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.