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24 September

Model Portfolio - Finance Sector

Well I had hoped to go through these sectors a little more quickly than this but that didn't quite work out. So I think I will try to get through one of the sectors a week. I will start first with an overview and then I will attempt to go into detail on on each of the companies probably starting with the ones that I'm not really comfortable with. So we should get started with the Finance sector.

The biggest part of the model portfolio is the finance sector and for good reason. Canadian financial companies for the most part are solid dividend payers that increase their dividends on a regular basis. The heart of the Canadian financial sector are the big five banks (Royal Bank, TDCanada Trust, Bank of Montreal, Bank of Nova Scotia, CIBC). I personally think that every Canadian investor should have at least one of the big five in their portfolio. These companies are the behemoths of the TSX. They have their ups and downs but if you look at a five year chart of any of them they basically always increase in value over that time (not to mention that they are also paying out a dividend every year). Of course there will be times when the banks don't do as well as the rest of the market but in general the banks are quite stable and not only pay a consistent dividend, they consistently raise their dividends.

Having said all that, the banks are not the only companies that make up the financial sector. There are also insurance companies and mutual fund companies. There are also smaller/regional banks like National Bank or Laurentian Bank.

I decided to set up the Financials portion of the model portfolio as follows:

Royal Bank: 25% of income from the sector
TD Bank: 25% of income from the sector
National Bank: 20% of income from the sector
Power Corporation: 20% of income from the sector
Manulife: 10% of income from the sector

If you recall I set up the Financial sector of the model portfolio to generate 40% of the overall portfolio income. So that means we are looking for a total of $1400 from financials out of our $3500 target for the overall model portfolio. So that means each of the financials needs to generate this much income:

Royal Bank: $350
TD Bank: $350
National Bank: $280
Power Corp: $280
Manulife: $140

These companies currently pay the following yearly dividends per share:

Royal Bank: $1.60
TD Bank: $1.92
National Bank: $2.00
Power Corp: $0.79
Manulife: $0.70

So if we take the required income divided by the income per share we get the number of shares (rounded up to whole shares):

Royal Bank: 219
TD Bank: 183
National Bank: 140
Power Corp: 355
Manulife: 200

At the end of this series I will total up how much it would cost to buy the shares we have calculated we need.

I should also go into a little bit of depth about each of these companies. There are a total of 22 companies in my model portfolio and I am probably uncomfortable with about 5 of them (Manulife actually happens to be one of them I am uncomfortable with).

Disclaimer: This model portfolio is intended for illustrative purposes only and should not be used as a guide for building your own portfolio. Before making any investment decisions you should do your own homework and consult with the appropriate financial professionals. I am not a financial professional.

posted at 09:49:06 on 09/24/06 by 0xCC - Category: Model Portfolio

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