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I’ve been saying for the past two years that when rates turned and started down, my Income Investor High-Yield Portfolio would thrive. They have. It is.
Declining rates contributed directly to a huge gain of over 20% in this portfolio for the seven-month period to Oct. 18. We haven’t seen a bump that big in a long time.
This portfolio was created in March 2012 for investors seeking above-average dividend income and who can live with somewhat more risk. The portfolio invests entirely in stocks, so it is best suited for non-registered accounts where any capital losses can be deducted from taxable capital gains. Also, Canadian dividends are eligible for the dividend tax credit.
The initial portfolio value was $24,947.30, and I set a target average annual total rate of return of 7% to 8%, with an annual yield of around 5%.
Here is a review of the securities in the portfolio and how they have performed in the time since our last review in March. Results are to Oct. 18.
Enbridge Inc. (TSX: ENB). The move to easing interest rates has worked wonders for this stock. The shares are up $9.68 from the last review. The quarterly dividend was increased in February to $0.915, and we received two payments. The stock yields 6.3%.
Pembina Pipeline Corp. (TSX: PPL). Falling interest rates also boosted this stock, which gained $12.17 in the period between March and October. We received two dividend payments that totaled $1.38. At the current price, the dividend yield is 4.6%. That’s a full percentage point less than March, which highlights the impact of the interest rates environment on this and other dividend shares.
Sun Life Financial Inc. (TSX: SLF). SLF continued its strong recovery and added $5.10 in the latest period. The quarterly dividend is $0.81, and we received two payments. The current yield is 4.1%.
Capital Power Corp. (TSX: CPX). The stock jumped $12.94 in the latest period. Due to timing, we received three dividends totaling $1.882 a share. The dividend yield is 5% at the current price.
Canadian Imperial Bank of Commerce (TSX: CM). The bank stocks (except TD) continue to recover strongly as recession fears have eased and interest rates have started declining. CIBC is up $18.20 since March. The bank raised its quarterly payout to $0.90 per share last December. The stock now yields 4.2%, which is still respectable for a big-five bank.
Power Corporation of Canada (TSX: POW). We added this conglomerate to the portfolio in March. It has interests in life insurance (Great-West Life), asset management, and banking. The stock is now trading at $44.39, up $6.41 since it was added. The quarterly dividend is $0.5625 ($2.25 a year) to yield 5.1%. We received three dividend payments due to timing.
BCE Inc. (TSX: BCE). BCE shares have struggled for some time as the company copes with slow growth and a high debt load. But at least the stock held its ground in the latest period, posting a small gain of $0.45. The dividend is $0.9975 per quarter ($3.87 a year). The stock yields 8.4%, which is a strong caution signal.
Firm Capital Mortgage Investment Corp. (TSX: FC). Mortgage investment corporations normally see their share prices decline when rates rise. But when rates switch direction, these shares move up. That’s where we’re at now – the shares gained $0.27 in the latest period. Not a lot, but we should see more of this as interest rates continue to fall. The monthly cash flow is steady at $0.078 a share, with a yield of 8%.
Freehold Royalties Ltd. (TSX: FRU). We added Freehold Royalties in March 2023 at a price of $14.10. It’s now trading below that, although the monthly dividend of $0.09 a share provides a yield of 7.7%.
North West Company Inc. (TSX: NWC). This company has a long history, with a prime focus on general stores in Northern Canada and Alaska. The shares are up $13.20 since the last review, and we received three dividends for a total of $1.18 per share. The yield is 3.1%.
We put our cash and retained earnings of $2,484.14 in a Duca Credit Union promotion account with 6% interest. We received $86.94.
The table below shows what the portfolio looked like on Oct. 18. The weighting is the percentage of the market value of the security in relation to the total market value of the portfolio. The gain/loss shows the performance of the security since it was added to the portfolio. Sales commissions are not considered.
The portfolio has a total value of $78,329.61 and is up 20.6% since the last review.
We have a total return of 215.2% in the 12 1/2 years since inception. That translates into an average annual growth rate of 9.59%, which is above our target range.
In terms of cash flow, the portfolio earned $2,463.49 in the latest period, for a yield of 3.8% in that time. Over a full year, that would work out to 6.5%. Our cash flow target is 5%, so the portfolio is doing its job.
I’m not happy with the way FRU is performing, so we will sell our position and buy a higher-yielding petroleum stock, Peyto Exploration & Development (TSX: PEY). It’s an Alberta-based natural gas company that is currently paying a monthly dividend of $0.11 a share ($1.32 a year) to yield 8.7% at a price of $15.23.
Our FRU position is worth $2,662.20. We’ll use that to buy 175 shares of Peyto for $2,665.25. We’ll take $3.05 from cash to make up the difference.
We will also reinvest some of our retained earnings as follows:
BCE – I’m still concerned about the performance of this stock, but it’s cheap and has a high yield. So, we’ll buy another 10 shares for $463.10. This brings our total to 90 shares and leaves $16.86 in reserve.
FC – We’ll add 20 shares at a cost of $233.20. That brings our total to 500 shares, with $132.62 remaining.
We have cash and retained earnings of $3,899.16. EQ Bank is paying 4.25% on its 30-day notice savings account, so we will put the money there.
Here is the revised portfolio. I’ll review it again in March.
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 Investor newsletters, which are available through the Building Wealth website.
Follow Gordon Pape on X at X.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2024 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. 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.
Image: iStock.com/alfexe
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