A near-perfect TFSA portfolio for the avid stock picker - MoneySense

A near-perfect TFSA for avid stock pickers

Look for a mix of value, strong dividends, Canada and global


Herman VanGenderen

AGE: 60
PLACE: Calgary
TFSA TOTAL: $104,565
STRATEGY: Mostly Canadian and U.K. dividend and value stocks held for the long term

Herman VanGenderen, 60, is an agriculturalist who runs a seed business in Calgary, Alta. He has been investing diligently in his TFSA since 2009 and he likes TFSAs for several reasons. For instance, he likes that you can start with small amounts and that small differences compounded over time can make a big difference and when he finds good value stocks that meet his criteria, he buys. “My favourite holding period is forever,” says Herman. “A forever holding period reduces my workload managing the account. And of course, starting to invest early in life, in general, is important, but starting is of utmost importance, and I’ve tried to teach my two 20-something sons that lesson over the years.”

Herman’s TFSA now stands at $104,565 and his criteria for choosing his TFSA investments over the years (like his RRSP and non-registered accounts) is fairly simple. “I like stocks that pay dividends, especially in conservative, registered accounts,” says Herman. “Long-term research has illustrated that dividends represent a big part of overall stock market returns.”

First, let’s review a snapshot of Herman’s holdings:

TFSA Holdings

Company Ticker  Value Percent
AltaGas Ltd. ALA  $8,697 8.3%
Atco Ltd. ACO.X  $4,447 4.3%
CI Financial CIX  $5,920 5.7%
Canadian Western Bank CWB  $9,837 9.4%
North West Company NWC  $6,030 5.8%
Rogers Communications RCI.B  $6,321 6.0%
Toronto Dominion Bank TD  $7,417 7.1%
 $48,669 46.5%
Foreign: Mostly UK
BHP Billiton Ltd. BHP  $5,955 5.7%
Diageo PLC DEO  $14,546 13.9%
Ensco PLC ESV  $3,270 3.1%
Glaxo SmithKline PLC GSK  $9,189 8.8%
HSBC Holdings PLC HSBC  $6,488 6.2%
National Grid PLC NGG  $8,673 8.3%
Ship Finance Intl. Ltd. SFL  $7,775 7.4%
 $55,896 53.5%
Total  $104,565 100.0%

































Foreign companies available as ADRs on American Market

Even though his TFSA has had fairly small balances, in the beginning, he has managed to create what he feels is a fairly well-diversified portfolio. “I have company representation from many different key sectors, and including international companies,” says Herman. “And over the next few years, he plans to add different industry groups.”

TOOL: Find out how much room you have in your TFSA with our calculator

And since Herman, like most investors, is not a fan of withholding taxes, he has not purchased any U.S. equities in the TFSA since he wants to avoid taking a hit on dividends. “The U.S. government keeps 15% of dividends paid by U.S. companies held in TFSAs, but not with those held in an RRSP account,” explains Herman. “And there is no withholding tax on dividends paid by U.K. companies or from Bermuda where Ship Finance is based, even though you can buy these on U.S. exchanges.”

Right now, Herman has 46.5% of his holdings in Canadian stocks and 53.5% in foreign holdings—mostly U.K. stocks. Every year he adds to some of his positions or buys what he thinks is an undervalued value stock. “I like dividends,” says Herman. “But if it has a high P/E ratio over 20 and a price-to-cash-flow yield over 12, I’m hesitant to buy.”

Herman’s returns have been excellent—over 16% average annual returns since inception. He plans to keep adding to his TFSA and selling only his cyclical stocks when warranted. “I’m a builder so I don’t expect I will ever use my TFSA money in future,” says Herman. “I get a kick out of growing things.”

For him, this method of TFSA investing is simple. “You don’t have to be a professional to pick good stocks,” says Herman. “It’s fairly simple to build wealth over time and you don’t have to let it impact your life. Two hours a month is what I spend on my TFSA—a lot less than you have to spend on real estate investments. A good bank stock, a good utility, a big international blue-chip stock and you’re well on your way to getting 7% to 10% average annual returns. In fact, I wish I had been able to invest this way at age 20. The power of compounding would have been amazing.”

(If you want to learn more about Herman’s personal strategy, he blogs at you1stenterprises.com).

What the pro says

John DeGoey, a portfolio manager with iAs Securities in Toronto likes what he sees in Herman’s strategy. “There’s not much I would add to what Herman has already done.”

Still, DeGoey says he’d like to see Herman add a little bit of emerging markets exposure to round out his equity positions—maybe Vanguard FTSE Emerging Markets All Cap Index ETF (TICKER: VEE). “Or perhaps buying U.S. stocks that trade in Canada via an ETF such as BMO’s ZEUS comes to mind, given his concern for P/E ratios.”

And even though he understands Herman’s passion for stocks with good dividends, DeGoey points out that sustainable dividends only come from retained earnings. “A couple of Nobel Laureates—Merton Miller and Franco Modigliani—showed that rational investors should be indifferent to a firm’s dividend policy,” says DeGoey. “But overall, I like Herman’s portfolio—his emphasis on diversification, low cost and his focus on a long-term time horizon. Of all the TFSA examples I’ve seen thus far, I think I like this one the best.