. I’ve owned shares in the Royal Bank since early 2010. It is Canada’s largest bank with a market capitalization of 74.9 billion dollars, a dividend yield of 4.38%, and a payout ratio of 51.3%. According to Andrew’s article above it has a 10 year return of 108%.

Regardless of what crisis we get hit with here in Canada, interest rate increases etc. the Canadian banks appear to be quite solid. That now brings Canadian Banks to approximately 27% of my RRSP holdings.

Readers, what’s your take? Do you own CLF? Do you have holdings in the Canadian banks? What else would you have purchased if you had the money to invest last week?

39 Responses to “Recent Buy: CLF, BNS and RY”

  1. youngdividend

    Aug 16. 2012

    Nice work DN! I did some research and the Canadian Banks are great investments. They were all still paying dividends in 08-09. Im about to add either KO or GIS in my RRSP! But waiting for either one to drop down. I am learning now to just be patient!

    Reply to this comment
  2. Maria

    Aug 16. 2012

    Of the three, I have shares in BNS only. I mostly own stocks that have a stock purchase plan along with thier drips. BNS has this. RY does not. I would love to own RY if I could start with one share and add to it through a stock purchase plan. That is the only way I can build up my portfolio. I recently bought REI.UN. It is slow, but in the end I’m sure it will be worth it:)

    Reply to this comment
    • The Dividend Ninja

      Aug 16. 2012

      Maria, yes it will most certainly add up! One DRIP at a time as they say. :)

      I’m in the process with some stocks DRIPping (synthetic DRIPs with TDW), and others I’m still building. By the time I’m 55 I will be able to DRIP all my stock and ETF positions – ready for early retirement! And I can turn the DRIP tap on and off depedning if I need the income or growth.!

      Cheers

      Reply to this comment
  3. Dividend Mantra

    Aug 16. 2012

    Ninja,

    First, thanks for the mention.

    I, like you, like to be invested. Sitting on cash waiting for the “perfect” time to buy stocks makes no sense as you are sitting on an asset guaranteed to lose value. Besides, there is no perfect time to buy stocks and if it did come how would you know it? (The market just dropped 1000 points…it’s a great time to buy…oh wait, it may drop another 400 tomorrow, I’ll just sit on my cash and wait.)

    You are obviously very bullish on the Canadian banks. I wish we had such strong banks here in the U.S. Although WFC and USB seem relatively strong investments in the banking sector, there is still a lot to dislike.

    Best of luck with your new buys! They look pretty solid to me.

    Best wishes.

    Reply to this comment
    • The Dividend Ninja

      Aug 16. 2012

      Mantra, first of all – welcome back! :)

      Our Banks here in Canada are indeed solid, in large part becuase they are governed under statues by the Federal Govt. i.e. they can only leverage a certain amount of their capital, all mortgages have to be CMHC insured etc. Also the average person cannot get a mortgage unless their emplyment and credit is solid, nor can a person walk away from a mortgage in Canada. Many of these statutes did not apply to U.S. banks or mortgage brokers.

      However there are always the risks. The Volker ruling, could create a real problem for Canadian banks. Also a rise in interest rates is the big factor as well. A sudden or substantial rise in interest rates could really put pressure on the banks here, escpecially if we start seeing loan loss provisions. But for know I think the Canadian banks are a solid bet.

      The big 5 Canadian banks also trade under the NYSE as well. ;)

      Cheers!

      Reply to this comment
  4. farcodev

    Aug 16. 2012

    DN, again a motivating and interesting post. :)

    I currently own BMO which is a good value bank. Even if they didn’t raise their dividend since some times, they work to keep the DPR in a acceptable range, according to the data on the BMO’s website.

    I didn’t though about BNS and it’s an interesting one, not close of its 52 weeks high for now, unlike the others.

    “While I don’t like buying equities in a rising market, I certainly don’t see the benefit of sitting on cash either.”
    Exactly.

    Reply to this comment
  5. Bob

    Aug 17. 2012

    Consider DCI for it’s juicy div.

    All the best

    Reply to this comment
  6. Rob Madrid

    Aug 17. 2012

    I’m in the process of pruning my stocks, realized that my “want” list was some 20 plus stocks long, and that’s not even getting into an Dividend achievers stocks.

    Regarding CLF interesting choice, yield of 4.5% not bad for a fund that focuses purely government bonds. My bother was looking for something like this for his parent in laws.

    Anyways for me I’m looking at two closed end MF Sprott Strategic Fixed Income Fund SFI.UN (hat tip The Dividend Girl for that one) and Aberdeen Asia (FAP) both offer yields north of 8%. the problem is that you have to trust the manager as it’s not totally transparent what they hold. Of the two I prefer Averdeen as it has both a DRIP and SPP and has a long track record. Sprott has only been around for a year or so.

