With half the year behind us, it is an opportune time to review the past six months and to look ahead to the rest of the year in the world of personal finance. I am pulling out my crystal ball and making some predictions so please feel free to call me out on it at the end of the year. This is also your opportunity to make some bold predictions too so feel free to chime in.

The big news makers. The real estate bubble collapse gathers steam, down goes bank stock prices, up goes oil and food prices. What’s the link in all three? In our collective hubris, we thought could maintain a consumption based economy forever and the market taught us there are limits to cheap credit and turning our entire economy to feed our consumption needs. What is governments reaction to all of this? Sending rebate cheques or proposing tax cuts in elections to fuel more consumption and dismissing any consumption-based taxes (see proposed carbon taxes- no matter how poorly designed the intention is the same: to limit consumption). Yes, it looks like  governments are taking out the playbook which states: “the only way to dig ourselves out of a hole is to keep digging deeper.” And here we thought Nixon and Trudeau-esque economic policies of running up massive deficits were gone. Silly me.

The most underplayed story of the year: Petrobras, the Brazilian oil company, announces the discovery of an deep sea oil-field which could be the third largest find in history. The media puts the story in the back-pages opting instead to focus on “sexy” stories like people who could only afford to buy a home with subprime mortgages now complaining they need to be bailed out. This story could go either way: (i) Brazil (the government is the largest single shareholder of Petrobras) becomes an economic power-house, changing the entire geo-political landscape globally since the reserve could put Brazil into a top 10 oil power; or (ii) this could be the biggest fraud in history since there has been scant detail on the discovery, leading many internet discussion boards to question the lack of full disclosure. Considering how much institutional money has flowed into Petrobras this year if, indeed, the skeptics are right, this could be a colossal wipe-out, leading to questions about the entire industry in general.

Here’s to the blogsphere: For picking up that the mutual fund industry is dying a slow and painful death but recognizing that the mutual fund industry is trying to turn the same trick in new clothes by offering exchange-traded funds with outrageous MER. Not all exchange traded funds are created the same. Check the MER’s carefully. Anything over 1% in MER is simply outrageous (actually anything over 0.75% makes me nervous). Canadian Capitalist is only one of many bloggers who have called out the industry on this issue (so sorry, I could not link to you all).

Most depressing research bit. I posted earlier this year that the Securities and Exchange Commission (the U.S. securities regulators) spent less than 0.5% of its budget on investor education. The rest was spent on important matters-regulation, policy-making, enforcement- but not budgetary items that would impact you and me on a day-to-day basis like a good education on personal finance. Sadly, the same seems to be happening in Canada as well as regulators regulate without asking its primary stakeholders, us, what we want. For administrations paid for and meant to serve us, they sure do miss the point. Expect more enforcement and high-profile cases but no focus on investor education for the rest of 2008 and beyond.

Things that make me worry for the rest of 2008: Softening commercial real estate market could be the final sign the real estate market has completely collapsed in the U.S., choking off of credit earlier this year by the banks will start being felt later this year, lame-duck President means no economic leadership and the continuing de-valuation of the American greenback fueling further inflation, lack of a true carbon emission policy will only create further business uncertainty meaning a slow-down in capital expenditures (businesses can work around bad policies but not policy uncertainty).

Predictions…BCE privatization is agreed at for $36.50/share (as I wrote earlier), a U.S. based mid-tier financial services firm goes under, U.S. banks start making massive dividend cuts (hello Bank of America…), a Canadian bank makes a big acquisition down south, governments finally realize its time to come up with an integrated environmental policy, and not a piecemeal one, after oil hits $160/barrel, steel makes a recovery (yes, steel), Apple finally hits a wall, Yahoo! is sold to MS after the Board and managemet is over-thrown, the stories on the death of the suburbs begin to increase, the T.V. show Lost has a confusing season (you notice it alternates good season, bad season?) and everyone remembers again that cash in the pocket is always nicer than a cheap line of credit.

Anyone care to make a predication?

No post tomorrow.  Have a great weekend.

Last week, I posted on options you may have if you are in debt and it is outstanding. If for whatever reason you cannot make arrangements for unpaid debt, the next step for most lenders is to send the unpaid debt to a collection agency. Collection agencies can be big and intimating institutions; they are supposed to be.  Most of us have not dealt with collection agencies, making it a daunting experience. What exactly can you expect and how do you deal with them?

