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Our Top 3 Picks – US Dividend Stocks

At the beginning of 2021, Bob (..from TawCan.com) approached me to contribute for an article which he was working on to list down best Canadian dividend/growth stocks. The ask from me and 17 other Dividend Growth Investors (DGI) was simply to pick our top 3 stocks and provide reasoning! His article took a great shape and became a go to post for beginners to find good stocks, it can be read here – Best Canadian Dividend Stocks. It was my first time collaborating with such masters and in order to come up with my picks, I took a methodical approach which is documented here in my own blog here at 2021 Top 3 Picks – Canadian Dividend Growth.

My top 3 picks for his article back in Jan’21 were GoEasy Financials, Kirkland Lake Gold Ltd & Agnico Eagle Mines and my selection was purely based on dividend growth data for recent past years (one and three). The last dividend raise for Agnico was astonishing 75% while Kirkland raised theirs’ by 50% and GoEasy gave a handsome 45.16% raise! All 3 companies dividend growth were amongst the top and it is worth mentioning that since then GoEasy again raised their dividend by whopping 46.67%. Even if you look at their average three years dividend growth percentage, they are quite envious. In terms of price appreciation, GoEasy lead the pack by YTD increase of 92% (163% in last 1 year!), Kirkland by 1% & Agnico decreased by 25%. If I had invested $10,000 in each of these 3 stocks, my value at the time of writing would have been about $37,000, an increase of 23%. It is a good return by all means but if I had to redo this, I wouldn’t choose 2 gold stocks. Gold miners/stocks have suffered in the last one year due to declining gold prices from the peak of Aug’20 amidst pandemic uncertainty by almost 25%. A bank or an utility company would have been a better choice. For the records, I only got a chance to buy GoEasy (..talk about getting lucky!) and we have doubled our money so far. There was also an announcement coming out in late Sept that Agnico is buying Kirkland Gold for $13.5 billion!

Bob contacted me again few weeks ago and this time he wanted to work on a similar article, but focusing on US based stocks! Again I am both nervous and excited as these exercises are quite enriching and a great learning experience. US stock exchanges – NYSE & NASDAQ are top 2 exchanges in the world in terms of market capitalization while Canada’s own TSX sits at the distant 9th spot. These two US exchanges lists more than 6500 companies with about 35 trillion dollars (give or take) market valuation; TSX in comparison is about 2 trillion dollars only. Given these many stocks to pick from, the task is quite daunting and intimidating but I recall long time ago someone telling me a very basic thing about stock selection – Look around for products/services you use daily and buy the companies that provide them! The idea is quite fundamental yet very strong, imagine a company manufacturing your toothpaste or supplying you electricity/gas or medicines you need or the phone you use or car you drive. These companies are so penetrated in everyday life that it is hard for them to go out of business, even if the consumer usage habit or the rule changes, these companies will adapt and innovate to remain in the business. So.. my approach for this exercise is based on this principle and hence is quite simpler than methodically weeding out stocks based on their fundamentals or dividend data. I am just going to pick 3 different sectors and talk about my favourite stocks from each of them. For now I am going to go with Technology, Financial & Pharmaceutical sectors and these stocks I bet are worldwide household names, especially in ours!

Technology – Apple

If you haven’t heard about Apple Inc then you are probably from a different planet! Apple was founded on 1-Apr-76 and they started their journey building personal computers (..called Macintosh back then) and back then spawned into Camera, Gaming console, Clothing line (wow.. can you believe it!) & iPod to survive! In present world they sells Macbook, iPad, iWatch, Airpods, etc but rules the consumer electronics space worldwide with their iPhones. They have sold nearly 2 billion phones so far with 1 billion active users currently and recently launched the latest iPhone 13 model. In 1985 Steve Jobs was oust from Apple as CEO but was brought back in 1997 when the company was in dire financial situation. And just in 14 years Jobs turned the company’s fortune around with his vision, dedication and ruthless leadership launching one successful product after another focusing on design aesthetics and ease of usage; and in 2011 Apple had more cash than the US treasury!

Source: Boston Consulting Group’s annual ranking

A successful company needs a deep pocket to spend on innovation and research, so they keep churning out unique product or service for its customer base. As per Boston Consulting Group, Apple singlehandedly ruled the innovation landscape since 2005 till 2021, not under its hometurf of Technology & Telecommunication sector but also amongst all other sectors.