    Reply to this comment
  7. andysterdam

    Aug 17. 2012

    Hi DN,

    Thanks for a timely post, as always. I’m mostly an indexer, but I own BMO and last month purchased 184 of POW at 22.88 for the solid yield.

    I need to buy a few thousand $ worth of bonds as soon as possible and I was contemplating XSB, but now I’m intrigued by CLF. It was in this context that I was wondering what you mean by “my focus is on keeping my bonds short”, as XSB is also short.

    Cheers and keep up the excellent work!

    Reply to this comment
  8. ric

    Aug 17. 2012

    I also own a big chunk of CLF along with BNS, CWB, CIBC, BMO, ZWB, FIE.
    I recently purchased D.UN, DCI, CFN, AP.UN
    I do try and buy the stock I have my eye on a dip. Sometime using 4/9/19 moving avg. And sometimes the 50 day mov avg.

    Reply to this comment
  9. andysterdam

    Aug 17. 2012

    Hey again,

    I think I may have found the answer in one of your replies to an earlier post (“Should I Invest in Bonds?”).

    In case anyone else had the same query, here is DN’s reply:
    __________________________
    The Dividend Ninja
    January 30, 2012 at 11:45 am
    Yes its good to have a diversified holdings of bonds, granted the longer bonds are more volatile (i.e. more sensitive to interest rate increases). That’s why I have a larger amount in Claymore CLF (short-term bonds – less than 5 years). But I am giving up some return for the shorter end.
    __________________________

    Bingo! I also like how you mention XBB, as it contains both short and long-term bonds.

    Reply to this comment
  10. DocB

    Aug 17. 2012

    Hi DN
    I am totally with you on the banks. I have owned TD,BNS for years and bought RY about three weeks ago. I am thinking of adding to my BNS in my unregistered account. I don’t drip any because I have been retired for 10 years and prefer to buy or add as I see fit.
    Cheers and keep up the good and interesting work.
    Doc

    Reply to this comment
    • The Dividend Ninja

      Aug 17. 2012

      DocB thanks! One of the reasons I also bought more BNS is because they are announcing earnings at the end of August. I would be surprised if they didn’t meet or exceed analysts expectations. ;)

      Reply to this comment
  11. Rob Madrid

    Aug 17. 2012

    I’m in the process of pruning my stocks, realized that my “want” list was some 20 plus stocks long, and that’s not even getting into an Dividend achievers stocks. Ideal would an extra 2-3 permanent holds on top of my Beating the TSX picks. Problem is I have too many I like.

    Secondly regarding CLF interesting choice, yield of 4.5% not bad for a fund that focuses purely government bonds. My bother was looking for something safe like this for his parent in laws, so I forwarded your post.

    Finally as far as fixed income goes I’m looking at two closed end MF. Sprott Strategic Fixed Income Fund SFI.UN (hat tip The Dividend Girl for that one) and Aberdeen Asia (FAP). Both offer yields north of 8% but. the problem is that you have to trust the manager as it’s not totally transparent what they hold. Of the two I prefer Averdeen as it has both a DRIP and SPP and has a long track record. Sprott has only been around for a year or so.

    Ahh much better!

    Reply to this comment
    • The Dividend Ninja

      Aug 17. 2012

      Hi Rob,

      Just remember the 4.5% is the coupon yield, which is distributed to you each month. The true yield of a bond is YTM (yield to maturity) or around 1.4%. In other words your total return is more around 1.4% – although you get the coupon yield. Bonds are complicated that way. ;)

      What keeps the total return decent on CLF right now is market volatility… otherwise all its holdings trade at premium and suffer a small loss as they mature. You will not make a captial gain on this holding, but you will get solid income and a cushion against any sudden market shocks. Just realize that if you only look at yield, you are missing half the picture.

      I have no interest in any MF of any kind, closed or open, regardless of who manages it. But that’s just me. ;)

      Cheers

      Reply to this comment
  12. My Own Advisor

    Aug 17. 2012

    Nice buys!

    I own a few banks, financial companies and lifecos, so I agree with your purchases. I’m about 50 shares short of having RY DRIPping for me, but I’ll get there, hopefully by the end of the year if the RY price hovers around $50.

