Amazon is one company that we’ve had a major change of mind about in the recent years and as negative as I was about the company, I did turn more positive in recent months and even went long Amazon recently. There are many things to like about the leading ecommerce company but its Kindle strategy seems to be working to the extent that Amazon remains a very relevant player in the tablet/ebook reader space and that is unlikely to change in the near future.

What has not changed is Amazon’s lead in ecommerce and recent acquisitions and a customer service unlike any others have clearly helped the company gain even more ground on leaders such as Ebay and Barnes & Nobles. It has also launched efforts to offer virtual goods and started offering products such as streaming videos thus entering Netflix’s (NFLX) space.

It is about the cloud

What I had not anticipated last year though was how well Amazon would perform in “cloud computing” and that seems to only be getting better. There are many different ways that Amazon is playing it but here are a few and you should know that in all of these, Amazon seems to have taken a leader role which certainly looks promising for the future.

–AWS: Amazon’s “digital” warehouse is quickly becoming a source of growth as the company lends virtual space to companies around the world either for storage, processing or other purposes. Many other companies compete but Amazon is growing more quickly thanks to better pricing, a better service and what has been a very reliable service so far.

–Android App Store: While we spend a lot of time discussing Apple (AAPL), the truth is that the mobile operating system that has more momentum than any other is Google’s (GOOG) Android and in that space Amazon has been a true leader not only in publishing apps but also in opening what seems to be the best overall App store which is sure to help future growth

–Retail “cloud computing”: Some companies such as Google have made a few efforts but overall most cloud players have only gone after businesses. It’s a big mistake in my opinion. Everyone is going digital and documents, photos, music and others need to be stored in the “clouds”. Why? Because it is convenient to have access from anywhere but even more important is having a reliable backup system. Having an external hard drive will serve no purpose if you are a victim of a fire, or any other physical event. I think the future for individuals is cloud computing and the recent launch of “Amazon Cloud Drive” is a promising product.

What the cloud means for Amazon

Personally, I think that right now the key for Amazon is not related to revenues or profits but rather becoming the leader in the clouds and fending off both Google (GOOG) and Microsoft (MSFT) as much as possible. But I have no doubt that these activities will become major sources of profits in the next 5-10 years and am more bullish about Amazon’s stock than I have been in a long time.

Disclaimer: We are long Amazon

Debt is a subject that attracts an incredible amount of interest around the internet. Why? Because it’s a subject that is emotional for most of us and you can debate it in so many ways. Some like Adam Baker from the excellent ManvsDebt have mastered the subject and I personally never get tired of reading about it. Why?

Debt is part of your life no matter what

As much as we would like to avoid debt, chances are that you when you buy a car, a house or other items, you are financing part of it through debt. You might have a love-hate relationship with it or you might love the possibilities offered by debt like Mike from TheFinancialBlogger. He is one of many who strongly believes in using debt for investments among other things.

Investing on margin?

Anytime that you hear about margin investing, it usually involves borrowing money at a rate in order to make a superior return through investments. The logic is sound in principle. The S&P500 generally returns about 5-10% or so per year on average and if an investor can borrow money at a lower rate, it seems like a winning proposition doesn’t it? Of course. That is unless you suffer a crash like we had very recently. That can wipe out your entire equity very quickly.

Buffet’s opinion on debt

As discussed yesterday, I recently read the most Berkshire annual letter and Warren Buffet discussed his opinion towards debt and his dislike for it in general. He compared investing to being in a car race and while going as fast as possible is important, the critical aspect of course is to actually finish the race. Living with high levels of debt can have fatal consequences as we experienced with both companies that went bankrupt (Lehman Brothers, Bear Sterns, etc) but also with millions of ordinary people who lost everything they had because of the overuse of debt.

There is no doubt that the most recent credit crisis gave us a number of examples of the importance of liquidity. Buffet, who has always been very conservative was able to make great investments and loans to companies such as Goldman Sachs that desperately needed cash. How good was it? That is what happened on a much smaller scale to millions of regular people all around the world.

Is leverage addictive?

It’s certainly interesting to see how some investors start using leverage in a very conservative way. As that goes well, they tend to increase the leverage seeing the opportunity to do even more. That trend often continues a bit too long. So how do you stop? It’s not clear to me.

So would you borrow to invest?