Apple is also the biggest company in the world in terms of market-cap and the first company to attain every market-cap milestones so far – be it $500 billion or $1 trillion or $2 trillion and now sits at the top with about $2.38 trillion valuation. Apple is followed by Microsoft, Google, Amazon & Facebook in terms of companies valuation and in last 5 years, Apple beats them all in price appreciation of about 400%, quite a returns on investment for its shareholders! The dividend yield is 0.62% with dividend payout ratio of 27% and the last 5 years dividend growth rate is 9.30%

In our home, in total we possess six devices and few more which aren’t used anymore. Even if you go outside and look around, you will surely notice every other person using an iPhone, so with such widespread usage it only makes sense to own a piece of this mammoth of a company!

Financial – Visa

VISA Inc is another such company which you will find in almost every wallet or pocket in the world! It is an American multinational financial services corporation and one of the world’s most valuable companies, which facilitates electronic funds transfers throughout through Visa-branded credit, debit and prepaid cards. Visa do not issue any card by themselves, rather they provides financial institutions with Visa-branded payment products that they then use to offer variety of cards. They IPO’d in 2008 and back then it was the largest IPO in history at $17.9 billion! Visa have about 2.5 billion cards boring their brand name earning transaction fees for them every time their card is swiped/tapped/inserted anywhere and as per 2020 data, a whopping $8.8 trillion transactions were processed by them with net revenue for Visa of $22 billion!

Visa’s competitors are Mastercard, American Express, Discover and many other small players but their main challenger is Mastercard. You will find plenty of articles all over the internet comparing these two companies and choosing one over the other; but my leaning is more towards Visa considering widespread usage in our household. I recall my first debit card had a VISA logo on it and I wondered why as the card belonged to a local bank. Looking at all our current cards, the count is like 8-2 in favour of VISA and the ones belonging to Mastercard are Costco & Walmart cards, with which they have contract! In the last 5 years, Visa stock price appreciated about 170% with dividend yield of 0.58% with dividend payout ratio of 25% and the last 5 years dividend growth rate is 18%

Covid changed the way world shop and pays which in all likeliness is going to stick around now. More and more people are shopping online and if not, at least avoid using cash and this change in behaviour is obviously boosting card payment and hence increase in related transaction fee. More so I read somewhere, the pandemic boosted debit card usage a lot by consumers who preferred cash earlier, and VISA’s debit card programs and penetration is bigger as compared to Mastercard and hence I believe VISA is a good choice.

Pharmaceutical – Abbvie

Abbvie Inc is an American biopharmaceutical company spinned off Abbott Laboratories in 2013 and hence is a relatively young company. After the split, Abbott takes care of medical devices, diagnostic equipments & nutrition products and AbbVie operate as a research-based pharmaceutical manufacturer & seller. Abbvie’s infamous product Humira (..which is used to treat Rheumatoid arthritis, Psoriatic arthritis and Crohn’s disease) is the number one selling drug in the world since 2015! Last year it brought in nearly $20 billion revenue for Abbvie while the second highest selling drug Eliquis made nearly $10 billion for their parent company, so you can judge how mammoth Humira is for Abbvie! While patent for Humira is expiring in different parts of the world, US patent is going to expire in early 2023 and until then there is no doubt Humira will rule Abbvie’s revenue charts and even a bit after that as it may take a while before other companies catchup and brings in biosimilars in the market. Abbvie majorly have 16 products selling in international market and many others in either research pipeline or acquisition plan, last year itself the company acquired Allergan, manufacturer of Botox for about $63 billion.

Abbvie have been consistent with the return on investment for its shareholders, ever since its inception. In last 5 years, Abbvie stock price appreciated about 80% with a juicy dividend yield of 4.79% with dividend payout ratio of 49% and the last 5 years dividend growth rate is 18%. With this kind of yield and a solid past record, Abbvie qualify as a long term stock to hold, at least for me.

Just like Apple & Visa products that are widely used in our household by choice, unfortunately Abbvie was also a company whose product I used in the past! Probably readers know, I am a Crohns disease patient (..or shall I say veteran!) and I have used Humira for more than 5 years.

Key Metrics

Below are some of the metrics I collected for readers from various websites and may be a bit off or stale, so please do check the latest. The focus is mainly on past price appreciation and dividend growth.

Also below is the chart showing Apple, Visa & Abbvie growth in last 5 years.

Conclusion

US market is so huge that picking just 3 stocks is like looking for a needle in a haystack even for professional analysts. I am no analyst and hence I chose 3 safe and boring blue chip stocks with proven track record and dominant position in their respective field. They all are well positioned to survive and grow for at least next few decades and even if the market demand, usage pattern, local rule changes or if they encounter a disrupter, they are all well capable to adapt or acquire to changing landscape. They all are relatively safe companies with no surprise elements and shall benefit their shareholders with double-digits return over years to come along with increased dividends.

