Although our daughter and her boyfriend are in their early 20s, they have expressed an interest in achieving financial freedom at a relatively young age so as to have ‘options’ later in life.

While there are various ways in which to achieve financial freedom at an early age, equity investing is the method my wife and I employed. We are, therefore, 1) sharing with them what worked for us, 2) encouraging them to be fiscally responsible, and 3) strongly recommending they regularly invest for the future.

This very brief article discloses the purchase of shares in 4 high quality companies.

Summary

  • Forming proper financial habits and starting the journey to financial freedom should start early in life.
  • We are currently witnessing conditions in which a broad market correction and a surge in personal and business bankruptcies within the short-term should not be ruled out. This is all the more reason equity investments should be restricted to high quality companies.
  • My wife and I are helping our daughter and her boyfriend invest in high quality companies in an effort to help them achieve early financial freedom. Recent investments in 4 high quality companies are disclosed in this article.
  • Canada Revenue Agency approval has been requested to reduce the amount deducted by an employer. The increased net pay will then be applied toward RRSP contributions until such time as the accumulated unused RRSP contributions have been eliminated after which time Free Cash Flow will be redirected toward maximizing TFSA contributions.

Introduction

In previous articles (most recently here) I have mentioned that our daughter and her boyfriend have expressed an interest in reaching a level of financial freedom at a relatively young age. Since my wife and I have experience in achieving financial freedom by way of investing in high quality companies, we are trying to impart what has worked for us. Naturally, there are various ways to achieve financial freedom at an early age but we are in no position to guide them in ways where we have had no experience.

Although our daughter and her boyfriend could invest through low cost exchange traded funds (ETFs), this method of investing would not teach them how to analyze companies. By investing in companies through the direct purchase of common shares I am hoping they will learn how to differentiate between high quality and sub-standard companies.

While active investing appears to be the ‘flavor of the month’, I want our daughter and her boyfriend to view themselves as business owners; when they invest in a company they should be thinking ‘long-term’.

The plan is to help them gradually build positions in high quality companies within the following five main economic sectors:

  • Manufacturing & Industry;
  • Resources & Commodities;
  • Consumer;
  • Finance;
  • Utilities.

Recent Purchases

Using a portion of their positive personal Free Cash Flow we will periodically acquire shares in high quality companies through various accounts:

  • Registered Retirement Savings Plan (RRSP);
  • Tax Free Savings Account (TFSA);
  • Non-registered.

Our daughter’s boyfriend has typically received an income tax refund following the submission of his annual personal income tax return. Receiving a tax refund is inefficient, and therefore, we have written to Canada Revenue Agency requesting that they authorize his employer to reduce the amount deducted at source. The plan is for any increase in weekly net pay resulting from this reduced source deduction to be redirected to the self-directed RRSP. This should help him eliminate the accumulated unused RRSP contributions that much faster. Once this has been achieved, the plan is to contribute to his TFSA with a vengeance.

Shares were acquired in the following companies on July 3rd:

  • The Royal Bank of Canada (RY.TO);
  • Brookfield Asset Management Inc. (BAM-a.TO)
  • Alimentation Couche-Tard Inc. (ATD-b.TO);
  • Intact Financial Corporation (IFC.TO);

Credit Ratings

The investment analysis process should always include a review of a company’ credit risk.

RY credit ratings

BAM-a long-term senior unsecured debt credit ratings:

Moody’s: Baa1 is the top tier of the lower medium grade. This rating was upgraded from Baa2 on September 30, 2019.

S&P Global: A- is the lowest tier of the upper medium grade

ATD-b credit ratings (see page 25 of 40):

Moody’s: Baa2 is the middle tier of the lower medium grade

S&P Global: BBB is the middle tier of the lower medium grade

IFC credit ratings

The credit risk of all four companies is acceptable for our purposes.

Dividend and Dividend Yield

RY – Common stock dividend information can be accessed here and here. On the basis of a $1.08/share/quarter dividend and a current share price of $92.17, the dividend yield is ~4.7%.

BAM-a – Common stock dividend information can be accessed here. On the basis of a USD$0.12/share/quarter (~ CDN$0.165) dividend and a current share price of $44.45, the dividend yield is ~1.48%.

ATD-b – Common stock dividend information can be accessed here. ATD-b does not maintain dividend history on its site and links from ATD-b’s site take the reader to the TMX Group Limited website. On the basis of a $0.07/share/quarter dividend and a current share price of $43.29, the dividend yield is ~0.65%.

IFC – Common stock dividend information can be accessed here. On the basis of a $0.83/share/quarter dividend and a current share price of $129.60, the dividend yield is ~2.56%.

One of the reasons for selecting 4 companies with dividend yields of different magnitudes is to demonstrate how ‘growth’ companies tend to have lower dividend distributions because senior management and the Board of Directors are of the opinion that the retention of earnings to grow the business is a superior method of rewarding long-term shareholders (ie. BAM-a and ATD-b). With RY, many investors invest in this bank so as to generate a reasonably safe and growing stream of dividend income while an investors in IFC expect to be rewarded with a steadily increasing dividend and moderate growth.

Final Thoughts

The four companies in which shares were recently acquired were selected because they are viewed as companies with competitive advantages which have a high probability of generating attractive long-term shareholder returns.

In this current environment is is certainly difficult to determine a reasonable valuation because we are experiencing unprecedented business conditions. Trying to properly value a company can, in many cases, be a crapshoot and this is borne out by the fact many companies are declining to provide earnings guidance.

Since it is currently very difficult to value a company, the decision to acquire shares was made on the basis of whether we think these companies have a very strong probability of being far more valuable several years into the future. After reviewing the most recent 10-K, 10-Q, and Earnings Presentations,  we came to the conclusion that the 4 companies are suitable investments for the journey to financial freedom.

Stay safe!

I wish you much success on your journey to financial freedom.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long RY, BAM-a, ATD-b, and IFC.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.