There are three things to consider. First, by the time a collection agency calls you, your options are very limited. Your opportunity to be creative and work with the lender has probably expired; very rarely will the unpaid debt go back from the collection agency to the lender. Thus, as I wrote last week, don’t be in denial if you owe someone money- be proactive. By the time your unpaid debt is at a collection agency, the option isn’t so much “how can we make this work for everyone?” but “when are you paying your money?” To be a realist, you aren’t playing with a good hand by the time the collection agency calls you. Again, be very quick to come to some arrangement with your lender, if possible, before it gets to a collection agency.

Second, collection agencies are regulated and licensed. The requirements are different from jurisdiction to jurisdiction. I’ll deal mostly with Ontario law. Please consult a credit counseling service or lawyer about the laws and regulations on how collection agencies can deal with you regardless of jurisdiction. However, the point being, your real leverage against collection agencies is that their tactics of collection violate local laws and regulations and you can file a complainant with the appropriate licensing body who can fine or revoke their license; this is a collection agencies’ weak spot (my one war story from my lawyer days is that I informed a collection agency in writing it was violating regulations and within 2 hours I had a written response that it would not pursue my client for 14 days while I attempted to settle the issue with the lender direct). Remember you can complain about their tactics if they are off-side the law but it does not change the fact you owe money.

Third, seek help. A collection agency attempts to confuse debtors with what they can and cannot get away with. A collection agency has two main bargaining chips: put a bad credit score on the account and taking you to court. Everything else is really intimidation. Know your rights. Most governments have free credit counseling services to help you or seek legal advice.

A collection agency action is, in most jurisdictions, begun by written notice that they will contact you. Once this is begun, there are several things you need to know:

1. When does a collection agency have no case against you? Mistaken identity (happens more often than you think), debt was paid or a settlement entered into in writing or debt was a corporate debt not personally guaranteed and they are attempting to pursue a personal action against you (happens a lot; hire a lawyer and one short letter can solve this issue). The tricky situation is always if someone claims they provided a good or service which they did not and demand payment. In this instance, be proactive. As soon as you dispute this, paper it over with documentation, and (as strange as this sounds) tell the collection agency to send this file to court since they have no authorization to deal with disputed charges and (one hopes) you have documentation to win in court. Service providers tend to back down if you have papered over the dispute with names and dates and are willing to go to court to prove it.
2. What can’t a collection agency do? This really depends on the jurisdiction you live in. Most jurisdictions prohibit collection agencies from calling you at certain hours, at work, calling your employer and/or family except in special circumstances. Some laws prevent a collection agency from sending your file to court without written notice. Again, seek help. As soon as you have been contacted by a collection agency in writing, call a credit counseling service, lawyer or government (typically the same department that deals with consumer protection) and see what limitations collection agencies have in collecting your debt.
3. What can a collection agency do? This is simple: (i) collect as much of the debt as possible; or (ii) failing that, send the debt to court. With respect to (i), most collection agencies have very limited leeway on what they will accept as part of an installment payment (again, negotiate this before it gets to them) but, since most collection agencies are paid on contingency, they are willing to listen to any offer to pay down the debt which leads me to…
4. What can you do? Negotiate. The first call from collection agencies are typically “feeler” calls. Most of the time, they make some offer at less the face value of the debt (given that the lender has already written it down or off based on their historical rate of collection) but still terms which are hard for a down and out borrower to swallow. This is typically an opening offer. If you have an honest negotiation on your ability to pay the debt, you can come to a realistic solution. Collection agencies know that if you have unpaid taxes, debt to secured creditors ranking in priority or debt on vendor financing (i.e. a car loan), they are legally subordinate these other lenders so they attempt to strike a deal that gets their clients money while recognizing their subordinate positions. However, they don’t know this unless you tell them.
5. What’s the worst thing you can do? (i) Deny you owe the debt if you really do; (ii) refuse to negotiate terms (unless you truly have no means to pay it off in which case, seek credit counseling on your options); or (iii) negotiate terms you never intend or cannot keep. Dealing with collection agencies is 10 times worse than going for a root canal. The industry has to be nasty to try to get money from people who don’t want to pay so the quicker you can end the ordeal, the quicker you can move on with your life.