We currently own a little bit of both Apple & Abbvie under our dividend portfolio and shall add Visa as well when we get a chance.

Happy Investing and Good luck with whatever you buy! 😊

Our Top 3 Picks – Canadian Dividend Stocks

30-Jan-2114-Oct-21R1 Comment

This post saw its existence only after Bob contacted me to contribute to his upcoming post on top Canadian dividend stock picks for 2021. Bob is a renowned blogger known for his site Tawcan where he routinely publish articles recording his financial independence journey. He aims to reach financial independence by 2025 or earlier mainly through Dividend investing, frugal approach towards personal finance and other passive income streams.

I got so excited by the idea that I immediately responded back listing my top 3 picks and in exactly 3 minutes he shot back saying – Can you write up some analysis/reasoning behind your picks? I then took a deep breath, a step back and decided to take a measured approach to this and document it in the form of an article. Thank you Bob for this opportunity as it gave me a chance to revisit my original picks and I would admit here that the names changed a bit (..no I am not divulging the original stocks!). Our personal 2025 goal is to generate monthly passive income of $6,500 out of which $2,500 is aimed to come from our Dividend portfolio. Last year we not only beat our annual dividend target of $5,500 but exceeded to give us a head start to this year’s goal of $8,500, I publish our monthly passive income progress comprising of dividends, rents and lending interest. Since we are in our early 40s we have the flexibility to focus on growth of our portfolio but at the same time not compromising too much on planned dividend goals. Keeping this in mind, I started compiling subset of stocks out off my favourite source of information, the Canadian Dividend All Star List December’20 edition. A big shout out to them for putting together useful source of information to be used readily! Since the theme is growth, my criteria is as below.

Last Dividend Increase greater than 20%

I got me the following 9 stocks with dividend raise ranging from 22% to all the way up to unbelievable 100%! I didn’t knew that Constellation Software raised its dividend by a whopping 100% last time.

But then we can’t judge a company only by its last raise, as personally I like to buy and hold for a long long time, if not forever! And this made me apply the next filter.

Last Dividend Increase within last 1 year

Even though my focus is growth I won’t like to own a stock which do not increase the dividend at least once a year. Even if Constellation Software increased the dividend by 100%, it was nearly 9 years ago! I am not saying it is not a good investment, but it just doesn’t fit my scheme of things. And for the same reason, neither does Altius Minerals nor Osisko Gold Royalties, whose last raises were more than 1.5 years and 3 years ago respectively. I am looking for companies which have good dividend growth rate and more so, consistent dividend growth track record. We own a bit of Canadian Information Technology Index ETF – XIT in our RRSP account, which holds Constellation Software shares as their second highest holding (at about 24%), so we do hold CSU indirectly!

Hence I removed them leaving me with six companies to proceed with. I went back looking at their dividend growth rates more closely by expanding the growth rate to three years instead of just looking at the last raise.

Last 3 Years Average Dividend Increase greater than 15%

If you look at the top four stocks, they all have impressive last dividend (and one year average) raise greater than 45% & three year average greater than 30%, leaving bottom two behind by a considerable margin. Again not that anything is wrong with them but for now I will go ahead with top four stocks and look at few other metrics.

At this point I would like to mention that Alimentation Couche-Tard is one of our biggest holding in my TFSA account and I recently added more when it dipped 10% due to an acquisition news. XIT (Canadian Information Technology Index ETF) also owns about 2% of Enghouse Systems shares out of its total holding and as I mentioned earlier, we have this ETF in our portfolio, I can say we indirectly hold some ENGH as well!

Our entire portfolio holdings can be found at this link, and you can make a copy of the google sheet and reuse if you want. It automatically populates the Latest Price, Annual Dividend, Dividend Yield and Projected Annual Dividend for you if you provide the TIcker & Number of shares you hold.

Target Price & Analyst Ratings

While you should always take analyst ratings and recommendation with a pinch of salt, as they may have their own ulterior motive behind their analysis, it does provide a fair idea if you look at quite a few of them. CDASL sheet provides both Analyst Ratings & Average target price for all stocks and also tells number of analysts it considered for the ratings. Additionally I also grabbed the target price from marketbeat website for comparison purpose and it showed some significant deviation from CDASL list and I don’t know why, could be source of information.

