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Reviving the Model Portfolio

I think it is time to revive my model portfolio. Since it has been about a year since I last posted about the model portfolio let me go over the goals of the model portfolio. The model portfolio is meant to track what would happen to income levels of a static portfolio from year to year. My main investment goal is to build up a portfolio of income generating stocks that increases from year to year at a rate at least equal to my personal rate of inflation.

"Personal rate of inflation" is another post for another day but the basic idea is that it really doesn't matter what the posted rate of inflation is. The posted rate might be accurate, it might not be accurate but it almost certainly isn't the right number for every single person in the country. So if you track your expenses from year to year over the long term you should be able to figure out how much more it costs you every year to maintain your lifestyle. This is your personal rate of inflation.

So getting back to my investment goals. I want to have a portfolio that generates enough income to support my lifestyle and increases that income at a rate at least equal to my personal rate of inflation. The problem is that I don't have a good idea of whether a specific mix of stocks is going to meet this goal. I also don't want to wait until I have collected that specific mix of stocks to figure out if there is a good chance that it will meet that goal or if it needs to be tweaked a little bit. I also want to know what happens to income generated from a model portfolio over at least one economic cycle, hopefully more than one.

So this gives rise to the model portfolio as another piece in the puzzle of financial independence. The model portfolio provides a way to track whether a specific asset mix will provide an income stream that increases at a minimum of our personal rate of inflation. I believe that it is very possible to have a portfolio of income generating stocks that increases the income it generates from year to year at a rate that significantly beats inflation. The hard part is getting to the level of income that will actually support your lifestyle.

Here is a recap of the posts I have already made about the model portfolio. I need to cover a couple more sectors (Health Care, Telecom and Consumer Discretionary) and the stocks in those sectors and hopefully I can have that done around the start of the year as well as provide an update on the income generated by this portfolio (and I need to come up with a better name because I don't want to give the impression that this is my actual target asset allocation because it isn't).

Model Portfolio Introduction
Model Portfolio Rationale
Finance Sector review
REIT Sector review
Pipelines and Utilities Sector review
Energy Sector review
Industrials Sector review

I think my goal in 2008 will be to provide at least quarterly reviews of/updates on the portfolio and maybe even do a little bit of an analysis of the earnings of a few of the companies in the portfolio.
category: Model Portfolio posted on Thursday November 22, 2007 at 08:18:29 by: 0xCC

Model Portfolio - Industrials Sector

I allocated 5% of the income generation of the overall portfolio to Industrials. I have decided to only use one company in this sector, Russel Metals. This is a company that I wouldn't even be aware of if it wasn't in the XDV ETF. This company makes metal products (plates, tubes, structural steel, etc) for industry. Recently they have been quite well as a result of strong sales of tubular steel used in the energy sector. This company has a strong history of raising dividends.

Currently Russel is paying a dividend of $1.60 per share per year. Since I have allocated 5% of the total income of the portfolio to this sector the income requirement is $175/year. So 110 shares (rounded up to the nearest share) of Russel Metals will give us the necessary income ($176 pre year actually).

Russel Metals: 110 shares ($1.60*110 = $176)

In my next post on the Model Portfolio I will discuss the Health Care 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 November 25, 2006 at 10:30:31 by: 0xCC

Model Portfolio - Consumer Staples Sector

I allocated 5% of the income generation of the overall portfolio to Consumer Staples. This ends up looking like a fairly narrow sector but I'm not sure if that is because I just don't really think about the consumer staple sector all that much or if it is because in Canada it really is that narrow. So since we are looking for 5% of our $3500 yearly income to come fron the Consumer Staples sector we need $175 in income.

I have decided to use 2 companies in this sector, both with the same weight and both grocery stores. What is more of a consumer stapel than groceries? The first company I chose is Loblaws and the second company I chose is Sobeys. Loblaws has been getting beat up recently as it has had some problems preparing itself for the move that Walmart is going to make into the grocery business. Sobeys has done better recently but both of these companies are potentially in for a tough fight with Walmart.

