Today, we’ll address this question specifically and then consider some reasons why we believe Canadian REITs still add necessary “flavour” to a diversified portfolio as well as offer some specific REITs you might want to consider to spice up your portfolio.

Canadian REITs Retreat

Positive news surrounding the European debt crisis, U.S. private sector job growth, the all consuming U.S. housing market and positive earnings in the 3rd quarter led to a robust 3rd quarter in 2012. Markets then saw a retreat in the first half of November as investors expressed concern about the uncertain U.S. presidential election and the upcoming fiscal cliff. Yet, results from REITs in both Canada and the U.S. remained strong often meeting or exceeding expectations. Quite simply, the positive results were a direct outcome of:

• Rent Increases – Spreads on renewals and new leases were reported in the high single to low double-digits.
• Low Yield – The current low-yield environment for refinancing allowed many properties to save interest on new debt ranging from 100 to 200 basis points.
• Cash Flow Growth – Through thoughtful acquisitions, development and redevelopment of properties, per unit cash flow growth has remained robust.

I understand that all this technical mumble jumble doesn’t mean much to many investors, so let me break it down with a simple example. Let’s say a property group, which we’ll call the Doctor Stock Property Group, operates as a Canadian REIT. As a result of the healthy regional mall sector, which is showing signs of growth in retail sales, the REIT is able to increase rents. As a result, the Doctor Stock Property Group is able to increase its free cash flow from operations, which enables the REIT to pass along that growth through increased dividend payments during the year. But not only does the Doctor Stock Property Group operate in the retail sector, but it has a large holding in apartments too in major centres such as Calgary, Vancouver, and Montreal. Due to a reported occupancy of 97%, the REIT is able to increase rents marginally. Combine that with the lower rate of interest the REIT pays due to refinancing costs and the result is a savings of Millions per year in interest expenses. So investors shouldn’t be surprised to see improving balance sheets and rising returns.

A well structured REIT is not only a built in dividend payer, but also a dividend grower

If you’re a nervous investor who remains concerned about the risk of an economic slowdown in 2013, then you may want to consider REITs whose assets have stable utilization rates regardless of the economic cycle. For example, even with an economic slowdown, assets such as toll roads, railroads, airports, pipelines, and many utilities will continue to be used and, therefore, the companies that provide or manage them will continue to generate stable cash flows.

REITs to Add Flavour to your Portfolio

As we’ve explored on numerous occasions here at Invest in the Markets, REITs have several benefits. Personally, I enjoy being able to participate in both residential and commercial real-estate with the benefits of liquidity as well as a small capital investment compared to trying to buy a house or commercial property. If you are interested in some of these benefits, then you’ll want to consider some of these Canadian REITs:

• Dundee REIT (D.UN.TO) – One of the purest large office plays in Canada with a fantastic management team. With a recently spun out industrial play, which they still own 44% of, Dundee is cheap with tremendous cash flow growth. Dundee is known for owning the highest quality assets within a diverse portfolio.
• Kinder Morgan (KMI) – A gas and oil midstream company in the US with a strong focus on shareholders. They have a number of projects that will underpin strong cash-flow growth.
• Enbridge (ENB.TO) – Recently, they announced expansion of a pipeline as well as an expanding earnings per share growth. Combine that with their attractive dividend while you wait, Enbridge is positioned well to produce results for shareholders in 2013. I talked about Enbridge in this article last year as a company you may want to consider.

If you’re still skeptical about REITs, consider the data. Companies that pay out a dividend and continue to grow that dividend, have historically outperformed many other stocks in Canada and the US over several years. When you consider REITs, you’re looking at companies with built in payouts. REITs must pay out 90% of any taxable income in order to keep their REIT status, almost guaranteeing investors in this environment a payment plan. A well structured REIT is not only a built in dividend payer, but also a dividend grower. While recession can be considered a viable risk for REITs (not interest rates), if you believe a recession is not around the corner, then investing in REITs might be the spice you need to add flavour to your portfolio in 2013.

Financial Security Tips

There is plenty of advice and insights on investment strategies, but few provide you with basic principles that you can adapt to meet your specific situation. Usually they tell you to do this or that, but fail to recognize that your situation may require something a little different. So, as you consider the following tips, realize that they are written for you to manipulate to meet your specific goals and to suit your individual situation.

