Stock Market Smarts: Building a Balanced Portfolio

Average annual growth rate of nine per cent since inception.

I created a Balanced Portfolio for income-oriented investors in September 2011 with the goal of combining above-average cash flow with reasonable risk. The initial portfolio valuation was $25,027.75, and the target was to achieve a return that at least matched the best available five-year GIC rate plus two percentage points.

The portfolio hit a rough patch during the summer of 2015, losing 3.1 per cent over the period to my last review in November. But it has rebounded well since and is generating a return that is well above target.

Here’s a summary of how the securities we currently hold performed over the five months since I last reviewed this portfolio. Prices are as of the close of trading on April 15.

iShares Canadian Short Term Bond Index ETF (TSX: XSB). We added this ETF to the portfolio in November. It is a defensive security, investing in short-term bonds with maturities of five years or less. Its purpose is to add stability and modest cash flow to the portfolio. The price is down $0.04 since our purchase, but we more than made up for that with distributions of $0.2843 per unit.

iShares Canadian Universe Bond ETF (TSX: XBB). This ETF provides exposure to the full range of Canadian bonds, including government and corporate issues of all maturities. It has recovered after a rough period in 2015, and the units are up $0.59 in value since the November review, plus we received distributions of $0.3738.

Inter Pipeline (TSX: IPL, OTC: IPPLF). This stock had sold off too much and investors finally realized it. The share price is up $2.67 since November, plus we are receiving monthly dividends of $0.13 per share.

Brookfield Renewable Energy Limited Partnership (TSX: BEP.UN, NYSE: BEP). The stock bounced back after a bad run last summer, gaining $4.46 over the five months since the November review. The partnership increased the quarterly dividend to US$0.445 (up 7.2 per cent) effective with the February payment.

Brookfield Infrastructure Limited Partnership (TSX: BIP.UN, NYSE: BIP). This is a companion limited partnership to Renewable Energy, but in this case the assets are infrastructure – everything from coal terminals and railways to power transmission lines. The shares were off $1.35 since the last review, but we received two dividends totalling US$1.10, which just about offset that. This is the top-performing security in the portfolio by a wide margin.

BCE Inc. (TSX, NYSE: BCE). BCE shares continued to be strong performers, adding $3.31 over the latest review period. The dividend was increased by 5 per cent, to $0.6825 per quarter, effective with the March payment.

Here’s how the portfolio stands now. Commissions have not been factored in. For simplicity, Canadian and U.S. dollars are treated as being at par for purposes of the calculations, although obviously the dividends received from the two Brookfield partnerships are worth more in Canadian dollar terms.

Changes: The basic composition of the portfolio is sound. Bond funds account for 38.4 per cent of the total assets, with the rest in equities. All the securities in the portfolio are performing about as expected.

That said, the CIBC Global Bond Fund is not producing the level of cash flow we need from an income portfolio. So despite its good overall results, I am replacing it with the Fidelity Global Bond Fund B units, which have a net asset value of $11.68. The code for the front-end units is FID1225.

The fund has posted above-average returns for all periods from one to five years. Distributions are paid monthly and amounted to $0.3022 per unit over the year to March 31, for a yield of 2.6 per cent during that period.

Our CIBC fund position is worth $3,129.07, including cash retained. We will use that to buy 270 units of the Fidelity fund at zero commission, taking the difference of $24.53 from our cash reserve.

We will also make a couple of other small changes.

Remember, I do not advise executing small transactions through a broker unless you can do so at no charge in a fee-based account. Use dividend reinvestment plans where available.

We will invest the cash of $792.82 in an EQ Bank high interest account paying 2.25 per cent.

Here’s a look at the revised portfolio. I will revisit it on its fifth anniversary in September.