Let’s be realistic. If your debt is at a collection agency, and it is not paid off or there is some other reason why it should not be there,  you have little to no leverage in most cases. The above are options more to alleviate the pain than to negotiate some brilliant strategy to beat the collection agency (which begs the question of why you would utilize said brilliant strategy so late in the game).  Above all, seek help. The fact that the collection agency is calling you (assuming the debt is legitimate) speaks to a larger structural issue in your debt-management which also needs to be looked into. Good luck.

Research in Motion Ltd., makers of the Blackberry devices, had a rough week last week. It lost over 15% of its share value in a week. Why? It announced that its revenue growth was up 107% from the same period last year and it was profitable (84 cents per share for the three months ending May 31) BUT it fell short of expectations so the stock market reacted quite negatively, sending Research in Motion stock down 13% within 24 hours of the announcements. Punishing a stock because it makes great but not outstanding profits once again reaffirms that market expectations are like bad mother-in-laws: if you meet expectations, you were supposed to do it and if you miss them, well, you’ll never hear the end of it.

Research in Motion’s adventures last week highlight the fundamental limitation of active investing in a growth stock. The law of averages dictates at some point in time, the company simply cannot maintain the blistering pace of growth which underlines its stock price and, when the growth moderates to more conventional pace (think under 15% annual growth in profit and under 20% annual revenue growth), the stock price is punished accordingly. If the stock also does not pay any dividend then, watch out. The market is investing in the stock purely as an appreciation pay and, once growth slows down, there isn’t an underlying cash flow a dividend provides for investors to maintain its position in the stock. Smart money takes their profits from one growth stock to another (in some respects, Research in Motion is this decade’s Nortel at its peak).

Morningstar, an investor research service, showed the law of averages work against businesses increasing their revenue and profits year over year (these statistics are from Seymour Schulich’s book, Get Smarter). Of 2,214 stocks that had 20% or more sales growth in year 1 of the study, only 15.8% of those firms could maintain that sales growth by year 3 which fell again to 3.9% by year 5. In other words, approximately 96% of business cease to be growth stocks by year 5 (and I am only looking at revenue growth which is easier to obtain than earnings growth). The odds simply work against you that a growth stock will be a market darling for an extended period of time (Apple seems to be one of those expectations rather than the rule).

Paradoxically, small cap stocks (stocks with market capitalization between $300 million and $2 billion), a bastion- and frequently synonymous with growth stocks-outperformed the general market in every recession since 1950 (the Fama/French Small Cap Value benchmark outperformed the S & P 500 index in the 3 years after the 9 recessions since 1950). What do we make of these two seemingly contradictory findings?

1. Picking a particular growth stock, whether it is a small cap or large cap stock, appears to be an exercise in futility unless you have a great acumen at finding winners in the stock market which most of us do not have.
2. However, based on past data, a benchmark of small cap growth stocks tends to act as a hedge in bear markets.Emphasis on past data and benchmark. As you know, what stocks constitute benchmarks change from time to time. For small cap benchmarks, successful stocks which “graduate” to large cap status or go out of business/privatize etc. are removed from the index and other small cap/growth stocks are added into the benchmark. Thus, the benchmark will tend to have the better or up and coming growth stocks.  Or, to look at it another way, it is continuously removing the 96% of businesses that cannot maintain its growth rates by year 5 with ones who survive or new growth stocks.

The potential for a growth stock to “pop” is quite high; this is why they are so enticing to invest in and attract so much media attention. But, statistically speaking, it is hard to time the purchase of a growth stock given it could cease to be a growth stock at any point in time (is RIM at its peak? Do you hold buy now, hold on to it or sell? Who really knows in growth based technology stocks), subject to unrealistic market expectations (I am sure the Research in Motion executives were muttering in their coffees the morning after their stock fell 13%) and there is typically no dividend to mitigate downside risk.

A well-balanced portfolio for an investor with a long investing horizon should include small cap/growth stocks but this allocation is better obtained through passive investing in small cap exchange traded funds then actively trying to pick which stock will be the new Research in Motion.

The next big employer-employee dispute is not life/work balance but whether one should be paid to check their Blackberry after hours. There have already been several union grievances filed over this issue with the union contending that employees should be paid over-time for looking at their Blackberrys. Most of the grievances have lost because checking 1-5 emails isn’t really considered work (and how do you pay a time and half for 5 minutes work?). But… it is always a slippery slope and suddenly employees are checking emails 1 hour, 2 hours, 3 hours a night.

