The goal of this portfolio is to protect assets against stock market losses
while providing a return that is at least a point and a half better than
the top GIC rate. Back in May, when I updated this portfolio in my Internet
Wealth Builder newsletter, that rate was at 3.46%, so our current target is
The initial investment was $50,000. Commissions are not factored in, and
the Canadian and U.S. dollars are treated as being at par for easier
The portfolio consists of the following securities. Here is an update on
their performance with prices as of mid-day on May 24. Prices May have
changed up or down since then, but my comments stand until my next update.
iShares Core Canadian Universe Bond Index ETF (TSX: XBB). This ETF tracks the performance of the broad Canadian bond market,
including both government and corporate bonds. Bonds have been under
pressure as interest rates rise, and the fund dropped $0.51 per unit since
the fall. However, we received slightly more than that in distributions
(including the May 25 payment), so we managed a fractional overall gain.
PIMCO Monthly Income Fund (PMO005). This fund invests in non-Canadian fixed-income securities from around the
world. Like almost all bond funds, it has been hit by rising rates, with a
decline of $0.41 in the net asset value (NAV) since October. The
distributions didn’t quite match the NAV drop, so we took a small loss.
First Asset Enhanced Short Duration Bond ETF (TSX: FSB). This ETF invests in a portfolio that is divided between short duration
high-yield securities and investment-grade corporate bonds. Like the other
bond funds, rising interest rates have cut into the price, with a $0.13
decline in the period. However, we received monthly distributions totaling
$0.17, so we ended up marginally ahead. Note that the distributions were
cut back to $0.02 per unit at the start of the year from $0.03 initially.
As a result, the yield dropped to 2.4%.
Canadian Utilities Preferred Shares Series BB (TSX: CU.PR.E). This straight preferred from a top-rated utility offers a fixed dividend
rate of $0.3062 per quarter ($1.2248 per year). Like bonds, straight
preferreds are negatively affected by rising rates. In this case, the
dividends almost exactly offset the $0.90 drop in the share price. The
current yield is 5.3%.
Royal Bank (TSX: RY). Banks are supposed to profit in a time of rising rates, but we have not
seen that reflected in Royal’s share price to date. The stock is down $1.60
since October. However, that was more than covered by dividends totalling
$2.76 per share. The bank raised its quarterly payment to $0.94 (from
$0.91) in April.
Fortis Inc. (TSX: FTS). Bonds and straight preferreds aren’t the only securities hit by rising
rates. Interest-sensitive stocks like utilities and telecoms also get
sideswiped. Fortis is down about $5 a share since October. There is nothing
wrong with the company; it’s just on the wrong side of the current cycle.
We are receiving dividends of $0.425 per quarter, but that’s not enough to
offset the drop in the share price.
BCE Inc. (TSX: BCE).
This is another interest-sensitive stock that suffered a setback. The
shares are down $4.56 despite the fact the company raised its quarterly
dividend by 5.2% in March, to $0.755 per share ($3.02 per year).
We received interest of $25.94 from the $1,933.60 held in our on-line
account at EQ Bank.
Here is a summary of the portfolio as of the mid-day on May 24.
Clearly, it has been a disappointing start for this portfolio. All of our
securities dropped in market price during the review period. In a few
cases, dividends/distributions offset those losses, but the net result was
an overall decline of 1.7% in the total value.
The reason is simple. Interest rates are moving up faster than anticipated,
especially in the U.S. and in the Canadian commercial marketplace. The Bank
of Canada may be raising rates slowly, but financial institutions are ahead
of the curve, especially when it comes to mortgage rates. This scenario is
probably going to continue for a while.
Changes: We need to make some changes that will improve performance and reduce
interest sensitivity without adding undue risk. Here is what I suggest.
PIMCO Monthly Income Fund. We can now purchase an ETF version of this fund with a much lower
management fee than the mutual fund A units. It trades on the TSX under the
symbol PMIF and is was priced at $19.60 at the time of this update in May.
Distributions are paid monthly, but they are not consistent, so don’t count
on predictable cash flow. We will switch our A series mutual fund units for
360 shares of this ETF, for a cost of $7,056. That will leave $40.05, which
will be added to cash.
Canadian Utilities Preferreds. The straight preferred I originally recommended (CU.PR.E) is well suited
to a stable or declining interest rate environment; however, its market
price is vulnerable to rising rates. Therefore, let’s replace it with a
rate reset from the same company that trades under the symbol CU.PR.I. It
should move higher in price as rates rise. It was trading at $26.03 and
yields 4.3%. We will buy 275 shares for $7,158.25, taking $12.67 from cash
to make up the difference.
BCE and Fortis. Here again, we have two first-class companies that are long-term income
generators. But both act too much like bonds to be included in this
portfolio at present. Therefore, we will sell both positions for a net of
$12,052.99. We will deploy that money as follows.
Dream Global REIT (TSX: DRG.UN). As a group, REITs are interest-sensitive, but this one, which focuses on
business properties in Europe, is bucking the trend. It is up more than 20%
to mid-May and pays a yield of 5.2%. We will buy 300 shares at $14.80 for a
cost of $4,440.
Sun Life Financial (TSX: SLF). Insurance companies should fare well in a rising interest rate
environment, and Sun Life is one of our best. The stock has made a modest
advance this year and yields 3.4%. It was trading at $55.20 in mid-May. We
will buy 100 shares for a cost of $5,520.
Apple Inc. (NASDAQ: AAPL). Technology stocks have come a long way from the Wild West days of the
1990s. The big companies are now well-established giants with strong cash
flow, good balance sheets, and, in many cases, dividends. Apple falls into
this group. Its shares have been steadily moving higher, and the dividend,
while not rich, is reasonable at 1.6% as of mid-May. The trailing p/e ratio
is a respectable 18.0, which means in the event of a market downturn it
won’t be as vulnerable as its higher-priced competitors. The shares are
trading at $188.07. We will buy 20 shares for a cost of $3,761.40. We will
take $1,668.41 from cash to make up the difference.
We are left with cash and retained earnings of $762.71, which we will keep
in our EQ Bank account at 2.3%.
Here is the revamped portfolio. I will revisit it again in my Internet Wealth Builder newsletter in October.
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 Investor
newsletters, which are available through the Building Wealth website.
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Notes and Disclaimer
© 2018 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