    Like Mantra and you, I like to be invested. I think it makes little sense to sit on lots of cash, waiting for the perfect time to buy. IMO, a great time to buy POW, PWF and RY is now! :)

    Hopefully over the next couple of years, I’ll have all the big Canadian banks, financial companies like POW, PWF and many of the lifecos like MFC, SLF, GWO all DRIPping. Then, I can just sit back, relax and watch the income flow in :)

    Smart investing Ninja,
    Mark

    Reply to this comment
    • The Dividend Ninja

      Aug 17. 2012

      Mark, thanks! ;)

      I agree RY is looking good right now, as are POW and PWF. Not as much of a fan of POW with its communication and media holdings. My only concern with the lifecos is they may be reaching the maximum of what they are allowed to borrow to raise for capital. Case in point – AGF. Thoughts?

      PS
      Can I make you a high interest loan so you can buy the other 50 shares of RY? :)

      Always appreciate your support Mark! Both as an investor and a blogger.

      Cheers

      Reply to this comment
  13. Jay Coffsky

    Aug 18. 2012

    As a US citizen is there not a currency risk if most of the holdings in CLF ate Canadian bonds. Thanks

    Reply to this comment
  14. S. B.

    Aug 18. 2012

    Earlier this year, I bought 300 shares RY and 200 shares TD. I wanted some financial representation in my portfolio, but wan’t comfortable with most of the U.S banks. I’ve read that the six largest Canadian banks have 92% of the country’s assets, so it made the research list small. There is a similar concentration in Australia, where 4 banks have 75% of the assets, but I was too concerned about a potential property bubble there to invest.

    Reply to this comment
    • The Dividend Ninja

      Aug 18. 2012

      SB your comparison to Australia isn’t far off the Mark. Both countries have a similar GPD, are resource based economies, and have strong currencies against the U.S. dollar. I’m afraid we have the potential for property bubbles in Canda as well – especially here in Vancouver.

      Cheers

      Reply to this comment
  15. Rob Madrid

    Aug 18. 2012

    Thanks, I have to say that closed end MFs are a bit of a black box to me! I know they return capital gains as well as a return of capital, but how all that works I haven’t quite figured out

    Rob

    Reply to this comment
  16. gibor

    Aug 20. 2012

    I prefer CBO over CLF. CBO has higher yield and YTM and also short term 1-5 Year Laddered Corporate Bond .
    My exposure to Can banks is about 20-25% and I hold all 6 big banks in different accounts. I’d buy NA or TD , simply because I don’t have enough shares to DRIP.

    Reply to this comment
    • The Dividend Ninja

      Aug 21. 2012

      Gibor, sounds good! :)

      CBO will give you a higher total return than CLF – assuming interest rates remain flat or low as they are now. The main reason I’m holding mainly CLF right now is as a hedge against interest rates. Corporate bonds are more sensitive to rate increases than govt. bonds obvioiusly.

      I’d also like to add XBB and CBO to my holdings.

      Cheers

      Reply to this comment
  17. Sekhar

    Aug 31. 2012

    I’m not an expert in Canadian Banks, however, from a first glace it looks like you have done detailed research and chosen the best as well as reputed/large players which is good for long term portfolio holding-congrats!
    On the other hand I’m not sure about the big US banks which are frequently in the news for bad loans, mortgages write offs, low earnings, etc. I think the ones with exotic stuff like credit derivatives, high amount of leverage, large derivative based trading, etc should be avoided.
    Some of the big names like Citi, BOA, etc, which were once seen as dividend bets are getting riskier. However, well-managed banks could be good picks but finding them is a challenge in US market.

    Reply to this comment
    • The Dividend Ninja

      Aug 31. 2012

      Sekhar, thanx for posting! The big difference between Canadian banks and their U.S. counterparts is the Canadian banks are regualted under the government. Canadian Banks have limits on leverage, reserve ratios, banking practices etc. U.S. banks did not – they were left to regulate themselves, borrowing well over 31 times their reserves at the heiight of the 2008 crisis.

      In addition in Canadians can only hold an insured mortgage under the CMHC guidlines, and banks will only lend on a CMHC mortgage (there are a couple of changes to that in the recent budget). Canadian banks also had limited exposure to U.S. sub-prime mortgages.

      I doubt Canadian Banks are perfect, and I’m sure they will be under stress with the amount of consumer debt Canadians have. However they are certainly in better shape than their U.S. counterparts.

      As a side note, the big Canadian banks all trade on the NYSE as well as the TSX.

      Cheers!

      Reply to this comment
  18. Reggie

    Sep 03. 2012

    Hi Ninja,

    Re CLF you state: “The YTM (yield to maturity) is only 1.54%. However my average price on CLF is around $20.05 per unit, plus DRIPs, so I’m getting very close to 4% yield as my total return.”