1. Start Now, but Start Slow – Investors that begin early in life set themselves up for tremendous success that simply comes with time. Profits, even small ones, that build upon profits add up over time. But the unfortunate temptation for many investors early on is to take a chance… go big… and take unnecessary risks. The size of the risk you take will not necessarily equal the size of reward you may experience. So, start slow… think in terms of the long term. That’s not to say you simply buy an investment and forget about it. Rather, invest with the long term in mind but check in on your investments on a monthly basis to ensure they are moving in the direction you intended!
2. Start with What you Know – Beginning investors can become overwhelmed with all the various financial instruments available to them. Remember, in almost every case, those who are promoting these financial instruments are making money if you invest in those they are selling. So, instead of investing in what they offer, invest in what you already know. For example, if you are familiar and interested in a company (perhaps Starbucks) and you are a consumer of their product, consider investing in their stock. You’re more likely to not only enjoy the experience of investing in a company you know but also be more successful as you follow a company you have a natural interest in. Besides, there’s nothing like purchasing a product knowing you’re contributing to your own financial security.
3. Diversify without Diluting your Portfolio – One of the most important financial concepts for those seeking financial security is known as diversification (or asset allocation). Quite simply, it is the practice of not putting all your eggs in one basket. While most diversification strategies focus on asset types or geographical diversification, they all seem to miss out on a few critical concepts that can better protect investors, especially when their investments are caught up in a global correction. This concept is so critical to achieving financial security that I wrote an e-book dedicated to this subject titled “Diversification Strategy: The Insider’s Guide on How to Diversify Without Diluting your Portfolio.” Check it out here.
4. Be Skeptical – There is plenty to be skeptical of in the investment industry, even from those who smile, shake your hand, and tell you they have your best interests at heart. When you hear of an investment that promises almost “guaranteed” returns that seem impressive and easy to obtain, be skeptical. When you are offered financial products that add an extra percentage point or two to your yearly costs, be skeptical. When you’re offered insurance on your investments for a “nominal fee,” be skeptical. This type of skepticism is what wise investors refer to as “healthy skepticism” and it will help you achieve financial security with less costly mistakes along the way.

Certainly, we could add a few more but before we do, what are your thoughts? Have you made mistakes or had successes that validate these tips? And, what would you add to the list to make it more complete?

No one invests just to throw their money away. No, whether a beginner or experienced investor, we are all seeking the same thing… financial security. We know you can adapt these tips to fit your personal circumstances and give you a far greater chance of finding financial happiness than those who try to seek some “magical formula” for wealth that doesn’t exist.

I think it’s only fair that you know my prejudice before reading this article. That’s right… I’ve never been one to consume Starbucks. With my general distaste of coffee, my aversion to sweats, and my squeaky tight wallet, you won’t typically find me inside a Starbucks. And I’m not one to order a “tall” drink only to discover it’s the smallest drink they offer. Confusing for simple folk like me!

Yet you’ll find me in Starbucks in 2013 more than ever before… and as a result, I thought I’d also share with you a few reasons why you might want to consider this stock star for your portfolio.

The Magic Bean in the Starbucks Coffee?

We met the green monster, looked her in the eye, and…SHE BLINKED! We got it! Thank you Seattle!

In a day and age when money seems to motivate most deals, Dempsey seems to have bucked the trend with an inferior cash offering, but a promise to keep employees and the Tully’s name. As he visits various Tully’s locations to meet with staff and customers, he sells his vision of a rebirth, not rebranding, of the Tully’s franchise with the hope of going national. Starbucks, on the other hand, was planning on converting the locations and closing several others.

But there’s no need to feel sorry for Starbucks. After all, for a company that boasts a $40 Billion market cap, a 9 or 10 Million dollar deal isn’t going to cause them to stumble. Instead, they likely saw it as an opportunity to benefit from the failings of another company rather than a critical move to propel success.

Starbucks has plenty of other strategic plans including:

• International Expansion – Holding to a target of doubling it’s footprint overseas by 2015.
• Asian Expansion – A new store in Vietnam and continued growth in China, making it the second-largest market in 2014.
• Opening 3,000+ net new stores in the “Americas” region by 2017.
• At Home Brew – Premium single-serve options in the global coffee industry.
• Loyalty Platform – Social and Digital media… loyalty and mobile payment platforms are creating a growing connection to customers around the world with less cost to reach customer.
• Teavana – The acquisition of a chain of 300 plus small based tea stores for $620 Million which positions Starbucks as a key player in the $40 Billion global tea market.

