RRIF Portfolio Posts A Solid Gain

Gordon Pape | September 30th, 2016

Gordon Pape’s picks have gained 8.4 per cent a year since 2013.

I created a RRIF model portfolio for my Income Investor newsletter in February 2013 with an initial value of $49,910.30. Its goals are to protect capital and to provide higher cash flow than investors could get from conservative securities like bonds and GICs.

This portfolio balances the two objectives of income and safety by putting a significant amount into low-risk assets and the rest into higher-yielding securities. Here are the current positions in the portfolio with a commentary on how they have fared since the time of the last review. Valuations are as of Aug. 19.

MAXA Financial five-year GIC. Our original three-year GIC matured in February, giving us $13,418.75 (principal and accrued interest) to reinvest. MAXA Financial was offering 2.5 per cent on a five-year term at the time of maturity and their GIC had two big advantages over most others. First, it’s redeemable so if rates rise we can cash in and trade up. Second, it makes annual payments. We therefore reinvested with them. The GIC will mature in February 2021.

Phillips, Hager & North Short Term Bond and Mortgage Fund (RBF1250). This low-risk fund was selected for the stability it brings to the portfolio. However, short-term bond funds, by definition, provide little return, especially during a period of low interest rates. Since the last review in February, the net asset value (NAV) has gone up by just $0.01 per unit. We received two quarterly distributions totaling just under $0.12.

CI Signature Dividend Fund (CIG610). This fund invests primarily in preferred shares and dividend-paying large-cap stocks, such as major U.S. and Canadian banks, Enbridge Inc., etc. At the time of the February review, the preferreds were dragging down this fund’s performance. I expressed concern but suggested we stick with it for a while. We were rewarded by a rebound in the preferred share market, which helped to boost the fund’s NAV by $1.14 per unit in the six months. We also receive distributions totaling $0.24 per unit for a total return over the period of 10.6 per cent.

PIMCO Monthly Income Fund (PMO005, front-end units). This all-bond fund was added to the portfolio in August 2015 to increase the fixed income weighting. The portfolio is composed of investment-grade bonds from developed countries around the world as well as some mortgage-backed securities. It pays monthly distributions, which are currently running at between $0.03 and $0.04 per unit. The units were up by $0.62 in the latest period and we received distributions of a little over $0.27 per unit for a gain of 6.5 per cent over the six months.

Sentry U.S. Growth and Income Fund (NCE737). This fund was added to the portfolio in August 2013 to obtain more exposure to the U.S. market. It invests in a portfolio of U.S. dividend-paying stocks, both common and preferred, with a large-cap bias. The net asset value increased by $0.89 during the latest period from $18.11 to $19 plus we received monthly distributions totaling $0.30 per unit.

BCE Inc. (TSX, NYSE: BCE). BCE shares have moved up again since the February review, gaining $1.60. In addition, we received two quarterly distributions totaling $1.365 for a total return over six months of 6.7 per cent.

Inter Pipeline (TSX: IPL, OTC: IPPLF). After a year-long decline in the share value due to low oil prices, Inter Pipeline rallied during the latest period, gaining $4.32 per share. We also received dividends totaling $0.78 per share for a total return during the period of almost 22 per cent.

Brookfield Infrastructure LP (TSX: BIP.UN, NYSE: BIP). This Bermuda-based limited partnership had a strong six months. The units are up by $14.49 on the TSX and we received two distributions for a total of US$1.14. This LP, which invests in infrastructure projects around the world, is our strongest performer to date.

DH Corporation (TSX: DH, OTC: DHIFF). This company was added to the portfolio in August 2013 and initially did very well for us. However, it has been in a downturn over the past year, losing $3.37 since our February review.

Cash. We kept the cash balance in a high-interest savings account paying 0.8 per cent. Interest earned in the latest period was $1.97.

Here’s a look at the RRIF Portfolio as it stood at the close of trading on Aug. 19. I have included the accrued interest on the GIC in the retained earnings column for clarity. Note that commissions are not deducted and that U.S. and Canadian currency is treated at par. Although this is a RRIF portfolio, withdrawals are not factored in, as this would make it impossible to track performance accurately.

Comments: The portfolio had a good six months, increasing in total value by $5,338.05 or 8.8 per cent. Since inception, three and a half years ago, we have a gain of 32.6 per cent, for an average annual compound rate of return of 8.4 per cent. This is a very acceptable result in this low interest rate environment.

Changes: The downtrend in the shares of DH Corporation shows no signs of abating. The company recently announced second-quarter results that showed an increase in revenue but a decline in net income. The company announced a realignment of its business that is expected to generate $53 million in savings, however investors were not impressed and the stock declined further.

We cannot continue with this situation, especially in a RRIF portfolio, so we will sell our position in DH for a total of $3,161.55, including retained dividends. We will reinvest the money in 65 shares of Emera Inc. (TSX: EMA), for a cost of $3,105.70. The remaining $55.85 will be added to our cash reserve.

Emera is a Halifax based utility with $27.5 billion in investments throughout North America and in four Caribbean countries. The company recently increased its dividend by 10 per cent to $2.09 annually and has a target of growing the dividend by 8 per cent a year to the end of 2020. The shares yield 4.3 per cent at the current price.

This type of stock is ideal for a RRIF portfolio, providing stability and steady income. The company has been on our Recommended List since October 2015.

We will also make some other small changes, as follows.

RBF1250—We will buy another 15 units for a cost of $157.35, bringing our total position to 535 units.

NCE737—We have enough retained income to buy another 10 units for a cost of $190, leaving $62.52 in reserve.

IPL—We will add five more shares to bring our total to 260. The cost is $138.75. Our retained earnings will drop to $60.93.

We now have retained earnings and cash totaling $1,014.16. We will invest the money with EQ Bank at 2.25 per cent.

Here is the revised portfolio. I will look at it again in February.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.