Buy 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?