Friday, July 3, 2015

Recent Buy


Whenever I make a new purchase for my portfolio I feel it's only fair to get a post written giving all of the juicy details. I want to be as transparent as possible with my journey to reach financial independence through dividend growth investing. Being open about the moves I make allows for better discussion with all of you and helps spread ideas around as well as letting me create my own "investing journal" to chronicle why I purchased a company in the first place and that way I can revisit if something changes and make the decision on whether to continue owning the company or not.

I've been mentioning in my last few posts about wanting to add another financial company to my portfolio, specifically another one of the Canadian banks.  Yesterday I finally moved forward with that plan and initiated a position in Toronto-Dominion Bank (TD) by purchasing 23 shares for $42.30 per share.  After commission my per share cost basis came to $42.52 per share.  Based on the current quarterly dividend of $0.4061 ($0.61 CDN) this position will provide $37.36 in annual dividends and carry a YOC of 3.82%.

Before this purchase I only owned Bank of Nova Scotia among the big Canadian banks, but now I own two of the more conservatively run banks available.  Since TD pays their dividends in Canadian dollars the dividend growth history just frankly isn't there in USD due to the exchange rate.  However, in CDN dollars TD has a rich history of rewarding shareholders.  TD has been paying a dividend since 1857!  Few companies have even been around that long let alone paying a dividend since before the Civil War in the United States.  Dividends were kept level during the financial crisis; however, solid growth has returned since the global economy has stabilized.  Over the last 10 years the quarterly dividend payment has been increased at a 9.8% annual rate.  Since resuming the dividend increase schedule coming out of the financial crisis TD has grown dividends at an 11.5% annualized rate.

There's two big concerns with investing in the Canadian banks.  One being that the housing sector is in bubble territory and we all know what a housing sector bubble burst can look like.  There's also the risk of a prolonged slump in the price of oil and other commodities.  Canada's economy is driven by the commodity sector and if oil prices don't stabilize, or worse decline, then the Canadian economy will limp along.  However, the good thing about Toronto Dominion is that they do have exposure to other markets than just the Canadian economy.  In FY 2014, TD generated approximately 65% of their revenue from the Canadian retail sector, 25% from U.S. retail, and 10% wholesale.  The diversification of their revenue will allow them to weather any extended decline in the Canadian economy better than those banks with more domestic exposure.

A quick valuation of Toronto Dominion using the Gordon Growth Model with a $1.62 annual dividend, 10% discount rate, and $42.52 entry price means that TD would need to grow the dividend at 5.96% per year to earn a 10% annualized return.  I've also rearranged the Gordon Growth Model to solve for the price of the current shares using the dividend, require return, and estimated growth rate.  Assuming a 7.50% annual growth rate of the dividend as well as the 10% discount rate and $1.62 dividend, shares of TD are worth $69.66 a piece.  That's quite a hefty discount should TD continue to perform well and the Canadian economy not collapse into a multi-year spiral.  Even if it does I have confidence that TD will be able to weather a downturn just fine and most likely be stronger on the other side as there would be consolidation in the sector.

Dividends currently only eat up 49% of earnings.  Since earnings are forecast to grow at 12.0% per year for the next 5 years TD will have ample room to give shareholders continued dividend increases and even pull their payout ratio a bit lower as well.  That's a good position to be in for investors.  The TTM P/E ratio sits at 12.8 while the forward P/E ratio, based on FY 2016 earnings estimates of $4.79, sits at just 8.8.

If you're paying attention this purchase was a lot lower than my usual purchase size.  That's because I recently started a second brokerage account with TradeKing.  The commissions at TradeKing are only $4.95 (Affiliate link) for stock purchases which means I can invest smaller dollar amounts to keep at my target "expense ratio" of 0.50% or less.  I'm still getting to learn the platform since it's different from my other broker and will give a full review whenever I get the chance to fully explore the system including the mobile app.  Going forward I will be including all purchases within either of my portfolio's into just one portfolio on my FI Portfolio page.

My FI Portfolio's forward 12-month dividends increased to $5,964.63.  Including the $56.33 from my Loyal3 portfolio brings my total taxable accounts forward dividends to $6,021.55.

What companies have you been buying?  What companies are on your watch list for purchase?  What do you think about the long term investment prospects of Toronto-Dominion?

Image courtesy of Stuart Miles on FreeDigitalPhotos.net.

22 comments:

  1. There's a lot if activity with Canadian banks. I need to review in detail this sector. Thanks for sharing.
    D4s

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    Replies
    1. Div Son,

      The Canadian banks are much more conservatively run than their US counterparts which is good. There's risks for sure with the Canadian housing market and depressed oil prices but I think those issues will correct themselves given enough time. Plus TD has access to the US markets as well which is a nice buffer to any domestic issues. Also the CDN dollar is extremely cheap compared to the USD thanks to the USD's strong run up over the last year. That will correct itself as well in the future which will be a boost on top of the dividend growth you receive.

      Thanks for stopping by!

      Delete
  2. Great purchase, JC. Those are teh two banks I own as well - TD and BNS. Great to have you as a fellow shareholder. Congrats on adding this fantastic company to your portfolio.

    cheers
    R2R

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    Replies
    1. R2R,

      I've been hinting at adding TD for awhile now and finally made the jump. It was a long time coming and I like my exposure to the financials now although I still want to add an insurance company or two to my portfolio.

