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The Garden Project - First Plantings
I'm a little bit late posting this as I actually got the seeds in about a week ago. Better late than never and this is a fairly important step in the whole garden process because, you know, without seeds in the ground there really isn't much of a garden...
So last week I planted the first round of seeds (excluding the seeds I started indoors a couple of months ago which I plan to cover when I actually put those plants in the ground). I have put in radishes, beets, spinach and peas. I have also left room for carrots, beans, zucchini and maybe cucumbers which I plan to plant in the next week or so. I also left room for the plants I started indoors (3 varieties of tomatoes, peppers and eggplant).
So this is the current state of the garden. In the next post will show some plants actually coming up. Any bets on which plants will come up first?
The Garden Project
Since the days are getting longer and the temperatures are getting warmer and here in Waterloo Region we are getting close to the average last frost day (which is around May 11) I thought it might be neat to start some posts about our vegetable garden.
We planted a vegetable garden last year which was the first full summer we had at this house. Our last house didn't really have a garden and one of the things we were looking for when looking for a new house was some property that would allow us to have a garden. We found that with this house. The overall property is just under a quarter acre and the backyard is about 80 feet deep by 130 feet wide. This allows for a few good sized flower beds as well as a 16 foot by 12 foot vegetable garden. Last year we didn't make full use of the garden but we were still able to get three kinds of tomatoes ('Early Girl', Roma and cherry) a whole bunch of zucchini (or courgette), some beets, some peas and a stray pumpkin. This year we will be looking to balance some things out (planting 15 zucchini seeds and then not thinning them out means you end up with a LOT
of zucchini and zucchini bread) and try some new stuff.
So this year we are considering planting spinach, radishes, green beans, peas, beets, carrots, cucumbers, pumpkins, tomatoes, peppers and eggplant (or aubergine). I have already started three kinds of tomatoes from seed (Roma, Beefsteak and a cherry variety), one kind of pumpkin (small sugar), eggplant and peppers. The tomatoes are doing well as are the pumpkin but the peppers and eggplant are really taking their time coming up. I hope to be putting the tomatoes and pumpkins in the garden in the next couple of weeks as well as starting the spinach, radishes (which may be too late already) and peas in the garden in the next week.
Last weekend I got the garden into the blank slate state by doing a full double digg
and adding compost from our composter as I did that. So now I have a blank slate pictured below. Again, this is a 16 foot by 12 foot garden. It gets about 9-10 hours of direct sunlight a day (from about 9:30-10:00am until about 7-8pm). The camera is looking basically north in the picture below.
I hope to post almost weekly updates on the garden over the summer including pictures. It should be fun to see how the garden develops over the summer.
More Dividend Cuts?
It seems like the market is expecting either really, really bad quarterly results from the Canadian banks or it is expecting the banks to cut their dividends.
What am I talking about? Let's take a look at the current annual dividend payouts of the top 5 Canadian Banks:
Royal Bank: $2.00
TD Canada Trust: $2.44
Bank of Montreal: $2.80
Ok, now what are the stocks trading at (as of 9:50am February 20, 2009):
Royal Bank: $26.75
TD CanadaTrust: $33.46
Bank of Montreal: $24.96
That gives us yields of:
Royal Bank: 7.48%
TD Canada Trust: 7.29%
Bank of Montreal: 11.21% (!)
Prime is currently at 3% and I think has a fairly good chance of moving to 2.75% on March 3 when the Bank of Canada sets the target for the overnight rate, provided the banks pass a BoC rate cut along to consumers. So currently the spread between the prime rate and the yield on Canadian banks at a minimum of 4.29% and as high as 8.21%.
So the question is does the market have it right and will we see at least one Canadian bank cut their dividend (I'm looking at you BMO) or is the market just totally out to lunch? One way to get a feel for that is to take a look at the payout ratios of the banks and their payout ratio targets. The payout ratio is the percent of income the bank uses to fund the dividend. The Canadian banks vary in their target payout ratios but their target ranges fall in the 35%-55% range. Based on Q1 2009 earnings estimates (as predicted by TD Newcrest) here's what the target payout ratio ranges and the projected Q1 2009 payout ratio will be:
Royal Bank: Target: 40%-50%, Expected Q1 2009: 56% (based on 90 cents/share earnings)
TD Canada Trust: Target: 35%-45% Expected Q1 2009: 47% (based on $1.49/share earnings, which isn't a TD Newcrest estimate because they have a conflict in covering their parent)
Scotiabank: Target: 35%-45% Expected Q1 2009: 54% (based on 90 cents/share earnings)
Bank of Montreal: Target: 45%-55% Expected Q1 2009: 67% (based on $1.05/share earnings)
CIBC: Target: 40%-50% Expected Q1 2009: 58% (based on $1.50/share earnings)
So it looks like all the banks are going to be outside their target payout ratio range with TD Canada Trust being the closest and BMO being the furthest from their range. I would expect that a bank that is within up to 5% of their payout ratio target wouldn't want to move their dividend at all but a bank like BMO that could be almost 12% outside their range (and their range is the highest of all the banks) might want to make some adjustments.
