I am helping two young investors build equity portfolios which will consist of shares in high quality companies.

On November 2nd, one of these young investors acquired shares in The Toronto-Dominion Bank (TD) and Brookfield Asset Management (BAM-a).

Summary

  • An investment in The Toronto-Dominion Bank and Brookfield Asset Management is unlikely to keep you awake at night wondering whether challenging conditions during the COVID pandemic could result in these companies falling by the wayside like so many other companies.
  • Both are extremely well managed companies.
  • Shares are reasonably valued as opposed to being priced to perfection like so many other companies.

Introduction

In previous articles I have indicated that I am helping our daughter and her boyfriend build their respective registered and non-registered portfolios. While an argument can be made that they should invest in low-cost Exchange Traded Funds (ETFs) my reasons for investing in individual companies are:

  • I want them to give some thought as to how they are investing their hard-earned money and to take an interest in the companies in which they have invested. They should understand the industry, the company, the risks, and the growth opportunites, etc.;
  • The fees associated with purchasing shares through a self-directed broker consist of a nominal fee ($9.99/trade) at the time of purchase and sale. Fees, even on low-cost ETFs, are recurring fees and rise as the value of your holding increases. Look at the fees of this ETF (0.35%) and this ETF (0.19%). This ETF, for example, has multiple holdings of which over 85% is held in another ETF which also has a fee (albeit negligible at 0.03%). On a $150,000 portfolio you’re looking at $525/year and $285/year. You can make several $9.99 trades before reaching the fee incurred through the ETF.
  • Both our daughter and her boyfriend are inexperienced investors. By investing in high quality companies for the long-term my intent is to demonstrate to them that financial freedom can be achieved. Having looked at the holdings within several ETFs I can say without reservation that there are a great number of companies in some ETFs in which I would never remotely consider investing if the intent is to achieve financial freedom within a reasonable timeframe.

Recent Purchases

In this recent article I disclosed the purchase of shares in Berkshire Hathaway Inc. (BRK-B) and Johnson & Johnson (JNJ) my daughter and I made through a non-registered account; this is an account for which I do not disclose details.

Today, we deployed the cash her boyfriend had been accumulating in his RRSP and acquired shares in The Toronto-Dominion Bank (TD) and Brookfield Asset Management (BAM-a); this is also an account for which I do not disclose details.

The Toronto-Dominion Bank

Readers unfamiliar with TD, Canada’s 2nd largest Schedule ‘A’ bank from a market cap perspective (The Royal Bank of Canada (RY) is the largest), are encouraged to start by looking at the 2019 Annual Report.

Risk is acceptable from my perspective and ratings assigned by 3 credit ratings agencies are investment grade. Current credit ratings can be found here.

The 4th quarterly dividend payable in 2020 was just recently distributed and I fully expect one more $0.79 quarterly dividend to be distributed January 31, 2021. On the basis of $0.79/quarter or $3.16/year and the current ~$59 share price, the dividend yield is ~5.36%.

Based on TD’s recent dividend history I anticipate that in late February TD will announce at least a $0.05/share increase to its quarterly dividend commencing with the dividend payable at the end of April.

Brookfield Asset Management

If you are unfamiliar with BAM you may wish to access this section of the company’s website where a host of information is provided. The Brookfield group of companies also held its 2020 Investor Day on September 24th. A presentation and the transcript accompanying the presentation made for each entity within the group can be accessed here.

I also very highly recommend you listen to an October 29th Bloomberg interview with Bruce Flatt, BAM’s CEO. While the BAM group of companies currently has ~$550B of assets under management, Flatt explains why it is not unrealistic for this to grow to ~$1T in 5 years.

Moody’s upgraded BAM’s long-term debt credit rating to Baa1 from Baa2 at the end of September 2019; the current rating is the top tier of the lower medium grade category.

S&P Global last reviewed BAM’s credit rating in July 2020 and affirmed an A- long-term debt rating; this is one notch higher than the rating assigned by Moody’s and is the lowest tier within the upper medium grade category.

Both ratings are investment grade.

An investment made in BAM is generally not made for dividend income; the current dividend yield is ~1.60% based on the current $39.71 share price. Investors should note that the dividend is declared in US funds and the Canadian equivalent will fluctuate depending on the CDN/US conversion rate. Investors who invest primarily for the purpose of receiving dividend income may wish to consider some of the other entities within the BAM group (click on Our Businesses at the top of the website).

Given the investor’s age and long-term goals and objectives we have elected to invest at the ‘top’ of the BAM group as it benefits from all the activities occuring in the underlying entities. The dividend yield is low but the potential to generate capital gains is more significant at the BAM level.

Final Thoughts

While I do not disclose specific details about the investments for these two young investors for confidentiality reasons I am, however, disclosing the investment activity for the benefit of young readers of this site who also wish to create a portoflio of individual high quality equities.

In previous articles I have expressed concern that the valuation of many high quality companies has reached the point where it may be difficult to generate reasonable returns. When companies are priced to perfection there is little margin for error and they are susceptible to a sudden and significant drop in value if investor sentiment changes.

In the case of TD and BAM, both are high quality and reasonably valued companies thus giving investors a reasonable opportunity to generate attractive long-term returns.

Stay safe. Stay focused.

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

Note: Thanks for reading 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 TD and BAM-a.

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.