Oh, Canada! A Few Notes on My Canadian Centric Portfolio

About 5 or 6 years ago, my investing outlook completely changed. I went from investing in the cheapest stocks I could find to building a portfolio of the best dividend payers out there, buying up these stocks when they were cheap in an attempt to maximize capital gains.

Why did I make the change? Simple, idiots. Dividends are magic.

Okay, maybe they’re not. Does anyone actually believe that, outside of straw man arguments?

I started thinking about my long-term goals. What did I want to do with the rest of my life? It was relatively simple. I wanted a much longer retirement than normal, filled with the kinds of activities I like following a schedule I had complete control over. My days will be filled with reading, writing, travel, video games, outdoor activities, and investing, leaving plenty of time left over to enjoy good food and the company of interesting people.

Most people look at investing completely backwards. Rather than establishing the goal first, they focus on the activity today. “I can afford to put 10% of my salary away,” they say. That’s fine if your goal is to retire at a standard age, or perhaps put a little aside for your kids or whatever. But my goal was to become financially independent as quickly as possible. So I put every penny I could spare into investments.

Over time, the goal changed. I was rapidly approaching financial independence. I determined dividends were the best way to fund an extra-long retirement, so I started using that approach, but with my own twist.

I wanted to maximize yield today while not taking any excess risks. Capital appreciation became the secondary goal, albeit one that was still important. So I embraced a dividend value approach. I’d buy dividend stocks when they were out of favour, maximizing both yield and upside potential.

Overall, it’s been a sound strategy for me. I’ve had some solid winners and some disappointments. I’ve endured dividend cuts, like with American Hotel Income Properties REIT (TSX:HOT.un) and Chorus Aviation (TSX:CHR). I’ve also bought a few stocks that essentially went nowhere, too.

The dividends help a lot more on those ones, obviously.

So why avoid American stocks?

When I embraced my new dividend-centric approach, I was writing for a certain investing website that shall remain nameless. I spent a lot of time researching top Canadian stocks, and eventually got to know about 100 different names pretty well.

You realize some important truths as you spend time in the Canadian market. Our banks are the best in the world and they’re backed by various forms of government protection. It would be foolish to bet against them. Canada’s telecoms are fantastic as well, albeit with the occasional huge hiccup (TOPICAL!). Nobody is going to actively compete with the so-called “Big Three,” no matter how much the government wants it to happen.

There are plenty of other examples of excellent Canadian companies, too. I’m a big fan of Choice Properties REIT (TSX:CHP.un) and SmartCentres (TSX:SRU.un), companies that take a long-term approach to value creation in real estate. A&W (TSX:AW.un) is quietly becoming a powerhouse in the Canadian restaurant space, and I get to own a royalty stream on that success. First National (TSX:FN) is a force in the non-bank mortgage market and is still owned by two founders who are actively involved in the business. Capital Power (TSX:CPX) pays an excellent dividend and is actively diversifying away from its home province.

So I bought them all, and more, content in knowing they’d likely not screw things up very badly if I didn’t pay too much attention.

This Canadian focus is the first reason why I don’t own many U.S. stocks. I spent most of my time analyzing local companies. I didn’t have much time to delve deep into the U.S. market.

The second reason was I realized many of the Canadian stocks I owned also had exposure to other parts of the world. Canada’s banks have operations in the U.S. and Latin America. Our life insurers have operations in all sorts of other jurisdictions. I was able to get exposure to U.S. real estate through Canadian-listed REITs. It wasn’t a lot, but it was something.

And perhaps most importantly, I started following a simple rule when it came to buying U.S. stocks. I would wait until the currency indicated it was a good time to buy.

Today, for instance, likely isn’t a good time for Canadians to buy U.S. stocks. About a year ago you’d could have gotten $1 US for $1.20 Canadian. These days it’s closer to $1.30.

If I follow a value approach on currencies I can maximize my potential for better long-term returns. I want to buy U.S. assets when my Canadian Dollars buy more U.S. Dollars. This maximizes what I can buy and increases my potential to make money on the currency exchange when the Canadian Dollar inevitably weakens.

The hard and fast rule is simple. I start putting money to work in U.S. names when the Canadian Dollar hits a five-year high against its American counterpart.

This approach also maximizes my dividends over time, at least when converted back to Canadian currency. A 20% move in the currency immediately creates an increased dividend stream.

Yes, I know I can’t predict short-term moves in currencies. Just like I can’t predict short-term moves in stocks or anything else. And I’d never try to invest in currencies directly. But what I can do is take steps to minimize currency risk and increase the amount I can buy at the time.

I did this in 2021 as the Canadian Dollar strengthened to a five-year high against the Greenback. I bought Costco (since sold), Abbvie, Johnson & Johnson, and Intel. This mini portfolio has gone up in value (with the exception of Intel) and my dividends are worth more because they’ve gone up and because my currency is weaker than it was a year ago. The value of each of these stakes has also been boosted by the exchange rate.

The bottom line

Make fun of my emphasis on the Canadian market all you want. I’m quite comfortable with it.

I will eventually diversify more into the United States. Hell, I might even put more money to work in places like Europe and Asia, although both continents have been poor spots to invest in equities for years now. But for now I’m content to put more money to work inside my home country, earning dividends I’ll likely end up spending in my home country anyway.

And if you’re curious, here are my top dividend positions: