Why Warren Buffett Sold Exxon Mobil And Bought Suncor Energy

Summary

  • Berkshire Hathaway sold out of its stakes in Exxon Mobil and ConocoPhillips.
  • And added more shares of Suncor Energy.
  • Reason 1: US dollar to the Canadian dollar is at decade’s low.
  • Reason 2: The Canadian Dollar is correlated to the oil price.
  • Reason 3: Suncor Energy is a quality company priced at a value.

Overview

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) reported its Q4 2014 moves. It sold out of its stakes in Exxon Mobil (NYSE:XOM) and ConocoPhillips (NYSE:COP). However, it added mores shares of Suncor Energy (NYSE:SU).

Some Reasons Why Mr. Buffett sold some US big oil companies but bought Suncor Energy

Reason 1: US dollar to 1 Canadian dollar is at Decade’s Low

It currently takes ~$0.80 USD to exchange for ~$1 CAD, which is at the decade’s low. That means, around this exchange rate, Berkshire Hathaway would have bought the Suncor Energy shares at a 20% discount based on the foreign exchange rate alone.

Reason 2: Canadian dollar is Correlated to the Oil Price

The oil price’s lowest points were in 2009 and the present day, which matches the low points of the Canadian dollar compared to the US dollar historically. So, there’s a correlation between the oil price and the Canadian dollar. Low oil price implies low Canadian dollar in comparison to the US dollar, and vice versa. If one believes, oil price will head higher again, then one should also believe the Canadian dollar will head higher again.
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High Dividend Stocks Priced at a Value: February 2015 Watchlist

When I say “high dividends”, I mean companies which are paying 1.8x (or 80%) more dividends than the index. For example, SPDR S&P 500 ETF Trust (NYSEARCA:SPY)’s Friday closing yield is 1.83%. So, a company paying out a high dividend would be one that pays at least a yield of 3.3%. Likewise, on the Canada side, iShares S&P/TSX 60 Index Fund (TSE:XIU) had a yield of 1.93%. So, a Canadian company paying out a high dividend must pay at least a 3.48% yield.

For February, I identified some high dividend/distribution companies in the US and a Canadian retail REIT that I’ve added to this month. Canadians can consider getting monthly income from this Canadian REIT.

High Dividend US Companies

This list shows the current yields, and I believe are good starting yields (with respective to the company’s historical yields) to start buying into these companies if you believe in the future of these companies.

  • AbbVie (NYSE:ABBV) – yield: 3.38%
  • Philip Morris International (NYSE:PM) – yield: 4.83%
  • Chevron (NYSE:CVX) – yield: 3.79%

Chevron was in the last watchlist: Dividend Stocks at a Value: January 2015 Watchlist. Since that article, Chevron’s yield has drop due to price rising a few dollars. Long-term income investors shouldn’t sweat the small changes in price though, as Chevron is still attractive at a yield of 3.79%.

AbbVie

AbbVie logo

AbbVie is a global biopharmaceutical company hardquartered in Illinois. It was spun off from Abbott in January 2013. It has around 25,000 employees and 7 research & development and manufacturing facilities around the world. AbbVie’s focus is on immunology and virology diseases. Currently, Humira, AbbVie’s top drug, makes more than 50% of the company’s profits. Fundamentally, both Morningstar and F.A.S.T. Graphs show it is priced in the fair value range. Technically, it is bouncing off of a recent bottom. Currently marked as in the fair value range by Morningstar, AbbVie is certainly worth considering on a pullback.

Philip Morris International

Philip Morris logo

Philip Morris is a leading global tobacco company, owning 7 of the world’s top 15 international brands, including Marlboro. Philip Morris holds 28% of the global market, excluding China. Other than to provide products to adult smokers, and to generate superior returns for shareholders, Philip Morris also has the goal of reducing harm caused by smoking by developing products which are close in look, feel, and taste to the conventional cigarettes but seem to be less harmful.
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Is Kinder Morgan A Buy Now For A Dividend Growth Investor?

