As you probably know by now, I really like getting paid for doing absolutely nothing. This is why I love dividend income so much. When it comes to increasing our dividend income, there are three contributing factors:
Although organic growth and DRIP are important, the new purchases of dividend paying stocks is the key contributor on increasing our forward looking dividend income. This is why we’ve been particularly busy this year. So far this year we’ve added the following stocks already:
30 shares of Bank of Nova Scotia (BNS.TO)
71 shares of Inter Pipeline (IPL.TO)
38 shares of Magna International (MG.TO)
87 shares of RioCan REIT (REI.UN)
115 shares of Vanguard Canada All Cap Index ETF (VCN.TO)
91 shares of Telus (T.TO)
20 shares of Canadian Imperial Bank of Commerce (CM.TO)
46 shares of Saputo (SAP.TO)
32 shares of Royal Bank (RY.TO)
123 shares of National Bank (NA.TO)
26 shares of Target Coropration (TGT)
15 shares of Agrium Inc (AGU.TO)
20 shares of Starbucks (SBUX)
40 shares of Brookfield Renewable Energy Partners Ltd (BEP.UN)
100 shares of High Liner Foods (HLF.TO)
All these buys added up to be a little shy of $32,000 without taking the US and CAN exchange rate into consideration.Yes, we’ve added quite a bit of money into our dividend portfolio, but we’re far from being done for this year. At end of 2015 we set a very challenging goal for ourselves – to receive $13,000 in dividend income by end of 2016. Given that we received $10,318.02 in dividend income in 2015, this correlates to an increase of over $2,600, or about 26%. To put this into perspective, to add $2,600 of dividend income without contribution of organic dividend growth and DRIP, at a 3% dividend yield, will require adding about $87,000. Wow that’s a lot of money!
While accomplishing this ambitious and challenging goal will be super cool, we want to make sure that we have long term view in mind. Sure, it would be a lot easier to accomplish this goal if we were to chase yield and simply purchase higher yield stocks. But that’s not what we want to do. There’s a place for high yield dividend stocks in our portfolio but we also want to focus on high dividend growth stocks too. We need to find the right balance. As you can see from our buys in 2016 so far, our stock purchases consisted a mix of low yield, high dividend growth stocks and high yield, low dividend growth stocks. What’s the right balance? I don’t think I can answer that question as the answer will different for each individual.
With that in mind, we recently purchased the following dividend paying stocks:
16 shares of Visa (V)
100 shares of Keg Royalties (KEG.UN)
159 shares of Dream Industrial REIT (DIR.UN)
Below are some quick analysis and rationale behind our recent buys.
You probably don’t see too many dividend growth investors holding Visa in their dividend portfolio. At 0.72% dividend yield, it is simply too low for most dividend growth investors. The reason I like Visa and decided to add it in our portfolio is the strong dividend growth history. Visa has an 8 year dividend growth streak with a 5 year dividend growth rate of 30.7% and a 1 year dividend growth rate of 19%. At a payout ratio of 21.8%, Visa should be able to continue such strong dividend growth for many years to come. Furthermore, Visa has a very wide moat when it comes to its credit/lending business. According to Nilson Report, in 2015 Visa accounted 56% of all global credit card transactions, or $126.1 billion. The closest competition was Master Card at 26% at $59.7 billion. Visa is totally dominating its competitors.
Another reason for liking Visa is the way it generates revenues is very different than how your typical financial stocks like Bank of Nova Scotia or Royal Bank generate their revenues. Owning Visa will allow for some diversification within the financial sector. We will most likely continue adding more Visa shares in the future.
We have owned Keg Royalties in our dividend portfolio for a while now and this recent buy simply added to our existing position. For those unfamiliar with The Keg, it is a restaurant chain specializes in high-quality steaks and prime ribs. The first Keg restaurant opened in 1971 and today there are 103 restaurants in the Keg Royalty Pool operating both in Canada and the US. The Royalties fund pays out a monthly distribution of about 6%, which accounts to roughly 82% payout ratio as of Q1 2016. In the latest quarterly results, the gross sales were $146,787,000 from 100 Keg restaurants compared to $146,383,000 reported by the 102 Keg restaurants. Despite having 2 less restaurants, the sales increased by $404,000 or 0.3%, mostly contributed by an increase of 1.1% in same store sales. Thanks to the good quarterly results, the fund has increased its distribution from from $0.0875 per unit to $0.09 per unit, or about 2.9%.
