Stock Market Smarts: Mini Portfolio Takes a Hit

Volatile markets hurt recent results but overall gains are still well ahead of target.

In November 2012 I launched a mini portfolio for small investors with limited resources. The goal was to generate better returns than those offered by GICs, with limited risk.

I have always acknowledged that GICs are a useful option if preservation of capital is the number one priority. But the returns they offer are even lower now than they were when the portfolio was created in 2012. As of Sept. 11, Royal Bank was offering only 1.5 per cent on a five-year term. The best five-year rate from a small institution was 2.6 per cent from Peoples Trust.

The alternative portfolio that I created included three securities: the common stock of BCE Inc. and Scotiabank, plus preferred shares from Laurentian Bank of Canada. The original book value was $14,984.55.

The Laurentian Bank preferreds were subsequently redeemed. In their place, I substituted the 5.75 per cent convertible debentures from Firm Capital Mortgage Investment Corporation.

The portfolio was last reviewed in early February, at which time it was showing an average annual compound rate of return of 12.57 per cent. Here is how the three securities have fared in the six months since then, based on prices at the close of trading on Aug. 26.

BCE Inc. (TSX, NYSE: BCE). After making a big move of over $10 a share in the previous period, our BCE stock pulled back, dropping $5.52 during the latest six months. We received two dividends of $0.65 each, which helped to offset that somewhat but the net result was a drop of 7.25 per cent in the value of this position. I warned at the time of the last update that we shouldn’t expect the stock to continue to perform at such a high level so this retreat does not come as a surprise.

Bank of Nova Scotia (TSX, NYSE: BNS). Scotiabank also weakened, dropping by $4.38 as banking stocks continued to be soft. We did benefit from a small 3 per cent dividend increase, however, bringing the quarterly payment to $0.68 per share. On Friday, the bank announced another dividend hike, this one of 2.9 per cent.

Firm Capital Mortgage 5.75 per cent Convertible Debentures (TSX: FC.DB.A). At the time of the last review these debentures were trading $100.20 so they have moved up slightly since. They pay interest at the rate of 5.75 per cent semi-annually, on April 30 and Oct. 31. We received a semi-annual interest payment of $28.75 for each $1,000 debenture in April.

We also received interest of $5.33 from the cash invested in a high-interest savings account.

Here is how the Canadian Mini Portfolio stood based on closing prices on Aug. 26.

 

IWB Canadian Mini Portfolio (a/o Aug. 26/15)

Stock Shares Average

Price

 

Book

Value

Market

Price

Market

Value

Retained

Income

 

Gain/

Loss

per cent

BCE 130 $42.53 $5,528.60 $52.65 $6,844.50 $342.85 +30.0 BNS 95 $55.36 $5,258.95 $58.59 $5,566.05 $333.55 +12.2 FC.DB.A 50 $101.50 $5,075.00 $100.50 $5,025.00 $575.00 +10.3 Interest $16.61 Totals $15,862.55 $17,452.16 $1,251.40 +17.2 Inception $14,984.55 +24.1

 

Comments: It was a rough period for this portfolio as both BCE and BNS incurred losses. The net result was a decline of 3.5 per cent in the total value (market price plus retained income). That reduced the total return since inception to 24.1 per cent. The good news is that works out to a compound annual growth rate of 8.4 per cent, which is still far better than you can get from a GIC.

Changes: BCE and BNS are high-grade stocks and both should recover from this setback. While the price is down, we’ll add five shares of BCE, spending $263.25 from retained income. That will leave us with $79.60.

We will also buy five shares of BNS for a total cost of $292.95, bringing our total position to 100 shares and reducing retained income to $40.60.

We also have enough money to buy another five Firm Capital debentures, at a cost of $502.50, leaving us with $72.50 in retained income.

Note that these trades are for modelling purposes only. Readers should not place small orders because of the cost of commissions. When available, add to your holdings through dividend reinvestment plans.

Here is the revised portfolio.

IWB Canadian Mini Portfolio (revised Aug. 26/15)

Stock Shares Average

Price

 

Book

Value

Market

Price

Market

Value

Retained

Income

 

BCE 135 $42.90 $5,791.25 $52.65 $7,107.75 $79.60 BNS 100 $55.52 $5,551.90 $58.59 $5,859.00 $40.60 FC.DB.A 55 $101.41 $5,577.50 $100.50 $5,527.50 $72.50 Interest $16.61 $16.61 Totals $16,937.26 $18,510.86 $192.70 Inception $14,984.55