Last updated by BM on September 7, 2023
Summary
- During the last fiscal quarter, the Magic Pants Wealth-Builder Model Portfolio (CDN) made seven transactions and added four new positions. The portfolio now consists of thirteen dividend growth companies across seven sectors of the Canadian economy.
- With an initial capital investment of $56,922, the portfolio’s annualized income has grown to $2,152 at the end of this quarter, and our capital has an unrealized capital gain of $2,298.
- The main goal of the portfolio is to generate growing dividends from quality Canadian companies with a track record of dividend growth.
- The secondary goal is to build a portfolio that generates above-average total returns over the long term (5-10 years).
Background
“You have a pair of pants. In the left pocket, you have a $100. You take $1 out of the left pocket and put in the right pocket. You now have a $101. There is no diminution of dollars in your left pocket. That is one magic pair of pants.”
This ‘magic pants’ analogy was from an article on dividend investing I read about a decade ago on Seeking Alpha and was one of the catalysts for me to take a closer look at this type of investing and see if it truly was magical.
The Magic Pants Wealth-Builder Model Portfolio (CDN) is our attempt to prove that dividend growth investing is one of the simplest and safest ways to build wealth. We believe that by following our process, an everyday investor can learn to build powerful dividend growth portfolios and eventually find that elusive pair of magic pants.
Goals and Objectives
Dividend growth investing is a long-term investment strategy that involves selecting quality stocks with a history of consistently increasing dividends and holding them for the long term. The goal of this strategy is to generate a steadily increasing stream of income through the reinvestment of dividends, as well as potentially realizing capital gains as the stock price appreciates over time. This can be an appealing strategy for investors looking for a reliable source of income, as well as for those seeking to grow their wealth over time.
The Magic Pants Wealth-Builder Model Portfolio (CDN) is a public, real-money, real-time portfolio demonstrating the principles and practices of dividend growth investing. The portfolio was launched on May 1, 2022, and has been managed in real-time since. Its primary goal is to generate a steadily increasing stream of dividends paid by quality Canadian companies. All the decisions to buy, hold, and sell securities are real decisions about handling money. The portfolio is intended to serve as a blueprint for constructing a dividend growth portfolio, and as a living example of how dividend growth investing works. It can be useful for illustrating goal setting, planning, stock selection, portfolio management, and other aspects of investing for those with similar goals.
With an initial capital injection of $100,000, dividend reinvestment and annual contributions of $12,000, the 10-year target is to achieve ~ $11,400 annual income by the tenth-anniversary date. The MP Wealth-Builder Model Portfolio (CDN) – Business Plan can be found here.
Quarterly Portfolio Review
One of our practices is to give the Magic Pants Wealth-Builder Model Portfolio (CDN) a checkup four times yearly, at the end of July, October, January and April. The basic questions are: How is the portfolio doing? Is it tracking towards its goal? How is each position doing? Should changes be made to keep the enterprise on track? We follow a formal process for portfolio reviews plus additional discussion.
To provide accountability, transparency and trust in our process, we ‘timestamp’ all our trades. We also like viewing our trades in this manner because it is easy to quickly see how we are doing and the effects a growing dividend has on price.
Every DGI Alert we’ve issued since we started our portfolio has been timestamped. We don’t hide our history. When we’re wrong, it’s right there for all to see – every win, loss, and tie.
Transactions This Quarter
“Your money is like a bar of soap – the more you handle it, the less you’ll have.”
There were seven purchases this quarter.
We will provide DGI alerts (timestamped) each time we buy/sell stock in our portfolio and then write an article on why.
Articles detailing the investment thesis behind our purchases can be found in the ‘Subscriber Only’ category section of our site on the right side of our home page. Here are the links:
We Just Bought More (TRP-T), (RY-T) and (CNR-T) for our MP Wealth-Builder Model Portfolio (CDN)
We Just Bought Magna International (MG-T) for our MP Wealth-Builder Model Portfolio (CDN)
We Just Bought Toromont Industries (TIH-T) for our MP Wealth-Builder Model Portfolio (CDN)
We Just Bought More Telus Corp. (T-T) for our MP Wealth-Builder Model Portfolio (CDN)
We Just Bought More TC Energy (TRP-T) for our MP Wealth-Builder Model Portfolio (CDN)
Dividend Increases Announced This Quarter
No companies in the portfolio announced dividend increases this quarter.
Income Paid This Quarter
The market may move irrationally while dividends remain much more stable, reliable and predictable.
