May 25

The Dividend Tactics

Dividend Tactics – Best Dividend Paying Stocks

After several years of investing with some success and some mistakes, I concluded that knowing the best penny stocks to watch wasn’t particularly helpful. The key is investing in the best dividend paying stocks. Sure, there is much less alpha to be had, but the volatility is so much less. And with the right knowledge and strategies, dividend paying stocks can also deliver capital growth opportunities.

In reality there are three key challenges getting in the way of investors like you and me from achieving our investment goals:

  • Common investment products such as mutual funds charge fees but routinely under-perform, and do not allow for tailored investment customization to match individual investor needs.  Bonds and GICs limit risk, but low returns and loss of access to funds can prevent you from enjoying the success during a strong market, or from taking advantage of buying opportunities when they arise.
  • We are our own worst enemies.  Without defined rules in place to dictate what to invest in and in how, we are subject to the human error factor.  For a variety of reasons we buy too high and sell too low, we make these trades far too often.  We hold poor investments too long because we are not sure how or when to re-balance, and we play favourites based upon past performance or dividend yield levels.
  • We think we know more than we do.  We watch financial shows on TV, read books and gain an inflated sense of confidence to find the best penny stocks to watch.  We hear stories of success from friends and colleagues and blindly believe that we can achieve the same success, and our emotions cloud us from seeing warning signs until it is too late.

I came to the conclusion about three years ago, with the help of a good friend that the best way for me to work towards achieving my investment goals was to attack to root cause of the problems identified above.  I decided to remove investment products such as mutual funds from my portfolio and developed clear, simple, mathematical rules to help dictate how I invest – a focus on finding the top dividend paying stocks which in turn will assist with the production of stable and growing dividend income, while still maintaining exposure for capital growth.

These mathematical rules are what I call my Dividend Tactics.  To me, they provide discipline, composure and clarity that strengthens the management of my investment portfolio – and I am more than happy to share my strategy with anyone interested.

Nov 05

The Surprising Yield of Simple Home Upgrades

Like most of my readers here at Dividend Tactics, I really love getting dividends from companies that I hold within my investment portfolio but I am not so fond of paying bills.  After I got my last electricity bill in the mail I recalled a study I performed a while back at work about how LED lighting compares to conventional incandescent bulbs.  The result was that the savings in energy costs paid for the cost differential over about seven years of normal use, if I recall.  But this spawned another interesting thought – what if I considered the purchase of an LED bulb an investment, and what sort of dividend would the annual energy savings equate to?  Then I thought about other upgrades, say like buying a new LED TV to replace an older plasma TV – what sort of energy savings would this switch produce and what would the “equivalent dividend yield” be?


home upgrade

1.  LED Light Bulbs vs. Incandescent Bulbs

LED bulbs are fantastic devices:

  • They use about 20% of the electricity that a conventional incandescent bulb uses
  • They last for about 10x as long as incandescent bulbs
  • They do not contain mercury and can be used outdoors (unlike compact fluorescent bulbs)

A 60W equivalent LED bulb produced by Philips only consumes 12.5W of electricity and retails for $16.98 plus tax (lets say $18 total).  If I put this in a frequently used room where the light would be on for approximately 3h a day, in a year I would save about 52 kWh a year.

My current electricity plan has a fixed rate of $0.0888 per kWh; therefore, in one year I would save $4.62 in energy costs.

If I consider each bulb a “share”, the $18 the market value for each “share” and the $4.62 in savings the annual dividend we get a whopping 25.6% yield!  Tax free and guaranteed!  Not even the best dividend stocks come close to matching this.

What’s the catch?  The “share” price is effectively zero once you buy and install them, so there is an inherent capital loss right from the start.

When I first looked at this a few years back the LED bulbs were about $30 each.  With them running over $12 cheaper each now, the buyback period is only 4 years.

2.  LED TV vs. Plasma TV

Need to justify to your significant other why you need to buy a new TV?

The older 50″ plasma TVs use up about 420W (at least the sticker on the back of mine says so).  A newer LED TV of comparable size uses much less.

I found a nice Samsung LED TV online that claims to use about 50W on average e for $985 plus tax (let’s say $1050).  If I bought that unit to replace my plasma TV and assume an average of 4h usage per day, I would save about $36 a year in energy costs.

This gives me an “equivalent dividend yield” of about 3.4% – not bad, considering it is also guaranteed and tax free.  Plus I can’t remember ever hearing about someone who could watch Family Guy or play Call of Duty on their JNJ shares….

3.  Installing Solar Panels

Costs for installing a solar panel generation system can certainly vary depending upon whether you do it yourself or hire a contractor, and there are efficiencies of scale to be considered as well.  To make this assessment easy, I googled up a real life story where the owner paid about $50K for a professional installation (down to about $30K after government rebates), and generated 12.05 MWh from this installation over one year of operation.

Using this scenario and my electricity rate of $0.0888 per kWh, the owner would have saved/sold electricity over the year at a value of $1,070, giving them an “equivalent dividend yield” of about 3.6% after those installation rebates are considered.  The added bonus here is their home value would also increase from the installation.