I started buying shares in Kinder Morgan (NYSE:KMI) since January 2014 with my starter position bought at $36. So far, it has done well for me as a dividend growth investor. Its quarterly dividend grew from $0.41 per share to $0.45 per share, which is an annual growth of 9.75%. Not too shabby for a starting yield of 4.56% and 14.4% unrealized gains. Adding on dips would have added to the profitability of this position.

Summary

  • Kinder Morgan’s price is 3.5% away from its 52-week high. Is it a buy now?
  • Its dividends are expected to grow 10% a year through to 2020. That is $3.22 per share of dividends by the end of 2020.
  • Based on a 4.5% yield, Kinder Morgan will reach $71.58 by the end of 2020.
  • It’s reasonable to expect Kinder Morgan to have annualized returns of more than 13.5% with Monday’s closing price of around $41.20.
  • Kinder Morgan is truly an income growth machine.

My last article on “What I’m Doing With My Kinder Morgan Shares As A Dividend Growth Investor” was when it announced the merger of the 4 companies. Now, this is an update amidst the low oil price from a dividend growth investor perspective, whether as a holder or as a buyer at the current price.
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Ann’s Simple Income Investing Strategy

A friend of mine is starting to look into dividend investing, and has lots of questions about the subject. My attempt with articles about Ann, a simple investor, is to keep things as simple as possible.

Summary

  • Ann, our simple investor, looks forward to income, money received on a regular basis, because it can be used to pay down debt, pay bills, or to be reinvested.
  • A simple way to earn income is to buy shares in dividend-paying leaders.
  • Ann decides that her $11,000 investment should earn her a minimum income of $330 annually.
  • Ann ends up buying shares in 11 leaders in 11 sectors, earning an income of over $400, exceeding her goal.

Why Would You Want Income?

Money can be used for many things, including paying down debt, buying for groceries, paying for your children’s tuition, watching a movie, paying the utilities bill, paying for gas for your car… you name it!

Income is money received on a regular basis. Among the most magnificent thing income can do is that it can earn you more income. That is, by buying income-generating assets, you can use those generated income to buy more assets that would generate more income.
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Dividend Stocks at a Value: January 2015 Watchlist

A good dividend stock pays and even raises its dividend whether the market goes up or down. As long as you don’t sell the shares, you will always get a positive return (the dividends you receive) no matter how the market behaves. Recently, there has been a lot of volatility in the Energy sector due to oil price plummeting so an investor could value dig there to get a high starting yield and potential return once oil price goes up again…that is if one can stand the volatility and the possibility of more downside in the near-term. That’s why I like buying in small chucks at opportune times when a company on my watchlist is priced at a value. Dollar-cost averaging allows the flexibility of buying more shares at a lower price when the market behaves negatively.

For this month, I looked over my current holdings to see which dividend payers are good values to buy. There are also other good Energy companies to look into, including Exxon Mobil (XOM), Enbridge (ENB), TransCanada (TRP), Inter Pipeline (TSX:IPL) Suncor Energy (SU), Cenovus Energy (CVE), Canadian Natural Resources (CNQ), and Vermilion Energy (VET).

Classic Dividend Companies

This list shows the current yields, and I believe are good starting yields (with respective to the company’s historical yields) to start buying into these companies if you believe in the future of these companies.

  • Bank of Nova Scotia (TSX:BNS) – yield: 4.16%
  • Chevron (NYSE:CVX) – yield: 3.96%
  • International Business Machines (NYSE: IBM) – yield: 2.82%

Bank of Nova Scotia

Bank of Nova Scotia logo

Bank of Nova Scotia is the third largest bank in Canada. This Canadian leading bank provides financial services in over 55 countries. It’s medium-term objectives were met in 2014. The 2015 medium-term objectives is the same as 2014. For example, earnings per share growth is expected to be between 5 and 10%, while return on equity is expected to be between 15 and 18%.

