Sample Portfolio Review

Investment Objectives

Income  

Reasonable after tax total return to fund retirement

Tax Efficient Portfolios

Currently you only have investments in RRSP’s, but recommend setting up TFSA’s and non registered accounts for both of you. 

Minimize annual taxes payable by holding securities in different types of accounts

Fixed Income Interest bearing securities held in RRSP’s and TFSA’s

Growth Equities, Canadian Dividend Stocks, Funds and ETF’s held in non registered and TFSA accounts

Dividend Paying Global Equities and ETF’s are taxed as regular income and best held in RRSP’s

No US dividend withholding taxes on individual US stocks and US listed ETF’s within an RRSP

However all Canadian listed ETF’s holding US stocks subject to US dividend withholding taxes regardless if held in taxable or non taxable accounts

US Dividends for equities held in a TFSA are subject to withholding taxes with no tax credit

US Dividends on equities held in non registered accounts subject to withholding taxes, but still entitled to a tax credit for foreign taxes paid 

Purchasing Power

Maintain purchasing power of investments 

Time Horizon

Retirement income for both of you – 30 years plus.

Risk Tolerance

No need to take unnecessary risk

Minimize portfolio volatility

US dollar Accounts

Currently you both have Canadian RRSP accounts where you hold your US securities.

In order to minimize the foreign exchange profit spread that financial institutions all charge, I advise setting up US dollar RRSP accounts. In addition when you set up two non registered Canadian accounts, you will need to set up US dollar ones as well. There is no need to set up US dollar TFSA accounts as the US dividend is subject to withholding taxes with no tax credit available.

As soon as you both have US dollar accounts set up, you will need to phone a TD discount online trader to tell them you want to transfer Canadian funds into your new RRSP’s and non registered accounts using the Norbert Gambit method. They will know exactly what you are referring to and will guide you through the process. This will save you between 1-2% of the foreign exchange spread. They will need to know exactly how much Canadian dollars you want to convert into US dollars.

Consolidated Asset Mix

Market Value Current % Recommended %
Cash & Equivalents           182,863        33.04        37.50
Fixed Income             60,438        10.92        10.00
Preferred shares             35,088          6.34        15.00
Common Equities           275,126        49.71        37.50
   Canadian           206,244        37.26        13.00
   US             54,663          9.88        19.50
    Global             14,219          2.57          5.00
Total Consolidated Portfolio           553,515      100.00      100.00

 

 

Equity Sector Weights

 

                                                                           Market Value          Actual          Recommended

%                  %

 

Financial                                                           103,832                     37.74             24.00

 

Energy                                                                  21,461                       7.80            10.00

 

Materials                                                               9,450                        3.43              4.75

Industrials                                                           22,078                      8.02             11.00

 

Consumer Discretionary                                    7,115                      2.59               8.00

 

Communication Services                               17,666                      6.42               8.26

 

Consumer Staples                                          14,219                       5.17              4.41

 

Technology                                                          6,998                       2.54            15.16

 

Utilities                                                               40,187                     14.61              1.78

 

Real Estate                                                           8,932                       3.25              2.96

 

Healthcare                                                         23,188                       8.43              9.68

 

Total                                                                 275,126                   100.00          100.00

 

Current Asset Mix

Your current consolidated asset mix, excluding your business investments, has 33% in cash and equivalents, 11% in fixed income, 6% in preferreds and almost 50% in common equities.

My current sample Income Portfolio has 37.5% cash, 10% in fixed income, 15% in preferreds and just under 38% in common equities.

Having a nice cash surplus provides you with ample flexibility to gradually increase your equity exposure as opportunities present themselves.

Even though you will be investing an additional $500,000 less applicable capital gain taxes in a few years from the sale of your business, I do not recommend investing your entire current cash surplus into the equity market at this time.

I do not think this current market drop is the beginning of an economic recession. However the equity market may not yet have reached a short term bottom and will remain quite volatile.

Fixed Income

Your fixed income average term remains low. This is important in a rising rate environment.

I do not recommend any changes in this asset class. 

High Interest Savings Accounts 

Currently the higher yielding Alterna Savings and EQ Bank High Interest Savings accounts are only available for non registered accounts.

