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Many income investors are getting discouraged seeing the continued drop in the value of their portfolios. That’s not surprising. We’re in a period when central banks are raising interest rates at the most aggressive rate in 40 years, as they struggle to beat back inflation. Many income securities are highly interest sensitive. Every time the Bank of Canada moves the rates a notch higher, market values get slammed.
The value of my Income Investor High-Yield Portfolio has suffered as result. But the whole rationale of this portfolio is to generate cash flow, not capital gains. Our target is an annual 5% yield, and we are exceeding that. Share prices will rise and fall but as long as the income rolls in, we should not be overly concerned. Rates will eventually turn around and the market value of our assets will rise.
This portfolio was created for investors who are looking for above-average dividend income and who can live with somewhat more risk. We invest primarily in stocks, so the portfolio 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 we own and how they have performed in the time since our last review in March. Results are to Sept. 24.
Enbridge Inc. (TSX: ENB). The stock was moving higher but then the company announced a new share issue at a discounted price to help finance the purchase of three gas utilities in the U.S. That knocked down the price, and the shares are still recovering. The stock is down $3.89 from the time of the last review in March. We received two dividend payments for a total of $1.775 per share. The stock yields 7.6%.
Pembina Pipeline Corp. (TSX: PPL). High interest rates were a headwind for the stock, but the six-month loss of $1.05 was offset by two dividend payments that totaled $1.335. At the current price, the dividend yield is 6.5%.
Sun Life Financial Inc. (TSX: SLF). SLF continued its strong recovery and added $5.66 in the latest six-month period. We received two dividend payments for a total of $1.50 per share. The current yield is 4.5%.
Capital Power Corp. (TSX: CPX). The stock lost $0.35 in the latest period, but we received two dividends totaling $1.16 a share. The dividend yield is 5.7% at the current price.
Canadian Imperial Bank of Commerce (TSX: CM). The bank stocks have stabilized since the turmoil in the U.S. financial system at the start of the year, but interest rate pressures still weigh on the share prices. CIBC is off $2.62 since March, although we recovered more than half that through dividends. The bank raised its payout by two cents per share in June, to $0.87 per quarter. The stock now yields 6.4%, which is very high for a big five bank.
Brookfield Energy Partners (TSX: BEP.UN). This Bermuda-based limited partnership invests in an international portfolio of clean energy properties, mainly hydro. Green energy stocks have struggled for most of the past two years, and the units are down $5.52 since the last review. The quarterly distribution is US$0.3375, for a yield of 5.3%.
BCE Inc. (TSX: BCE). The stock was down $7.05 in the latest six-month period, with rising interest rates the main reason. The quarterly dividend is $0.9675 per quarter ($3.87 a year). The stock yields 7.2% at the current price, which is unusually high for this company.
Firm Capital MIC (TSX: FC). Mortgage investment corporations normally see their share prices decline when rates rise, and that continues to be the case here. We’re showing a loss to date, but the monthly cash flow is steady at $0.078, with a yield of 9.4%. I know the results don’t look good now, but when interest rates turn back down, this stock will rise quickly.
Freehold Royalties Ltd. (TSX: FRU). We added 170 shares of gas and oil company Freehold Royalties at the time of our last review at a price of $14.10. The shares are now priced at $15.01, and we are receiving monthly dividends of $0.09, for a yield of 7.2%.
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 down $0.38 since the last review, but we received two dividends of $0.38 each, so we ended up a little ahead. The yield is 4.5%.
Automotive Properties REIT (TSX: APR.UN). Automotive Properties is the only Canadian listed REIT focusing on owning and acquiring automotive dealerships. It was added to the portfolio a year ago at $13.20. The price pulled back by $1.57 in the latest period. Monthly distributions are $0.067 per unit, to yield 7.5%.
We earned $26.93 from the cash we deposited in an account with Scotiabank that paid 5% at the time.
The table below shows what the portfolio looked like on Sept. 24. 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 and exchange rates are not considered.
The portfolio is down about 3.5% since the last review. That’s not a bad result considering the continued increase in interest rates during that time.
We have a total return of 138.3% in the 11.5 years since inception. That translates into an average annual growth rate of 7.84%, which is within our target range.
In terms of cash flow, the portfolio earned $1,693.46 in the latest six months, for a yield of 2.84% in that time. Over a full year, that would work out to about 5.7%. Our cash flow target is 5%, so the portfolio is doing its job.
We are nearing an inflection point in the fight against inflation. The CPI report for August showed prices moving higher again, at 4%. That has raised fears that the Bank of Canada will resume raising rates again, perhaps as soon as its next meeting on Oct. 25. If that happens, it will put more pressure on the market price of the stocks in this portfolio.
As a result, I am not going to reinvest any of the cash we are holding, which totals $4,975.73. We can earn a guaranteed 5% on this money by putting it in a six-month GIC with EQ Bank. It will mature on March 24, 2024. We’ll make our reinvestment decisions at that time, assuming we know more about how rates are likely to move.
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. To receive a free copy of the special report “The Tumultuous Twenties,” go to https://bit.ly/bwGP20s.
Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2023 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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