While I am not as keen to borrow as some others, I still could see investing on margin as a possible way to increase my net worth at some point down the road but not for now and not in the near future either. I would have to be significantly better off than I am right now. How much more? Difficult to say. But I would want to make sure that I could sustain a 30-40% stock market crash. It can and it will happen again. If that happened again, would I be comfortable with my situation? Not right now I guess.

What about you?

In the past, we have often tried to compare investments, often from a current and future dividend perspective. Today, after reading through the most recent annual Berkshire Hathaway newsletter, we decided to think about the choice that we and many others have to make.

Passive retirement Portfolio

We have discussed the idea of having a passive portfolio many times in the past, one that you can set initially and spend little time looking over. Generally, these would either be passive income (dividend) portfolios or simply passive portfolios, generally made up of ETF’s. In both cases, the portfolios are created with a very long term perspective. Today we will look at the situation where you decide to invest in a passive portfolio.

US stocks

No matter where you live, and how aggressive you choose to be with that portfolio, equities are bound to have a significant portion of your portfolio and even more so for younger investors. Generally, you would invest a big part of that portfolio in the US stock market, which is by far the most important one. If you are American, that is even more true.

SPY or BRK.B?

Today, after reading through the annual report, it got me thinking. Would I be better off owning Berkshire stock in that portfolio instead of owning what you would most commonly buy (ETF that tracks either the S&P500 or a combination of small and large US stocks)? You might think that the idea in itself is crazy… but hear me out.

Past history

If you compare the returns of the two, there is no doubt that Berkshire easily dominates the S&P500. The charts that I looked at compared the book value of Berkshire with the total return of the S&P500 (including dividends). Why the book value? It is the most easy to track and in any case, the market value of a company like Berkshire tracks its book value very closely. So what are the results?

–Between 1965 and 2010, Berkshire returned an average of 20.2% while the S&P500 returned 9.4%
–Berkshire had only 2 negative annual performances
–If you look at annual returns, the S&P500 sometimes beat Berkshire, but look at 5 year periods and you will see that it did not happen

To be fair, the domination  was especially true in the earlier years and it’s clearly been a lot closer in more recent years. That being said, between 2000 and 2010, Berkshire did beat the S&P500 by 6% which is very significant in my opinion.

Can we use the past to predict the future?

Of course the answer to that question is no.  Everyone knows that and it’s especially true in the case of Berkshire. Warren Buffet is the first to admit that with the huge sums of money now being invested, it will be impossible to over perform to the extent that was done in the past. Why? Because finding a great opportunity for a $500 million investment is non-significant. Berkshire must find gold opportunities in the tens of billions of dollars and those are much much harder to find.

That being said, Buffet is the first to say that there is no point in running Berkshire if it cannot over perform the S&P500.

Dividends?

I had written some time ago about buying Berkshire as a dividend stock and while it’s certainly debatable, the fact is that it’s not all bad to not have dividend payments for such a portfolio. You will not need to manually reinvest your dividends over time but rather Buffet will be managing the money for you. Of course, when the time comes to start living off of those funds, you will be forced to sell some of your holdings. The good thing is that you will not have dividend taxes for all of those years but you will of course pay capital gains taxes when you start selling that position (assuming it has gained since then!!!).

Future management

One of the big questions of course about Berkshire is about the future once Warren Buffet and Charlie Munger are gone. They are both old and it’s a fair question to ask. To me, they seem very aware of the issue and even this year started discussing in their annual letter the future of management. Will the future be as talented as Warren Buffet? Probably not. I mean, investors like him come very infrequently. But the company is so solid that I have no doubt they can attract incredible talent in order to keep up the strong performance.

Diversification

Buying an ETF like SPY is an easy way to get access to a broad range of businesses and while Berkshire is diversified, there is no way that it can compete with the S&P500. However, in my opinion, the major advantage of Berkshire is that it can use the cash generated by some of its businesses such as the insurance business in order to reinvest in others that have long term futures. That is a unique situation and seems to be working very well up to now. Berkshire does have tens and tens of companies and has only had 2 negatives years through its existence (although both are fairly recent) which to me tells you a great deal about the strength of the business. To give you an idea, while Berkshire does have major investments in insurance and financial products companies, it also has many services, manufacturing, retail, energy and even railroad companies that make it difficult to go wrong.

Are you convinced?