A table for Scotiabank 2014 Medium-Term Financial Objectives Met
Source: Bank of Nova Scotia Q4 2014 Investor Presentation, Slide 5

Chevron

Chevron logo
Chevron is a large oil company, which pays an attractive dividend of over 3.9%, 20% higher than its 5-year average of 3.3%. It’s paying out 38% of its earnings for its dividends. Historically, this is at the higher end of its yield range, unless one wants to shoot for above 4.25%, which looks possible.
CVX Dividend Yield (TTM) Chart

CVX Dividend Yield (TTM) data by YCharts

If history is telling, then, having raised dividends for 27 years in a row, CVX will be increasing its dividend in Q2 of 2015 even amidst low oil prices. Additionally, Morningstar gives it 4-stars, meaning the shares are currently undervalued.
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Launching the Canadian Buy the Dips Portfolio: Identifying the Leading Energy Companies – Part 1

Summary

  • The Canadian Dollar is much weaker than the US Dollar from a year ago.
  • As a result, some Canadians may want to invest in Canadian stocks instead of US stocks for now.
  • The main strategy of this portfolio is to buy leading companies after some form of pullback.
  • 2 Canadian leading Energy companies can be bought with at least 31% and 38% potential gain in 2 to 3 years, not including dividends.

Why I’m Launching the Canadian Buy the Dips Portfolio

With more than $1.14 Canadian Dollar needed to convert to $1 U.S. Dollar (not to talk about added conversion fees), do-it-yourself Canadian investors may want to stay in their domestic currency and invest in Canadian companies instead of US ones. A reader asked me how to build a Canadian stock portfolio that is conservative and have the goal of income and steady growth. One strategy is to buy companies in a specific sector which has pulled back. A classic of buying low and possibly selling high. I say “possibly” because it might be wiser to buy low and sell high in certain sectors or companies more than others.

To remain conservative though, let’s first identify leaders in their respective sectors and industries. One way of doing this is finding the companies with the largest market capitalization in a particular sector. They are able to grow big (relative to their peers) because they are doing something right. These companies generally have more solid balance sheets and pay a growing dividend.

A Couple of Canadian Leaders in the Energy Sector

A stock portfolio can only be built one company at a time. The Energy companies have pulled back with the oil price decline. This fits the pull back criterion. Let’s take a look at some of the Canadian leaders in the Energy sector. They are Suncor Energy (TSX:SU), and Canadian Natural Resources (TSX:CNQ). They are the companies with the largest market capitalization in their respective industries.

Industry Leaders *Market Cap S&P Credit Rating *Yield
Integrated Oil and Gas Suncor Energy 52.4B A- 3.1%
Oil and Gas E&P Canadian Natural Resources 41.4B BBB+ 2.4%

* As of the close of Nov 28, 2014 on the TSX

Introducing Suncor Energy

Suncor logo

Suncor Energy is Canada’s largest integrated energy company, having a balanced portfolio of high quality assets. Its oil sands business is located in Alberta, Canada having 6.9B barrels of reserves and 23.5B barrels of contingent resources. Suncor estimates to have a compounded annual growth rate of 10 to 12% in oil sands and 7 to 8% overall until 2020. Suncor has been publicly traded since 1992. Since its high of $46 in June 2014, Suncor Energy has dropped to $36, a 21.7% decline.

SU Chart

SU data by YCharts

Even as the oil price dropped like a rock in the financial crisis, Suncor maintained its dividend. In fact, since 2011, it has increased it from $0.10 per share to its current $0.28 per share, a 180% increase. Its current yield is sitting around 3.1%, which is higher than the index’s (TSX:XIU) 2.34%.