I, personally, hate the machine. It only makes my life easier if I am on business travel; the rest of the time, it makes me feel like I am on call. I don’t forward emails to my Blackberry unless I am on travel. If someone really had an emergency, they would call and leave a voice-mail (think about it this way: before, when you got your emails on your desktop, if, God forbid, your child was in an accident, would you call your spouse or email them? Of course, you would call them. Same rule should apply even if you have a Blackberry. If it is that important, pick up the phone!).

After I leave the office, I define an emergency as its burning or its bleeding. In all other cases, it can be dealt with in the morning when the banks are open and people are in the office (I don’t work in a big office and I don’t have to engage in the politiking where people send emails out late at night to prove they are working hard).

Of course, there’s a the constant checking of the Blackberry’s in front of others… a real pet peeve of mine. The whole point of technology is to make our lives easier so we can do things like spend time with people we love. Funnily enough, we now use technology as a means to separate ourselves from our loved ones (metaphorically and physically).

Me, I would throw the damn thing in the lake if i could (and, yes, I don’t own any stock in Research in Motion- tell you why next week).

My Friday rant is over. Thanks for reading.

Do you think employees should be paid to check their Blackberry’s after work?

On the heels of the Royal Bank of Scotland warning of an impeding stock market crash, Warren Buffet commented yesterday that the U.S. economy is in a recession and getting worse. The economy is under at least three distinct pressures: collapse of the real estate market in the United States, the financial industry unwilling to lend money and high fuel and food costs. You have the worse of three worlds: a slow-down of consumption in a consumption based economy, lack of capital to fuel business growth and productivity and out of control expenses on essential items.

Before you head to your bomb shelter and hunker down for a few years, there are a few things to remember:

1. There is a people shortage in all sectors. This isn’t like the 70’s or the early 90’s where there was a large supply of labor relative to demand. Everybody needs people. Remember the hue and cry about there being too many lawyers (please no lawyer jokes, I have heard them all)? My friend can’t hire a junior lawyer to save his life; there are none available. If you live in Alberta, you know full well the labor shortages everywhere (Tim Hortons in Alberta are known not to open for lack of employees). The U.S. unemployment rate is at 5.5% as of May, 2008.  I remember my first year economics professor telling me (before the internet, tech bubbles and globalization) that a 5% unemployment rate was the perfect unemployment rate (not too hot and not too cold). Despite all the rhetoric about outsourcing and the collapse of traditional manufacturing (without looking at the growth of non-unionized and high tech manufacturing) demographically, the work-force needs people. The more skilled, the better. But, North America needs bodies because there are more people retiring than we can bring into the work-force (and, hence, why choking off immigration may win political points but is economically unviable especially if government promotes a consumption based economy).
2. …but, there’s clearly something not right with the financial system. It is pretty clear with hind-sight what the banks did with all the money the federal banks pumped into the system; they used it to prop up their balance sheet and didn’t lend it out. Easy access to capital is the foundation of business growth. By choking off access, the banks are slowing the economy down. This won’t be felt until later this year and 2009 but it works its way through the system.
3. The American election is sugar-coating the real problems. America has a lame-duck President until November (and, realistically, 2009) and, given it is election season, a lot of issues are being glossed over. There’s been a lot of policies which got us here (the deductibility of interest payments on mortgages, the subsidization of a bio-fuel industry, the propping up of the financial industry rather than the defense of the U.S. dollar) which cannot be examined in-depth with quick sound-bite quotes which all elections are built in. 2008 is a stand-still year because of that reason and we seem to be living in a never-never land.

Do I think the economy will get worse? Yes. A crash? Probably not. We increasingly live in “I want it now and let’s forget tomorrow” society, governments will do anything to prop up the economy for a crash regardless of the long-term consequences. The real crash will be driven by demographics in about 5 years.

