Greetings friends! It's been just over six months since I started Rainbow Wealth, and it's time to recount my progress made thus far. My idea is to produce two reports for Rainbow Wealth each year: one halfway through the year, and one at year-end. While the half-year reports are likely to be more brief in their overview of results, the annual reports will be lengthier, and provide more insight.
Oh how time flies! When I started the portfolio at the beginning of this year, I started with $2,000 dollars in a TFSA. In the six months that have since passed, I've made 6 monthly contributions of $250, and invested the proceeds into a 5-Year, 5% non-redeemable guaranteed investment certificate (GIC), as well as built a small portfolio of preferred stocks. As of June 30th, the value of the portfolio had grown to $3,387.28. This equals a savings growth rate of 69.36% since January 3rd, hooray!
A note on preferred shares
You may notice that the portfolio's value is slightly lower than what would have been the case had I just simply contributed $1,500. This is due to declines in the price of the preferred stock portfolio, as well as trading fees.
Your girl loves volatility, so she's been buying a fair amount of preferred stock. Each time I buy a preferred stock, I'm charged a $10 trading fee, so each new investment in a preferred stock will almost always start slightly in the red. But when I make an investment into a preferred stock, I'm not focused on today, but tomorrow.
If you've visited the site before and have read my article on preferred stocks, you'll know that each preferred stock has a "par" or "redemption" value, which is typically $25. The redemption value is the price that a company must pay to preferred stock shareholders if they someday wish to redeem it (which most commonly occurs because a company has found better options to finance their operations).
So when I make an investment in a preferred stock, there are two ways that I calculate my future returns:
I calculate the dividend yield by dividing the amount of dividends paid to holders of the preferred stock by the average price that it is selling for
I look to see if a preferred stock is selling at a discount to its redemption value
For example, let's take a look at the preferred stock of an established Canadian company, George Weston, that owns well-known brands like President's Choice and Joe Fresh. To look up its 5.8% Series 1 preferred shares, go to www.tmx.com and search WN.PR.A in the search bar. You will discover a bunch of information on the stock, such as its current trading price, its price history, and what its quarterly dividend is.
Looking at the image above, you will notice the two boxes highlighted in red. The box on the left details how much is paid out to preferred stock holders quarterly (every three months), which equals $1.45 per year ($0.362 x 4 = $1.45).
Even though TMX is a sweetie and tells us what the current dividend yield is, I feel it's important to understand how to calculate it ourselves. To do this, we would simply take the $1.45 in dividends that are paid each year to preferred stockholders, divide it by the price of the preferred stock, which is currently $22, and then multiply it by 100.
$1.45 ÷ $22 x 100 = 6.591%
At a yield of 6.591%, assuming we make an investment through our TFSA or RRSP, we can expect to receive 65.91% in dividend payments on our $250 investment over a ten year period.
Then comes step two: Is there a discount to redemption value? Considering the price of George Weston's Series 1 preferred has a redemption value of $25, the answer to that question is yes.
Whether or not this discount is relevant to our purchase price depends on how the market has valued shares of George Weston's Series 1 preferred in the past. To get a good understanding, scroll to the top of the page to the price chart of the preferred stock, and click "10Y", which stands for 10 years.
As you can see from the chart, the price of George Weston Series 1 tends to trade not only near redemption value, but often trades above it. This gives me confidence that, at some point in the future, it is likely that George Weston's Series 1 will eventually trade back to redemption value, or above it.
Now that we have this information, the next thing is to factor the discount into our forward expected return. To do this, we need to know the gap between the current trading price and the par value as a percentage. To calculate the discount as a percentage, simply subtract the redemption value of $25 from the current trading price of $22, divide the difference by $22, and then multiply that figure by 100.
$25 - $22 ÷ $22 x 100 = 13.64%.
This calculation is what is known as "yield to par," or "yield to redemption," which describes the expected investment return to be received by investors should the discount to redemption value close, or shares be redeemed.
To measure our overall ten year returns in simple terms, we then add the yield to par of 13.64% to our expected ten-year dividend interest of 65.91%, to arrive at an expected 10 year return, assuming no reinvestment of capital.
13.64% + 65.91% = 79.55%.
Knowing what my expected ten year return is on my investment, this helps me decide whether or not investing a smaller sum like $250 is worth it, considering I'm going to lose $10, or 4%, right out the gate in trading commissions paid to my broker.
A $240 investment, net of trading commissions, would be worth $430.92 by 2033, assuming the preferred stock is trading at its redemption value of $25, which is likely.
$240 starting investment x 1.7955 in interest = $430.92
Alternatively, it would be worth $398.18 if it trades at the same price I bought originally bought at.
$240 x 1.6591 = $398.18
Both of these results would produce profit many times more than the $10 I initially pay in commission. To me, the return is sufficiently high enough to make investing a smaller sum worth it despite the higher costs. It just means that there may be a bit of a delay between the price paid and positive returns, which I have no problem waiting for.
Portfolio Holdings
As of writing, and with the addition of July's $250 inflow, the portfolio is valued at $3,637.28, and is distributed as such:
This marks the end of my first interim report for Rainbow Wealth. I hope the information provided on the site has been helpful so far, and the growth of the portfolio is helping to inspire you. With our next meeting set for September, the big articles to expect will provide a masterclass on all things bonds, as well as the power of compound interest.
Happy pride!
Disclaimer
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