You currently have the TD Bank Savings Canadian account that is CDIC insured. It is available for all types of accounts. Unfortunately the TD US savings account is not CDIC insured.

Rate Reset Preferreds

Currently you have exposure to rate reset preferreds through the Horizons Active Preferred ETF, HPR.

You also have BCE preferred K. This BCE rate reset preferred has a current yield of 4.07%, but is not callable until December 31, 2021 at $25 at a reset spread of 1.88% over 5 year Canada bonds.

I recommend switching out of the BCE preferred K issue into the Royal Bank Preferred J rate reset preferred. While the current yield is a little lower at 3.8%, it is callable on May 24, 2000 at $25 with a reset spread of 2.74% plus 5 year Canada bonds yields. It is also ranked higher by the rating agencies.

The Canadian dividend tax credit is available for these preferred dividends, making them tax efficient

Please keep in mind that these rate reset preferreds do not perform well when interest rates go down, so you really do not want to own them in a recessionary period.

However we are not in a recession and now is the time to own them with interest rates going up.

My advice is to increase your weight in Canadian rate reset preferreds in this environment of rising rates. I continue to like your holding in the Horizons actively run preferred ETF, HPR. 

Current Equity Sector Weights and Individual Stock Recommendations 

Financials 

Currently you have a large overweight in the financial sector.

I am advising a reduction in weight but to remain overweight.

While Power Corp is not an expensive stock, it is having difficulty competing with the large Canadian banks. My advice is to reduce your Financial sector weight by selling Power Corp.

Energy

Maintain your underweight position until both the global and domestic outlook for crude oil improves.

Both of your holdings in Enbridge and TransCanada are fine and are not materially exposed to commodity price fluctuations. However they both have a fair amount of debt, but Enbridge is proactively reducing it. The Canadian producers are currently very cheap after their recent price collapse. I recommend a position in Suncor at this time, but make sure your sector weight goes no higher than 10%, still underweight relative to the benchmark North American weight of 10.86%. 

Materials

Currently you are underweight and I recommend that you continue to be.

I am recommending the purchase of iShares Global Gold ETF, XGD to complement your holding in the Global Base Metals ETF, ZMT.

Industrials

Currently you are underweight, but I recommend you increase your exposure to overweight.

Global infrastructure continues to be an important theme.

I like TFI International, Finning International and Toromont in Canada.

In the US industrial space I like Honeywell and Guggenheim Equal Weight Industrial ETF RGI.

Consumer Discretionary

Currently you have very little exposure to this sector. I recommend a material increase to overweight.

I like Canadian Tire in Canada and Home Depot and Amazon in the US.

I am not a fan of Restaurant Brands International.  Although this stock is inter listed and shows up on your brokerage account as Canadian, it is really a US stock. I recommend the sale of this stock with the proceeds directed into Canadian Tire, Home Depot and Amazon.

Communication Services

This sector used to be only for telecommunication companies, but recently it has been expanded to include Google, Facebook, Twitter and Disney.

I am recommending the purchase of Google for this sector in addition to continuing to hold both Verizon and Shaw Communications.

Consumer Staples

I am advising maintaining your sector weight and continue to like Unilever. I also recommend the purchase of Alimentation Couche –Tard.

Technology

Currently you are significantly underweight, but this has not hurt you in this recent market correction that has especially trimmed technology share prices.

Now is a good time to increase your exposure. I recommend the purchase of Microsoft and Visa. 

Utilities

Currently you are materially overweight and I advise cutting back your exposure to an underweight one. 

Both of you have a sizeable position in Brookfield Renewable Partners. It has done very well for you. My recommendation is to sell at least half your position in both accounts while maintaining your investment in Algonquin Power.

Real Estate

My recommendation is to maintain your sector weight, but to sell half your position in Brookfield Property in order to purchase some Canadian Apartment Reit, Inter-Rent Reit and Summit Industrial Reit. The first two are apartment reits that are benefitting from the very tight supply of apartments in Ontario. Summit is an industrial reit that is benefitting from the online Ecommerce logistic business.

Healthcare

I advise maintaining your equity weight in this sector and consider adding Eli Lilly to your portfolio.

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