Investing for Financial Freedom

[Captain Awesome]

Just read a book "Lazy Investor" about investing into dividend-paying shares with DRIP options and got pretty excited about it.

Sounds a bit too easy though.

[Glacier]

Does anyone have any experience with the Smith Maneuver?

Also, Enbridge and TransCanada always seem to be highly recommended, but I notice they both have high price to earnings ratios. I've remember reading somewhere that you shouldn't buy stock with a P/E higher than 15, but these two pipeline companies are sitting at 26.9 and 20.8 at the moment. This doesn't sound like a very good investment choice to me. The payout ratios are also quite high (around 80%) and that doesn't sound so good either.

[Captain Awesome]

High payout rate is a sign of trouble, I've been told.

[Homeownertoo]

Enbridge and TransCanada always seem to be highly recommended, but I notice they both have high price to earnings ratios. I've remember reading somewhere that you shouldn't buy stock with a P/E higher than 15, but these two pipeline companies are sitting at 26.9 and 20.8 at the moment. This doesn't sound like a very good investment choice to me. The payout ratios are also quite high (around 80%) and that doesn't sound so good either.

Enbridge and TRP are great companies, though I lean toward the former. All a PE number indicates is whether they may be overpriced/underpriced at any given time. BTW, the DOW's (or is it S&P500?) longterm PE average is about 16. So these two stocks are on the high side now, especially given the systemic problems in Europe that seem to elude repair. I bet they'll be lower at some point in the next three months. Also, there are other ratios that are more relevant than PE, such as PE/growth.

[Homeownertoo]

High payout rate is a sign of trouble, I've been told.

Depends. What do you mean by 'high'. And for some industries cash flow is more important, though those are the exception rather than the rule. As a general rule, a company pretty safe with a payout ratio under 70%, and the lower the better.

[Captain Awesome]

Does anyone have any experience with the Smith Maneuver?

I'm also interested in this.

Feedback from somebody who tried it?

[Homeownertoo]

It's an old strategy. I've never heard it referred to as the Smith Maneuvre. It's usually sold as a technique for making your mortgage tax-deductible. Essentially, you borrow an amount equal to your mortgage, invest the proceeds in the stock market (for example; it has to qualify for what comes next). You deduct the new loan interest cost from your taxes and use the tax savings to pay the interest on the loan, or your mortgage; doesn't matter which. Over time, your mortgage is paid down while your investments grow, hopefully.

This technique enjoyed a brief popularity in the '90s before most practitioners discovered they were not the market wizards they thought they were and their investments were growing slower than their debts. Notice, for example, that the tax rebate on loan interest payments is insufficient to pay the loan interest ($100,000 loan at 5% = $5,000 interest = $1,700 tax rebate to pay down interest). So that excess interest gets added back to the loan. And don't forget taxes on investments, even if they are tax-preferred.

The bottom line is it works for informed, disciplined and lucky investors in a rising market, not for the rest, or when the market is stagnant r falling. And it means carrying a massive debt load that you may not be able to easily pay off when interest rates rise and your investments tank due to rising rates.

But it is a good scheme for investment advisors who can talk their clients into buying massive portfolios they can't really afford and a boon for dreamers who envision themselves as high rollers.

Good luck.

[Glacier]

Here's an interesting read I'd like an opinion or two on: http://canadiancouchpotato.com/2011/01/ ... hs-part-1/

[Captain Awesome]

Here's an interesting read I'd like an opinion or two on: http://canadiancouchpotato.com/2011/01/ ... hs-part-1/

Just something I've noticed - the website is focused around index funds, so it's almost natural for them to poke fun at other approaches. I think that's why they bring up indexes in 2 or 3 "myth debunking" stories. I'd read it with that perspective in mind.

[Homeownertoo]

1. I'd rather have the income than gamble on the company doing the right thing with it.
2. A company with a lot of income on its hand will be tempted to find uses for it, as opposed to a company that knows it's going to pay out a significant portion of it will be more careful with how effectively it uses the cash flow it is left to work with.
3. A company that pays a dividend is treated in the market as a sort of bond substitute (though hardly a perfect one) and as a consequence its stock price benefits from a presumed floor.
4. In a down market, not only does a dividend-paying stock tend to hold up better, thus making it less stressful to continue holding (and thus alleviating the burden of timing the market), it also pays you to hold it.
5. I'm interested in income. So even if the market is down, I still get income coming in and don't have to sell into a bear market.
6. I'm sure you can come up with other reasons to prefer dividends to selling stock.

[Homeownertoo]

An interesting article.

http://business.financialpost.com/2012/01/13/why-you-should-fear-the-retiring-baby-boomer/

[Static]

Also, Enbridge and TransCanada always seem to be highly recommended, but I notice they both have high price to earnings ratios. I've remember reading somewhere that you shouldn't buy stock with a P/E higher than 15, but these two pipeline companies are sitting at 26.9 and 20.8 at the moment. This doesn't sound like a very good investment choice to me. The payout ratios are also quite high (around 80%) and that doesn't sound so good either.

Enbridge has 2 securities, ENF and ENB. The latter is the parent of the first. ENF is a trust of ENB that acquires and distributes the income generated by ENB's pipelines. ENF's P/E is justified because of the income it generates and today's ;pw interest rate environment. ENB's P/E of 28 is very high, however, I do beleive it is somewhat justified because of the growth it tends to generate. Investors will pay a premium for fast growing earnings.

TRP vs ENF? I would prefer ENF because it has a better record of increasing its distribution. ENF has increased its distribution by close to 29% since 2007, compared to 23% for TRP. TRP is a great company though. I must disclose that I do own ENF and ENB.

[grammafreddy]

Would appreciate opinions on this stock portfolio ...


Canadian:
-Rogers
-TD
-Royal Bank
-Thomson Reuters

US:
-Target
-Wal-Mart

What would you change? Add? Delete? and why?

[Static]

I would sell them all except for TD.

[steven lloyd]

Why ?