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Model Portfolio - REIT Sector

In my orignal post about the Model Portfolio I didn't define what a REIT is. REIT stands for Real Estate Investment Trust and I think these might have been the original investment trusts. What is the difference between an investment trust and a regular stock? Good question, I don't completely understand the difference but an investment trust is basically a legal structure that allows a company to pass income through to shareholders in a more tax efficient manner than they can as a regular company. The way the income received by unit holders (investors) of an income trust from that income trust gets taxed is different (most of the time) than the dividend income that regular companies pay out. In order to have a good understanding of how income from investment trusts gets handled from a tax perspective you should talk to a tax professional which I am not.

Back to the model portfolio. I had allocated 10% of the income generation of the overall portfolio to REITs. This means that of our $3500 yearly income $350 should come from REITs. There are a few good REITs to choose from on the TSX ranging from REITs with a focus on apartment buildings to REITs with a focus on office space to REITs with a focus on retail space. I chose to put two companies in this part of the portfolio and both have a focus on the retail space, which probably isn't a great idea but I'll stick with that for now and maybe make some adjustments later.

The two companies I chose are Rio Can REIT (REI.UN) and Calloway REIT (CWT.UN). Rio Can is currently paying out a distribution of $1.29 a year and Calloway is paying out $1.45 a year. I want both of these companies to have equal weighting in the REIT portion of my portfolio so they will each need to generate $175 of income per year. That gives us the following number of shares required for each company:

Rio Can: 136 (136*1.29 = $175.44)
Calloway: 121 (121*1.45 = $175.45)

In my next post on the Model Portfolio I will discuss the Utilities/Pipelines sector.

Disclaimer: This model portfolio is intended for illustrative purposes only and should not be used as a guide for building your own portfolio. Before making any investment decisions you should do your own homework and consult with the appropriate financial professionals. I am not a financial professional.
category: Model Portfolio posted on Saturday September 30, 2006 at 12:13:03 by: 0xCC

Model Portfolio - Finance Sector

Well I had hoped to go through these sectors a little more quickly than this but that didn't quite work out. So I think I will try to get through one of the sectors a week. I will start first with an overview and then I will attempt to go into detail on on each of the companies probably starting with the ones that I'm not really comfortable with. So we should get started with the Finance sector.

The biggest part of the model portfolio is the finance sector and for good reason. Canadian financial companies for the most part are solid dividend payers that increase their dividends on a regular basis. The heart of the Canadian financial sector are the big five banks (Royal Bank, TDCanada Trust, Bank of Montreal, Bank of Nova Scotia, CIBC). I personally think that every Canadian investor should have at least one of the big five in their portfolio. These companies are the behemoths of the TSX. They have their ups and downs but if you look at a five year chart of any of them they basically always increase in value over that time (not to mention that they are also paying out a dividend every year). Of course there will be times when the banks don't do as well as the rest of the market but in general the banks are quite stable and not only pay a consistent dividend, they consistently raise their dividends.

Having said all that, the banks are not the only companies that make up the financial sector. There are also insurance companies and mutual fund companies. There are also smaller/regional banks like National Bank or Laurentian Bank.

I decided to set up the Financials portion of the model portfolio as follows:

Royal Bank: 25% of income from the sector
TD Bank: 25% of income from the sector
National Bank: 20% of income from the sector
Power Corporation: 20% of income from the sector
Manulife: 10% of income from the sector

If you recall I set up the Financial sector of the model portfolio to generate 40% of the overall portfolio income. So that means we are looking for a total of $1400 from financials out of our $3500 target for the overall model portfolio. So that means each of the financials needs to generate this much income:

Royal Bank: $350
TD Bank: $350
National Bank: $280
Power Corp: $280
Manulife: $140

These companies currently pay the following yearly dividends per share:

Royal Bank: $1.60
TD Bank: $1.92
National Bank: $2.00
Power Corp: $0.79
Manulife: $0.70

So if we take the required income divided by the income per share we get the number of shares (rounded up to whole shares):

Royal Bank: 219
TD Bank: 183
National Bank: 140
Power Corp: 355
Manulife: 200

At the end of this series I will total up how much it would cost to buy the shares we have calculated we need.

I should also go into a little bit of depth about each of these companies. There are a total of 22 companies in my model portfolio and I am probably uncomfortable with about 5 of them (Manulife actually happens to be one of them I am uncomfortable with).

Disclaimer: This model portfolio is intended for illustrative purposes only and should not be used as a guide for building your own portfolio. Before making any investment decisions you should do your own homework and consult with the appropriate financial professionals. I am not a financial professional.
category: Model Portfolio posted on Sunday September 24, 2006 at 09:49:06 by: 0xCC

Model Portfolio

Ok, I came up with a first crack at a model portfolio. I took a look at the different sector weights that the iUnits Canadian Dividend Income Fund uses. According to their quarterly disclosure document they have the following breakdown:

Financials: 46.9%
Telcom: 18.0%
Consumer Discretionary: 6.9%
Energy: 5.7%
Materials: 5.4%
Industrials: 3.1%
Consumer Staples: 2.6%

The first thing that I wanted to adjust on this list is the lack of real estate exposure. I think that adding a couple of REITs to the mix should help with overall returns. The second thing that I wanted to change is the Consumer Staples category. The only company the XDV has in that category is Rothmans, i.e. tobacco. I don't want to invest in a tobacco company even if they do pay out a good dividend. I do think that consumer staples are a good thing to have though and I will get into that later.

