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Pape’s TFSA Income Portfolio gains 9.3%
7/27/2017 8:34:06 PM
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Wealth Builder
Gordon Pape writes on common-sense wealth-building strategies.



By Gordon Pape  | Monday, July 03, 2017


 

BUILDING WEALTH WITH GORDON PAPE
 

Two years ago, in May 2015, I launched an income portfolio designed for Tax-Free Savings Accounts (TFSAs). At that point, the annual TFSA contribution limit was $10,000, making these plans highly attractive to income investors. The portfolio has performed as expected, delivering a decent gain of 9.3% in the period from last December to mid-May.

The limit for TFSA contributions has once again been rolled back to $5,500 a year, but even at that level TFSAs can provide a valuable source of tax-free income to investors who structure their portfolios properly.

At present, the maximum lifetime contribution for an individual who was 18 or older at the start of 2009, the year TFSAs were launched, is $52,000. However, at the time this portfolio was created, the maximum was $41,000, so that was the initial starting value.

This portfolio has a goal of generating cash flow of at least 5%. Income is the key to its success; any capital gains are a bonus. Note that because the securities chosen have above-average yields, risk is on the high side. So this is not a good model for very conservative investors.

I selected 10 securities from the recommended list of my Income Investor newsletter. All are traded on the TSX, so currency exchange is not a factor, except for the distributions from the limited partnerships, which are in U.S. dollars. I gave each security an initial weighting of approximately 10% for diversification and balance. Here are the components of the portfolio with a brief report on how they have performed since my last update in December. Prices are as of the close of trading on May 19.

BCE Inc. (TSX: BCE). BCE shares have rallied since their winter lows, touching $63 last month before pulling back to a recent price of $60.40. The dividend was increased by 5.1% effective with the March payment. The stock yields 4.75% at the recent price.

Bank of Nova Scotia (TSX: BNS). After a great run last fall, Scotiabank shares are off $1.39 from the last review. That was just about offset by dividends totalling $1.50 per share during the period. The dividend was raised by $0.02, to $0.74 per quarter in March. The stock yields 4.1%.

Brookfield Infrastructure Limited Partnership (TSX: BIP.UN). This Bermuda-based limited partnership is a spin-off company from Brookfield Asset Management, which owns a majority stake. The units split three for two last September, which means you received an additional half unit for every one you owned previously. The stock has been a strong performer since the split and is up $10.50 per unit since the last review in December. Due to timing, we received only one distribution during the period of US$0.435 per unit. The payout was raised by 11.6% at the start of the year. The current yield is 4.5%.

Brookfield Renewable Partners (TSX: BEP.UN). This is another Brookfield spin-off, but with a focus on renewable energy, mainly hydro but also some wind projects. The units are up a healthy $4.93 from the time of our last review. The quarterly distribution was increased by 5.1%, to US$0.4675 per unit, effective with the February payment. The units yield 5.6% at the current price.

Inter Pipeline (TSX: IPL). This stock pulled back by $1.22 in the latest period. However, we received dividends of $0.675 per unit, which partially offset that. With the price retreat, the yield is up to 6.2%.

North West Company (TSX: NWC). After a selloff last fall, the shares recovered well and gained $5.56 during the latest review period. The quarterly dividend was raised by a penny, to $0.32 per share, effective with the March payment. The current yield is down to 4%, due to the rise in the share price.

Sienna Senior Living Inc. (TSX: SIA). Sienna’s share price rebounded by $1.48 per share during the latest review period, and the monthly dividends of $0.075 per share continued to roll in. The current yield is 5.2%.

TransAlta Renewables Inc. (TSX: RNW). The stock has recovered nicely since last fall’s slump and is up $1.79 since the last review. The monthly dividend remains at $0.0733 ($0.88 per year), for a yield of 5.7%.

Firm Capital MIC (TSX: FC). This mortgage investment corporation saw its share price slide to as low as $12.29 in reaction to the problems at Home Capital Group. However, it has since recovered to a recent $13.24 as investors realized this small company is well capitalized and conservatively managed. The stock offers a monthly payment of $0.078 ($0.936 per year), to yield 7.2%.

SmartREIT (TSX: SRU.UN). This is the only REIT in the portfolio. The shares are almost flat since my last review, with a gain of just $0.05. The monthly distribution was increased by 3% in October, to $0.1416 ($1.70 per year), to yield 5.4%.

We received interest of $14.71 during the latest period from our EQ Bank savings account.

Here is how the portfolio looked at the close of trading on May 19.

Comments : The overall value of the portfolio increased to $52,586.48 from $48,130.16 in December. That was a profit of 9.3% in the latest period. Since inception two years ago, the portfolio has gained 28.3%, for an average annual compound growth rate of 13.25%.

The yield in the last period was 2.1%, which is slightly below target. However, this only covers a little over five months so the one-year objective of 5% remains intact.

Changes : I am not pleased with the performance of SmartREIT, and the fact it operates in the shopping mall space is a concern given the growing trend towards e-commerce. Therefore, I am selling our position in SRU.UN and investing the proceeds in Dream Global REIT (TSX: DRG.UN), which invests in office, industrial, and mixed-use properties in Europe. Dream’s price has been trending higher recently, and it was trading at $10.40 in mid-May. The units yield 7.5% at that price.

Selling SmartREIT will net us a total of $4,926.06, including retained earnings. That will buy us 470 units of Dream, at a cost of $4,888. We will add the remaining $38.06 to our cash account.

We will also make a few other small purchases, using retained income, as follows.

IPL – We will buy 10 shares at $27.01 for a cost of $270.10. That will reduce our retained cash to $44.78 and bring our total position to 150 shares.

SIA – We’ll add 10 more shares at $17.50, for an investment of $175. This brings our position to 300 shares and reduces our retained income to $14.65.

RNW – We will buy another 10 shares at a price of $15.69 for an outlay of $156.90. This brings our share count to 370 and reduces the cash to $42.72.

FC – Finally, we will invest another $132.40 to buy 10 more shares of Firm Capital at $13.24 each. We now own 380 shares, with cash remaining of $11.90.

Remember, don’t do small trades unless you have a fee-based account. Use dividend reinvestment plans instead.

We will keep our cash of $1,552.48 in the EQ Bank savings account, which now pays 2.3%. I’ll review the portfolio again in November in my Income Investor newsletter.

Here is the revised portfolio.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investornewsletter, which are available through the Building Wealth website. This column originally appeared in The Toronto Star.

For more information on subscriptions to Gordon Pape’s newsletters, check the Building Wealth website.

Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.

Notes and Disclaimer

© 2017 by The Fund Library. All rights reserved.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.

BUILDING WEALTH WITH GORDON PAPE
 

 
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