As per CDASL, the Target price and Upside for Quebecor Inc is $37.95 and 24% respectively while MarketBeat website states – 4 Wall Street analysts have issued ratings and price targets in the last 12 months. Their average twelve-month price target is $37.57 (upside of 22.8% at current price). The high price target is $40 and the low price target is $35 and there are currently 1 hold rating and 3 buy ratings for the stock, resulting in a consensus rating of Buy. Current dividend yield is 2.61% with dividend payout ratio of about 38% and its EPS has been growing at 34% a year over the past five years. All the metrics reviewed so far are favourable but I personally feel it is a still a provincial player with limited geographical reach, with mostly no intent or appetite to expand elsewhere. This makes it a narrow moat company and hence I will pass for now but will monitor it.

As per CDASL, the Target price and Upside for Kirkland Lake Gold Ltd is $60.34 and 22.8% respectively while MarketBeat website states – 4 Wall Street analysts have issued ratings and price targets in the last 12 months. Their average twelve-month price target is $79.75 (upside of 62.3% at current price). The high price target is $95 and the low price target is $68 and there are currently 4 buy ratings for the stock, resulting in a consensus rating of Buy. Current dividend yield is 1.95% with payout ratio of about 21% and during last three years, Kirkland Lake Gold achieved compound earnings per share growth of 72% per year. Its total debt to equity ratio is 0.5% meaning they have negligible debt and hence considering all the metrics reviewed so far, they makes it my number one pick of the year. I don’t own it but would like to add it to my registered account as soon as I get an opportunity. More information about them can be found at their investor’s page here.

As per CDASL, the Target price and Upside for GoEasy Ltd is $98.67 and 5.6% respectively while MarketBeat website states – 3 Wall Street analysts have issued ratings and price targets in the last 12 months. Their average twelve-month price target is $107 (upside of 14.5% at current price). The high price target is $122 and the low price target is $92 and there are currently 3 buy ratings for the stock, resulting in a consensus rating of Buy. Current dividend yield is 1.93% with payout ratio of about 30%. GoEasy’s earning per share has grown 30% each year, compound, over three years with about 25% of insiders holding the stock, making it a stock to buy and hold for long term and is second on my list to add more. We already hold this in TFSA since last 1 year and it is up by 50%, and when opportunity comes up I plan to add more to our position. More information about GoEasy can be found on their investor’s page here.

As per CDASL, the Target price and Upside for Agnico Eagle Mines Ltd is $97.07 and 8.7% respectively while MarketBeat website states – 5 Wall Street analysts have issued ratings and price targets in the last 12 months. Their average twelve-month price target is $117 (upside of 31.1% at current price). The high price target for AEM is $140 and the low price target for AEM is $95 and there are currently 2 hold ratings and 3 buy ratings for the stock, resulting in a consensus rating of Buy. Current dividend yield is 2.09% with payout ratio of about 42% and debt-to-equity ratio is 31% and based on overall metrics and analyst recommendation, I am putting this third on my buy list for this year. More on why to invest in Agnico can be found on their investor’s page here.

To conclude, my criteria revolved around dividend growth and while it may not be the best approach to compare or judge a company, it surely is one of the yardstick for a company to be financially sound and reliable. While there is no guarantee that past performance or results will repeat itself, a low payout ratio and good EPS growth does further indicates potential in future dividend raises. Below is the last chart I present from morningstar website, which compares the top four companies I discussed above. The comparable is for 10K growth over the period of 5 years and as you can see – Kirkland Lake Gold Ltd, GoEasy Financials & Agnico Eagle Mines leads the race.

Happy Investing and Good luck with whatever you buy!

Canadian Dividend Calendar

04-Oct-2004-Oct-20RLeave a comment

I often come across fancy Dividend calendars for US based companies but have rarely seen any for Canadian stocks. Few days ago I even read someone enquiring about the same on a Facebook group which made me think – it shouldn’t be that difficult to come up with a quick list and stick them on a slide, may take 30 minutes tops. But it seems nothing is straightforward and when I started working on it, it took about 4 hours! This makes me wonder how some people keep churning quality article after articles at quick succession! It took me longer as I wanted to spend some time telling the thought process behind the list, the calendars I have seen normally don’t talk about the selection process or criteria behind the list, hence I also added a quick write-up. Please pardon the lack of creative juice and imagination, the calendar turned up quite vanilla! Selection criteria was quite simple and straightforward. The list comprises of:

Quarterly dividend payers (duh!!) with long and credible history of dividend payments as well as growth
Diverse sectors where most of the companies are leaders by market cap in their respective sectors (highlighted in bold font)

Since the calendar comprises only of quarterly payers, 4 companies should have been sufficient for this calendar. But as I also wanted to diversify, I first went with 12 companies, one for each month and then I ended up with 16 companies as I couldn’t decide one over another! I used CDASL Sept’20 spreadsheet for come up with the initial list based on market capital, dividend streak, growth and chowder rule; Google Finance for the latest price, Marketbeat and Company’s Investor relations pages for Dividend schedule and amounts.