However, some things to note in the realm of personal finance:

1. It is time to get back to fundamentals:My banker friend says it best- “when there’s more junk than common sense on the street, its the end of the cycle.” I am seeing a lot of strange stuff being sold: exchange traded funds hedged to markets, mutual funds disguised as exchanged traded funds (with the requisite high MER’s), limited partnership units investing in treasure ships and whatnot. WHAT?!? Stick to the bread and butter products: government issued bonds, blue-chip/dividend paying stocks and real estate based on positive cash flow production. Things your grand-parents bought when they were your age; there’s a reason why they keep selling it now. It works. BORING EQUALS GOOD in investing (and in life if you really think about it).
2. Forget appreciation, focus on cash flow. I have mentioned before I sometimes vet deals for a friend of mine who lends money out. Here are his instructions- I will not lend on potential or appreciation. Lend on cash flow only. My friend is not dumb. The past 5 years were all about looking for the home-run appreciation stock or real estate. Those days are, alas, done. The easy money is gone. Anything you invest in, look for cash flow first then appreciation second. Cash flow gives you a margin of safety in bad times. Look for stocks that pay a dividend (which it can maintain), real estate with positive cash flow or businesses that are cash rich.
3. Better get your credit now. HSBC turned off the taps on all new real estate lending recently. Globally. Banks and lenders are systemically shutting off one risky loan portfolio after another. If you have shaky credit, best to secure some now. If you have good credit, ask for an extension before the pool of money to be lent out by banks shrinks.
4. Asset allocation is your friend. Balance your portfolio with the right mix of cash, fixed income and stocks and you can weather the worse. Never forget that cash is an asset allocation category. The pros are not fully invested and neither should you.
5. The consumer is in control. Remember the days you could not find a trades person, a car on sale or an affordable home? Those days are gone. The consumer has the power so use it to hunt out the best deals.

..and, above all, stay positive.

My regular columnist, Mom2KG, made a request that I blog about how to deal with collection agencies (great topic) but I thought I would take one step back before addressing that issue next week and explore the question of what options a person has if they owe someone money and can’t pay it. By way of background, I use to practice some corporate bankruptcy law where people were bouncing cheques in the tens of thousands monthly so it was like the Simpson’s episodes where Mr. Burns brought his phalanx of lawyers to the bargaining table to make you do as his wished (I was in the phalanx- third to the right in the second row) and, surprisingly, someone did not always get their knee caps metaphorically and legally broken- if they did some of the below.

Whether it be back-taxes, a personal loan, credit-card debt, rent or a mortgage, there are always ways to resolve the issue of owing someone money you can’t pay back without going to court, having your assets seized or the entire ordeal ending in a lot of tears. As a huge caveat, the below are options and best practices and may not apply to you so the best thing to do is to see a lawyer, accountant or debt counseling for help.

1. Be pro-active and tell your lender you are in trouble early. My friends always tell me the same story about their kids and large amusement parks (the details change but the outcome is the same). Little Johnny wants to go on all the rides but has a big can of pop beforehand. Of course, Little Johnny tells his parents he needs to go to the bathroom one ride too late and he wets himself while they all wait in the huge line to the bathroom. Or, he simply wets himself because his parents told him to go to the bathroom after drinking that can of pop and he doesn’t want to admit they were right and tell them he needs to go NOW. The perplexed parents always ask the same question- “why didn’t you tell me sooner?”At risk of linking wetting one’s pants with unpaid debt, the same principal applies. Tell the lender early you are in trouble and you may not wet your financial pants. In some cases, there may be no remedy at hand but, in others, if the lender knows there is trouble far enough ahead, they can minimize damage for all concerned (the one thing to remember is that unless they are a lender of last resort, lenders hate seizing assets- they are not in the repo business, they are lenders so they will take reasonable steps to keep the loan alive).
2. Attitude counts. This is what always gets me about the subprime melt-down. People who put no money down, bought houses they couldn’t afford and then default on the payments take no responsibility for the default. Worse, they want the government to bail them out. Lenders HATE these type of borrowers and will cut them NO slack. If you get to the lender quickly (see above), be honest and propose solutions (I am looking for a second job, I sold my car, I am borrowing money from my parents etc.), lenders are willing to cut some slack and come up with alternative arrangements (stretch out the loan to reduce payments, ask for additional collateral in return for not calling in your loan etc).
3. You have to put some money up. Lenders are lenders and not charitable foundations. You have to offer to make some type of partial payment to your regular payment. It shows you are making an honest effort to resolve the problem (see attitude) and the commercial reality is the lender can rework a loan as long as you make some type of payment (lenders have lenders too and need to pay them something as well).
4. Make sure what you arrange is realistic and not to get the lender off your back. I could call this one “do what you say you are going to do.” Most of us have never had a lender breathing down our neck so, given the novelty and stress of the situation, we panic and say anything to get them off our backs. I use to have the same conversation twice a year with different clients who owed back-taxes: “why would you promise to make a payment if you have no money? Now, they are really going to come after you because you made a promise you can’t keep…” Be realistic in your proposal and don’t say something you want the lender the hear. Its better to keep your word on a modest promise then lie big because the latter is really going to come back to haunt you.
5. Denial gets you nowhere- or to a collection agency. Don’t avoid the problem. Deal with it upfront, honestly and directly. Even if you have no money, tell the lender you have no money. The alternative is that the lender hires a collection agency because you can’t work out a reasonable commercial arrangement and your life gets a whole lot nastier because you were in denial about the entire thing. Worse yet, you become deceitful and try to hide assets. There are laws that can trace your deception and undo it; now you have to pay for lawyer’s fees (both sides fees in these situations) on top of everything else (some of these laws have criminal implications as well).