Currently Loblaws pays $0.84 a year in dividends and Sobey's pays $0.56 a year. So in order for each company to pay $87.50 a year (half of the $175 allocated to this sector) the following number of shares are required (rounded to the nearest share):

Loblaws: 105 (105 * 0.84 = $88.20)
Sobey's: 157 (157 * 0.56 = $87.92)

In my next post on the Model Portfolio I will discuss the Industrials 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 Friday October 27, 2006 at 17:59:18 by: 0xCC

Model Portfolio - Energy Sector

I allocated 10% of the income generation of the overall portfolio to Energy, the same as the REIT sector and the Pipelines and Utilities sector. Just like the other two sectors this means that of our $3500 yearly income $350 should come from Energy. In the last few years Energy has had a very nice run on the TSX, it now makes up between 20% and 30% of the of the TSX on a market weight basis. There are a number of energy companies to pick from on the TSX, everything from a large company like Petro Canada that does everything from taking the oil out of the ground to refining oil to selling gas at retail gas stations (a company like this is called an 'integrated' company because it does everything) to a small company with not much more than a piece of land and a dream of finding oil.

I have decided to use 3 companies in this sector, each with different weightings. The first company I chose is Encana (ECA), a big natural gas company whose stock has been having a rough ride lately but it should do well as natural gas prices come back. The next company is Bonavista Energy Trust (BNP.UN) and the third company I chose is Canadian Oil Sands Trust (COS.UN). I chose to give a 35% weighting to Encana, a 40% weighting to Bonavista and a 25% weighting to Canadian Oil Sands. This means that Bonavista will have to pay $140/year, Encana will have to pay around $122.50/year and Canadian Oil Sands will have to pay around $87.50/year.

Currently Bonavista pays $3.96/year per unit. Encana pays $0.40/year per share and Canadian Oil Sands pays $1.20/year per unit. So in order to meet the income requirements I have set up for each of these companies in the model portfolio the following number of shares are required (rounded up to the nearest share):

Bonavista: 36 (36 * $3.96 = $142.56)
Encana: 307 (307 * $0.40 = $122.80)
Canadian Oil Sands: 73 ( 73 * $1.20 = $87.6)

In my next post on the Model Portfolio I will discuss the Consumer Staples 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 Sunday October 15, 2006 at 08:00:00 by: 0xCC

Model Portfolio - Pipelines and Utilities Sector

I allocated 10% of the income generation of the overall portfolio to Pipelines and Utilities, the same as the REIT sector. This means that of our $3500 yearly income $350 should come from Pipelines and Utilities. On the TSX there are a few pipeline companies. The more recognizable ones are Enbridge (which is actually a combination of a pipeline and utility company), Trans Canada (which is also a pipeline and utility combination). I have decided to include both of these in the model portfolio. I also chose to add a third company to the model portfolio in this sector, Emera which is mostly a power company that provides electricity to parts of Nova Scotia and Maine. The other small part of their business is fuel distribution and energy asset management (I think this is like Direct Energy in Ontario, they install furnaces and water heaters and do maintenance on them).

So since I am looking for $350/year out of this sector each of these three companies will have to pay $166.55/year. Enbridge (ENB on the TSX) currently pays a dividend of $1.15 a year, Trans Canada (TRP on the TSX) pays $1.28 a year and Emera (EMA on the TSX) pays $0.89/year. So the shares required for each stock to generate $116.55 a year are as follows (rounded to the highest whole share):

Enbridge: 102 (102*1.15 = $117.30)
Trans Canada: 92 (92*1.28 = $117.76
Emera: 131 (131*0.89 = $116.59)

In my next post on the Model Portfolio I will discuss the Energy 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 Sunday October 08, 2006 at 08:52:06 by: 0xCC

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

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