As per my previous recent buys update, I have been keeping my eyes on several dividend stocks for potential purchases. Over the past month, we continued saving money so we can have some free cash to invest in dividend stocks. Although price of crude oil has rallied the last few weeks, the stock markets remain quite volatile. Since we're still building our dividend portfolio, volatility is a nice thing to have. The volatile markets provide good opportunities to buy dividend stocks at a reduced price. While energy sector stocks look enticing, I'm becoming more cautious because we have purchased several oil & gas stocks over the last few months. I believe over the short term, the energy sector will remain quite volatile. While more and more alternative energy sources are becoming available to us, crude oil remains one of the most important raw materials. Not only we use crude oil for heat and fuel, we also use crude oil in many synthetic materials such as plastic, detergents, and paints. For this reason alone, I do not see crude oil price staying this low forever. The demands for crude oil will always be there and the price will eventually recover.
For now, I will remain monitoring energy sector stocks and see if there are anything worthwhile to add to our portfolio. We would like to add enough shared of Chevron so we can enroll in DRIP and possibly adding more shares in ConocoPhillips to average down our cost basis.
Due to my attention shift, we recently made the following purchases in non-energy sector stocks:
27 shares of Toronto-Dominion Bank (TD.TO)
21 shares of Canadian Imperial Bank of Commerce (CM.TO)
210 shares of Dream Global REIT (DRG.UN)
Toronto-Dominion Bank (TD.TO)
We added 27 shares to our existing position. TD is one of the big five Canadian banks and has a very strong dividend history, having paid dividends since 1857. (Random fact, 1857 happens to be the same year that Ottawa was chosen as the new capital for Canada). TD currently has a PE ratio of 13.2 and a forward looking PE ratio of 11.3. Or if you're Steve at Kapitalust who likes to use earning yield, TD has an earning yield of 7.58%. This is much higher than the current Canadian government 10 year bond yield of 1.30%. What I particular liked about TD is the low PEG ratio of 1.17. Having a low PEG ratio means TD will continue to grow its profits and earnings in the future. It also means that the stock is reasonably valued.
What I find the most interesting about TD is that here in Canada, the company quietly raised the minimum monthly balance requirement for the chequing accounts. What does this mean? This means that TD can generate more income by charging people with insufficient balance in their chequing accounts, or guarantee that they have a certain amount of funds available to lend out. Either way, this is a revenue generating move and it will only improve TD's bottom line.
When it comes to dividend history in the recent years, TD has done quite well. Since the Great Recession, TD has raised dividend for 4 straight years. Recently TD raised the dividend from 47 cents to 51 cents per share, or an 8% increase. Like many Canadian banks, TD held its dividend the same during 2008 and 2010 but did not cut the dividend payout, unlike many American banks during this time. If we look at TD's 10 year dividend growth rate, it has an annualized 10 year growth rate of 10.5%.
You can see TD's presences in all major Canadian cities, as they seem to have branches almost everywhere. While Canada remains the stronghold for the company, TD has been expanding into the US as well. Since US has a much higher population than Canada, expanding into the US banking sector will only provide more revenue & profit streams for the company. TD has a current yield of ~3.7% and a payout ratio of 49.28%. Considering the strong dividend history, we can safely assume that the dividend growth will continue.
Buying TD comes with its associated risks too. Due to the volatile crude oil price, the Canadian economy is under siege. The value of the Canadian dollar has dropped significant over the last few months. Last time I checked, oil rich province like Alberta is starting to feel the pinch. Since Canadians have a high consumer debt level, a slowdown in the Canadian economy may hurt TD and other Canadian banks' bottom lines. However, having seen how Canadian banks did during 2008 to 2010, I know TD will survive any potential downturns. Because we're enrolled in DRIP, a drop in the stock price is a welcomed event because we can purchase additional shares at a lower price. Having said all this, I believe the risk for holding TD is somewhat limited.
The purchase of TD.TO will add $55.08 in our annual dividend income.
Canadian Imperial Bank of Commerce (CM.TO)
Before we made this purchase, CIBC was the only big five that we didn't own in our dividend portfolio. For some reason, CIBC never came up on our radar until now. This purchase completes our ownership of all five major Canadian banks (or all the top six Canadian banks if you include National Bank). Just like TD, CIBC has a long history of dividend payment, having paid dividends since 1868. CIBC currently has a PE ratio of 12.15, a forward looking PE ratio of 9.9, a PEG ratio of 1.13, and a return on equity of 17.48%. With these good looking numbers I'm a little surprised that we haven't pulled the trigger on CM earlier. But later is better than never right?
