Category Archives: Stock Portfolio Building

High Inflation: Beat It With Dividend Stocks!

High inflation is already upon us. As BBC News reported, the U.S. saw consumer prices jump 4.2% in the past 12 months. Price surges for certain goods can be even more ridiculous. Second-hand car prices rose 10% in April versus March. 

A part of that had to do with the shortage (and consequential price rise) in basic materials like steel. The situation is similar for other raw materials like copper and lumber.

We can say something similar for Canada as well — higher inflation and higher raw material costs. The annual inflation rate was 3.4% in Canada.

The Federal Reserve aims for a long-term inflation rate of 2%, as does the Bank of Canada. The Federal Reserve explains very well here how a stable rate of 2% helps with keeping maximum employment and consumer price stability. It further clarifies that an extended period of low inflation is likely to lead to a period of higher inflation (triggered by monetary policy), which is what we’re seeing now in both countries. 

At the very minimum, Americans and Canadians need to ensure their savings are earning at least 2% a year from interest income. Of course, we can do better than that with dividend stocks.

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Dividend Stock Portfolio Building: How Big Should Your Stock Position Be?

You build a dividend stock portfolio one stock at a time. But how much should you buy the stock of a quality company until you stop? 

You might stop when the stock is no longer attractively priced or when you’ve bought a big enough position.

If you are relatively new to investing, you might be confused about these terms: “starter position”, “partial position”, and “full position”. I’ll explain them real soon (in the section after the next one).

Dividend Stock Portfolio Building Examples

Portfolio building is about spreading risks. You might refrain from buying more than 25% of your stock portfolio in a sector or 5% in a stock. For example, banks, insurance, and asset managers fall under the financial services sector. 

Under the 25% rule, these holdings cannot make up more than 25% of your portfolio when you make purchases. Under the 5% rule, you won’t have more than 5% in Royal Bank of Canada (TSX:RY)(NYSE:RY) or Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) when you buy their shares.

You might also limit how much you invest in a dividend stock by the yield it provides. For example, a high-yield dividend stock that pays a 10% yield could be risky. If so, you might only limit it to contribute to only 1% of your annualized income. It could be a great move to just avoid risky, high-yield stocks altogether. 

Not all high-yield stocks are risky. You’ll need to perform fundamental analysis on potential ideas to determine if they’re risky or not, given the economic condition or situation at the time. During a market crash, a nice bunch of quality dividend stocks could provide nice yields of 5-10%.

Here’s a concrete example. A new $11,000 dividend portfolio that’s focused on growth (or dividend growth) might look like this with $1,000 invested in each of the following:

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5 Top Stocks for November 2019

Contributors at Motley Fool Canada (including myself) cooked up a list of 16 top stocks for November 2019. I further reduced it to 5 top stocks that I like not just for this month but for the long term as well.

Four of the 5 stocks pay a dividend, including 3 dividend stocks that offer juicy but safe yields of up to 6.1%. Without further ado, the 5 top stocks are Alimentation Couche-Tard (TSX:ATD.B), Enbridge (TSX:ENB)(NYSE:ENB), Pembina Pipeline (TSX:PPL)(NYSE:PBA), SmartCentres Real Estate Investment Trust (TSX:SRU.UN), and Spin Master (TSX:TOY).

Enbridge and Pembina are both energy infrastructure companies, but Enbridge is markedly larger with an enterprise value of almost CAD$174 billion compared to Pembina’s more than CAD$34 billion. The rest of the stocks are in different spaces and together handily make a pretty diversified and quality portfolio.

Alimentation Couche-Tard for long-term growth

Source: Author – One of Couche-Tard’s Circle K locations in Toronto

Couche-Tard just had a stock split recently. The growth stock has simply been taking a breather and consolidating after running up more than 50% from early 2018.

Couche-Tard is an exemplary M&A growth story. It has successfully acquired about 10,200 stores across 60 deals since 2004. In the period, the stock delivered total returns of 21% per year! 

The company only yields 0.6%, but its payout has shot up at a rocket pace — over 8 years, its dividend has increased at a compound annual growth rate of 27.8%! Its last dividend hike in fiscal Q3 was 25%!

Going forward, as Couche-Tard has matured and heading into its 40th year next year, it’ll be shifting its growth focus from 70% acquisitions and 30% organic in the past to 50% from each. Management still sees growth by acquisition opportunities in the fragmented fuel and convenience industry.

Today, at $39 and change per share, the stock trades at a forward price-to-earnings ratio (P/E) of 18.5, which implies a decent PEG ratio of about 1.6 based on the estimated earnings growth of 10.6-12.3% per year over the next 3-5 years. 

Enbridge offers a safe 6.1% yield and stable growth

Enbridge has worked hard and come a long way after taking on too much debt to acquire Spectra Energy in 2017 and selling off non-core assets to reduce the debt levels.

The stock was also depressed by delays in the Line 3 Replacement project. That said, if Enbridge successfully places the Canadian portion of the project into service as it plans to for this quarter, the stock should shoot up much higher by year end. 

ENB Dividend Yield (TTM) Chart

ENB Dividend Yield (TTM) data by YCharts

Assuming a fair yield of 4.5%, the stock should trade at CAD$65.60 per share. First, the stock needs to break above the CAD$50 resistance, though.

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