High Yield Portfolio Averages 14%

There’s risk here but so far this portfolio is performing well above expectations

In March 2012 I started a High Yield Portfolio for readers of my Income Investor newsletter who wanted above-average cash flow and were willing to live with a higher level of risk. This is a 100% equity portfolio; there are no bonds to cushion losses when stock markets retreat. So it is not suitable for very conservative investors or for RRIFs where capital preservation is important.

There have been some changes to the portfolio since the launch. It now consists mainly of small/mid-cap companies with one exception (Sun Life). All the stocks are Canadian except for FLY Leasing, which is an Irish-based ADR that trades in New York.

This portfolio is best suited for non-registered accounts where any capital losses can be deducted from taxable capital gains. Also, a high percentage of the payments from this portfolio will receive favourable tax treatment as eligible dividends or return of capital.

Here, a rundown of the securities we own and how they have performed in the six months since my last review in May.

The Keg Royalties Income Fund (TSX: KEG.UN, OTC: KRIUF). This fund is the leading operator and franchisor of steakhouse restaurants in Canada and has a substantial presence in select regional markets in the United States. I added it to this portfolio in April 2013 when it was trading at $15.25. At the time of the last review in May, it was trading at $15.99. We saw a nice upward move over the summer and the shares closed on Nov. 21 at $17.30. We also received $0.56 per share in distributions during the period for a total return of 11.7% since the last update.

DH Corporation (TSX: DH, OTC: DHIFF). This company used to derive most of its revenue from cheque printing but it has successfully diversified into other areas. The stock has been on a strong run and the shares are up $4.38 since my last review. We also received two quarterly dividends of $0.32 per share each. The total return on this security is now 92%, making it our top performer.

Freehold Royalties (TSX: FRU, OTC: FRHLF). It hasn’t been a good time for energy stocks, with the price of oil plunging. Freehold has held up better than most because it is a royalty company, however the shares are down $1.68 since our review in May. The stock continues to pay monthly dividends of $0.14 a share, which has partially offset the drop in the share price.

Baytex Energy (TSX, NYSE: BTE). This traditional energy stock didn’t escape the bloodletting. I added it to the portfolio last May at $44.52 and it performed well until the beginning of September when the decline in the oil price turned into a rout. The shares are now down to $30.94 and even the nice monthly dividend of $0.24 can’t come close to offsetting that. We’re down 27.3% on this one but Baytex is a sound company and I expect it to recover.

FLY Leasing (NYSE: FLY). This Irish-based airplane-leasing firm was added to the portfolio in October 2013. It was trading at US$14.39 at the time but has been gradually losing ground and closed on Nov. 21 at US$13.25. However, the quarterly dividend of US$0.25 per share has allowed us to just about break even on this one.

Income Investor High Yield Portfolio – as of Nov. 21/14

Security	Weight%	TotalShares	AveragePrice	BookValue	CurrentPrice		MarketValue	RetainedDividends	Gain/Loss%
KEG.UN	8.2	160	$15.29	$2,446.80	$17.30		$2,768.00	$89.60	+16.8
DH	15.5	145	$19.39	$2,811.15	$36.42		$5,280.90	$115.30	+92.0
FRU	9.3	140	$20.68	$2,895.20	$22.62		$3,166.80	$208.10	+47.1
BTE	4.5	50	$44.52	$2,226.00	$30.94		$1,547.00	$72.00	-27.3
FLY	5.8	150	$14.39	$2,158.50	$13.25		$1,987.50	$183.00	+ 0.6
PBH	9.0	125	$19.30	$2,412.50	$24.35		$3,043.75	$156.25	+32.6
MSI	11.3	230	$12.23	$2,813.60	$16.74		$3,850.20	$86.25	+39.9
PPL	12.2	95	$29.09	$2,763.60	$43.69		$4,150.55	$193.48	+57.2
SLF	13.4	110	$24.06	$2,646.10	$41.54		$4,569.40	$236.30	+81.6
CHE.UN	10.7	170	$17.06	$2,899.40	$21.31		$3,622.70	$102.00	+28.5
Cash	0.1			$21.81		$25.42
Total	100.0			$26,094.66		$34,012.22		$1,442.28	+35.9
Inception				$24,947.30					+42.1

 

Comments: The sharp drop in the price of Baytex shares dragged down the overall results of the High Yield Portfolio. Despite that, we recorded a respectable total return of 5.5% during the period since the May review thanks to steady cash flow and good results from DH Corporation and Sun Life.

Since the launch of the portfolio in March 2012, we have recorded a total return of 42.1%, based on the book value at inception. That works out to an average annual compound rate of return of 14.07%. That’s down from 14.72% in May but still well above our target range of 7% to 8% annually.

Changes: We’ll stick with the securities we currently own – the energy stocks will come back. However, we will do some rebalancing and reinvest some of the dividends in additional shares as follows.

KEG.UN – We will buy five additional shares at $17.30 for a cost of $86.50.

DH – The success of this stock has resulted in an overweighting (I try not to exceed 15% for any security). Therefore, we will sell 10 shares for proceeds of $364.20. This will reduce our position to 135 shares.

Here’s the updated portfolio. I will revisit it again on the third anniversary in March.

Income Investor High Yield Portfolio – revised Nov. 21/14

Security	Weight%	TotalShares	AveragePrice	BookValue	CurrentPrice	MarketValue	RetainedDividends
KEG.UN	8.2	165	$15.35	$2,533.30	$17.30	$2,854.50	$3.10
DH	14.1	135	$19.39	$2,617.65	$36.42	$4,916.70	$115.30
FRU	9.7	150	$20.81	$3,121.40	$22.62	$3,393.00	0
BTE	5.3	60	$42.25	$2,535.40	$30.94	$1,856.40	0
FLY	6.1	160	$14.32	$2,291.00	$13.25	$2,120.00	$50.50
PBH	9.1	130	$19.49	$2,534.25	$24.35	$3,165.50	$34.50
MSI	11.1	230	$12.23	$2,813.60	$16.74	$3,850.20	$86.25
PPL	11.9	95	$29.09	$2,763.60	$43.69	$4,150.55	$193.48
SLF	13.7	115	$24.82	$2,853.80	$41.54	$4,777.10	$28.60
CHE.UN	10.4	170	$17.06	$2,899.40	$21.31	$3,622.70	$102.00
Cash	0.4			$134.12		$134.12
Total	100.0			$27,097.52		$34,840.77	$613.73
Inception				$24,947.30