The Canadian Investor - Are we in an AI bubble?

Episode Date: July 8, 2024

In this episode of the Canadian Investor Podcast, we tackle a few listeners' questions including one about analyzing 10-K and annual reports. We break down the key sections that we focus on when reviewing annual reports. We then discuss a recent tweet from Chris Bloomstran about the rich valuation of AI mega cap stocks and how the current market concentration poses risks for the overall market.  We finish the episode by talking about high yielding dividend stocks and how it might not be the most optimal strategy. Tickers of Stocks & ETF discussed: VFV.TO, VEQT.TO, GOOG, META, AMZN, TSLA, VDY.TO Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. Welcome to the show. My name is Brayden Dennis, as always joined by the powerful Simon Belanger. Today, we got two awesome listener questions. I'm going to answer the question. Simone, are we in an AI bubble?

I've been getting this question a ton personally. I got it at a conference that I attended last week. So we'll dive in a little bit into that. And then we'll talk about being dividend drunk, which I think is a recurring theme on the podcast. And we'll get touch on it today. Good, sir. How about this?

You can answer the first question off the slate today. I'll read it to you, and then you take it away. Yeah, that's good. Go for it. Would you have any resources for a guide on how to look at a company's financials? Have you considered doing a course or video about this? Actually looking into the paperwork,

pulling out the info you need. I understand a lot of the terminology used, but a bit overwhelmed looking at a 10K. Any help would be appreciated. Thanks for all you do. No, thank you, Amanda, for this question because you come to this podcast because you want to do your own research.

You want to hear us do our own research. And it's like, what are the things I should be looking for right out of the gate? Yeah, I know. Exactly. Great question from Amanda. So some quick clarification, because if we have some new investors, some may not be familiar with the term 10K. So that's just what the annual filing is called in the U.S. for U.S. listed companies. the annual filing is called in the US for US listed companies. I'm not, I think it's a different name, though, slightly different for foreign companies that are listed in the US, but 10k,

if you have like US domicile companies, that's what they'll refer to. And then obviously, I use Finchat.io to do a lot of my research, including looking at like filings that are all available there. So that's a great tool. If you want to try that out, obviously getting all the metrics and stuff, that's probably the one of the most attractive features of FinChat.io. But the fact that you can pull those filings because there is a lot of good information there. But again, it can definitely be overwhelming because it's pretty common to have these annual filings being 100 plus pages long. So, you know, when you start looking at a company, especially if you're just starting your research for a company, maybe you're not quite sure if you want to invest in, you know, you don't want to

waste too much time necessarily on that, especially since we all have a finite amount of time. So first of all, I'll say is, control F is definitely your friend, when you're looking at financial statements, or looking at annual reports. But more specifically, you know, if you want to look at certain terms, if they come up, that's always an interesting thing, especially with, you know, what you talked about AI, right? If you want to see how companies have evolved, I mean, you just look at a few annual statements, maybe like four or five years in a row, and you just have a look at how often AI is mentioned in the annual report, or for a while it was blockchain, right? It was the word that was

constantly mentioned. No, I think that's exactly right. And all of these resources are things that the company is putting out to investors because they're a public company to be in the public domain for people to find. And I appreciate the FinChat shout out because of course, we don't tell people how to work, how to do their own research, or even if a stock is undervalued, overvalued, that kind of stuff. We just provide everything in one place so that you're able to do that. And some of it is numerical. Some of it is a little bit of reading. And I think that you just hit on that with the good old control F, whether you want to focus on specific sections of the report or just follow along. For me, I mean, this is really relevant because

people who listen to podcasts are probably audio listeners as well of just listening to the conference calls as well, right? And so you'll get a lot of that color and the Q&A that is done from those analysts asking who know a lot about the company, that's a goldmine right there, right? It's having Q&A from shareholders, from analysts directly to the management team. There's so much juicy content in there. So, yeah, I mean, there's so much to go through. So, carry on. Yeah, exactly.

And that's one of the things in addition to the 10K I was going to mention is the earnings call. And I think I want to be clear here. I think people sometimes will just stick to the transcript. And it's fine to look at the transcript while you're listening to the call, but I think it's a mistake personally to just look at the transcript because there are things that you cannot get on, you know, paper, the way the tone that they're using, how they're responding to questions, if they're hesitating. Sure, you might be able to kind of catch that a little bit with the transcript, but just hearing them talk and, you know, being able to rewind and listen again to what their answer is. I think that brings a whole lot of value because I've listened to calls where, you know, you may not be able to tell. So

in the transcript, but then you listen how they answer a question and then management gets extremely defensive. And that's a red flag, right? If they get very defensive is because they feel like they may have not done something correctly or something might be off. So I think it's something that's really important is listen to those calls and something that I do regularly. Now to go back to the annual statements, the first thing I'll do is I'll read the letter to the shareholders. So that'll typically be written by the CEO or a top executive. Sometimes the, you know, the director of the board will be the one writing or it'll be multiple executives. It just provides a good overview of the last year and often insights