So making some adjustments and dropping some companies and categories I came up with the following list:
Financial: 40%
REIT: 10%
Telcom: 10%
Utilities/Pipelines: 10%
Energy: 10%
Consumer Staples: 5%
Health Care: 5%
Consumer Discretionary: 5%

So based on those numbers and the fact that I want to come up with a portfolio that will generate $3500 in the first year (and will hopefully increase nicely after the first year) I came up with the following cash flows per sector:

Financial: $1400
REIT: $350
Telcom: $350
Utilities/Pipelines: $350
Energy: $350
Consumer Staples: $175
Industrials: $175
Health Care: $175
Consumer Discretionary: $175

So given these categories and cash flows I will go through each sector over the next week or so and talk about the companies that I put in the model portfolio. Hopefully by next weekend I will have gone through all the sectors and then I can give a summary of the model portfolio. I am currently not comfortable with all the companies I have chosen to put into the model portfolio. I will discuss my reasons for being uncomfortable and maybe between now and the new year I can take a closer look at the companies in the model portfolio and see if I can become comfortable with all of them...
category: Model Portfolio posted on Sunday September 17, 2006 at 18:45:00 by: 0xCC

Five Years Ago...

I was sitting at my desk watching the north tower of the World Trade Center with smoke pouring out of a gaping hole in it. At that time it seemed like it could have been an accident. Sixteen minutes later I watched what I thought was helicopter fly around the building but then a big fireball came out of the second tower. What I thought was a helicopter was actually the second plane.

I was fixated on the TV for the rest of the day as the buildings continued to burn and finally collapse. It was the collapse that stunned me the most. At that point I knew that the number of people that had lost their lives was something that I couldn't imagine. I didn't have a blog back then but I did keep some notes on what I was thinking at the time. I noted that I don't think I see 3,000 people in a day even if I include all the people that I see in cars as I drive to work. I can't imagine what an impact having 3,000 people disappear in one day would have on the area I live and work in. The other thing that noted about that day and the following days was the total lack of air traffic. I work near a regional airport so there are usually small planes and helicopters around all the time. For three days there was nothing in the air...

Remembering September 11, 2001 today. It doesn't seem like it was 5 years ago, it only feels like a year or two.
category: General posted on Monday September 11, 2006 at 08:56:11 by: 0xCC

Light Show

Last night we had a bit of a light show around our house. I tried to get some interesting pictures the last time we had a thunderstorm blow through at night but I didn't get any good shots. This time was a little different.

small light show

lightshow1 - click to view

lightshow2 - click to view

lightshow3 - click to view

Those images were taken with my D50 off my front porch. I don't have a tripod so they were all hand-held shots and the exposures were either 5 or 8 seconds.
category: General posted on Saturday September 09, 2006 at 14:42:07 by: 0xCC

Note to Self: ivtv on Ubuntu

Use this set of instructions:

And note that I am using Dapper so the comment about the firmware files belonging in /lib/firmware instead of the hotplug directory applies.

I am working on getting MythTV set up on a system that I have. I hope to give some more details on this later but I just needed to document where I got working instructions for now.
category: MythTV posted on Friday September 08, 2006 at 21:14:44 by: 0xCC

Setting Up a Model Portfolio

A little while ago I made a post about tracking income per 'unit' of a portfolio. My reason for that was that I wanted to be able to track the growth rate of income generated by my portfolio. Using this information and using the growth rate of our expenses I should be able to tell if the growth in our investment income is exceeding the growth in our expenses. If we can have that happen consistently for a few years and if we can build our total investment income to exceed our expenses we will have reached the state of financial independence which is our ultimate goal.

I think I found a problem with the way that I proposed tracking investment income growth. The problem stems from the mix of investments in our portfolio. I have had my discount brokerage account open since March, 2003. It wasn't until about a year ago that I changed my investment goals to focus on income rather than simply beating the index and my managed account. Since I didn't want to sell the stocks I already had (which did include some banks) so that I could buy stocks that paid dividends or distributions I have been using any new money to either add to positions that I already had or to buy some new stocks. So this has meant that our asset allocation has been changing over the last year or so. If I strictly look at the income per unit our portfolio is generating and if I try to follow the growth in income per unit per year I am not going to get an accurate picture because a higher and higher percentage of the portfolio is generating income.

I think the only way to get an accurate picture of what to expect is to come up with a model portfolio. The model portfolio will be a collection of stocks that pay dividends or distributions. This model portfolio will basically be the template or the goal portfolio that I want to eventually get to. It will contain the stocks that I want to own in the amounts that I want to own them. So for example if I wanted to get $160 dollars a year from Royal Bank in my goal portfolio since Royal Bank pays out 40 cents a quarter (or $1.60 a year) in dividends currently I would want to own 100 shares of Royal Bank in my model portfolio. I currently have a rough outline of a model portfolio but I haven't been using it to really track income, I have been using it to mostly look for entry points on the stocks that I want to own. I need to clean that stock list up a little bit and post it as my 'model portfolio'. I think I will even go to the point of calculating taxes on my model portfolio since it probably isn't going to be as straight-forward as just having dividend income, there will be some interest income as well as capital gains in the portfolio.

Next week I will try to post a first attempt at a model portfolio. This model portfolio will attempt to provide income of around $3500 a year through a combination of dividends and distributions. I hope to pick stocks that will grow the income generation by between 5% and 10% a year. That may be a little optimistic but if the last year is any indication it should be possible.
category: Model Portfolio posted on Wednesday September 06, 2006 at 20:56:59 by: 0xCC