At this point, I’m leaning towards trying out this strategy but am not entirely convinced, I would love to hear your thoughts on this. Would a retirement portfolio comprised of ETF’s (fixed income, international stocks, etc) and of Berkshire Hathaway stocks (BRK.B) be superior to one that owned an S&P500 ETF in its place?

In yesterday’s post, I discussed some of the major benefits that I see in owning foreign paying dividend stocks that are listed on US exchanges. I will try to take a look at a few different countries but one of the more obvious ones (but still easy to overlook) is Canada. When looking, I started by taking a deeper look into countries that had attractive currencies in the long term and then following up with a look for solid dividend candidates.

So why Canada?

The Canadian economy and its currency, the dollar (often referred to as the loony) are set to enjoy a relatively good time in the next few decades. Why? Here are some of the reasons:

-Economy is already going strong and did not require much stimulus in the recent downturn
-The central bank and federal governments have very limited debt and have actually been enjoying budget surpluses in the most recent decade
-The Canadian economy is mostly built around natural resources which should continue to be in strong demand in the coming decades thanks to China, India and others
-Inflation is low and stable
-Corporate tax rates have been diminishing thanks to the healthy finances by both federal and provincial governments
-Generally recognized as having the most stable banking system

These are some of the many reasons why having exposure to Canadian companies can be very profitable in the long term. These companies are likely to enjoy solid profits (especially the Canadian banks which face little competition) and the Canadian dollar which most of them pay their dividends in will likely continue to rise for a long time. When looking in Canada, you would generally do well by investing in either financial companies (banks and insurance) or commodities. The former is a much better fit for a passive income dividend portfolio so that is where we will start.

Obviously, as regulars can guess, we will take a look through the 20 things that we look at when analyzing dividend stocks:

Dividend Analysis

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To me, it seems clear that almost all of these banks and insurance companies get great scores for their dividends. They have only recently restarted hiking their dividends after going through a difficult time (although nothing comparable to US banks) but just take a look at the current dividend yields and high dividend growth rate, it’s very impressive.

Company Metrics

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These numbers are not as stunning as the dividend ones were but they remain strong. There will be more volatility in the earnings for the banks because of the trading element of it but overall the numbers are solid and the payout ratios are very reasonable which signals that these could continue hiking the dividends for many more years.

Stock Metrics

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These numbers are once again very solid and signal the strength of these Canadian banks. Most indicate a strong buy sign through their trend analysis score.

Overall, these companies, especially the 5 banks look incredibly strong and should certainly be part of a diversified passive income dividend portfolio. They already have very strong dividend metrics and because of the laws in Canada, will not face more competition in the coming years.

We have discussed passive income portfolios many times in the past few months and dividend investing is certainly a major part of what we consider to be a great way to add passive income. Every month, we take a look at the top dividend stocks from the S&P500 and then do a further analysis in our free newsletter. We even tend to do some deeper analysis into a few of the promising names both on this blog and in the newsletter.

We have also discussed the benefits of adding international exposure to investment portfolios and the various ways of doing that. One interesting idea is to add US listed stocks that pay foreign dividends. Why?

–Greater diversification in the actual payout: Companies that pay a foreign dividend generally have an important part of their business outside of the United States and because of that they will generally help you get a better risk/return for your portfolio

–No conversion complications: In almost all cases, if you own a US listed stock in an account in $USD, the divideend will automatically be convered to $USD in your account even if it is paid in a foreign country.

–While the $USD is not doomed, it is fairly easy to make the case that there are many things to worry about (debt, emergence of China, high unemployment, etc) and having a cash flow in another currency might help increase your yield over time if the dollar continues to have a difficult time

–By buying US listed stocks, you avoid all of the tax implications of owning foreign stocks that would require withholding taxes, etc.

Cons:

–Your broker will be taking a slight cut on the conversion of your dividend as usually happens for all conversions

–International companies sometimes have a less reliable dividend payout. Why? Because while companies in North America generally put a high value on paying a consistent dividend, many international companies try to pay oput as much as possible, making some years biggers and some others less so. Obviously, the dividend growth is not as consistent for these companies but it can still amount to superior growth overall and you could argue that a company that has such a pattern will have bigger incentives to perform than a company that pays a third or half of what it could.

Overall, I think it’s a winning proposition to add some quality foreign companies that are listed in the US, ideally that pay a dividend in a foreign currency. Over the next few days I will take some time to look at a few options, hopefully we’ll find some interesting ones.