on the future as well, coming straight from the executives running the company. The second one, especially if you're looking at a new business, is business overview and risk factors. This will go over the actual business and what they do, and also the potential risk that they face. So whether it's competition, macroeconomic factors that tends to come back regardless of the business or geopolitical factor again, tends to come back, or even consumer concentration. That's something that we've seen, for example, in NVIDIA, They're very concentrated in their consumers. And for the risk, I always push it a bit further, though, because sometimes it can be a bit vague. So I'm talking about macroeconomic geopolitical here. I find that

companies will tend to just put that because they have to put it in there because it can be a risk. But I think it's good to also you do your own research on top of that because sometimes they may downplay some of these risks. For example, the customer concentration, companies may downplay that. But if you have your business is getting revenue for a handful of companies, that's a pretty major risk if any of one of them is actually falling off in terms of orders. The third one here, management discussion and analysis MD&A. So this section offers management perspective on the financial results, including insights on the company's operation, market conditions, liquidity, capital resources, and even other risks. Often includes a discussion on significant trends and future outlooks as well.

So to me, this goes hand in hand with the letter to shareholders. Obviously, number four, financial statements. I think that goes without saying. I don't think I need to go into much detail here. If you're not looking at financial statements, I mean, what are you doing investing in visual companies? The fifth one here, financial statement notes.

And to me, actually, this is equally as important as the actual financial statement, if not more, because it provides much more context to the financial health of the business. For example, say the company has long-term debt. You'll see it on the financial statement, but you have no idea how it's actually structured. Is it variable fixed debt? Is it convertible debt where they can convert it to shares down the line? What's the term on that debt, etc. So you have to be able to, you have to actually drill down to the notes to be able to see that. And when you read the actual financial statement, usually you'll see the notes next to, you know, either the long term debt, for example, you'll see which is the

corresponding note that you have to go to. So you don't have to like reach every single note necessarily, but at least read the ones where you need more information on. And then the number six here, which is kind of sort of in the 10k, at least they'll refer to it, the executive compensation or corporate governance. So this will typically be found in a proxy statement, but they will tell you in the 10K that it can be found in the proxy statement. Yeah, that's a great list, those six right there. And again, this is stuff that the company is putting out there. One caveat I want to mention here is not every company is required to put out all this stuff. They have a list of things that they are required to do to be publicly traded in that geography, like SEC filings, your Ks and your Qs. But they are not

required to have public conference calls and earnings calls. They're not required to have investor day hooplas, and they're not required to have even letters from the CEO addressing shareholders. So not every company will have them. So before you go, I can't find it for this company. Sometimes it may not exist. For instance, the universe of companies that have earnings calls at least once a year, let's say every quarter, is around 7,000 around the world. There are 65,000 active global companies around the world today. So that just gives you an idea of scale of how many of these companies actually run conference calls. I have two companies that I own in my portfolio that do not have earnings calls.

So you have to go use other resources to learn more about the business. Yeah, no, that's a good point. I mean, the big companies typically will, obviously. So the ones that you know will typically have that. And something that's worth noting is when a company does have regular calls and then they decide not to have one, that can be a sign of something's different, whether it's good or bad. I mean, I think we saw it may have been GME that did that during the whole like kind of meme stock craze where they either that or they had literally like a four minute conference call and that's it because they didn't want to, I guess, address what was going on with the stock and, you know, the whole meme stock craze. So something to take

note when a company is like changing on a dime, there's probably a reason for it. And just a couple more things that I like to look at that are a bit outside of the 10k. But we mentioned earnings calls earlier, again, something that they're not necessarily going to be required to put out, but a lot of companies will do depending on the industry, supplemental financial information. So this is especially useful. There's two sectors that come to mind for me that I will look at that very closely is for financial companies and then real estate investment trust, because that supplemental financial information you'll usually find very like for banks, for example, you'll find a lot of very useful information like their net interest margin is just an easy example there. But also

they'll break down like provisions for credit losses, even more so. So I think, you know, being aware of those depending on the type of companies you own. But there are companies that have no like Apple doesn't have supplemental financial information. Like they just don't, right? So keep that in mind, but it can be very useful. And the second thing is, we talk about adjusted metrics quite a bit. And if it's a company that uses adjusted metrics a lot,

although in the 10K, they will use gap metrics. So they will use a generally accepted accounting principle and in canada it'll be ifrs so same kind of you know these are the official accounting rules that companies have to publish with but a lot of companies will also provide their adjusted metrics and if you notice that i can't say enough, make sure you read what the adjustment is and how they arrive to those numbers. Because you may think, you know, one that comes to mind is funds from operation. Well, funds from operation can vary quite a bit from company A to company B, depending on how they calculate it, because it's not an official metric. It's not a generally accepted metric. So

that would probably be the last thing I'll mention here just to keep that in mind and making sure you know what you're looking at. I think I've been pretty vocal around not being particularly keen to own companies where I have to do mental backflips to understand the adjustments they make every quarter. Or I feel like I have to relearn their financials

every quarter because their adjustments are so off the beaten path. And it's not that there's anything wrong with adjusted numbers. And sometimes gap or IFRS just doesn't make sense for a lot of companies. You need to use adjusted numbers and non-standard metrics for that particular business assessment to make sense. But the alarm bells go off when they're so far from gap profitable and all these adjustments need to be made. And I have to relearn it every single quarter. Yeah. I'm not trying to look for homework. No, no. Yeah. I'm not trying to look for homework. No, no. You and I finished school a while ago now. We're not looking to give ourselves a new homework every single quarter. So that's not to say that adjusted metrics are not good. In fact,