Below table shows if you have $10,000 to spend and you spread them amongst these 16 companies, it would be $625 (or 6.25% allocation) for each company. The table also shows how many shares you will be able to buy for each of the company at last recorded price. To keep it simple I am not considering any commission paid but you can add roughly $160 for commission at $10 per trade. Total annual dividend earned on $10,000 will be about $290, meaning dividend yield would be 2.9%, not considering any growth or ad-hoc bonuses. I captured below information in this google sheet as well.

Few additional points about above table:

The Dividend used is current and do not consider any upcoming raise or ad-hoc bonuses
Waste Connections, Thomson Reuters, Opentext & Algonquin Power pays their dividend in USD and hence the actual payout amount will fluctuate a bit based on prevailing conversion

My belief is one shouldn’t consider buying into a company based on their dividend schedule, instead one should focus on good companies. All the companies mentioned in my calendar are solid stocks with great history. If you are living out of dividend money and require regular withdrawals then also planning and budgeting for it would be better than relying on company paying in a specific month. There is a wise saying that you should have 3 months of your expenses as liquid emergency fund, so letting dividends accumulate and have money parked in High interest savings account would be a good idea. In coming days I plan to work on a similar calendar for monthly paying stocks and you can subscribe using below link to get an email notification.

Happy Investing and Good luck with whatever you buy!

Top 6 Canadian Banks Comparison

19-Sep-2021-Sep-20RLeave a comment

I repeatedly see questions on Social media such as – “TD or RBC?”, “Is BNS a buy at this rate?”, “Which is the best bank to buy?”, “Is NA worth a shot?” etc, and have met few people asking the same standard questions personally. Canadian banks have a strong global reputation for safety and reliability and are recognized worldwide. Their names often appear in sentences also having words such as Mature, Stable, Predictable, Consistent and it is because of sound Canadian regulatory framework and relatively risk-averse approach. Most of these banks are amongst the oldest ones on earth and have a long history of dividend payments and growth; in fact BMO started paying the dividends in 1829. Can you believe it?! Almost 200 years of rich history of banking and dividends. Top 6 banks of Canada are Royal bank, TD, Bank of Nova Scotia, BMO, CIBC & National bank and contributes hefty 25% of entire TSX60 market capital and hence financial sector is considered the backbone of Canadian economy. Nearly 375,000 people (including myself!) are employed by these 6 banks and hence are graciously supported by federal & provincial governments in the time of crisis. While the past history or track record do not guarantee future performance, the whole ecosystem of regulations and sheer vastness makes them “safe”, “too-big-to-fail” and are hence considered must-haves in any Dividend portfolio.

Below I take a stab at putting together some basic metrics for top 6 Canadian banks and also take the liberty to explain them in the simplest form. Some of the numbers mentioned here may be teeny weeny off and you should look at the latest data for accuracy. I gathered them from variety of sources such as Google Finance, CDASL August’20 spreadsheet, FinBox, as well as Investor’s page of respective banks. Since dividend plays a key role in my personal financial independence journey, I will start with dividend data comparison itself, the favourable metrics are highlighted in Green.

As per the latest share price, BNS commands the highest dividend yield of 6.53% and dividend payout ratio is about 64%. Though high yield shouldn’t be chased and I have personally gotten burnt by tempting yields, it surely is worth pursuing as it is unlikely that BNS will cut the dividend. If you go by safe yardstick of less than 50% payout ratio then National bank looks far better in comparison to others and the 4% yield is not bad at all. If dividend growth entices to you the most then TD is by far the best, averaging 9.5% growth in last 5 years (or 9% in last 10 years). Accordingly chowder ratio (coined by Seeking Alpha contributor Chowder) is highest for TD. Chowder rule is the sum of current dividend yield & 5 years of average dividend growth rate, normally the higher it is the better as it signifies the company is having both good and growing dividend. Lastly, each of these banks have a history of good dividend growth streak of 9-10 years.