We earned $497.21 in dividend income last quarter, almost double the quarter before! This amount gets deposited directly into our brokerage account, where we can reinvest it in quality individual dividend growth companies that are sensibly priced.
Note: When the currency of the dividend and share price match, the calculation is straightforward. But it’s not so simple when the dividend is declared in one currency, and the share price is quoted in another. Dividing the former by the latter would produce a meaningless result because it’s a case of apples and oranges. To calculate the yield properly, you must express the dividend and share price in the same currency. Franco Nevada is one such company. We bought it in CDN dollars, and it pays a USD dividend. The dividend amount above has been converted to CDN dollars.
Returns
Wealth-Builder Portfolio (CDN) – Business Plan Projections (Actual):
Our ‘Initial Capital’ amount for our Model Portfolio was $100,000. This is the amount we use to demonstrate our process and position sizing component. For example, an investment of 200 basis points or a position size of 2% is equal to an amount or investment of $2000. Investors wanting to invest less or more in our dividend growth strategy can then substitute the ‘Initial Capital’ amount to suit their own individual situation. Subscribers wishing to customize their ‘Initial Capital’ and ‘Annual Contributions Invested’ projections can reach out to me for a copy of the spreadsheet.
To date we have invested $56,922 of our initial capital as per our business plan. That leaves us with uninvested capital for this fiscal year of $25,078 ($82,000-$56,922) plus dividends collected.
Since inception, our income has grown to an annualized amount of $2,152 and our capital has seen a rise of $2,298. Our income aligns closely with our projections, but not being fully invested (as per our business plan), our capital gain and portfolio value are behind projections. On the positive side, we were able to invest ~16K of our capital in the first quarter of our fiscal year (May – July) and if we are correct in our macro analysis, the rest of fiscal 2023 should be an opportune time to get fully invested. We are also tracking a higher starting yield and dividend growth rate than we budgeted for.
Return Calculation:
We reviewed several different calculations to come up with a fair representation of total return. After consultation with portfolio management professionals, we have now decided upon the monthly ‘Modified Dietz Return’ formula to calculate our portfolio returns going forward.
The ‘Modified Dietz Return’ calculates the monthly rate of return of an investment portfolio which includes the cashflows in and out of the portfolio. The method accounts for the timing of when the cash flows come in and out of the portfolio in order to properly weigh the impact of these cash flows on the portfolio’s return.
At present we do not incorporate the returns of our uninvested cash positions as part of our portfolio returns only contributions and withdrawals and of course our dividends.
Wrap Up
Our income is growing, and our initial invested capital is safe and growing as well. We still have lots of ‘dry powder’ (cash) to invest when the opportunities arise.
One of the highlights of the past quarter was our investment in Magna International (MG-T).
This is an example of the Real Time DGI Alerts that Subscribers receive when we buy/sell a position in the Wealth-Builder Model Portfolio (CDN).
The stock price is up almost 30% since we bought it and the company’s increase on guidance, in its most recent quarterly report, is an indicator that better times are ahead.
“I am pleased with our second quarter operating performance, which reflects continued strong execution on higher organic sales and cost reduction actions being taken across the company. We remain highly focused on executing our strategy and remain confident in our ability to meet our short- and long-term growth and margin outlooks.
With the closing of the Veoneer Active Safety acquisition, we have hit the ground running on integration plans and delivering synergies from the combined business.”
– Swamy Kotagiri, Chief Executive Officer
Our most challenging purchases were with TC Energy (TRP-T). We initiated our three-dot rule (buy incrementally three times and stop) with this stock to dollar cost average into a position size on the way down. Unfortunately, we did not execute on the fourth dot as (TRP-T) went as low as $45 before rebounding nicely to the $48 level, which was our last purchase. We still believe strongly in this company and are looking for our investment thesis to play out later in the year or early in 2024. In the short run we will be happy with our growing ~7.5% yield.
“The combination of top-tier asset and contract quality, regulatory protection on existing pipelines, attractive near- and long-term pipeline projects, and a vast, diverse pipeline network allows TC Energy to generate durable excess returns on invested capital…TC Energy’s assets are some of the highest-quality assets we cover.”
Source: Morningstar on TC Energy
Although it is difficult to stay disciplined when the markets are volatile, we continue to believe in our process and fifteen months into our business plan, the results speak for themselves.
P.S. Enjoy your growing income and don’t forget to ‘Front Load The Fun’!
Please don’t hesitate to reach out to us anytime with your comments or questions to info@magicpants.ca .