      Thanks for stopping by!

      Delete
  3. Solid company. You may or may not do well but you won't lose your entire investment like Bear Stearns.

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    1. FV,

      I think TD is a solid long term play and while it might not provide huge returns I expect steady returns that are acceptable which is fine by me. As well as solid dividend growth most years.

      Thanks for stopping by!

      Delete
  4. Nice buy JC. We have been keeping a close eye on Canadian banks lately. So far, TD is the only Canadian bank we own but we hope to own 1 or 2 more in our family's dividend stocks portfolio. Glad to have your on board as a fellow shareholder buddy.

    Keep adding to that awesome passive income stream of yours! Looks like you'll be crossing over that $6K mark pretty soon.

    Best wishes and continued success my friend. AFFJ

    ReplyDelete
    Replies
    1. AFFJ,

      I finally added another Canadian bank to my portfolio and I'm looking forward to continued dividend growth from them. Technically I'm over the $6k mark in forward dividends thanks to my Loyal3 portfolio which is really exciting. Even more exciting is that I'm continuing to work my way up towards $7k. I expect to make another purchase or two next week to keep building up my dividends!

      Thanks for stopping by!

      Delete
  5. Nice buy buddy. I am underweight the Canadian banks, but many of them are of a higher quality than their American or European counterparts. Have a great weekend
    -Bryan

    ReplyDelete
    Replies
    1. Bryan,

      I have two small positions in TD and BNS but with further weakness I expect to probably add more to both over the coming months. I want to build up my financials exposure a bit more and like you said they are higher quality than other banking options. I also want to add an insurer or two to my portfolio since I only own AFL which is a different beast from a P&C.

      Thanks for stopping by!

      Delete
  6. Nice buy! I wish we can buy more Canadian banks right now as the sector seems to be taking a hit by the Greece turmoil.

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    Replies
    1. Tawcan,

      I'd love to be loading up on them a bit more but capital is extremely light/tight right now. I need the cash flow from my day job to start coming back in before I can really start going after investing once more. The good news though is that my employer swapped out payment methods around so we'll be getting much more even paychecks which is great and will allow for more consistent saving/investing throughout the month rather than waiting for my huge paycheck to hit and let me transfer money over.

      Thanks for stopping by!

      Delete
  7. Good Buy JC. Can't go wrong adding TD bank to your portfolio. I would love to add more Canadian banks when I get the chance. Thanks for sharing and let's keep it up! Best wishes for you and your family my friend. Take care.

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    Replies
    1. Hustler,

      I want to add more of both BNS and TD to my portfolio because the CDN banks have been fairly/unfairly beat up recently. But these are solid financial institutions that will continue to be around paying higher dividends in the future.

      Thanks for stopping by!

      Delete
  8. Hi JC -- TD is not on my watch list since I primarily use the CCC list. That's underlines the one aspect of the CCC list I don't like -- that dividends growth are defined in US$ terms, which means a non-US dividend grower can be kicked off the list due to exchange rate issues. I appreciate why David Fish choose to do it that way, though -- the alternative would involve a tremendous amount of additional work. TD seems like a solid dividend growth company -- congratulations on the buy!

    Cheers
    FerdiS

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    Replies
    1. Ferdi,

      That's about the only bad thing about the CCC list. Foreign companies tend to get dropped from the list because the USD payments don't necessarily increase each year. I understand the reasoning for it but it kicks out some truly excellent companies like Unilever, Nestle, the Canadian banks. Those are all solid dividend growth companies.

      Thanks for stopping by!

      Delete
  9. I still like the Canadian banks and just posted my July stock considerations with BNS and TD as potential buys for the month along with other names too. Congrats on adding this solid long term dividend payer. I think now is a good time to nibble on the Canadian banks as they have fallen out of favor.

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    Replies
    1. DivHut,

      I think both of those companies are excellent and I wouldn't mind adding to either company if capital allows. With additional turmoil from the Greek "No" vote we could see some interesting valuations over the coming weeks. I'm trying to narrow down my list of potential buy candidates to figure out the best opportunities.

      Thanks for stopping by!

      Delete
  10. I own BNS and TD also. Hey, do you have a post on what you have in taxable accounts and what you have in TFSA and RRSP? I understand Canadian dividends are favorable for taxable or TFSA and obviously US for RRSP only.. Just wondered if you wrote about that more anywhere. Thanks!

    ReplyDelete
    Replies
    1. Stephen,

      Since I'm in the US we don't have TFSA and RRSP accounts. Although we do have semi-equivalent accounts available. I invest primarily in my taxable accounts because my plan is to reach FI before the age when I'm legally allowed to withdraw from the other accounts without penalties. But on my Portfolio page my FI Portfolio and Loyal3 portfolio are both taxable accounts and my Roth IRA is a tax free account. I do have other investments in tax deferred accounts but they are workplace savings accounts so I have less options for what to invest in.

      Thanks for stopping by!

      Delete
  11. Awesome purchase, JC. This is a position I hope to build when I get more contribution fire next year. I love the Canadian banks especially TD :)

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    Replies
    1. Ryan,

      Yeah I'm with you on wanting to build up the TD position. I really like the company for the long term. I might just average down my cost basis if Mr. Market gets in an ugly mood this month.

      Thanks for stopping by!

      Delete