they are. And for some sectors, you absolutely require them and need them. But the more they stray from the norm of industry adjusted metrics, the more I have some red flags, alarm bells go off, or at least further investigations required. Yeah, I totally agree with that. And just an example on how adjusted metric can be useful. And I totally agree with what Brayden said and an example of how useful it can be. But that's why it's important to understand why they're doing it is I'm just going to take CPKC, right? So or CPKS, where Canadian Pacific acquired Kansas City Southern. So they actually provided adjusted numbers to back out the acquisition, because without those adjusted numbers, I mean, it would

look like the revenues were up like 30%, which was, yes, they were. But clearly, you know, if they had not purchased Kansas City Southern, the numbers would not be up 30%. So in cases like that, I think it makes a whole lot of sense because it gives you a much better perspective on how the business is actually doing than being completely skewed by an acquisition, kind of a one time acquisition. Right. So that's the importance of understanding what the adjustments are. But like Brayden said, some companies, I mean, they have a track record of not being profitable, but then they are on this fantastic adjusted metric and they constantly adjust it. And sometimes I find analysts just kind of feed into that too, right? Yeah. I mean, hey, I might want to own Bell stock if I just adjust for the interest costs.

Yeah, exactly. I might just back out some core key line items and I got quite the business here. You know how to get me started. Yeah, yeah. Your veins about to pop out of your forehead. Thank you for the question, Amanda. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years

now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service.

Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products.

I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away.

hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. So not so long ago, self-directed investors caught wind of the power of low cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally

diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. information. Chris Blumstrand's tweet, and I'm going to segue that into, are we in an AI bubble? So Chris Blumstrand is a fairly well-known investor, definitely well-known on Twitter. He's been in the Buffett, Berkshire Hathaway shareholder group in a long time. So he's the chief investment officer of Semper Augustus. And I wanted to read some pieces of his tweet because some of the facts in here,

some of the numbers are quite staggering and it kind of resembles where we are in the market right now. So this tweet was from June 19th. Of course, some of the details may be off by a percent or two, but don't sweat the small stuff. The guts of this remain very relevant. Quote, stunning. NVIDIA passes Microsoft and Apple as largest market cap. Combined, the three are valued at 9.9 trillion, 21.5% of the entire market capitalization of the S&P 500. The three of those companies are today larger than the capitalization of the entire S&P in September 2011, not a market low. Including Google, Amazon, Meta, and Tesla, the Magnificent Seven, have a $16 trillion combined market cap, 34% of the S&P 500,

and larger than the entire S&P as of February 2016, just over eight years ago, and most definitely nowhere near a market bottom. Those are crazy. I had to look this up. The Magnificent Seven, 16 trillion, just barely passes in 2016. If you tick it, I forget what date is in the month. It's like 15.9 trillion in market cap. Even if we are cherry picking certain stats, who cares? That is a staggering stat because February of 2016 was not that long ago in the grand scheme of things. And for seven of these companies to be larger than the entire market cap, it is quite staggering and tells you a little bit of a story about how

there's such a disparity between the top big names, the top technology names. A lot of them have an AI spin on them too, which is certainly helping their valuations right now against kind of the rest of the economy. If we're going to call the S&P 500, a lot of the industrials, a lot of the companies that kind of make the world work, a lot of them are not doing that good, yet the market is ripping because of these seven companies. It's been a really fascinating market to invest in. Yeah, I mean, it's hard to say that we're not in a bubble right now, at least for AI. I like you just sing back, right?

I think we're just in the early innings. AI, too, I think we have to and maybe disagree withnings. AI, too, I think we have to, and maybe you disagree with that, but my perception, AI has been around for a while. It's just the LLM, the large language model, and more specifically, what, five, six years ago, that really deep machine learning really started to pick up and led into OpenAI launching, ChatGPT, and all the progress we've done.

But it's not like AI has just been around for two years since ChatGPT came out. It's been around before that. It feels like we're still in the early innings, a bit like the 1990s for the internet. It just feels a whole lot like that. I remember I'm old enough to...

I was a teenager pretty much and most of the 90s like not most but for a decent part of the 90s like i was selling stuff on ebay when i was 13 14 years old from flea markets putting on there with a big rectangle or scanner scanning the stuff putting on there and things have evolved so much and the companies that we were massive back then are completely different now not all of them but a lot of them are different at least the internet companies so it just i don't know it's something just doesn't feel quite right at hard it's hard for me to put in numbers i mean i've heard a lot of smart people talk and we have before where there's so much money

being invested in AI and companies are not seeing that much return on their investment, at least right now. And at some point, when do companies say, OK, well, let's just kind of scale these investment back. We're still going to invest in AI, but a whole lot less. These NVIDIA chips, maybe we're looking to buy some to build our own kind of AI in-house platform. But you know what?