Currently, this industry leader can be bought around $36. Rated 4-star by Morningstar, it is undervalued with a fair value estimate of $50, which is a potential 38% gain. Read More

Buying Vermilion Energy for Growth and Income

I recently discovered Vermilion Energy (TSX:VET), a Canadian oil and gas producer which is listed on both the TSX and NYSE exchanges. In the last decade, it returned 25% annually. Since it is a mid cap company, it’s more stable than a small cap, while has higher growth than a large cap. My research indicates that it provides a safe dividend with a current yield of 4%. With its low payout ratio, there’s also potential for future dividend growth. Enrolling in Vermilion Energy’s dividend reinvestment program allows dividends to be reinvested with a 3% discount.
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Canadian Dividend Reinvestment at a Discount – Companies List

Some Canadian companies offer dividend reinvestment at a discount. These dividend reinvestment plans (or DRIPs) allow you to reinvest dividends (or distributions) at a discount. So that you can buy shares (or units) of these companies (or REITs) for a cheaper price with the dividend (or distribution) that is paid to you without having to pay commission fees. Typically, the reinvestment price is some sort of weighted average of the market price in addition to incorporating the discount percentage.

If you’re reinvesting for more shares (or units) through a transfer agent, you’ll be able to reinvest for partial shares. If you enrolled for the DRIP in a brokerage account such as ScotiaOnline, then, you’ll only be able to reinvest full shares. That means, you need to buy enough shares (or units) initially to receive a dividend (or distribution) that is enough to buy at least 1 full share. For example, I held 364 units of TSX:PLZ.UN, a retail REIT. On October 22, 2014, its distribution was reinvested at $3.78 at a 3% discount, and I received the rest of the distributions ($3.50) as cash. Now, I hold 365 shares.

Learn more about buying shares through a transfer agent.

Dividend or Distribution must be Safe

As a dividend investor, the dividend is an essential ingredient to my total return. So, I decided to add another criterion for a company to make this list. The dividend or distribution hasn’t been cut for the past 5 years (since 2009). This criterion eliminated some Energy companies. This criterion is especially important if you’re planning to reinvest dividends into the company. Think about it; you’re adding more money to the investment!

Additionally, companies with a BBB+ S&P credit rating or better indicates that they are investment grade, and have safer balance sheets. This means, I will purchase a BBB+ company over a BB- company for example, given the companies are at proper valuations and future earnings expectations are positive.

Dividend Reinvestment at a Discount – The Canadian Companies List

Below is a list of companies or REITs whose dividends (or distributions) haven’t been cut for 5 years. For ones which have only paid dividends (or distributions) for less than 5 years, they’re marked as such. This list is not a recommendation to buy these companies. It simply serves as a reference to look for safer companies with a DRIP discount. Just because they offer a DRIP discount, doesn’t mean you should buy them at any price. Check their valuations and future prospects first! For instance, do you have a positive outlook on their future?

Safe dividend reinvestment at a discount with Enbridge, Fortis, and Sun Life Financials.

3 companies I want to highlight are Enbridge, Fortis, and Sun Life Financial. They have the most solid balance sheets of the group.

In the list, there are 11 REITs. Investors invest in Real Estate Investment Trusts for their tendency to pay out a higher starting yield. So, they are nice income vehicles. However, most offer little growth for that payout. Additionally, their distributions aren’t eligible dividends. Further, a portion of an REIT’s distribution maybe return of capital. Wrap your head around REIT taxation from Globe and Mail. To simplify things for yourself, you can choose to buy REITs in the TFSA or RRSP instead of in the taxable, non-registered account. Then, you don’t have to worry about their tax situation. Read More

Invest in Real Estate Investment Trusts or REITs for Income

Investors can passively invest in real estate by buying units of REITs or real estate investment trusts (just like buying shares of a company). So that they don’t have to deal with tenants. Investors buy REITs mainly for their income. So, REITs are suitable for income investors, and retirees. Some REITs pay out distributions monthly, while others pay quarterly.

