Don't be too concerned about falling prices. The key points to watch are continued profitability and sustainable distributions.
At my recent Toronto Money Show workshop I was asked what income investors should do in the face of rising interest rates. My answer was to stick with your plan.
It's no secret that when rates rise, income-sensitive stocks tend to decline in value. All things being equal, the ones that fare best are those companies with a long history of dividend increases and a strong commitment to future hikes. But even they can see a price retreat.
The important thing to remember is that you invested in these securities for cash flow. As long as the dividend/distribution appears to be secure, don't worry about the day-to-day or even month-to-month movement in the share price.
We are seeing an example of the inverse relationship between interest rates and share prices in my High-Yield Portfolio, which was created for readers of my Income Investor newsletter. It outperformed its target by a wide margin in its first five years but in the latest six-month review period it suffered a setback.
The portfolio was launched in March 2012 for readers who wanted above-average cash flow and could handle a higher level of risk.
It invests all its money in stocks, so it 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 will receive favourable tax treatment as eligible dividends or return of capital.
The initial value was $24,947.30, and I set a target average annual rate of return of 7 per cent to 8 per cent annually. Here is a review of the securities we own and how they have performed in the six months since my last review in March. Results are to Sept. 7.
The Keg Royalties Income Fund (TSX: KEG.UN, OTC: KRIUF). The units are trading at about the same price as they were in March, having pulled back from a mid-year high of around $23 due to pressure from rising interest rates. We continue to receive monthly distributions of $0.0917 per unit. The yield is 5.5 per cent at the current price.
AltaGas (TSX: ALA, OTC: ATGFF). This stock was added to the portfolio a year ago with the purchase of 100 shares at a price of $33.46. Unfortunately it has been downhill since, with the shares hit by a double-whammy of rising interest rates and softness in the energy sector. However, we continue to receive dividends of $0.175 per month and the yield is up to 7.6 per cent as a result of the price retreat.
Vermilion Energy (TSX, NYSE: VET). This is another energy stock that was hard-hit in the past six months, as the entire sector has struggled through a bear market. However, the monthly dividend remains unchanged at $0.215. The yield is now up to 6.2 per cent.
Exchange Income Corp. (TSX: EIF, OTC: EIFZF). This stock has been under intense short-selling pressure from a U.S. investor in recent months. The price dropped as low as $25.80 in late July but has since rallied somewhat on strong second-quarter earnings. We are still ahead by 27 per cent from the time this company was added to the portfolio. At the current price, the yield is 6.6 per cent.
Premium Brands Holding Corp. (TSX: PBH, OTC: PRBZF). This specialty food manufacturer and distributor was added to this portfolio in October 2013 and has shooting out the lights ever since. It was such a strong performer that we had to trim to trim some of our position last year at this time. But the stock just keeps roaring higher. It rose another $20 and change during the latest six months, bringing our total return to date to 445 per cent. That's great, but the continued run-up in the share price has pushed the yield down to 1.7 per cent. However, the yield based on our original purchase price is 8.6 per cent.
Morneau Shepell Inc. (TSX: MSI, OTC: MSIXF). The shares are up $1.23 since the last update, which is a big move for this stock. We continue to receive good cash flow from the monthly dividend of $0.065 ($0.78 a year), however the yield has dropped to 3.8 per cent because of the price increase.
Pembina Pipeline Corp. (TSX, NYSE: PPL). Pembina shares slipped a little during the period, pulling back $2.16. This was despite the fact the company increased its monthly dividend by a penny, to $0.17 per share ($2.04 per year). The increase combined with the share price pullback means the stock now yields just over 5 per cent.
Sun Life Financial (TSX, NYSE: SLF). After a big gain in the six months to March 18, the shares gave back a little in the latest period, losing $2.81. On the good news side, we received a 3.6 per cent dividend increase, to $0.435 per share quarterly ($1.74 per year). The increase plus the price retreat pushed the yield up to 3.7 per cent.
Chemtrade Logistics Income Fund (TSX: CHE.UN, OTC: CGIFF).
Chemtrade is one of the few income trusts still remaining. The price is down $0.51 since the last review but we received distributions of $0.60 per unit, so we did slightly better than breakeven. The units pay a $0.10 monthly distribution ($1.20 a year), to yield 6.4 per cent.
Medical Facilities Corp. (TSX: DR, OTC: MFCSF). This is another addition from last September that has not fared well. We bought 170 shares in at a price of $21.85, but they have since pulled back to $14.70. The shares pay a monthly dividend of $0.09375 ($1.125 per year), to yield 7.7 per cent at this level.
We earned $21.93 from the cash we deposited in an account with EQ Bank that paid 2 per cent at that time.
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