Maybe we wait a year or two and look at what AMD is offering, because even if it's not quite as performing, it'll be more than good enough for what we need. And in terms of value and shareholder value, it'll be much, much better than trying to get our hands on these probably overpriced chips from NVIDIA. Yeah, and look, the build-out CapEx that's being spent right now cannot be spent in perpetuity. It just cannot be justified, right? And so something's got to give. perpetuity. It just cannot be justified, right? And so something's got to give. And I think that companies are going to have to start getting a little bit more reward for their efforts in this category. I was on a panel at a conference last week and I was asked, is it too late to invest

in AI and is there a bubble? And I said, it's certainly not too late to invest in AI. I think that that's a crazy notion. But what I did say is I'll answer that question with a story about Microsoft. It wasn't too late to invest in Microsoft in 1999 after the stock went parabolic for several years there in the late 90s. It was not too late to invest in Microsoft, of course. Right now, the stock's worth $3.5 trillion. It's been an absolute monster ever since. But if you bought the stock on December 17th of 1999, you did not see a positive return on the stock until September 6th, 2016, or September 2nd, 2016. So you waited there for largely 20 years with the stock doing, with a flat return, if you held it during that time. And so that's what happens when things are extremely overvalued. Split adjusted, the stock was around 57 bucks and it took till mid 2017 to get back to there. Now, if you bought it at various other times and held onto it,

you made exuberant amounts of money holding that stock. But that is the story around price you pay really matters. So I answered the question with, it's not too late, but it might be too late to buy it at a good price, or at least you're going to have to wait. I'll round out this Bloomstrand quote quote, quote, this is the goofiest and likely most dangerous concentration of overvaluation I've seen in 34 years of investing. The extremes extend beyond the three and seven companies like fellow NASDAQ 100 member Costco with 386 billion in market cap on 254 billion in sales. Costco has a 2.8% net margin, up 1.7% when I first bought the stock. With $7.1 billion in earnings, the PE multiple is an

incredible 54 times. How do you make money with an initial earnings yield of 1.8%? Mr. Market is very good at rewarding business success, but to a fault. In the short term, stocks can trade at extremes relative to fundamentals, both on the low and high. At 23X 2024 expected earnings, the market cap weighted S&P 500 is frothed with excess and, in my judgment, uninvestable. Under the hood, the stocks are not overvalued. The bifurcation between the dear and cheap reminds me of March 2000. From that point, the index returned 7% per year, spending much of the subsequent decade in the red. That's what I just talked about with Microsoft. You can have extremes of over and under valuation in the short and intermediate terms

but in the long run mr market gets it right that was really hard to read at my 11 point font here on the on the google doc i i apologies tripping up on the quote so many times i was squinting here Simone, I think the kind of rhetoric or thought around the market's uninvestable is usually a loser's idea. So I'm going to just generally disagree with him on there. small caps, and basically anything other than mega caps is the largest mathematical spread in valuation and flows that we've ever seen. But we've been saying that for years and years and years. It just keeps concentrating and keeps concentrating in a few select names over time. And yes, you can try to blame it on ETFs, but I think it's a lot more than that. These companies are earning outstanding amounts of profit and gaining market share and flexing their distribution more and more each day. Look at Microsoft. Each year, they just pick a new product to throw into their office suite and trounce a competitor. I mean, it's a playbook that keeps working. Yeah. And what I'm pulling up here for our joint TCI subscribers is the difference between the SPY. So one, probably the most well-known S&P 500 index fund, market cap

weighted and comparing it to RSP, which is the equal weighted and you can clearly see that it's not the first time where there's a difference between the returns of both right but you can clearly see that bifurcation i would say probably started in 2023 before that it was kind of you know there was some bifurcation, I would say, between 2020 and 2022, kind of came back to the means a little more. But then 2023, it's been picking real up. And then since the start of the year, I mean, it's just like they don't even look like they have the same companies. And they do. These are the exactly same companies, just the weighting that's different.

It's pretty wild to see visually there what you see on the screen, right? And they do. These are the exactly same companies, just the weighting that's an example, too, where you can visually just see, okay, this isn't just I think this. This is actual facts, right? This is not just vibes and going, oh, the rich getting richer. There is an actual serious spread that starts to widen in around 2018. Yeah, exactly. And then this year, obviously, if you look at this year, it's pretty, I mean, it's been even more pronounced since May, right? So that would probably be around, was it the last time that NVIDIA reported? I think that's around that time, right?

Yeah, that sounds about right. Their fiscal is super weird. They're reporting like Q1 2025 as if there's like their recent one. So for those wondering, the equal weighted is up a whopping four percent so if you just had u.s treasury bills you'd be pretty close behind maybe at like two and a half percent returns that year to date year to date so 4.08 equal weighted so you could probably yeah you'd sit in treasury bills in the u.s and you'd be just behind a little bit here compared to the regular S&P 500 index fund that's up 16%. So it's just it's just massive.

Like I know it may not sound like that much as we're talking, but considering that they have the same holdings, just different weighting, it's pretty remarkable. Are you liking how you can do all the ETFs in FinChat now? Yes. This data is super nice, right? You know I like to look at ETFs and you heard my concerns for a little bit about that, so I didn't notice that for sure. Yeah, we just launched that a couple days ago, so go check that out. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense.

And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want and they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with

strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host

at airbnb.ca forward slash host. That is airbnb.ca forward slash host. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US.

Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. Well, this is a great transition actually into your segment here

which is about ETF exposure. Yeah. So go ahead and take us away. Yeah. So if you invest, so the question comes actually from Gooby6 on Twitter. So if you invest in an ETF with significant US exposure, for example, VFV, which is the Vanguard S&P 500 ETF listed in Canada, this is the non-hedge ETF or VQT. This is, I think, all country index. Just so people are aware of this, it's not an actual question, but are purchasing it in CAD, in Canadian dollar, is this a way to hedge against the Canadian market? Or do you need to be investing with US dollars, specifically purchasing US ETFs?

For example, VO, which is the US listed Vanguard S&P 500 ETF in order to hedge appropriately. So, you know, I think just to summarize the question, are you hedging if you buy ETFs that are listed in Canadian dollars in Canada, but have US exposure? Or do you need to buy ETFs that are denominated in US dollars on US stock exchange? So the answer to the question I would say is yes and no, just because he provided VFV and VQT as part of the question. So because of that, I would say yes and no, and I'll qualify why. VFV is not Canadian hedge, like I mentioned, and tracks the S&P 500. So yes, this will help you hedge against the Canadian dollar because what's going to happen is VFV is that the fund is going to outperform if the Canadian dollar is weak compared

to the US dollars. That's because all the underlying securities are traded in US dollars in the US, whereas the fund is listed in Canada in Canadian dollars. So for example, say the S&P 500 is flat, but during the same period of time, the US dollar increased in value by 1% compared to the Canadian dollars. So you'll actually be looking at gains of around 1% with VFV, even though the actual underlying index,

the S&P 500 is flat. That's because the Canadian dollar actually got weaker, which pushed up the price of the Canadian listed one. The opposite is also true. So if the S&P 500 is flat, but the Canadian dollar increases in value by 1% versus the US dollar, then you'd be looking at a 1% or around 1% loss. So you are definitely hedging against the Canadian dollar by doing that. Now, I'm strictly talking about what currency these are traded in. Obviously, there's some more complex factors to come in play because lots of businesses in the S&P 500 do business in other countries. So currency fluctuations will also have an impact on the results they report.

That's why a lot of international companies, when they provide their results, they'll often provide FX adjusted. So they make adjustment to show how their sales were like actually rose if you remove out the impacts of foreign exchange. What I just mentioned still applies to VQT, but to a lesser extent.

So that's why I was saying yes and no. That's because VQT has about 28% in Canadian equities. So it's very, there's a big allocation to Canadian equities, especially if you factor in that the investable universe, Canada represents about 3-4%, so low single digits in terms of the global stock market. And in my view, that's quite high. But again, I interviewed Mark McGrath a few months ago who made some compelling arguments that an index funds like VQT might be worth having despite the higher Canadian concentration. But I'm just saying this because you will be hedging definitely less than you would with just a VFV because that's straight up the S&P 500.

There are some U.S. equities. There's also equities outside of Canada. So the hedging is definitely a bit different in that situation. And I personally own some index funds that are traded in Canadian dollars that track predominantly U.S. equities. So I think it's a fine approach. I also have some that are USD listed on US markets like ITOT. At the end of the day, it's more of a personal thing. I like being able to have funds that I can just sell and have US dollars straight up. But again, I think the impact is probably minimal. You'll be able to hedge either way. One thing I do not own is the very popular Canadian hedge ETFs. I know they're very popular in Canada.

I have personally zero interest in them for a few reasons. Because first, the fees associated with hedging. So you are paying some fees for that hedging. It's usually not huge, but it is still some additional fees that will be embedded in the ETF. They tend to underperform their non-hedge counterparts. And it's still, I mean, I guess the last, the silver lining here with these Canadian hedging ETFs is that it's still better than not having any U.S. exposure, right? So I think it's definitely, I would not do it, but I can see why some people would prefer having that lower kind of currency volatility, but I would personally prefer just having the one that's not had straight up. I don't know if I have any really, really bold

opinions on this. I think for me, if I have US dollars and I'm planning on investing in US dollars and I'm planning on doing it efficiently with something like Norbert's Gambit, which I highly recommend looking up, we've talked about it on the podcast several times. You can also look up some guides we've done on it. That is called Norbert Gambit, is to buy those funds directly in US dollars, like the VOO equivalent or any very low cost one from some of the major providers is my preferred way to do this. In terms of CAD hedging ETFs, I align with you. I don't see the rationale. I think the fees are not worth it. There's better ways to do it, from my view. And last point here is, why can't we get a low-cost total world ETF that doesn't have 25% Canada, it makes no sense why we would buy a global ETF allocation

with exposure to global equities, and I get like 30% of my portfolio in Canadian stocks. The math doesn't make any sense. All right. If the math doesn't make sense,. All right. If the math doesn't make sense, then it's probably a demand thing. That's what, yeah. I feel like some asset managers have looked at it

and they're like, there's no demand for that. So that would be my sense. I would love if there'd be an option, low cost and less than 10%, let's say Canadian exposure. I think anything less than 10% is fine, even if Canada is more in the low single digits. But I think that would be the reason. And the graphic I was showing for Joint TCI was simply the difference between VFV and VSP. So the difference between the hedge and non-hedge over the last 10 years, ESP, so the difference between the hedge and non-hedge over the last 10 years, it's pretty significant. So you're looking at about 195% returns for the hedge version and then 315%