    Since YTM is only 1.54% how do you calculate that you will get very close to the 4% yield as your total return?

    Cheers!

    Reply to this comment
    • The Dividend Ninja

      Sep 03. 2012

      Hi Reggie, thanks!

      Sorry for the confusion here, and I’ve also made a mistake. The coupon yield on CLF is over 4.1% (distributed monthly). The YTM or worst case scenario yield is around 1.5% (it could be lower).

      My total return (ROI or Return on Investment) on CLF is not an annual yield – it is over 20+ months.

      I’ve just plugged the numbers into my spreadsheet to verify. CLF would need to reach a share price of $20.20+ per share in my portfolio, to bring my ROI to 4.1% over 20 months, and match the coupon yield. That would bring my Annual Return, which includes share price as well as monthly income, to around 2%+ total return per year. Slightly higher than the YTM, but by no means fantastic.

      I’ll edit that part of the post. Thanks for pointing it out. ;)

      Cheers

      Reply to this comment
      • Reggie

        Sep 03. 2012

        Thanks for the reply!

        I am trying to understand how one would only get 1.5% YTM if they bought it tomorrow at $19.92. Any help would be appreciated.

        I assume it would be in the form of reduced distributions. If you imagine a yield of 1.5% annualized, that would suggest a yearly distribution of $0.30 per unit which would equate to $0.025 per month.

        Looking at the distribution history it appears to be a constant monthly value that is stated at the beginning of the year and is currently $0.068 per month(4.1% annualized).

        Am I to assume that the distribution will go down that much over the next 2.68 years (duration of the ETF)? Actually it would have to go down more because the last 4 months of this year look like they will be at the 4.1% rate.

        I can’t be right?

        Reply to this comment
        • The Dividend Ninja

          Sep 03. 2012

          Reggie, your assumptions are not correct. You are looking at YTM as the current yield, but it’s not. The current yield is the coupon rate. Bonds are complicated that way…

          The coupon rate of a bond is at a fixed rate; hence bonds are called fixed income investments. In the case of CLF the average coupon rates within the laddered bonds are currently around 4.1% collectively. The coupon rate never changes over the term of the bond.

          Since this coupon yield of a bond never changes, what does change is its value or price. That depends on two main factors such as equity markets and interest rates, which effect bond prices. CLF tends to also move in an opposite direction to the TSX, since it holds govt. bonds. That’s one reason why there has been a recent loss in share price, because stock markets are rising. Another reason is because its holdings are being bought at premium.

          Yield to maturity (YTM) is simply the discounted rate,at which the sum of all future coupon payments plus principal, are equal to the price of the bond. YTM is affected by both the price of the bond and length of time to maturity. YTM is considered the worst case scenario the expected return of a bond if you sold it before maturity.

          If you are getting a yield of 4%, but your real expected return is 1.5%, then the difference is reflected in the share price. This is the case with CLF.

          Cheers

          Reply to this comment
          • Reggie

            Sep 04. 2012

            Thanks for talking about this!

            I understand the bond basics, but I am having trouble understanding how it works in an ETF.

            In order to realize “only 1.5%” it appears that you would need to see a significant drop in unit value, which would presumably come after lowered distributions (which would occur because the newer bonds replacing the maturing bonds are offering lower coupon rates)

            Am I on the right track there?

            Reply to this comment
            • The Dividend Ninja

              Sep 04. 2012

              Reggie, the share price already factors that spread, among other factors such as bonds being purchased and sold. You are correct in that new bond issues are currently being purchased at premium.

              Yes you are also correct – you must consider YTM over the coupon yield as your total return. The YTM will vary depending on current rates etc.

              In my case my total return on CLF (in my portfolio) is abouve YTM, even with the drop in CLF share price. ;)

              Do read this link regarding CLF, it will help to clarify your question:

              http://canadiancouchpotato.com/2010/11/22/bonds-gics-and-the-yield-illusion/

              Cheers

              Reply to this comment
              • Reggie

                Sep 05. 2012

                Great chat & great site. Thanks!

Trackbacks/Pingbacks

  1. Weekly Blog Round: Vacation Edition « The Passive Income Earner - August 19th, 2012

    [...] Dividend Ninja with ‘Recent Buy: CLF, BNS and RY‘ [...]

  2. The Weekly Lineup: Bonds, Banks, and the Dividend Toolkit | The Dividend Ninja - September 2nd, 2012

    [...] purchase last month, I had decided to top up on my Canadian bank holdings, and wrote up on that in Recent Buy: CLF, BSN, and RY. I was certainly expecting the banks to be profitable come their earnings reports in late August, [...]

Comments are closed on this blog