Next set of metrics will give you a glimpse on financial data and health of these six banks starting with 5 years Compound Annual Growth Rate (CAGR) and both BMO & CIBC fairs well, meaning their revenue grew faster than other banks.

CAGR in simple term is an average of year-on-year revenue growth for set number of years and below is a 5 years CAGR example from finbox website for Royal Bank.

Next column is the Price-to-Earnings (PE) ratio and as highlighted in Green, Bank of Nova Scotia has lowest value meaning it is the cheapest stock at present to buy. This metric is used to find out whether a company is overvalued or undervalued and the lower the value the better it is. As the name suggests, PE ratio is the ratio of a company’s share price to the company’s earnings per share (more on this in next paragraph). PE ratio comparison should always be done with the peers and companies under same sector meaning a Bank’s PE ratio shouldn’t be compared with a Technology stock.

On the other hand Diluted Earning per Share (EPS) is highest for CIBC amongst all banks, higher EPS is the sign of higher earnings, strong financials and hence a reliable company to trust for your hard earned money. There are two type of EPS – Basic & Diluted and the former is always higher than the latter. Below is a simple yet excellent visual showing the difference between them, it is sourced from slideshare.net which I also find quite useful to understand various fundamentals in easy forms.

Going back to data comparison, be mindful that CIBC may be leading the diluted EPS race at present but it decreased by 17% over Q3 2019 and if you look carefully the diluted EPS didn’t changed since last year for National bank! So focusing on just the present value of any metrics is not wise, the trend should also be taken into consideration. National bank also netted the best Profit margin among all other banks, little over 32% and the net profit margin increased about 2% year over year. This tells a great success story about National bank especially since this Q3 ending result had 5 months of Covid pandemic outrage. It is also worthwhile to mention, it is the only bank whose profit margin increased over last year, every other bank’s profit margin decreased minimum by 9%! The last piece of financial information I am showing is Net Income, which in itself is a relative term. Royal bank’s net income was more than 3B but then it’s market value is also more than BMO, CIBC & National bank combined! On the other hand, Net income for National bank was only 589M but notably it is the only bank whose income decreased the least year over year. I think the last two metrics tilts the comparison a bit in favour of National bank, so they should be looked as key outlier and deserve some more thought and research.

Besides above metrics I also documented some additional data in a google sheet, feel free to copy and use however you want. But before I wrap up I would also like to point your attention to two other factors which should also be considered while making any decision. First is Credit Quality also known as Provision for Credit Losses (PCL), in simpler terms it means expected losses from bad loans that may become a reality in future. Each bank keeps a track of such potential loss and report it as part of their quarterly results. As of Q3 for fiscal year 2020, TD reported the lowest PCL of 32 points and Bank of Nova Scotia reported the highest with 58 points. If such loss materializes then it may have severe influence on future earning and results and eventually impact the share price. Second point to keep in mind is bank’s diversification outside Canada and both BNS & TD leads the pack. BNS is the most diversified bank with presence in USA & Latin American nations such as Chile, Caribbeans, Mexico, Peru & Colombia and on the other hand TD is having a noteworthy presence in USA generating 35% net income from south of the border. Royal bank, BMO & CIBC also have significant presence in USA but National bank is having negligible diversification. In extreme case of Canadian economy slowdown, diversification may provide cushion to the bank’s performance and well diversified bank shall do better.

I am no financial analyst or advisor and fairly new to looking at numbers myself and apologies if I confused you even further or misled in any way. While I can’t point you to a specific bank to buy, we personally have CIBC as our biggest holding and a little bit of BNS in our Dividend portfolio. I am learning new things everyday as getting more serious about investing our hard earned money in stock market. I believe our future literally depend on quality of shares we buy now and it is important to do some level of due diligence before owning a piece of any company (well most of the times if not all the time!). I must admit the whole process is not that simple but I can also tell you that for me personally, writing helps. It gives me an opportunity to do some research and in the process teaches a thing or two! I hope this honest and humble attempt of mine may help you at least with the data if not with the decision.

Happy Investing and Good luck with whatever you buy!

First Step towards Passive Lending Income

01-Jul-2007-Sep-20R6 Comments

I personally don’t like keeping more than $2000 in bank account, be it Chequing or Savings, they provide minuscule interest on the money and barely keeps up with the inflation rate. While there are situations when you still have to have some liquidity and keep the money in low interest bearing accounts, I mostly prefer to keep it in TFSA* account parked in Stocks. For bigger amounts that I surely don’t need for 1-2-3 years, I prefer to lend it on high interests mainly under following two categories.