for the non-hedge version. So it just goes to show that it's performed a little bit better than the hedge version. I think there's a few reasons for that. Obviously, the US, I think, has been appreciating against the Canadian dollar. But you have to factor in also all these dividends that you get in U.S. dollars, right, that then are kind of converting the total returns. That has a pretty decent impact, too. But I'm kind of the mind, you know, whether you look at the non-hedge or you buy it, it's straight in USD. I think both options are absolutely fine. I think where you end up not necessarily getting good bank for your buck. And I mean, I'm more of a firm believer in the US dollar versus Canadian dollars, the hedge version. Last on the slate

today is talking about high yield investing, bracket dividend drunk. We're really on the ETF train today with the show. Here we go. So from high yield investing perspective, this is a strategy that is very common, very popular among the Canadian DIY crowd. That is no secret. It definitely sparks confusion from our side, from you and I. But from young and hungry 20-something Zoomers to 70-plus boomers, Canadians love their dividends. And sometimes to an extreme, it's really holding them back. There are scenarios where it makes sense. And there are scenarios where it makes very little. I'm going to speak primarily to the long-term investors who have long horizons. They're investing to maximize their investment returns.

I'm talking more to the 20-something Zoomers in this case. If you're in retirement age or strictly investing for income, in this specific situation of living off your investing income, then carry on. The purpose of the segment is not to say that the strategy holds no merit. It's just to look at the facts again. So people are very, very passionate about this topic. So it is not to say the strategy holds no merits. And in fact, those two cases I just mentioned, among others, is one where it certainly makes sense. I'm just here to look at the facts and the performance over time. Look, we've all been there. When I started investing in my personal account and I learned about dividends, I was dividend drunk. I see this all the time. I see

it happen time and time again. It feels like a free money hack for those that are just learning about the idea. They throw out prospects for a company moving forward because there is a big old 6% juicy dividend yield staring right at me. It's too appetizing, right? Especially this idea is particularly alluring when interest rates were so low in years prior that getting 6% on your money is so attractive. High yield fixed income instruments were yielding next to nothing that an equity with potential upside and this huge income yield. Now that's quite the attractive proposition. Now let's just look at the historical performance of a few examples. So a very popular Vanguard fund is the High Dividend

Yield Index ETF, ticker VDY. This is about 15% Royal Bank, 10% TD, 5% Bank of Nova Scotia, 6% BMO, 7.5% Enbridge. Then you have basically Bell, Canadian Natural Resources, CIBC, Manulife, these kinds of names are all huge positions. Financials and energy, baby. Financials and energy and and to extreme concentration right you have the canadian banks enbridge bell that makes up more than half of the portfolio you get the insurer all the insurance companies uh trans canada cnq you're at nearly 70 percent of the portfolio right there. So that's kind of crazy. You do have a nice 10% of other.

Yeah, other. Other makes up 10%. That might be the most attractive part. The share price, when you compare that to just the S&P 500, for instance, during a five-year period, the S&P 500, for instance. During a five-year period, the S&P 500 did 94%. That high-yield Canadian dividend ETF only did 28%. Now, I'm going to play devil's advocate in a couple scenarios. So, that's the share price. What about the total return? You idiots, you guys are forgetting about all the dividends I'm going to get. Well, let's not forget. We never forget about the dividend.

We never forget about the dividend. VDY, if you include the dividends, did 60%. It's like we forgot that the S&P also pays a dividend. You're at 108%. So, you know, you've almost doubled the performance on a total return. You've, you know, almost, well, you have more than 3x'd it on just the share price, but total return, you're still lapping it. Okay, that's apples to apples. You're comparing the US and Canada.

All right, let's compare US to US. The high yield SPY dividend yield ETF did 33% during that timeframe. And the regular S&P 500 did around 100%. Now let's talk about a longer time horizon, Simone. What about historically beyond just, okay, that was just the past five years. All right. The results get even more extreme. During that 10 year, or sorry, since 2016, since those two ETFs were both trading, so you can compare them, you've had more than double performance on the regular S&P versus the high dividend yield. Okay. So we've talked about the past. Those are the results. What about the future? Look, dividends are not free money. They're simply moving cash from their

balance sheet to yours. That cash, and by the way, that has tax implications a lot of times too. The cash on the balance sheet of the company you invest in has a lot of value and it may have a lot of optionality to be reinvested. Dividends are awesome, don't get me wrong, but for very profitable companies, it makes sense to pay them. And it makes sense to take some of that cash and put it off their balance sheet to yours as a shareholder. But at the core, companies that are paying very, very high dividend yields can mean one thing, can mean two things. One, it's a yield trap runaway, Or two, the company is looking to pay all the earnings out as dividends because it doesn't offer a lot of investment opportunities.