Howard Schultz (CEO)

Add Howard Schultz to the list of exemplar CEOs along side the late Steve Jobs of Apple and Jeff Bezos, the current CEO for Amazon. A truly innovative leader, Schultz continues to guide Starbucks in strategic directions without unreasonable risk. Starbucks multi-channel growth agenda is backed by a healthy brand that is expanding globally. Take a look at some of the plans for 2013 and beyond:

• Renovations to thousands of stores in addition to thousands of new stores.
• Refreshing juice beverages with the recently completed Evolution Fresh and La Boulange acquisitions.
• Continued expansion in Mainland China, Japan, Korea and now Vietnam. But the expansion doesn’t stop there… it continues to Mumbai, India where Starbucks successfully opened 3 stores and reaffirmed plans to open Starbucks first store in Delhi in early 2013.

Did you know Starbucks cards are used in approximately 25 percent of the company’s US transactions?

Taking Stock of Starbucks Numbers

The story of Starbucks is compelling with its global expansion, product adaptations, customer relations and genius of a leader. So it should be no surprise to investors when they look at the books and discover some compelling reasons to own Starbucks stock in 2013. Here’s a few that rise to the top:

• 24% return on investment and a 29% return on equity. Compare those numbers with their leading competitor, Green Mountain Coffee Inc. (GMCR), whose return on investment is only 13% and their return on equity is only 17%. Still an impressive feat, but shadowed by the Star of Starbucks.
• Falling coffee prices has resulted in increased profits. With little or no change at the register, Starbucks profits every time the coffee prices drop… which has been a common occurrence in 2012.
• Trending stock price. Apart from some dips which provide some good buying opportunities, SBUX is in a general uptrend year over year and for the monthly investor, is positioned to boost your portfolio too.
• Revenues, which were consistently single digit from 2009 – 2011, reached double digit (13%) in 2012 and are expected to near 12% for 2013 and 2014.
• A 1.5% yield with a $0.84 annual dividend payout.
• ZERO short term debt and only $550 Million in long-term debt (not bad for a company with a $40 Billion market cap).

1-year Chart (click to enlarge):

Source: Stockcharts.com

After a rather unstable 2012, SBUX is positioned well to see a more reliable growth pattern in 2013, especially as investor expectations are bridled by reason rather than pure optimism which never lasts forever. With Starbucks impressive free cash flow margin (calculated by dividing the free cash flow by the total revenue) averages around 9%, a full 4% above the point when most companies are considered cash cows.

When I study Starbucks, I find a growing company with a solid track record and expanding revenue base. I see excellent leadership and cutting edge consumer outreach which is increasingly important in our social media age. So, despite my previous prejudice against Starbucks as a consumer, I’ve found myself using some of my Starbucks profits to buy Starbucks cards.

Kids love the juices and coffees. I’ve found a refreshing fruit juice at a reasonable rate. And I enjoy the free wi-fi to write articles such as this one to get out of the stuffy home office. I know I’ll be spending more at Starbucks in 2013… and I’m not alone. I haven’t figured out all the loyalty rewards yet, and I hear that by using the card I get bonuses… so perhaps you can fill me in. In the meantime, I’ll watch for Starbucks revenues to increase and their stock price follow in suite. To me, Starbucks is star stock I’ll continue to add to my portfolio using an attentive monthly trading strategy in 2013.

But that’s not to say there is some truth underlying their concerns. After all, you don’t have to look to far to find those who lost money in the stock market, especially during crises such as the dot.com bubble of the early 2000′s or the crisis of 2007-2008. So, are there some stock trades that are consistently high risk and others that are lower risk? And, if so, which types of stock trades are best suited for your personal risk tolerance levels? Today, we’ll explore four high risk stock trades that cause many investors to lose money more often than not.

High Risk Stock Trades

High risk is self-defined. For some, high risk is any loss while for others, they’ll allow their investment portfolio to ebb and flow 25+%. But generally speaking, high risk trades are those trades which consistently cost the majority of intelligent investors a significant loss in their portfolios. To that end, here’s three to consider.

• Penny Stocks – Some investors think that the best way to make money in stocks is to buy them when they’re barely starting out and long before any sustainable growth phase. Usually these investors are hoping that this stock will produce a product that will make them a market changer. Friends will tell you the company has had a break-thru that simply hasn’t been announced yet or they are sitting on a product that will cause even Apple to tremble. This type of stock trading is more akin to gambling than it is to  wise investing. Beware of the flashy emails, the glossy brochures, the 1-800 numbers with sales people on the other end and other forms of over-publicized promotions.
• Junior Tech Stocks – There is a delicate balance between risk and reward when it comes to tech stocks. We can all think of market leading tech stocks who once traded as junior tech stocks. And our memories are often short, or completely oblivious, when it comes to those companies who had promising young entrepreneurs and a great idea.
• Frequent Trading – Some investors are students of the market and they want to be actively involved in watching their investments. They are to be commended. But there’s a fine line for some between attentive trading and frequent trading that diminishes gains and increases costs. Between brokerage commissions, losses between the bid/ask spread and possible tax implications, frequent trading can create unnecessary losses.

