Bond Yields Rise and Then Fall
Though treasury yields have risen since the beginning of the year as the American economy continues to recover, rates on 10 year Government bonds have actually eased since March 31st . They peaked out at roughly 1.75% and have fallen to roughly 1.25% by July 8th. This has given the equity market another boost as dividend yields are still quite attractive relative to bond yields. Canadian 10 year bonds yield 1.30%.
In contrast to bonds you can simply pick up shares in power providers like ATCO where you can earn 4% in annual dividends and with ATCO having a history of raising their dividends you likely will be protected from inflation. If you hold these shares outside of registered accounts (like I do) you also get preferential tax treatment. A simple rule of thumb is to multiply the dividend yield by 1.3 times which would give you an interest rate equivalent of 5.2% which is substantially higher than 10 year bond rates.
I used to own a substantial percentage of my investments in the form of preferred shares as these are also tax preferred and yield substantially more than bonds. The “problem” is that the preferred share market has risen substantially over the past 12 months and bargains are few and far between. I like to purchase securities trading at a discount as this gives me a margin of safety. These discounts have now pretty much disappeared. For example I had EL Perferred shares for many years as they traded at 80 cents on the dollar or less with a yield above 5%. Now they trade pretty well at par or even above par so they are not a bargain anymore. So I sold them.
Oil a Harbinger of Bad News
Higher oil prices may be good for Alberta but they generally lead to a slowing economy which is not good news for equities. Oil prices have risen some 80% over the past 12 months as evidenced by WTI crude prices which were $40 US per barrel a year ago and now trade at roughly $75 per barrel today. A number of funds such as Fidelity’s Large Cap Canadian fund and Trimark Canadian fund were betting on an economic recovery and held a larger than average proportion of their assets in oil and gas names and this emphasis has paid off handsomely for shareholders so far this year. I mentioned a company TransGlobe Energy about a year ago where the shares traded so low you in essence paid for the company’s cash and got the business for free. This is not the case today as the shares have risen from a low of 50 cents to as high as $2.85. With a book value of $2.35 they are not trading with an adequate margin of safety so again I sold my shares.
Has Our Dollar Peaked?
The Canadian dollar generally operates as a petro currency where higher oil prices inflate and lower oil prices deflate the currency. If oil is no longer a value play it is safe to say that betting on a continued rise in our dollar is more speculating than investing at this point. I would even go as far to say that international investing has become more attractive so I invested in Invesco’s Global Companies Fund (the old Trimark Fund). It is quite volatile but I think the reward for holding the fund today outweighs the risks.
Fidelity has clamored for years that the Canadian dollar is overpriced as our economy has been supported primarily by inflated house prices rather than GDP growth. Basically, consumers have felt better spending when they see an increase in the equity of their home. Fidelity has been wrong for years on the currency bet but I think they might finally be correct. Another fund that was a top performer was the Templeton Global Bond fund. Their performance is near the bottom now but again they may finally get this one right. Their top “bet” is that our dollar will also fall.
Making Money on the Horses
July 1st was my mother’s birthday and I would always take her to the horse races as a tradition. I’m not saying I have any inside information and would never recommend betting on horses as a way of making money as “the house” takes too high a percentage of the bets. But, you can look at betting on horses in a similar way to investing in securities. You increase your odds tremendously by betting on mispriced tickets. Sometimes you can just get the odds in your favor by waiting for good odds on the favorite or exceptional odds on the long shot.
For investing I take a humble approach and never purport to predict the future. But, I have been able to do well in investing by only purchasing securities when they trade at a discount to book value. Or have a high margin of safety. They happen to trade at discount prices when news is predominantly bad. That’s just the way it works. So I am happy to sit waiting in international equity funds and Canadian securities that pay a high and increasing dividend.
Setting up Your TFSA to Pay You?
I have had some recent difficulties with TD Waterhouse as they had two offices in Edmonton where I could drop in and transact business. Now they have none. So I am forced to phone them if I need to take money out. I have been on hold for up to 5 hours over a number of days just trying to get through to them so I was “forced” to open up a TD personal account just to get my money out. I have already set up a RRIF with Fidelity and Invesco and am thinking about transferring my TFSA to a mutual fund as well. The reason I mention this is that this may be a tool for clients to consider in generating a monthly tax free income. Let’s say you have invested your lifetime limit of $75,500. If you assume a return of 8% annually you can set up the TFSA to pay you $500 per month for life. Tax free. You don’t show the withdrawals as income on your tax return but you cannot make deposits in the same year to take money out.