For the relatively low entry cost and the added value of reducing your overall energy footprint, I would recommend that everyone who pays electricity bills on their home seriously consider replacing any frequently used lighting with LED bulbs.  They have come down in price considerably since only a few years ago, and the cost savings on energy usage alone pays for itself in only a few years.

As for the TV upgrade, if you have the cash and watch TV enough, this one is an easy sell.

Installing your own solar power system for your home is a bit more complicated.  If you are seriously considering this you should really do your homework – it might make more financial sense to just invest the same amount of money a solar system costs into a basket of dividend paying stocks and avoid the installation and maintenance hassle…but remember to keep a few bucks aside to buy some LED bulbs.

Oct 20

Active Trading vs. Passive Investing

The typical dividend growth investor, myself included, follows a buy and hold style where the day to day fluctuations of an individual stock are essentially ignored and the focus is instead directed on the receipt and reinvestment of dividends coupled with long term asset growth.  This strategy is also often referred to as passive investing, since there really isn’t much effort involved on a day to day basis.

Active trading contrasts passive investing in that the trader is solely focused on short term movements of the stock price and isn’t particularly interested in dividends or long term valuations.  It is much more exciting than passive investing, with the notion of making a quick score luring in many investors into this method.

passive v active trading

How Active Trading Works

An active trader, or day trader, purchases an investment at a price he or she thinks is on the low end of a typical fluctuation range for that particular stock.  They determine a desired sale price and would typically create automated instructions for the security to be liquidated upon reaching the desired sale price. To be successful you need to know the top penny stocks to watch, period.

Below is a chart showing how Apple’s stock price fluctuated this past Friday.  For a typical buy and hold investor, it was actually a pretty good day – up $2.95 or 0.6%.  For an active trader who played his cards right, it could have been a really good day.

Say this active trader had $10,000 and had the foresight to set up an automatic purchase prior to markets opening to buy 20 shares at $492.  Around 10am, the stock price slid down to $492 and the purchase was made.  When he got back from his coffee break and saw that the purchase was complete, he set up an automated sale price of $498.

After a nice long Friday lunch he got back to his computer around 2pm and sees that the price is nearing his sale target – watching with anticipation it hits his magic $498 number around 2:30 and he celebrates as he just raked in a cool $100 ($6 profit on 20 shares minus two trading fees of $10 each).

How Much Can Active Trading Make?

How much a person makes using an active trading technique depends on many factors such as initial investment, commission costs, market fluctuations, knowing the ultimate stock alerts, and to some degree, luck.  The better information a person has on a particular company, the better are his chances of making wise decisions.

Highly sophisticated active traders can utilize leverage to make money off of someone else’s money, but there are always additional risks when taking this approach.

Challenges of Active Trading

The two biggest challenges that active investors have is to know what target buy-in and sale prices should be used on a given day for a given security.

To help them identify both the buy-in point and the desired sale price they can use historical charts, beta values, market news, cycles and insight, moving day averages and so on; however, there is never a guarantee that the decision they make is correct or even realistic.

Risks of Active Trading

As with any investment there are always risks, but with active trading there are additional risks as well.  For example, if your buy in point is too high and the stock price continues to drop after you make a purchase you will be down.  When this happens, a typical individual investor might become scared and set a sale price lower than he wanted, maybe even selling at a loss just to get out.

The excitement with active trading amplifies the emotional response people experience with investing and there is a point where it starts to mirror gambling.

Summary – Active vs Passive Investing:

The table below shows some advantages and disadvantages of the two approaches.  Obviously, since I place myself into the dividend growth camp I am somewhat biased, but regardless I truly believe the buy and hold approach is much better in the long run and much more enjoyable of a ride too.

Have you ever considered or tried active trading?


Active Trading
Passive Investing
Requires significant effort and attention from the investor Requires minimal effort and time from the investor
Higher Level of Risk Lower Level of Risk
Potential for Quick Gains Potential for Long Term Gains
No Dividends Dividends
Stressful Minimal to No Stress
Capital Gains Tax Only pay Capital Gains When (or if) You Sell
High Trading Fee Cost Minimal Trading Fees
Significant Accounting Effort Minimal Accounting Effort
No Special Tax Credits Dividend Tax Credits


Oct 13

DT Assessment: Russel Metals (RUS)

Russel Metals processes, manufactures and distributes tubular metal products amongst North America, with about 30 sub-companies operating under the Russel Metals brand.  A large percentage of their business is devoted to providing piping materials to the energy industry.

Russel Metals has one of the longest operating histories of any company, not just in Canada, with its roots dating all the way back to 1785.

Financial Information

  • Revenue over last 12 months: $3.0 Billion
  • Profit in last 12 months: $88 Million
  • Company Assets: $1.8 Billion
  • Company Debt: $1.0 Billion
  • Cash and Equivalents: $115 Million

Russel Metals came out of the 2008 recession in rough shape.  Revenues dropped by over a third in 2009 vs 2008 and they wound up taking a loss that year as well.  Since then, they have managed to increase revenue back up to near pre-recession levels, and have been generating profits since then.

