Portfolio Construction 101

When it comes to portfolio construction what should you do? Well, you could try the couch potato portfolio, the perfect portfolio, the permanent portfolio, the sleep easy portfolio, the beat the tsx portfolio etc.. etc.. Lots of direction out there and confusion, on what to do and what to try. Here is another idea of my own for an open non-registered account. This is where you keep money in case you needed it right away. Just open a self-directed investment account with any discount broker. This allows you to buy and sell these particular stocks anytime you like or when you have new money to put to work.

My basic premise is to design your own hedge fund if you will. We all complain about the high price of gas in Canada so why not buy a company that pays a dividend to help you offset the cost of gas? Something like a Husky Energy for example. You then do this for all the household expenses you have.

Phone, internet, cable, utilities, groceries, consumer discretionary goods etc.. etc..

Quite simply buy the companies that bill you monthly, or that you are a consumer of. They all pay dividends and because you hold them in an unregistered account you reap the quarterly payments and use them as a hedge against your monthly expenses. You are also getting the dividend tax credit so you end up paying a lower tax rate at the end of the year. Barbara Streisand loved Starbucks coffee so much she bought the stock, as an example of buy those things which you consume. So here is what I would need to do; Buy Scotiabank (BNS) – where I have my bank and investment accounts Buy Sunlife (SLF) – where my wife and I have life insurance policies and our drug plan Buy Emera (EMA) as our electric utility stock – we are billed monthly for our power consumption Buy Enbridge (ENB) – this is the company we use for natural gas and bills us monthly Buy Bell (BCE) - home phone and cell phone provider Buy Rogers Communication (RCI.B) – cable provider Buy Suncor or Imperial Oil  – integrated oil and gas companies, we consume lots of gas Buy Empire (EMP.A) or Loblaws (L) – you have to eat and we all buy groceries Buy Alimentation Couche-Tard (ATD.B) – corner/variety store, cheap gas and smokes Buy Dollarama (DOL) – Canadian discount retailer we use all the time These companies all pay dividends and I am a customer. It seems to me they would provide a good hedge against monthly expenses. You don't need to buy everything right away. You should take at least 6 months to put a portfolio together anyway. There is no need to go out and rush to buy everything and every company you deal with. This is simply an exercise in doing things your way. Buy companies you are already giving your money to. Why not get something in return to boot? Wait for them to become cheaper, in the interim you can put together a watch list of what you would like to buy.  When they go on sale you are ready to pounce. Think about grocery shopping, we all love a deal don't we? When your favourite item goes on sale you buy it. We just don't like to buy it at full price.  Think toilet paper, who buys that at full price? We always wait for it to go on sale, just don't wait until you run out.  If you like, you can add in some real estate exposure through an ETF like ZRE or XRE. This can help give you a little juice in an area where it's hard to pick just one name and will give you diversification across multiple income streams. I do not own any REITs at the present time but I'm watching and waiting to buy. If we just added one each of the higher yielding stocks to get started, it could look something like this; CIBC (CM) – 4.7% SunLife (SLF) – 3.4% Emera (EMA) – 5.4% Enbridge (ENB) – 7.05% Bell (BCE) – 5.49% Rogers (RCI.B) 3.15% Telus (T) 4.39% CNQ (CNQ) 2.9% Loblaws (L) 1.64% Dollarama (DOL) 0.33% BMO Equal weight REIT (ZRE) 4.14% (after fees) TOTAL YIELD = 3.87%* When high interest savings account are only yielding a little above 1% and money in the bank averages .15-.25% this is a pretty good return.  All quality blue chip Canadian names and over time you can expect some capital appreciation. The best of three worlds, hedging your expenses, collect your dividends and capital appreciation (growth). You can hold these forever or however long you decide to carry a monthly bill with these companies.  You decide on how much or how little you wish to buy. Equal dollar amounts or equal share amounts, the choice is yours. Keep it simple and do what you feel comfortable doing. Take your time and do your own company specific research.   This is a great way to learn about what you are already paying for and now you can invest and get paid for what you already own. We all hate our cable company, if you can't beat 'em join em' err buy them! Many people have money in a savings account at their local bank but would never think of buying bank stock. Why not? It gives a better return than a dead end savings account that fails to keep up with inflation.  Over time your dividends will continue to grow and these blue chip companies always pay out their dividends and raise them consistently. Stay away from what the bank is trying to sell you, mostly high MER bank specific mutual funds.  You can also sign-up for Drip programs and continue to accumulate shares from your dividend payments if you so choose. You don't have to limit your list with just these examples, you can expand your list to include other items you consume, you might smoke, drink, buy a lot of take-out foods, I don't know. You can explore those stocks from companies you buy from or that you enjoy so much you'd like to become a shareholder in. Whatever your list, just be sure to buy Canadian stocks for your open account for the tax benefits they provide, and also the liquidity. If you need the money for expenses you can sell the stock and then transfer it to your chequing account usually within 24-48 hours. Any US stocks you wish to buy should be held in an RRSP. There is foreign-withholding-tax-explained to be paid when you sell your stock, so for tax purposes they are best held in a shelter. Stocks like; MCD McDonalds - if you like their coffee (I do) and consumer product giants like PG Proctor and Gamble - for consumer staples DEO Diageo - if you drink a lot of hard stuff like scotch etc.. etc.. You could do no worse putting together a portfolio of stocks from companies who's products you use on a regular basis and pay a monthly bill to use their service. If nothing else just having the satisfaction knowing some of your hard earned money will be returning to you in the form of dividends. It's like getting cash back on store purchases. So there you have it, a portfolio that will help you hedge out some of your monthly expenses. You will hear professional money managers tell you to only invest in what you know. If you use these companies then you already have that familiarity. Now you just need to do some added research to see where they stand financially. This is what I do and also think of doing when I have more cash to invest. In my retirement account I am always looking to add to my holdings in Canadian listed dividend companies that I'm a consumer of. What do you think of this strategy to build a portfolio? Is this something you would try? 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