Just like TD, CIBC has done quite well when it comes to dividend growth. It recently surprised investors by raising its dividend payout from $1.03 per share $1.06 per share. This increase marks the seventh time that the company has increased its dividend since 2011. The company has a 10 year annualized dividend growth rate of 5.5%. Combined with an already high dividend yield of ~4.4% and a payout ratio of 53.94%, it is hard to ignore CM when it comes to dividend growth investing.
Right now we do not own enough CM shares to enroll in DRIP. I'm hoping that we can add more CM shares in the future so we can reinvest dividend each quarter and just put this position on auto-pilot. Banks like CIBC will continue making money. It's in the business to keep people and businesses' money for a fee while lending the money out for even higher fees. Hard to argue with this money making business model. I think CIBC is one of these blue chip dividend stocks that you can purchase and check back every 6 months. As Dividend Mantra stated, who doesn't like keeping it simple?
The purchase of CM.TO will add $89.04 in our annual dividend income.
Dream Global REIT (DRG.UN)
I have to admit, this purchase is a pure income play as the stock pays a 8.5% dividend yield. If you look at our dividend portfolio, you'll see that all the REITs that we own are Canadian REITs, with the exception of Omega Healthcare Investors Inc (OHI). Dream Global REIT manages retail and office buildings in Germany. It currently has 266 properties comprising approximately 14.8 million square feet. Dream Global's properties are strategically located and geographically diversified within Germany. There are office properties in all seven major German cities (Munich, Berlin, Hamburg, Frankfurt, Dusseldorf, Cologne, and Stuttgart). Adding Dream Global REIT is our way to diversify our REIT positions geographically.
Dream Global REIT used to be called Dundee International REIT but changed its name in May of 2014. I have been monitoring this stock before the name change and just like CM, I finally managed to pull the buy trigger recently. The reason for not pulling the trigger earlier was my concern with DRG.UN's tenants composition to Deutsche Post previously. When DRG.UN was first listed in 2011, Deutsche Post contributed at least 90% of the gross rental income. This was not income diversification at all; I did not like invest in a REIT that collects 90% of the rental income from one single tenant. Fortunately, this number has dropped to 37.3% in end of 2013 and 29.5% in the latest quarter. The Dream Global team has been able to add some solid tenants like AIG, Google, Imtech, CinemaxX Entertainment, and State of Bavaria to further diversify their tenant composition.
Evaluating a REIT can be challenging because you cannot look at the PE ratio, you have to look Fund from Operations (FFO) and Adjusted Fund from Operation (AFFO). In the Q4 2014 financial statement, DRG.UN has a FFO of $0.21 and an AFFO of $0.20. Both an improvement of one cent compared to the same quarter of 2013. If you compare on an annual basis, DRG.UN had a FFO of $0.88 and an AFFO of $0.83, an improvement of about four cents compared to 2013.
If we look at from a rental income point of view, the average in-place net rent is €8.86 per square foot, an increase of €0.40 per square foot compared to 2013. The occupancy rate is around 85%. The occupancy rate dropped by 1.1% from the end of 2013, mostly due to the termination of some Deutsche Post leases during this period. An 85% occupancy rate is an OK number but definitely can see some improvements. (For comparison purposes, RioCan has an occupancy rate of 97% and Dream Office has an occupancy rate of 93.0%). From a long term investor's point of view, a mid 80% occupancy rate is promising. It means the properties are being occupied and rental income is being collected, it also means that more rental income growth can be generated in the future as the occupancy rate increases. A 5% increase in occupancy rate at the current net rent would generate about €6.5 million (14.8 million square feet of properties * €8.86 per square foot * 5%). I'm sure the Dream Global team will be working hard to drive the occupancy rate up.
The purchase of DRG.UN will add $168.01 in our annual dividend income.
Together all three purchases will add $312.13 in our annual dividend income. Considering that we have already added $415 and $89.76 since the beginning of 2015, we're on a roll! In case you're wondering that's an additional $816.89 of annual dividend for doing absolutely nothing at all. Please repeat that last sentence if you don't understand how powerful it is. 🙂
I have update our dividend portfolio to reflect these new positions.