I am a realist. In some cases, you are done as a borrower if you default on a payment. But, in most cases, there is always room for negotiation no matter what the lender may say at first (unless your lender was a lender of last resort). Above all, seek professional advice; there are professionals who do this for a living and give free consultations on what may or may not work in your situation. Good luck.

I am a begrudging buyer of bonds and fixed income. Yes, I need them for asset allocation and diversification but I really dislike buying them for several reasons: (i) their payments are tax inefficient; (ii) their face value is affected, relatively speaking, to macro-economic factors more than stock; (iii) with a long investing horizon (20+ years), you can get better return from stocks; and (iv) unless they are government issued bonds, there is no guarantee of payment- see ABCP (the term fixed income is a bit of a misnomer).  But, alas, they are like carrots to me. I don’t like them but I make them part of my diet.

Outside my retirement account, I am building a dividend fund- a fund that pays lots and lots of dividend (one hopes) and I have debated the relative merits of even buying any fixed income instruments in this fund. Thus far, I have decided to forgo such instruments (by way of background, I do have an emergency fund in a high-interest account which is yielding GIC like rates) and I have been playing with the concept of anchoring this dividend fund with slow growth/high yield dividend stocks that returns to me fixed income like returns as a way to mitigate against any downside risk.

I better explain. There’s many ways of dividing up the dividend stock world- by industry, geography etc. I like dividing it up into fast growth and slow growth. Fast growth dividend stocks are stocks that are both increasing their dividends and their stock price. They tend to be members of the dividend aristocrats (well-managed businesses that have increased their dividend for the last 7 years straight) and in growth industries such as banks, insurance companies and real estate companies (remember this is a historical list and do not take recent history to be indicative of historical trends). Here’s a quick and dirty on finding members of the dividend aristocrats. Their dividend yields tend to be in the 2-4% range because their share prices keep appreciating.

These stocks, because they are both growth and income oriented, tend to appreciate in good times but, conversely, drop in bad times (financial stocks tend to both lead the down-turn and the recovery). The second issue is that if these stocks raised their dividends too much in good times, they are exposed to a dividend cuts or halts in a downturn. A prime example is Citigroup who rode the housing and private equity boom up but got caught when they both crashed, leading to a battered stock price and a dividend cut. Thus, you end up with the worse of both worlds- falling stock prices and less dividends in your pocket.

If you hate bonds, my pet theory is to mitigate the risk of fast growth dividend stocks with slow-growth stocks. I would define slow-growth stocks  as mature industries- think tobacco, booze, utilities- where the technological advances have peaked or pricing is strictly regulated (utilities) and profit margins are predictable and stable. As such, there’s a lot of cash lying around which is repaid in the form of dividends and, given the maturity of the business, the share prices tends to appreciate slowly given that growth is not assured.

Thus, with money being returned to shareholders and a relatively steady stock price, the dividend yields tend to be higher (4% plus; for example, Rothmans’ dividend yield is 5.4%) and, given that the stock price generally appreciate gradually, your return has a very bond-like quality to it. They are safety stocks. The stocks you buy in bad times. For example, every broker seems to be recommending the utility company Fortis right now- earning estimates are modest (8.6%) but it pays steady dividends and both the upside potential and downside risk is modest (to be clear, you can be a slow growth dividend stock and a member of the dividend aristocrats)- this is not a recommendation, do your own due diligence. One warning- a stock with high dividend yield is not necessarily a slow growth stock. A recent spike in its dividend yield may indicate its a growth stock in trouble (see Bank of America).