The challenge Russel Metals faces is likely faced by all players within this segment – it is clearly difficult to generate strong profit margins in this industry given the significant infrastructure and labor costs associated with this industry.  Their current profit margin of 3% leaves little room for error, and is not particularly appetizing from an investor standpoint.  Even back before the recession they only had a profit margin of about 7%.


Dividend Information

Russel Metals has 13 years of uninterrupted dividends, but its dividend was cut almost in half in early 2009.  Since 2009 they have been aggressively increasing the dividend; however, it has held steady for the past 6 quarters and is still below pre-recession levels.  The yield is currently just over 5%.

Stock Performance

Russel Metals stock price was hammered in the recession, dropping from from over $30 a share to just over $10 a share.  Since early 2009, the stock price has rapidly increased back up to its current $27ish level.  For investors who bought in at the low point, congratulations.

Going forward, Russel Metals will likely need to continue to grow revenue and increase profits in order for there to be market appetite for higher stock prices.

Dividend Tactics Assessment

DT Score:  463

From a dividend investor standpoint, Russel Metals has been a decent company to own over the past 3-4 years with both strong dividend increases and capital growth.  Those who owned it before the recession and sold their positions missed out on a great recovery.  Going forward the dividend is high and likely safe given the way they are able to manage inventories to align with the cyclical pattern of the market, but I am concerned about their ability to generate profit and the effect it may have on future dividend increases and stock price growth.

Disclaimer: I currently own Russel Metals within my portfolio

Sep 29

DT Assessment: Eaton Corporation (ETN)

Eaton Corporation is involved in power management and the provision of energy-efficient solutions within the electrical, hydraulic and mechanical power industries.  They have five main segments: Electrical, Hydraulics, Aerospace, Truck and Automotive.  Headquartered in Ireland with over 100,000 employees, they have been in operation for over 100 years and have an impressive record of 90 years of uninterrupted dividend payments to shareholders.

Financial Information

  • Revenue over last 12 months: $19.2 Billion
  • Profit in last 12 months: $1.4 Billion
  • Company Assets: $35.8 Billion
  • Company Debt: $20.8 Billion
  • Cash and Equivalents: $1.1 Billion

Eaton Corporation is a major player within the industries they operate in, and revenues they earn will have a tendency to parallel overall market strength.  Revenues were down immediately after the recession but have climbed up steadily since – most likely driven by Eaton’s customers replacing aging equipment coupled with a shift towards improvement in overall energy efficiency within their operations.

Profits, on the other hand, are dictated by cost of material and equipment, cost of labour, and of course the amount they can charge for their products and services.  Currently, the profit margin for Eaton is around 7%, which is low in comparison to many other dividend paying companies.

Eaton Corp


Dividend Information

As stated above, Eaton has a very impressive record of 90 years of uninterrupted dividends.  Equally important is the growth of the dividend – over the past five years the dividend has grown at a rate of nearly 11%.  Yield on ETN shares is quite moderate at just under 2 and half percent, making it a pretty safe dividend as well.

Stock Performance

Since the recession, Eaton has been a great success story for investors, with the stock price climbing from the $20/share range up to the nearly $70 range where it is today – this is considerably above the $40 to $50/share range where it traded at is peak just before the recession.

Dividend Tactics Assessment

DT Score:  552

Eaton’s dividend payment history and revenue generation ability are very attractive to any dividend investor.  Equally attractive is the recent history of dividend increases and overall capital gain.  Going forward the rate of increase will most likely taper off; however, the company remains a solid investment for anyone looking for exposure into the industrial sector.  If they can focus on improving profit margins going forward it will make them even stronger.

Disclaimer: I currently own Eaton shares within my portfolio

Sep 22

Portfolio Performance: September 2013

Well – I’ve been lazy lately. minimal website updates, falling behind on emails, etc…I wonder if it is a coincidence that my ‘laziness’ started about the same time as the NHL regular season….

Whatever the case, I am finally now getting around to posting my portfolio performance update for September 2013.  It was another pretty solid month with a nearly 2% capital gain and dividend income right where I expected it to be.

Probably the biggest event in my portfolio was the long overdue replacement of TransAlta with Canadian Utilities.  Why did I do this?  The answer really boils down to investment quality.  Other than the huge yield, TransAlta has been a bottomless pit for my portfolio – I buy shares and after a strong bull swing it drops again so I buy more and it drops more.  I took a loss on TA.  Not a big loss as it was hedged by significant income from dividends, but a loss for sure.  Sometimes though, you need to remove some bark to save the tree.  Reinforcing my decision was the results from my own Dividend Tactics (DT Score) investment quality rating system – TransAlta’s 425 is outclassed by Canadian Utilities’ 495.


The green area in the chart above now reflects my estimated dividend income for the next few years.

Most of the month’s transactions revolved around the removal of TA from my portfolio and it’s replacement with CU.  These were my buys:

My sales:

  • TransAlta (TA)

I have also updated my overall portfolio performance page.