Now the question is what would it take to get their payout ratio back into their target range? Well 55% of $1.05 is 57.75 cents. They are currently paying out $2.80 a year or 70 cents a quarter so a move to 57.75 cents would be a 17.5% reduction. Of course my bet would be that if they did decide to cut the dividend they would give themselves way more room than just hitting the top end of their target range. After all, if you are going to disappoint investors by cutting the dividend at all you might as well give yourself some breathing room and an opportunity to really increase the dividend once earnings start to recover. So if and I really mean if BMO does decide to cut their dividend I would expect to see a 20 or 21 cent per quarter reduction which would be about a 30% drop (21 cents/ 70 cents = 30%). That would put them in the low end of their target payout ratio range (at around 46%) and it would also put their yield down in the 7.85% range (based on the $24.96 price listed above) which isn't too far off the other banks.
So out of all the banks I think that BMO is in the worst shape with respect to dividend payout ratios vs. their target payout ratios and I think that if any bank has a slim chance of cutting their dividend it will be BMO. Even if BMO does cut their dividend I think they will cut it by at most around 30% (which will give them lots of room to increase their dividend when earnings finally start recovering) and the yield of the stock will fall roughly in-line with the other banks at around 7.85% based on a stock price in the high $24 dollar range. I'll take an almost 5% above prime yield from a Canadian Bank after a dividend cut thank you very much.
In short, I don't see too much more downside in Canadian bank stocks based on the lows that they hit this morning. The earnings releases for the big 5 Canadian banks are scheduled to take place of the next couple of weeks ( starting on Wednesday next week and going into the first week of March). We could be in for an interesting ride on the bank stocks.
No Games Today
This morning the Bank of Canada announced
it was lowering the overnight target rate by 50 basis points (0.5%) to 1.0%, a level not seen since the summer of 1958 (as a side note it may be interesting to take a look at what happened in the economy and markets in the 10-15 years after that to get some insight into what we may be looking at now). For the first time in months the Canadian banks lowered their prime rate by the same 50 basis points within minutes of the Bank of Canada's announcement. The banks still haven't passed on all the interest rate cuts since December 2007 to consumers (they are still 0.25% behind) but at least this time they didn't hold anything back.
The Bank of Canada made some interesting comments in their statement and they have Monetary Policy Statement due out on January 22 that could be even more interesting. I don't know how often this happens but they actually used the word recession in their statement saying that "Major advanced economies, including Canada's, are now in recession
". They also say they are expecting the Canadian economy to shrink in 2009 by 1.2% "Canada's economy is projected to contract through mid-2009, with real GDP dropping by 1.2 per cent this year on an annual average basis.
". For 2010 they are looking for real GDP growth of 3.8%. The Bank isn't concerned about inflation right now and in fact expects some deflation in the next 6 months or so because energy prices have come down so far from a year ago (remember $1.30/litre gas last summer compared to the 78-80 cent/litre we are seeing right now?).
So my question is, does anyone know of a good resource (book, website, whatever) that goes through historic economic conditions? I would really like to look into what happened in the 1955-1985 (or maybe 1987) time period in terms of the economy and the markets to see if there can be any lessons learned for what we may be seeing over the next 10-20 years.
New Year's Resolutions - Expense Tracking
Now that we are almost three weeks into the new year I suspect the enthusiasm for some of the resolutions made three weeks ago is starting to wane. I hope I can put some of that enthusiasm back into some personal finance related resolutions.
The first resolution that I want to discuss is simple expense tracking. I believe that expense tracking provides the foundation of any personal finance planning. Without having a solid understanding of your cash flows, how much money comes in and where that money seems to disappear to so quickly, there isn't a context to frame all the major aspects of financial planning.
