Stock Market Smarts: High Yield Portfolio Loses Ground
Falling markets take toll but average annual gain still above target.
In March 2012, I launched a High-Yield Portfolio for readers seeking above-average cash flow and who were willing to live with a higher level of risk. I cautioned at the time, and since, that this is a 100 per cent equity portfolio with no bonds to cushion losses when stock markets retreat. Therefore 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 from this portfolio will receive favourable tax treatment as eligible dividends or return of capital.
The portfolio had been performing well above our target return of 7 per cent to 8 per cent a year, but the last six months were difficult. Out of the nine positions we hold, only three posted net gains, including dividends. All the others fell, with the worst results posted by stocks in the energy sector.
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. It was added to this portfolio in April 2013 when it was trading at $15.25. At the time of the last review in March, it was up to $19.80. However, like most of the securities in this portfolio, it has lost ground since then, dropping by $1.90 per share. The good news is we had a second dividend increase in 2015 in July when the payment was bumped up by 3 per cent $0.0845 per month ($1.014 annually). The shares yield 5.7 per cent at the current price.
DH Corporation (TSX: DH, OTC: DHIFF). This is one of the few stocks that managed to hold its ground over the past six months, losing only $0.02 per share. That was more than made up for with two dividends of $0.32 each. The company used to derive most of its revenue from cheque printing, but it has successfully diversified into other areas.
Vermilion Energy (TSX, NYSE: VET). I added Vermilion to the portfolio in March. Despite the weakness in the energy sector, I like this stock because of its well-diversified international holdings and good management. Even that wasn’t enough to support the share price in the face of the continued decline in oil prices, however. The only good news is that this is one of the few mid-size energy companies that hasn’t cut its dividend (at least not so far). It continues to pay $0.215 per month, to yield 6.1 per cent.
FLY Leasing (NYSE: FLY). This Irish-based airplane leasing company saw its share price slip by $1.64 after it reported a second-quarter loss due to a non-cash impairment charge. Stripping that out, adjusted net income was US$9.5 million (US$0.23 per share). The quarterly dividend is US$0.25.
Premium Brands Holding Corp. (TSX: PBH, OTC: PRBZF). Finally, some good news. This specialty food manufacturer and distributor, which was added to this portfolio in October 2013, saw its share price jump by $5.69 since March. PBH reported record second-quarter sales and earnings in August, which fuelled the buying spree. The quarterly dividend was increased to $0.345 from $0.3125, effective with the March payment.
Morneau Shepell Inc. (TSX: MSI, OTC: MSIXF). Morneau Shepell Inc. is the largest Canadian-based firm offering benefits and pension consulting, outsourcing, as well as health management services. The shares are off $1.91 since the last update but we continue to receive good cash flow from the monthly dividend of $0.065 ($0.78 a year). The company reported a solid second quarter with normalized free cash flow up 23.1 per cent to $16.1 million.
Here’s what the portfolio looked like as of the close of trading on Sept. 18. The weighting is the percentage of the market value of the security in relation to the total market value of the portfolio. Sales commissions are not taken into account, and the U.S. and Canadian dollars are treated as being at par. Note that the original book value was $24,947.30. The return since inception is based on that amount. We received interest on our cash position of $6.91 during the latest period.
High Yield Portfolio – a/o Sept. 18/15
Comments: When markets go south, this portfolio will inevitably feel the effects. Fortunately, the high yields mitigate the damage to some degree. The total value of the portfolio, including retained income, is now $34,391.48. Overall, we are down 3.7 per cent since March, reducing our total return since inception to 37.8 per cent. Our average annual compound rate of return since inception is 9.6 per cent, still ahead of target.
I was pleased to see that, despite then general downturn in share prices, not one company in our portfolio reduced its dividend. As a result, we are now looking at very attractive yields: Morneau Shepell is at 5 per cent, Pembina Pipelines is up to 5.4 per cent, Chemtrade is at 6.7 per cent, and on it goes.
Changes: I do not advise changing any of the securities in the portfolio at this time. These are all sound companies and the share prices will recover when the market turns around. In the meantime, we are enjoying great cash flow.
Here is the revised portfolio. I’ll review it again next March.
High Yield Portfolio – revised Sept. 18/15