Or three, it's doing it as just part of their broader capital allocation strategy, which is my favorite. Number two is fine, but if you're trying to maximize returns, historically, and I would bet in the future, the market is going to continue to reward companies that can reinvest profits back into the business at high ROICs. The whole idea of investing in one of these companies is you're betting on they can take that money and reinvest it at a higher rate than you can. So next time you see your friend diving into some yield traps, send them this. It's not to tell them, hey, your strategy sucks. It's to educate on the fundamental gravity of businesses more so than any sort of strategy. Dividends are not

creating value out of thin air. There is simply a method of capital allocation. Sometimes that method can be fantastic for shareholders. Sometimes it can destroy value. So the conversation is nuanced and has more to do with the company and less to do with, I like them because they're paying a 7% dividend into my bank, into my investment account. That strategy throws away all logic, throws away all prospects about the future of that company. It throws all idea around their financials, who's running the business, if that's a good move for the company, and just says, Simone, they're paying me 7%. I want that, come over here. they're paying me 7%. I want that, come over here. That is a really good way to lose money.

And so to round this out, it's not to say, hey, dividends suck or that that strategy sucks, because that's absolutely not true. It's to say that they are not free money and high yield investors get caught in what are called yield traps time and time again. And it's one of the most common ways that you and I see self-direct investors lose money is in high yield traps. Yeah, it rarely ends very well, especially when there's high yield, if you haven't done a lot of due diligence. Because I can think about examples where if you've done your research, you could have done really well by picking, you know, a few high yield companies, but you had to do a lot of research and know that this was more of a temporary thing and the company, the fundamentals were good going forward. But those are probably

the exception to the rule. And the rule I would say for the most part is you start getting these eye yielders. And my experience looking at these companies is leadership or management tends to feel like they're trapped in paying that dividend until it's absolutely, you know, the writing's on the wall and they have absolutely no choice but to cut the dividend. That's what I've noticed is they, and that tends to be way more present in these high yielders where, you know, we've always paid a dividend so we can't cut it. That's why the investors are in this stock is because they want to get paid that dividend, even though, you know, it's not even covered by free cash flow, even though the stock is because they want to get paid that dividend, even though, you know, it's not even covered by free cash flow, even though the business is struggling and could use some fresh capital

invested in the business to make earnings grow. They decide to not do that and they decide to keep paying the dividend, even though medium to long term, it's going to destroy shareholder value just because they're afraid of either cutting the dividend or they have too much incentive, too many shares themselves, and they don't want to lose the income that gets with that. And that's another issue that you'll tend to see from management. So these are all things you should be keeping an eye on. And we've harped quite a bit about BCE, but I think bc is in this exact position right now they are in the

position in my view that they should have cut the dividend probably a couple years ago and i think the more that things go on the more the likelihood of them cutting the dividend increases when will it happen it'll happen when they have really no other choice but to do it. It always happens when it's too late. Because look at the incentives, right? You have corporates running the company, this company that's been around for a long, long time that dates far back to when any of them who were working there were even alive at this point. And you have this business that spits off a lot of cash in, well, maybe not, right? It spits off a lot of operating income. Okay, we'll leave the accounting nuances for another discussion. And there is very little incentive for anyone to kind of rock the boat from a public markets

perspective in terms of cutting the dividend because the investor base there is there for one reason, it's to collect that check. And as soon as that goes away or there's any disruption to that thesis, the stock sells off. And so there's no short-term incentive for it to be managed correctly. Now, the long-term incentive, if it was managed properly and by people who have a lot of skin in the game and are thinking about running the business for the next 30 years or acting more like an owner-operator, you know, running the business for the next 30 years or acting more like an owner operator, they will do what is needed for the business to succeed long term.

So I'll give you an example, okay? You and I run this business. We have advertisers who pay us money. We have other kind of subscription products that we've introduced to listeners. But for the most part, right, this business is an advertising business and we have, you know, advertisers come on, they'll pay for a few months or a couple years. And that's the revenue coming into the business. You and I pay ourselves dividends for the business. If there is a massive dry up in the DIY Canada market or all these Canadian banks that sponsor the show or their asset managers sponsor the show, they're not doing podcasting advertising anymore. And things are looking a little rough. And you and I say,

let's keep paying out that dividend the same as we always have. Heck, let's even increase it. That would be fiscally insane. Yeah, it would be stupid. It would be straight up insane. And just because these are large public companies does not mean they don't have to defy by the basic common sense laws and logic of business. They do. And so it's really easy to think about, right? It's like, what would be the correct thing to do is to get ahead of it. And so slash it to a very conservative amount. And if there's a lot of cash

sitting on the balance sheet for investors, pay out a big old special dividend. Yeah. I mean, that's why I like Termaline because they have that kind of strategy. They pay a small, pretty small dividend when you compare it to other oil and gas producers. And then they have a lot of cash on the balance sheet or prices of natural gas go up. You know, cash flow goes way up, they'll pay a special dividend. Costco does the same thing. They pay a very small dividend, they have a tendency to pay a special dividend every couple years, three, four years, I can't

remember exactly. But that makes a whole lot sense because then you provide, you know, you give that income, you, it's a very low payout ratio. So you have ample flexibility. I mean, border, you basically need to have almost the apocalypse for that little dividend to not be payable at that point. And then if things keep going well, then you pay that special dividend on a basis that you can actually afford it. You don't like hamstring yourself or, you know, put yourself in this vicious cycle where you have no, no flexibility whatsoever. And, you know, I, it's hard to not pound on bell itself because it's so obvious in my view, the, the problem that they're facing and they're just kind of repeating the same thing over and over trying to like do cuts on the margins and they're facing and they're just kind of repeating the same thing over and over