Real Estate Lending

When I was first introduced to the field of high interest lending, my first reaction was – WTF! Who borrows money at these rates? Is it even safe? How can a borrower afford to pay so much in interest and still return the principal in the end? Is this a scam?

All logical doubts and concerns.. and I recall my real estate agent sat with me at a Tim Hortons somewhere, and on a piece of brown (not even white!) paper-napkin, front-and-back, jotted down the numbers and reasons why a decision to borrow money at a high interest still makes sense. Before I indulge you with details, keep in mind the most important dynamics here, we are ONLY talking about Greater Toronto Area Real Estate market investment where as you can see below, the price appreciated by more than double in last decade! This chart is sourced from TRREB where you can also find this data in a tabular format. I added the Green arrow (or should I have used Red?!) to show how steep the price rise was!

Source: http://trreb.ca/files/market-stats/market-watch/historic.pdf

We migrated to Canada in 2013 when the market was fiery HOT already and prices in some areas of Toronto was increasing at an average 15%-20% yearly, that’s an insane ROI for any investment! The market was so lucrative that rich foreigners were dumping their cash in real estate here along with other major cities across Canada. The ballooning price got the government worried as it may become a bubble which could burst and have disastrous impact on the economy, besides home ownership was getting out of reach for majority of the millenials. They intervened and introduced several measures like mortgage stress test, tighter down payment requirement, foreign ownership tax etc and to some extent they were able to reign in the price. The rules are still evolving and Covid-19 also helped with the cooling a bit, but as per many analysts and publications, Toronto prices are still expected to grow by 10% in 2020! The whole situation is so enticing that I personally known quite a few people who jumped into getting Real Estate agent license to work part time to ride the wave and make money!

While I will share our Real Estate ownership & Investment journey separately under Rental Income topic, the reason there is no dearth of people willing to borrow money at high interest rate is primarily hot real estate market here. I have seen short term lending interest rate as high as 20%, effectively costing the borrower in the range of 22%-25% including finder’s fee, legal paperwork and other formalities.

As per Canadian Criminal Code Section 347, it is a Criminal offence to 1. Enter in an agreement 2. Receive interest rate; beyond the maximum allowable annualized interest rate of 60%!

Honestly I personally would never want to see myself on the other side of this equation! Other reasons to borrow at this exuberant rate are:

Poor credit history due to which mortgage with traditional banks is difficult to get approved
Insufficient time in Canada to build a credit history, again resulting in banks declining the mortgage application
Above two points may also result in getting mortgage approved but at a higher rate. I was in this situation and had to go with a B lender for first year at double the normal mortgage rate!
Insufficient down payment funds due to which mortgage application is denied or approved at higher rate
Less than 20% down payment also attracts CMHC insurance charges and they aren’t cheap

These reasons should be enough to give you an idea why people borrow at high rates and why lending money is a booming business. There could be several other reasons and factors leading a person to go this route but I am not into judging people, so will stop here. As I mentioned earlier, I personally won’t be comfortable borrowing like this and don’t wish this situation arising for others too. Having said that, high interest borrowing shouldn’t always be seen in bad light or risky all the time. There are deals where even after paying interest, people manage to make money. There could be a tight short term financial situation or money stuck elsewhere and a real estate (or any other opportunity) deal comes up which is too good to ignore and hence a person is inclined to borrow money. I guess in the end it all depends on one’s ability to crunch the numbers and putting the money to good use. Here I will present you with an oversimplified example on how money can be made in Toronto real estate even after borrowing at a high interest rate of 20%.