Managing High Risk Trades

Knowing the high risk trades is part of the battle. Knowing how to manage the high risk trades to minimize the risk is an equally important lesson. May I quickly suggest a few steps you can take?

• Psychological Commitment – If you were to sit down with a friend and explain to him or her why you’re making the trade and you find yourself using words like “hope,” ” feel,” “believe,” or “just know it,” you likely need a new perspective. What we are trying to do is avoid emotional trading. If you feel like you’re taking a gamble, don’t invest your money.
• Trade in Slow Motion – Slow everything down… become a real investor of a company. Study their conference calls, look for increasing revenues, and avoid trading each and every day. Not only will a longer time frame help you avoid emotional trading, but it will also save you lots of money related to commissions. Personally, I think the best way to start is to place orders once a month. Then, when you’re alerted that you’ve purchased a stock, simply go in and set up your stop losses. Then, once a month, take a look at the company. If you’re relatively new to investing, find yourself too emotionally involved, or are paying too much in commissions, trade in slow motion.

Some people would have you believe that ALL stock trading is high risk investing or even gambling. Of course, such hyperbole is simply not true. If you avoid some of the high risk trades and take a couple of simple steps to adjust your trading style, you’ll find your losses minimized, your profits maximized, and your emotions stabilized as you invest in the markets.

The Problem of Cash

Cash is usually considered as assets on a company’s balance sheet, not a liability!

Perhaps Cooperman’s assault is as a result of Apple’s resistance to offer a special dividend in December since so many other cash-rich companies did prior to the “fiscal cliff” resolution. I’m not really sure, but I do know that Apple has already committed to shareholders that they’ll return approximately $45 billion over the course of the next three years.

That doesn’t mean that investors are somehow discounting Apple’s cash…

The Problem of Competition

Samsung and in a less direct fashion, Google, pose as the only real competitors for Apple. After all, finding real competitors for Apple is like trying to find someone who could stop Michael Jordon in his prime. But if there are two companies that are and may continue to eat into Apple they would be Samsung and Google.

Projections for 2013 have Samsung widening its lead over Apple in global smartphone sales. Perhaps the most notable reasons is Samsung’s widening product line. After all, Apple tends to focus on one all-star product with little supporting cast. Unlike the iPod with its broad product offerings, and as a result broad price points, the iPhone has typically been expensive and more expensive. The iPad has experienced a similar fate. Even with the release of the iPad Mini, uses are left questioning if the premium they’ll pay for the Apple product will be realized in tangible enjoyment. Apple lacks product diversification. Combine Samsung’s broad product offerings with Google’s Android choices and it’s no wonder Apple is losing market share in the smartphone industry, especially amongst the lower price points.

Yet, the “problem of competition” is also a story of opportunity for Apple. Clearly, Apple dominates the higher price point market with almost all of their products. In fact, even those who have purchased smartphones using the Android platform are cited in surveys as saying if they felt they had the money, they would prefer to purchase an Apple product. It makes me wonder… if Apple were willing to produce a competitive product in the lower price bracket if they’d be able to penetrate these lower priced markets now dominated by their competitors such as Samsung and Google. And don’t forget about Apple’s suspected development of TVs. Certainly, they can’t expect to compete with the SmartTVs of Samsung with a noticeably higher price point.

And Samsung isn’t without its own internal issues. One might be able to successfully argue that diversity of products can lead to dilution of focus. And Samsung is nothing if not diverse. With its prongs into display electronics, mobile technology, telecommunications, storage technology and other components for electrical devices and LED technology, Samsung is a supplier for nearly everything electronic in your home.

And not unlike Apple, Samsung keeps most of the profits it makes within the company

Second, and more importantly, Samsung is a family business. With family businesses can come controversy and Samsung has three children fighting over key roles within the company such as chairman, COO, and others. Unless they can settle their family affairs, Samsung may struggle to remain focused on its goal of being every household’s primary provider of all their electronics.

A Worm in the Core?

Is there a worm in the Apple core? No matter which way you slice it, Apple has some challenges. When I look inside, I see some bruising from the competition and some seeds of opportunity. I suppose we’ll have to wait and see what Cook does with Apple before we’ll be able to assess whether or not it’s a sweet taste in the mouth of most investors in 2013.