I wasn’t considering about buying more KEG.UN shares until our recent visits to local Keg restaurants. During our recent visits, the restaurants were packed. One of the times we were told that we’d need to wait for more than 30 minutes. Because we were using Keg gift cards that I won at work, we decided to wait (luckily because we had Baby T1.0 around, they prioritized us and we got seated within 10 minutes). Looking around at the restaurant entrance, I was shocked to see so many people, ready to spend their money. The Keg menu was slightly on the higher end of the eating out price range for our household but was still affordable compared to some specialized steak houses here in Vancouver. Having said that, a dinner for two and a toddler without any appetizers or drinks and a shared dessert was almost $100 Canadian! I was sure that we were spending on the low end of the spectrum, considering other tables were ordering multiple appetizers and drinks.
I’ll be blunt, this purchase is more for income purposes rather than dividend growth. The goal is to use the distribution to either DRIP or purchase other dividend paying stocks.
Dream Industrial REIT
With Vancouver real estate being freaking nuts right now, invest in rental properties is out of question for us. The only way for us to invest in real estates is through REITs. Looking at our REIT holdings in our dividend portfolio, most of them focus in the retail and office spaces. One of the important concept in investing is diversification. While we can diversify through owning stocks in different sectors, it’s also possible to diversify within each sector by owning stocks that operates differently within that particular sector. As mentioned earlier, this is why we purchased shares of Visa. Similar concept can be applied with our purchase of DIR.UN. You see, Dream Industrial REIT focuses on owning and managing a diversified, growth-oriented portfolio of light industrial properties located in primary and secondary markets across Canada. The assets that DIR.UN owns and manages are very different than assets that RioCan or Dream Office REITs own and manage. This provides diversification within our REITs dividend portfolio holdings.
As of end of Q1 2016, DIR.UN owns and manages 219 light industrial properties totaling approximately 17 million square feet of gross leasable area, with 94.7% property occupation rate and a 4.2 year average lease rate.
Because the way REITs are set up, we cannot calculate the payout ratio by simply dividing the dividend payouts by annual earnings. Instead, we need to go through the financial results and look at the fund’s distributions and Fund from Operations (FFO). Below is a quick analysis I did to compare DIR.UN with some Canadian and US REITs based on their Q1 results.
As you can see, DIR.UN’s 8.4x Price/FFO ratio is quite reasonable compared to other REITs. DIR.UN’s 8.6% dividend yield is much higher than many other REITs. But if you look at the FFO payout ratio, I think DIR.UN’s distribution is very reasonable and safe. The fund should be able to continue to pay out its monthly dividend distribution and even increase by a small amount in the future. Looking at DIR.UN’s 2015 annual report, I noted that the AFFO payout ratio went from 88.5% in 2014 to 85.1% in 2015, This is a great trend to see. Two thirds of the portfolio is multi-tenant, which offers a significant rental growth potential. DIR.UN has limited direct exposure to Western Canada oil & gas industry with the Alberta portfolio is currently 98% occupied and only 0.9% of total gross leasable area expires in the next two years. These are great numbers to see given the oil & gas industry in Alberta is suffering quite a bit in recent times.
Dream Industrial has managed to provide a 5.5% compounded annual AFFO growth since IPO forecast in Oct 2012. It also increased asset base from $0.7 billion to $1.7 billion
The part I like about the Industrial REIT space is the Canadian industrial fundamentals are very strong with 1.8 billion square feet of total industrial market. Currently Dream Industrial’s 17 million square feet of leasable space is a small drop in this gigantic 1.8 billion bucket. I believe that there are great growth potentials in the industrial REIT space.
These recent buys will add $231.44 into our annual dividend income.
Dear readers, what do you think about these recent buys?