The key is not to stack your portfolio with too much slow growth stock if you have a long investing horizon. You would allocate a slow growth stock like you would allocate fixed income- the older you are, the more slow growth dividend stock you have. I am playing with the idea of 20% of my dividend fund being in slow growth stock. Now, this concept is not for everybody. It depends on your risk tolerance (and remember I have an emergency fund to back-stop a 100% equity fund and I am a good little asset allocator in my retirement fund which is much larger than my dividend fund) so context is everything.

Perhaps it is a semantics argument and slow growth/fast growth stocks is really another way of equity diversification among industries but something to think about when you look at dividend stocks. Its not all always about yield. There may actually be ways to reduce your down-side risk if you are putting together a dividend fund.

As I predicted last week, BCE, history’s largest private-equity privatization to date, received judicial approval to proceed with the privatization as planned on Friday afternoon; the Supreme Court of Canada over-turned a Quebec Court of Appeal ruling that the privatization could not proceed based on belief the ruling was not fair to the bond-holders (in essence, the amount of debt issued as part of the privatization would make the face-value of the bonds be worth less even though the interest payments would continue to be met). The Supreme Court of Canada reserved its reasonings to be issued at a later date (the practicality being that such reasoning would be quite long and the market needed clarity right away and the Court should be on a summer hearing schedule).

A few things to note about the decision and the fall-out:

• At one point during the hearing, the Supreme Court of Canada asked lawyers for BCE whether they ever considered bond-holders rights when structuring the deal and they, to paraphrase the response, said not at all; BCE was only bound to treat the bondholders in accordance with the terms of the bond issue (i.e. interest payments need to be made at certain times). There was no attempt by BCE to sugar coat the answer. The decision seems to affirm the trend that shareholders trump bondholders in these types of situations and bondholders are really along for the ride as long as interest payments continue to be made on time.
• the decision was unanimous: 7-0 in favor of BCE which appears to put a nail in the bondholders coffin.
• BCE bondholders may have done more harm than good going forward. As I previously discussed, new bond issues are very issuer friendly. There are a lot of “BCE clauses” in them now to avoid giving the bondholders an opportunity to hijack the wishes of the board of directors. Bondholder rights are increasingly becoming more and more limited.

As for the next hurdle- the banks financing the deal refusing to fund on the original deal terms-a lot of columnists seized on this statement by the banks financing the privatization (Citigroup, Deutsche Bank, Royal Bank of Scotland and TD) as indication that the deal would get done: “The banks expect the transaction will close in accordance with the Definitive Agreement between BCE and the sponsors. We continue to negotiate the financing documents in good faith with the sponsors and stand behind our original commitment to the transaction.”

This statement means nothing to me other than a CYA exercise. I am going to put my lawyer’s hat on here. The banks are the only hurdle remaining in the privatization process and the clock is running. You have to put out a press release saying you intend to close the deal. If you don’t, you just committed breach of contract or anticipatory breach of contract and just left your a** hanging legally.  Also read the press release carefully, it states it will negotiate in good faith and on the original funding commitment- NOT the original deal terms (a commitment to fund is conceptually different than funding on certain terms). “Negotiate in good faith” is a legal buzz word covering yourself. There is some lazy analysis occurring in the media relying on this press release as a indication things are going to get done.

I also believe the June 30 deadline is completely artificial. Yes, parties can walk away after that date but everyone has too much committed now: BCE has its reputation on the line, the Teachers Pension Fund and Private Equity firms have spent too much time and money to walk away (not to mention this 100 day plan the Teacher’s have put together indicating they are already envisioning running BCE) and the banks cannot take another reputational hit on the markets or overly antagonize some of the parties (see below). If they miss the June 30 deadline, the parties can enter into a Standstill Agreement (a type of legal agreement freezing everyone’s legal rights to pursue action) and extend the negotiations. Don’t buy June 30th as dooms day.

There is also one factor on one has talked about. The Ontario Teacher’s Pension Plan is one of the largest in the world and very active globally. All banks want their business financing their deals. You don’t think at some point during the negotiations, either the banks or the Pension Plan will swap future favors to get the deal done? It is how the world of business works. The question is whether the BCE financing is used as a bargaining chip negatively or positively for the shareholders. If you use the Clear Channel Communications privatization as a comparison, BCE will go private but shareholders will get less than originally negotiated so don’t bank on a $42.50/share buy-out.

