As a compliment to a more predictable aspect of consumer demand I invested in Metro (MRU.A) and Empire (EMP.A) for their grocery operations across Canada. Each consumer company adds a different element of growth to the portfolio and exposure to discretionary or consumer staples in various areas of the country.
Choosing stocks for my energy exposure proved difficult. I often say that a value investor expresses humility in their actions and understanding the various elements of the energy industry is not more forte. I’ve gone with simplicity and infrastructure as the main themes for my exposure to this sector. I chose to invest in Husky Energy (HSE) for its upstream, midstream and downstream operations and a commitment to increasing its dividend. After careful study I added a complimentary natural gas & energy infrastructure company by the name of Alta Gas (ALA.UN).
Utilities and pipelines have presented one of the significant challenges to the construction of the portfolio. As with the banks I wanted to gain exposure to a number of various operations and long-term fundamentals of the specific industries. With the weakness in markets throughout 2008 valuations finally seemed more tolerable and I initiated positions in utilities Fortis (FTS) and Atco (ACO.X). Both companies have international exposure and service different regions of Canada with their operations. ACO.X has a controlling interest in Canadian Utilities (CU) and although I continue to want exposure to Enbridge (ENB) for its strong pipeline operations the valuation continues to be too expensive.
As a hedge against inflation over the long-term I decided that a prudent objective would be to invest in real estate assets away from the railway stocks and utilities. Real estate investment trusts (REITs) were the most cost effective method of investing directly in real estate and I chose two companies: Calloway REIT (CWT.UN) and Cominar REIT (CUF.UN). CWT.UN provides my portfolio with exposure to commercial shopping real estate and indirectly to Walmart who is their largest tenant. CUF.UN, a Quebec based REIT, provides exposure to commercial business real estate with large office holdings in Montreal and Quebec City.
One element of diversification that I’ve included in this portfolio is gaining exposure to preferred shares. Now these aren’t usually exciting, but with high volatility in credit markets throughout this year many preferred shares are trading on a tax-advantaged basis well above their respective commons. Since my original intention was to hold 25 common stocks I felt that exposure to an additional five preferreds would decrease the overall risk in my portfolio from common equities and decrease the long-term volatility of the portfolio when compared to the overall market. Each preferred gives me additional exposure to a sector that I felt was lacking in my portfolio. Specifically BAM.PR.J for real estate, CU.PR.B for utilities, LBS.PR.A & NA.PR.L for financials and ENB.PR.A for my desired exposure to pipelines.
For exposure to supplementary business services and business infrastructure I hold shares in Thomson-Reuters (TRI).
Dividend Growth:
For any investor starting out a portfolio of dividend stocks there is the eternal debate of whether an investor is better to own a stock of high yield and low dividend growth or a stock of low yield and high dividend growth. Throughout my stock selection process I was very keen to attempt to create a balance between both.
Stocks in the portfolio such as EMP.A, MRU.A, RCI.B, SAP or SC have always had low dividend yields, but grow those dividends in the double digits annually well above the blue chip banks or insurance companies. An investor may state that it takes a stock such as SC years to reach a cost-based yield of what a bank offers today, but for an investor with a long-term investing horizon concentrating on low yield and high growth stocks offers a very attractive method of growing my annual income at an expedited rate. It will entirely depend on the individual investors priorities, but I think a rational investor constructing a portfolio of stocks benefits from the accelerating cashflow provided by higher growing dividends over the long-term than concentrating exclusively on stocks that yield over a minimal requirement (>2%). An investor would still hold a large portion of their portfolio in 3-4% yielding equities, but yield growing stocks add a nice element of diversification for cashflow purposes that help to provide cash to fuel continued purchasing.
