Well, this is a rare event. My webhost is closing down, so this website, Passive Income Earner, is being transferred to another host. I will try to make it as seamless as possible so that there’s little disruption. The transfer will take place over the weekend. Wish me luck!
Where is the Best Place to Buy REITs?
REITs or real estate investment trusts allow you to easily invest in real estate for rental income. You can buy residential REITs, retail REITs, healthcare REITs, office REITs, etc. Generally, REITs pay out high income called distributions. However, they are different from stocks that pay out dividends.
Investors generally buy REITs for their high income. But investors need to consider where to buy high-yield REITs to avoid as much tax as possible for the high income. That is, to buy in a non-registered, TFSA, or RRSP account. First, we need to gain a better understanding of REIT distributions.
How are REIT Distributions Different from Stock Dividends?
REIT distributions may consist of other income, foreign non-business income, capital gains, and return of capital. Other income and foreign non-business income are taxed at your marginal tax rate, while capital gains are taxed at half your marginal tax rate.
However, the return of capital portion is not taxed until the adjusted cost basis goes to negative. If you buy a Canadian REIT in a non-registered (taxable) account, the T3 you receive will help you determine how much to deduct from the adjusted cost basis for the year.
Where to buy Canadian REITs?
Because the return of capital part of the distribution reduces the adjusted cost basis, investors should consider buying REITs with a big percentage of return of capital in the distribution in the non-registered account. Read More
About Plaza Retail REIT
Plaza Retail REIT (TSX:PLZ.UN) is based in Fredericton, New Brunswick in Eastern Canada. It rents out retail properties such as strip plazas, single-use properties, and enclosed malls. Plaza’s unique business strategy drives its business via value-add opportunities to develop and redevelop retail real estate mainly in Eastern Canada.
Plaza maybe a new name to you because it is a small REIT with a market capitalization of 398 million. However, whenever a business’ board of directors, officers, and employees own a huge stake (roughly 43.5%) in the business, their interests are aligned with common shareholders’.
The REIT pays out monthly distributions that can be reinvested at a 3% discount if you enroll in the dividend reinvestment plan. The yield is close to 5.9% at $4.30 per unit.
The REIT has interests in 306 properties with 6.7 million square feet of gross leasable area (GLA). Over half of Plaza’s gross leasable area is located in Québec and New Brunswick.
Plaza primarily leases to national retailers (over 90% based on square footage) with a focus in the consumer staples sector. So, the Target withdrawal from Canada and the Future Shops to Best Buy rebranding has had little impact on Plaza. Read More
I notice some utilities have dipped as much as 20% from their 52-week highs. The dip maybe a rotation of funds out of the typically slower growth utilities sector for the purpose of profit-taking, or maybe investors are worried that interest rate hikes will cause the typical high-yielding utilities to dip further.
Because of the dip, I reviewed the 30 utilities in The Utilities Select Sector SPDR Fund (NYSEARCA:XLU) to see if there are treasures to be found. I filtered down to one utility that has had stable, growing earnings for more than a decade.
Southern Co, a Stable Utility with 5% Yield
Here, I present Southern Co (NYSE:SO), which has a S&P Credit Rating of A, sustainable debt levels, and is trading close to a price-to-earnings ratio (P/E) of 15 priced around $43 per share today.
I believe it’s fairly priced today, hitting the orange earnings line. The blue normal P/E line indicates that it has historically traded at a P/E of 16.
Since 2005, the company has increased dividends by 3-4% per year. I’d say that’s keeping pace with inflation. With a juicy yield of 5%, and growing say at 3% going forward, it should keep pace with general market returns of 7%.
- Some investors maybe worried about interest rate hikes.
- Lower-yielding companies with estimated high earnings growth will likely be less affected by interest rate hikes compared to high-yielders.
- These 5 companies could help complement the blue chip dividend payers in a dividend growth portfolio.
With the interest rate hike matter looming, investors might opt to look for investments which pay a lower yield, but have higher expected earnings growth rates.
If you’re looking for total return in investments and are not concerned about the immediate dividend income, here are 5 businesses for consideration. They are all expected to grow earnings at a rate of 10% or higher per year in the near future.
I placed them from lowest expected earnings growth to highest, assuming it’s easier to achieve lower growth than higher. So the companies appearing first are more likely to achieve their expected earnings growth. Additionally, they’re all expected to grow dividends at least 10% per year in the foreseeable future.
- Enbridge Inc (TSX:ENB)(NYSE:ENB) with 3% yield and 10-12% expected earnings growth.
- Gilead Sciences, Inc. (NASDAQ:GILD) with 1.5% yield and 11% estimated earnings growth.
- Union Pacific Corporation (NYSE:UNP) with 2.1% yield and 11% estimated earnings growth.
- Johnson Controls Inc (NYSE:JCI) with 2% yield and 12% expected earnings growth.
- Cummins Inc. (NYSE:CMI) with 2.2% yield and 15% estimated earnings growth.
To learn more about each of these companies, check out the Seeking Alpha article at 5 Dividend Companies With 10-15% Growth.
I recently took another look at International Business Machines Corp. (NYSE:IBM). Some people thinks it’s done for as after it reached a high of $215 in 2013, it has since gone down to the $150 area and now it’s back up to the $170 area. Is IBM still a valid investment?
Here’s why I believe IBM is turning a new leaf with proof of growth.
- IBM is transforming its business, just like its many enterprise clients who want to extract value with new technologies such as the cloud, Big Data, analytics, social, and mobile.
- IBM is innovating, moving towards high value products and services, as well as developing open ecosystems and forming strategic partnerships with leading companies including Apple, Facebook, Twitter, SAP, and Tencent.