trying to like do cuts on the margins and they're laying off people and obviously you know it's too bad for the people that got laid off and I'm not saying that it wasn't necessarily you know it was a good or bad thing per se like obviously there was probably some efficiencies that needed to be done but the real thing that could save them a whole lot of money is what's in plain sight. And that's the one thing they're afraid of doing. Yeah, I like Terminaline. It's not just up and to the right. They go based on market dynamics. And then you saw they're paying around a 26, 25 cent dividend every quarter, roughly. But then there's a couple of times where they just launched a dollar a share, a dollar and a half a share, two bucks a share off their balance sheet

as special dividends. And they're pretty frequent. They're actually really frequent. They're almost as common as the regular quarterly dividend. But the difference is one is a policy and one is a decision from management that may make sense at the time. But as soon as it's a policy and standard, and we're going to do this every quarter with no flexibility, now you've just shot yourself in the foot, especially if you're a cyclical name like this one it's a really good yeah i like this yeah we should make a bet huh in the next when do you think so if i give you let's just say a year and a half over under that bell will cut its dividend bc oh god i never look at the stock i never yielding 9% right now.

Yeah. And they have a lot of debt to refinance. Debt is starting to refinance in 2025. I just want to know what the interest expense, every quarter. It's high. Every quarter, the interest expense is growing. It's high, yes. But it's 416 million.

So yeah, they're on pace to spend about 2 billion in the next four quarters of interest expenses on a 6 billion a quarter total revenues. Jeez. There's the interest expense. Yeah. It's not trending in the right direction. It's doubled since 2020. It's doubled since 2020.

It's doubled since 2022. Yeah, pretty much, yeah. Pretty close to it, yeah. Look, I mean, I'd have to do a lot more digging. A year and a half? Just for fun. For me, I'll take the under, I would say. You're going to take the under on a year and a half

and then cut the diff? Yeah. I think that's a really good line. That feels like the Vegas diff. Yeah. I think that's a really good line. That feels like the Vegas line. Yeah. You know, it's a good line because that would probably be around my guess, but I'm going to take the over. It's going to be somewhere between one and a half and two years.

Yeah. Or who knows? Maybe they were both wrong. They never cut it. Who knows? All I know is that shareholders have had a bad time. Total return over the last five years is negative. Over the last 10 years, you've done,

you were doing better before that, but it's been really rough since 2022. Yeah, ever since interest rates started going up. But obviously, you know, we're saying that I know there's a lot of people that own BC and that I'm sure are listening to this podcast. Maybe they don't cut the dividend. Maybe they will. It's just a lot of warning signs are there. And if you dig into the numbers, you there's has to be a lot of things that go right for BC to being able to cover that dividend on a sustainable basis, including much lower interest rates as they are starting to refinance in 2025, because that's when their long-term debt is starting to come up.

And none of this is financial advice, of course, but just to let's, let's throw a bell out of the picture here. Just throw this, this is Acme Corp. Okay. Acme Corp in this example here, the stock's down 27% since 2022. Yes, this is, these are bell numbers still. Acme Corp is down 27% since 2022. It's a $40 billion in market cap, $80 billion in enterprise value. Holy debt load. Very, very rate sensitive. That's why the stock's getting handled the way that it is. It has maybe some structural decline issues. The government is doing everything they can to destroy their pricing power. There is some growth domestically of customers they can serve. Okay, that's good. It's easy to just say, Simone, it's easy to say, you have a blue chip that's down 27%. That's got to be a good time to buy, right? That kind of surface level thinking is

very easy to fall into. This is a blue chip. I'm a customer myself. It's not going anywhere. It's down 27%. You know, bet the farm. But the reality is that there's a lot of structural issues with the business. Maybe it is undervalued. I don't know. It's just like the facts have changed. The financials have changed. Its prospects are changed. It's going to have to make some really hard decisions about capital allocation in the next few months.

going to have to make some really hard decisions about capital allocation in the next few months is much more of a nuanced conversation than here's this blue chip down 27%. Let's buy the stock. It's going to pay me 10% a year in income. The second one sounds like a really good investment thesis, but it sounded like that 27% ago as well. So it's just a reminder that those kind of first level thinking ideas is a pretty easy way to lose money. You know, you and I are trying to do this for a really long time and that involves not losing money as much as we can. That's, yeah. And I guess I'll just finish on the numbers don't lie right that's it the numbers don't lie unless the company does lie well yeah but uh or you know with the assumption that uh

they're properly audited the numbers don't lie so correct just just remember that when the numbers don't add up you know you draw your own conclusions, but the numbers are what they are. Yeah. That's right. Thanks for listening to the podcast, folks. We really appreciate you tuning in here. We are here Mondays and Thursdays. Fincha just launched ETFs. So you can go check that out. It's really nice. All the data we're doing cross comparisons. We didn't just do that because we just launched it. It just happens to be really useful. And we're like, oh, let's go dig into some data here. You can get 15% off using code TCI on any subscription. See you in a few days.

Take care. Bye-bye. The Canadian Investor Podcast should not be construed as investment or financial advice. The hosts and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.