Stock Market Smarts: Income Portfolio Returns 11 Per Cent

Using TFSAs to generate cash flow pays off.

One year ago, I created an income portfolio designed for Tax-Free Savings Accounts (TFSAs). That was right after the former Conservative government raised the annual contribution limit to $10,000, making the plans even more attractive. At the time, the maximum lifetime contribution for an individual was $41,000 so that was the valuation I used for the portfolio.

As we all know, the Liberals rolled back the limit to $5,500 shortly after taking office. But even at this level, TFSAs are a viable alternative for investors looking to create tax-free cash flow.

As of right now, everyone who was at least 18 when TFSAs were started in 2009 has $46,500 in contribution room, or $93,000 for a couple. If you take full advantage of that and keep making yearly contributions, it won’t take long to build a very sizeable income portfolio.

My TFSA Income Portfolio has a goal of generating cash flow of at least 5 per cent. The initial yield was actually 5.3 per cent. Income is the key to success of this portfolio; any capital gains are a bonus. Note that because the securities chosen have above-average yields, risk is on the high side. So this is not a good model for very conservative investors.

I selected 10 securities from the recommended list of my Income Investor newsletter. All are Canadian based so currency exchange is not a factor, except for the distributions from the limited partnerships, which are in U.S. dollars. I gave each security an initial weighting of approximately 10 per cent for diversification and balance.

Click through for  the components of the portfolio with a brief report on how they have performed since the launch. Prices are as of the close of trading on May 20.

BCE Inc. (TSX, NYSE: BNS). BCE shares have performed well in the first year of this portfolio. The stock gained $3.21 since our last review in late November and the company announced a 5 per cent dividend increase effective with the March payment. Our total return in the first year was 17.7 per cent.

Bank of Nova Scotia (TSE, NYSE: BNS). BNS got off to a rocky start and the shares were down $4.58 at the time of the review last fall. They have recovered somewhat since, gaining $2.27 in the latest six-month period. With dividends, we are just about at breakeven after the first year. The quarterly dividend was increased to $0.72 a share in April, the third hike in 12 months. The stock now yields 4.6 per cent.

Brookfield Infrastructure Limited Partnership (TSX: BIP.UN, NYSE: BIP). This Bermuda-based limited partnership is a spin-off company from Brookfield Asset Management, which owns a majority stake. The price is virtually unchanged since the last review. Because of timing, we received only one distribution of US$0.57, which was converted to Canadian currency at a rate of US$1 = C$1.30. The yield at this price is 5.3 per cent.

Brookfield Renewable Energy Partners (TSX: BEP.UN, NYSE: BEP). This is another Brookfield spin-off, but with a focus on renewable energy, mainly hydro but also some wind projects. After a bad year in 2015, the units have rebounded in price, gaining $4.51 in the last period. The distribution was increased by 7.2 per cent in February. Because of timing, we received only one distribution during the period. The units yield 6.1 per cent at the current price.

Inter Pipeline (TSX: IPL, OTC: IPPLF). This stock was a big loser during the May-November 2015 period, dropping $7.35. However, it recovered some of that loss in the latest since months, gaining $3.42. The monthly dividend was increased to $0.13 per share in November. The shares yield 5.9 per cent.

North West Company (TSX: NWC, OTC: NWTUF). This Winnipeg-based retail firm offers a predictable business model and dependable cash flow. The price is ahead by $1.82 since the last review and we received two dividends totalling $0.62 per share. The current yield is 4.3 per cent.

Sienna Senior Living Inc. (TSX: SIA, OTC: LWSCF). Sienna’s share price was flat in the last six-month period but the monthly dividends of $0.075 per share continued to roll in. The current yield is 5.3 per cent.

TransAlta Renewables Inc. (TSX: RNW, OTC: TRSWF). We saw a nice rebound here after a very weak 2015. The shares gained $2.72 (27 per cent) in the latest period and are now ahead of the original purchase price. We also had a dividend increase of 4.7 per cent at the start of this year.

Firm Capital MIC (TSX: FC). Mortgage investment corporations won’t vary much in price in normal times but they provide steady and predictable cash flow. This stock offers a monthly payment of $0.078 to yield 7.1 per cent.

SmartREIT (TSX: SRU.UN, OTC: CWYUF). This was originally named Calloway REIT. The name and the trading symbol were changed last year to reflect the trust’s new direction. It is the only REIT in this portfolio and it has turned out to be our top performer so far with a one-year gain of 21.8 per cent. The monthly distribution is $0.1375 ($1.65 per year), to yield 4.8 per cent.

We received interest of $3.86 during the latest period. Here is how the portfolio looked at the close of trading on May 20.

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Comments: After a slow start, our TFSA Income Portfolio made a strong comeback in the latest six-month period with a total return of 9.9 per cent. That brought the gain for the first year to 11.2 per cent.

We received dividends and distributions totalling $2,324.63 over the first year for a yield of 5.7 per cent based on the initial portfolio value of $41,000. That’s better than our target, plus we received some modest capital gains.

Changes: There is no reason to make any changes to the composition of the portfolio, which is performing to expectations. However, we will spend some of the retained income as follows.

NWC – We will buy five shares at a cost of $145.45. This will bring our total to 170 and reduce the retained income to $55.85.

SIA – We’ll add five shares to bring the total to 280. The cost will be $85.50, leaving $94.10 in reserve.

RNW – We have enough money to buy 10 shares for a cost of $128.10. That will bring the total to 350 and leave cash of $27.09.

FC – We will also add 10 shares here, spending $131.10. We will now hold 350 shares and have $81.50 left in the reserve.

Readers are reminded not to execute small trades unless you have a fee-based account. If you don’t need the cash flow now, use dividend reinvestment plans where available.

We’ll invest our total cash holdings of $1,521.09 in an EQ Bank savings account paying 2.25 per cent.

Next: The revised portfolio

Here’s a look at the revised portfolio. I’ll review it again in November.

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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.