- Other than its Hybrid Cloud, IBM’s customizable POWER microprocessor, and Watson Analytics are also showing promising growth potential.
- The company is undervalued and at a high yield of 3%, its shares are attractive.
TFSA Limit Increased from $5,500 to $10,000
- Update April 27, 2015: The Canadian government published an official news release that Canadians can immediately take advantage of the proposed $10,000 Tax-Free Savings Account contribution limit.
- Update April 23, 2015: The budget bill has not passed yet and must be passed in order for the TFSA increase to be approved and become law. So, I’d wait for Canada Revenue Agency’s Tax-Free Savings Account page to be updated before contributing that $4,500 amount.
If you were at least 18 years old back in 2009, and you have never contributed to a TFSA, you would have accumulated $41,000 contribution room.
- Each year from 2009 to 2012 allowed for $5,000 contribution room.
- Each year from 2013 to 2014 allowed for $5,500 contribution room.
- This year started off with a contribution room of $5,500, until the announcement on April 21, 2015, that it as now be raised to $10,000. Going forward, each year, there will be $10,000 TFSA contribution room until further notice.
$10,000 maybe a lot for some people, and not everyone have the extra cash to invest that much. But we all need to start somewhere.
Look within yourself and learn from experience to discover your unique investing style. Are you the type to put away a set amount every month, dollar-cost averaging, say $500 into the market via an ETF? One could do the same with individual stocks, except you might want to accumulate at least $1000 before investing to keep costs low. Banks typically charge $10 for each trade, which is about a 1% cost.
You Don’t Have to Invest $10,000 All At Once
There’s no one forcing you to contribute the $10,000, but any gains you get from a TFSA is tax-free, so it’d be illogical not to use it.
If you plan to put some funds in interest-producing vehicles, you can put that in a TFSA since interests are fully-taxed in the non-registered account. However, you’ll have to decide whether you save more taxes by placing interest-producing vehicles into a TFSA or if you put ETFs or stocks in a TFSA.
Of course, you can always create multiple TFSAs for the different types of investments. Just remember that the total contribution amount is still $10,000 for the year. Read More
Dividend stocks are attractive because they pay an income no matter what the market is doing. It’s true that some dividend stocks cut their dividends in harsh times. So, having a diversified portfolio of high quality dividend stocks will mitigate the risk of dividend cuts, and dividends received from the portfolio as a whole could even increase every year.
The index fund, iShares S&P/TSX 60 Index Fund (TSE:XIU) pays out a yield of 2.6%. Here are some monthly dividend stocks that you can consider. They pay 73% to 150% more than the index fund, respectively.
Vermilion Energy is the Best Amongst its Peers
When thinking of Energy companies, companies like Suncor Energy, Enbridge, TransCanada, and Canadian Natural Resources come to mind. However, smaller mid cap companies can provide higher growth potential than large cap companies, and at the same time, are more established and stable than small cap companies.
Vermilion Energy Inc. (TSX:VET)(NYSE:VET) is a mid core energy company that is the best of its kind. Essentially, it is a blended play of value and growth. Vermilion Energy is diversified globally with leading positions in high netback businesses in North America, Europe, and Australia.
Vermilion Energy started investing in the Corrib natural gas project in Ireland since 2009. Finally, the capital expenditure spent will start paying off, as the project comes online in mid 2015. It will add to the company’s overall production growth as well as its cash flow.
Since 2003, Vermilion Energy has paid a reliable dividend, not having to cut it once. It yields 4.5%, and pays out a monthly dividend of $0.215 per share.
Further, Vermilion Energy has a record of creating shareholder value.
- Buying stocks is a risk and reward game. We try to maximize the rewards and minimize the risks.
- In the first part of the series, I discussed the risk of capital loss and volatility risk which come from investing in stocks, and ways to counter those risks.
- In this part of the series, I’ll discuss valuation risk, the risk of market crashes, and individual risks.
Read part 1 of the article.
3. Valuation Risk
No matter investing for growth or income, overpaying for a company will not only reduce your returns but also increase your risk.
For example, during the internet bubble, Cisco Systems, Inc. (NASDAQ:CSCO) reached an all-time-high of $79. The price of buying at extreme overvaluation is an inevitable hard crash. To this day, it hasn’t come near that price.
To counter valuation risk:
- Buy stocks at reasonable valuations, if not at a discount.
- Buying stocks is a risk and reward game. We try to maximize the rewards and minimize the risks.
- In the first part of the series, I’ll start by discussing the risk of capital loss and volatility risk which come from investing in stocks. And ways to counter those risks.
If I’m not better off investing in a stock, why bother the time, effort, and the cost of capital? I have the opportunity cost of not being able to use that money, while I’m holding that stock.
1. Risk of Capital Loss
Stocks on major exchanges can be bought and sold easily. However, the flip side of this liquidity is that it’s also very easy to sell at a loss. Some make a better investor in real estate because it is less liquid, even though one usually needs to get a mortgage to buy a house because the investment is much bigger.
When investing in a stock, there’s a chance that the company could go bankrupt. However, the odds are in the investor’s favor if he or she invests only in companies whose rewards outweigh the risks. So, the more likely scenario is to sell at a loss emotionally after the price of the stock goes down.
If that happens, then, you need to ask yourself why you sold at a loss. Did you no longer believe in the company you chose? Did something change from the story of when you made your purchase? Or was it due to emotion?
To counter the risk of capital loss:
- Record why you bought the company in the first place.
- If it’s for a short-term trade, decide the holding period and at what price range you plan to sell. Do that ahead of time without emotions.
- Know thyself. That is, know your temperament, risk level, time horizon, experience, and test the waters if you have to.
- Buy at reasonable valuations.
- Have an investing plan and update the plan as you go.