Say John Doe with $25,000 cash in hand sees a house on sale for asking price of $500,000. His market understanding and business acumen makes him believe this is a good deal and could potentially give him good ROI in 2 years. With price appreciating at 15% a year, he expects to sell the same house for about $650,000!
But having only $25,000 means he could only afford 5% down payment and with his income and other debts, he knows mortgage approval chance is slim and may not get a favourable rate with bank
Besides anything less than 20% attracts CMHC insurance, his meagre 5% down payment would translate into $19,000 CMHC insurance premium cost. To make the matter worse, if he can’t pay this fee upfront, it gets added to the mortgage principal, on which you pay interest. I won’t even go into that calculation! So instead of $475,000 mortgage ($500,000 price – $25,000 down), he is forced to borrow $494,000 ($475,000 + $19,000 CMHC) meaning he lost $19,000 plus 2 years of interest on it right away! In other words, his $25,000 is worth only $6,000.
Knowing the situation, he opts to borrow $75,000 at 20% interest rate. Which means he will pay total interest of $30,000 over 2 years period ($1,250 monthly) plus of course $75,000 principal at the end of the term when he sells the house.
With borrowed $75,000, he is eliminating CMHC fee of $19,000 upfront. Also with 20% down payment now, his chances of mortgage approval and that too at a much better rate, is bright!
So his net borrowing cost is only $11,000 ($30,000-$19,000), not to forget two other key benefit – he could actually afford to buy the house at a better mortgage rate & h avoided interest rate on $19,000.
At the end of 2 years, he sells the house for $650,000 as planned. After paying off the mortgage balance of about $375,000 & high interest loan of $75,000, he is left with $200,000.
Deduct another $100,000 towards expenses such as Realtor’s commission, Land transfer cost, Lawyer fee, Mortgage prepayment penalty (if any), Miscellaneous expenses towards maintenance of property, Rental fee, Capital gain etc. The list could be longer but we deducted a generous amount to take care of it all.

To summarize – on his initial capital of $25,000, John was able to convert it into $100,000 in 2 years! Is it a bad deal, did I missed anything? Of course this was a best case scenario, things could have gone wrong in numerous ways. Greater deal of risk was involved but money is made only when you know what you are doing and take calculated risk. This is not for everybody, even I won’t get into such deals myself but then there are people who take this sort of risk all the time.

Primarily our extra money is parked directly with our Real Estate agent, occasionally he also facilitate lending to a Third party. A lawyer is involved to put together the Agreement/Promissory note, where key points documented are – Amount you are lending, Duration, Annual Interest Percentage, Monthly Interest Amount, and Property details which is liened. You also get advance Interest checks for entire duration and at the end of the term, you either renew or get the principal amount back via lawyer. This mostly happens when the property is Sold or Refinanced with the bank at a lower interest rate. One can expect 8%-16% annual interest rate, now compare it against typical 2% (or less) you get in a Savings account and that too on a bigger amount! Ratehub is a great site to compare prevailing Interest rates if you still think traditional bank is still a way to go.

Lending Loop

Quoting their website – Lending Loop is Canada’s first fully regulated peer-to-peer lending platform focused on small businesses.

As it says, they provide a platform to connect carefully screened borrowers (usually small businesses) to lenders (like you and me). They charge 1.5% servicing fee on each loan/commitment you make. Depending on borrower’s application approval, financial condition, ability to payback and several other factors, they are assigned a Loan grade and annual rate of interest accordingly varies between 4.96% – 24.93%. They have a great and simplistic website and you can read about all of this in detail there, for some reason they discontinued their mobile app, which was really handy. Before we delve into details, one extremely important point to consider is, the money you chose to invest via lending loop is not insured and you may lose your entire investment. Having said that, as per statistics available on their website, there are more than 11,000 active investors who lent more than $74M CAD to 100’s of small businesses across Canada!

The steps to get this started is quite straightforward:

Create an Account by providing basic details
Upload required documentation
Attach your Bank account (used to Deposit/Withdraw)
Transfer funds, and you are set to lend to available borrowers!

If you enroll via my referral link, both you can me can get $25 each once you lend total of $1500 via their platform.

Various features that I personally find quite helpful are:

Auto-Lend, if you opt for this and set a limit & loan grade you are comfortable with, the system will automatically lend money to any new borrower available
Email notification for any new borrower available in the marketplace needing funds
Monthly Earning statements
Annual T5 – Statement of Investment Income

While the small businesses borrowing money on this platform are carefully screened and you can see their detailed plan and intention before lending, there is always a risk in high interest lending which everyone should consider. My three cents 1. You can lend as low as $25 for each commitment, and hence minimize the risk by diversifying across multiple borrowers. 2. Lend money to Borrower’s with Loan grade C+ or better, the interest you are offered for such grades are in the range of 5%-16% 3. Look at the commitment term carefully, as your money gets locked for that period.

One last point I would like to mention and it is actually the only point I don’t like about Lending Loop, the fund transfer time (both Withdrawal or Deposit) take about 4-5 business days, which at times is frustrating! It happens that a good commitment is open and gets quickly funded while you’re waiting for fund to come in!

My departing words on high interest lending – Don’t be too greedy, if you think a deal is too good to be true, it often is! Think if the interest rate someone is paying you is sustainable by putting yourself in their shoe. The decision is always yours, and there could be a better and safer deal out there, suitable for you!

Happy Lending!