Types of REITs

  1. Equity REITs are the safer kind as they invest in and own properties. They receive rents from those properties and by law, they pay out a high portion of that as distributions. (Distributions are like dividends.) That’s why, generally, REITs pay out higher distributions than a typical stock.
  2. Mortgage REITs owns property mortgages. They earn interest from mortgage loans. So, mortgage REITs are the riskier type. That’s also why they sport higher distributions than the equity REITs, sometimes in double digits!

Because I’m primarily a conservative investor, I have only bought equity REITs.

Equity REIT Categories

Equity REITs (or eREITs) can be categorized into retail REITs, office REITs, residential REITs, Healthcare REITs, etc. Some eREITs are categorized as “diversified” for example if they own properties in retail, office, and industrial.

REIT Distributions act like Dividends but aren’t exactly Dividends

One thing to note is that the distributions from REITs aren’t entirely considered as eligible dividends. If you want to avoid the tax hassle, then, as a Canadian, you would want to buy REITs in the Tax-Free Savings Account (TFSA) or the Registered Retirement Savings Plan (RRSP).

Personally though, I like to buy Canadian eREITs in the TFSA, since I can withdraw from it anytime without any tax consequences. If you plan to reinvest the monthly distributions via DRIP (dividend reinvestment plan), then, it doesn’t matter if you buy the units in the TFSA or RRSP. However, note that Canadians can only DRIP full shares/units (cannot DRIP partial shares/units) via an online broker.

Canadians who buy US REITs will find that they need to pay the marginal tax rate on the distributions if bought in the taxable / non-registered account. I heard that Canadian investors who hold some US REITs in the RRSP won’t have withholding tax on the distributions, that is, they’ll receive the full distribution. However, I can’t be certain that that is the case for all US REITs.

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Foreign Dividends with No Withholding Tax – Companies List

Usually there’s a non-resident withholding tax on dividends paid by foreign companies. For example, as a Canadian, the US dividends I receive in my non-registered (taxable) account will automatically get 15% deducted. However, I can recover that by filing for a foreign tax credit. Still, I must pay the marginal income tax rate on those foreign dividends.

So, to save the tax on the foreign dividends, Canadians would buy US dividend stocks in the RRSP instead. However, the point of this article is to record the list of companies which don’t have a withholding tax on the dividends for non-residence. As I’m continuing on my dividend growth investing journey, I’ve collected a list of companies which do not have withholding tax on the dividends for Canadians. That means, if you’re holding these dividend companies in the RRSP or TFSA, you receive the full dividend. If you’re holding them in the non-registered (taxable) account, then, it’s true that there’s no withholding tax on the foreign dividends, but you still need to pay the marginal income tax rate on the dividends.

Buy these companies in your TFSA, and receive their full dividend.

  • BP plc (NYSE: BP) – *yield: 5.39% – an Energy company
  • Royal Dutch Shell plc or simply, Shell (NYSE: RDS.B) – *yield: 5.04% – an Energy company
  • Unilever plc (NYSE: UL) – *yield: 3.78% – a Consumer Staple
  • Westpac Banking Corporation (NYSE: WBK) – *yield: 5.23% – an Australian bank
  • BHP Billiton plc (NYSE: BBL) – *yield: 4.55% – a Basic Materials company
  • GlaxoSmithKline (NYSE: GSK) – *yield: 5.88% – a pharmaceutical company
  • HSBC Holdings plc (NYSE: HSBC) – *yield: 4.83% – a London-based bank doing business in 80 countries
  • Vodafone Group plc (NASDAQ: VOD) – *yield: 7.13% – a Telecom

*yield as of October 28, 2014 closing ; Note that I collected this list from the web, so there could be inaccuracies. Please let me know if any correction is needed. I will also add to this list as I come across such companies.

Of course, buying the above companies in the RRSP will yield the same result — that there’s no withholding tax on their dividends. However, you get deducted 15% on US dividends in the TFSA, but get the full dividend in the RRSP. So, you probably want to leave the room in your RRSP for US dividend companies instead.

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