Two final comments:

1. If the negotiations really begin to drag, expect BCE to continue to halt dividend payments. It needs the extra money for flexibility (it could be used to pay down debt and alleviate some concerns of the banks).
2.  Even if you don’t own BCE stock, the decision reinforces that bondholders have relatively little power and raises questions of the utility of purchasing bonds altogether. Tomorrow, I’ll talk about slow-growth dividend stocks as an investment product in lieu of buying bonds.

I have deliberately made this a light posting week because of personal commitments (its summer, I get to have a life!) and to give myself some perspective on this blog. The blog is 14 months old now with over 260 entries and, over that time,
it has evolved quite a bit. I now have a regular columnist who is a nice change of pace from my very male perspective on personal finance and I have an insider’s series now. I perceive the blog as less of a personal finance journal now than an alternative on-line money magazine; its just kinda of evolved that way. Do the readers see the same thing?

I am trying to figure out where to go from here so your comments are greatly appreciated. What’s working? What isn’t? What would you like to see more of? Less? Want to get something off your chest?
The one thing that will happen over the summer is a migration to a better WordPress template and I will finally get around to categorizing my posts better than shoving them into “misc”.

If you want to rant to me personally, email me at thickenmywallet (at) gmail.com. Otherwise I look forward to your comments. Thanks.

My regular columnist, Mom2KG, checks in on the comings and goings of her family’s personal finance and why you should always stay sober at places designed to take your money.

Viva Las Vegas!

Vacations are lovely things. But a girls’ weekend in Vegas – that’s a whole different kinda lovely. I would like to share some lessons I have learned.

• Book early and do your research. Or, book really late. Either way, you’ll get better prices than booking about two weeks out, which is what I did. I got an okay price, but I know there are better prices available if you can wait until the last minute, or if you book the hotel and airfare together. Also, I never knew there were so many airline consolidators out there.
• Budget, and carry cash only to help enforce your pre-set limits.
• Check out everything online beforehand. Pretty much every restaurant, including menu and prices, are available. This helps with the budgeting (and the calorie intake).
• Don’t get too drunk. Drinks are free in the casinos and cheap elsewhere, and you can buy a drink and leave the bar, and even take it in a cab or shuttle! Drinking encourages stupid spending (anyone want to see my henna tattoo?), and can lead to other scary situations like getting kicked out of a bar (yes, even Vegas has its limits).
• Try to walk or take the shuttles. Cabbing is expensive.

Weekly Meetings

In other news, my husband and I have not been doing well with our weekly meetings. For a while it was because we were doing so well – things going according to plan, our to-do list well-executed – there wasn’t much to talk about. But it’s time to sit down again, I think, and re-visit our goals and budget. He recently also bought some more bank stocks. We now have DRIPs in three Canadian banks, and I have one in a major Canadian corporation, so we should talk about other investing options.

Mortgage or Investing?

One issue that came up with some friends lately was whether or not to pay off the mortgage quickly, or pay it off reasonably and invest the extra cash elsewhere. I have learned this is the personal finance version of if-a-tree-falls-and-there’s-no-one-to-hear-it-does-it-make-a-noise, and has passionately divided camps. We’re solidly on the side of paying off the mortgage. Our interest rate is low (and we all keep hearing that the bank rates are going to rise), which seems to me to be a great reason to pay it off – even less interest to pay. Our friends say, well, we’ll never get this much money on a loan at such a low interest rate again, so let’s put the money elsewhere and carry the mortgage a little longer. It’s an interesting question, and largely hypothetical – we won’t know until the end of our lives how we’ve done financially overall, and hindsight can tell us where we should have put our money. In the meantime, as a couple, we have set our strategy and are not going to waffle on it.

Life Insurance, or, Why Moms Rock

I am one step away from obtaining life insurance. If you have not considered this, do it! Stay-at-home parents will be shocked to learn their financial value to the household! Our provider showed us that my ability to be at home part of the time (as well as bringing in a salary) had a huge impact on how much insurance would be needed to “replace” me. I’d always (like every mom who also works outside the home) felt guilty about not “doing” as much with my career, even though I know very well how hard it is to take care of the kids. But now I can see that that choice benefits not just the family as a whole, but also our financial situation! (Now I just have to fill those damn forms out.)