The first thing that expense tracking does is point out where money is being wasted. Are you spending $80/month on a cell phone contract for a cell phone that you only use for emergencies? Is your habit of getting a coffee on the way into work every morning (when you could drink the free coffee at work) in addition to buying lunch everyday showing up as a $100/week cash withdrawal (that's a little more than $400/month)? Is that gym membership that you never use (there's another resolution) really worth that $60/month? Do you keep on paying it hoping you will feel guilty enough to actually go to the gym? Are you spending over $100/month for cable/satellite TV? How many of those extra channels (that all seem to be running episodes of the same shows) do you actually watch? I know you got that HDTV for Christmas last year but do you really need to pay that $12/month to rent the HD decoder box thing? For that price you could get a 1-DVD at a time unlimited rental plan with Zip.ca (you pay $11/month and like Netflix they mail you DVDs that you want to see and you mail them back when you are done and then get the next one on your list).
The second thing that expense tracking does is allow us to realistically estimate those once-in-a-while-but-not-every-month sort of expenses. How much did you spend on car maintenance last year? How about the year before that? Were those expenses surprises when you actually had to shell out the money for them? I'd be willing to bet that from year to year your car maintenance costs are fairly consistent (except in the year where your car crosses the 100,000km odometer mark, that year will be a little more expensive). How about gas for the car? Did your gas expenses go up last year? Have they gone down in the last couple of months? Do you expect those to go up again as we get closer to the summer driving season?
The most important thing that expense tracking does is give you information. The information that you get from tracking expenses is priceless. What happens if your spouse gets laid off? That emergency fund that you have put a little bit of money in (you have started a TFSA for that, right?), how many months of living expenses will that cover? What are the first things that you could cut out of your monthly expenses if your household income dropped for some reason? Long-term expense tracking (over 5 or more years) should start to give you good insight into what your expenses might look like as you approach financial independence. If you track your expenses you should get a very good feeling for when you will actually achieve financial independence. Once your investments start generating greater absolute returns than your annual expenses then depending on the stability of those returns that is pretty much the definition of financial independence (which some people like to call retirement but there isn't anything that says that financial independence means stopping work although it could).
So tracking expenses seems like a daunting task, doesn't it? You have to go out and buy some software and then spend hours in front of the computer trying to figure out how the software works and entering in all your bills. Or you have to save all your receipts and plug all the exact amounts into some software that comes up with some strange numbers that you don't understand. It doesn't have to be that complicated. I have a made up a fairly simple spreadsheet that you can get from here: Expense Tracking Spreadsheet
. There are pre-defined categories for spending categories in that spreadsheet which you can modify to suit your situation. The numbers that you enter in that spreadsheet don't have to be exact. If you start by just trying to track to the nearest ten or twenty dollars what you are spending for one month I think you will be able to find some areas that you could adjust your spending slightly. At the very least after one month of expense tracking you will have a better idea of where your money seems to go so quickly. You will have the beginnings of the foundation you need for planning out your personal finances.
Happy New Year
Yes, I know it is a little bit late. I've been trying to set up some new routines in order to implement some 2009 resolutions and unfortunately those haven't been leaving much time for posting here.
I wanted to do a quick little recap of how things went through the end of 2008 and how things have started to go for 2009.
So for 2008 our portfolio had a return of right around -38%. Lovely. The TSX was down around 35% so we underperformed the TSX a little bit, the S&P 500 was down around 38% as well so we weren't too far off that. and the Dow was down around 33%-34%. Things looked pretty good from an investment income perspective though (despite some issues as we approached the end of the year). Our total investment income grew by a little more than 30% in 2008 (compared to 2007) and the overall increase in investment income was a little over 5% (compared to what we would have received if there were no dividend increase over the year). That 5% growth in investment income was a little less than I was hoping for, it was on track to be just over 9% until the energy companies started cutting their distributions late in the year. If the BCE deal had gone through at the full $42.75 per share purchase price we would have beat the TSX over the year. There was a silver lining to that deal falling through though. BCE has re-instated its dividend.
Looking forward I think 2009 is going to be quite a volatile year, much like the end of 2008 was. I have no idea where to expect the markets to be at the end of this year. I can say however that from an investment income perspective things are looking pretty good in 2009. It looks like we should be able to increase our investment income at least 30% over what our portfolio generated in 2008. There are some risks to that though. We have already seen one energy company in our portfolio reduce their distributions (Bonavista Energy) and I suspect we will see a few more in the next few months if oil prices don't get to the $50 a barrel range soon. The nice part about owning energy companies is that although distributions are probably going to go down our budget for fuel can also go down. Overall for the income aspect of our portfolio I don't think we will see any significant increase in distributions or dividends from companies in 2009 which I hope means that 2010 or 2011 will see some very nice increases.
I hope to start posting a little bit more regularly in the coming weeks. In the meantime if you haven't already you should look into opening your Tax Free Savings Account. Remember, it probably makes the most sense for the first couple of years to use the TFSA to build up an emergency fund (or transfer your existing emergency fund into a TFSA).