Stock Smarts: This Mini Portfolio is Averaging Over 10%

Gordon Pape updates us on a mini portfolio launched in November of 2012.

This mini-portfolio was launched in November 2012. It is designed for readers with a limited amount of money who want a better return than they could get from a GIC without taking on a lot of risk.

The idea came from two readers who held GICs that were up for renewal. They were unhappy with the rates that were quoted and were looking for other options. This low-risk portfolio was my solution to their dilemma.

However, I stressed at the time, and still do, that while there is not a lot of risk here, the portfolio is nowhere near as safe as GICs. They guarantee both principal and interest (this portfolio does not) and are covered by deposit insurance up to $100,000. If absolute safety is what you want, stick with the GICs and forget about the extra return this portfolio offers.

Right now, you can find a five-year GIC that pays 3.1 per cent at Oaken Financial. But Home Capital owns Oaken. That company has been going through a major financial crisis and has seen its clients withdraw millions of dollars in a classic run-on-the-bank scenario. Even with deposit insurance in place, many people are obviously uncomfortable with Oaken right now and are voting by pulling out their money.

As always, you need to decide how much risk you are prepared to take on to receive a higher return. If the answer is “none”, stick with GICs from the major banks and learn to live with their low rates (1.6 per cent at Royal Bank for five years).

This portfolio includes three securities: the common stock of BCE Inc. and Scotiabank, plus the 5.75 per cent convertible debentures from Firm Capital Mortgage Investment Corporation.

The portfolio was last reviewed in November, at which time it was showing an average annual compound rate of return of 10.3 per cent. Here’s a look at the components, based on closing prices on May 31.

BCE Inc. (TSX, NYSE: BCE). BCE shares have rallied since our last review, gaining $3.16 in the six months. We received two dividends totaling $1.40 per share during the period. The quarterly payout was increased by 5.1 per cent to $0.7174 ($2.87 per year) at the start of the year.

Bank of Nova Scotia (TSX, NYSE: BNS). Scotiabank reported good first-quarter earnings and the shares are up $3.47 from the time of the last update. The company increased its dividend by $0.02 per share in March to $0.76 per quarter ($3.04 per year). We received two dividends totaling $1.50 per share for the period.

Firm Capital Mortgage 5.75 per cent Convertible Debentures (TSX: FC.DB.A). The price of these debentures has held reasonably firm despite concerns about mortgage firms in the wake of the problems at Home Capital Group. These debentures 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 at the end of April. We have 60 shares for the equivalent of six debentures so that amounted to a dividend of $172.50.

We received interest of $7.17 from the cash invested in a high-interest savings account with EQ Bank.

Here is how the Canadian Mini-Portfolio stood at the close on May 31.

Comments: The portfolio now has a total value of $23,466.29 (market value plus retained income). That’s up from $22,172.82 at the time of the November update for gain of $1,293.47 in the period. That’s an advance of 5.8 per cent in six months. Since the portfolio was created, we have gained 56.6 per cent. The average annual compound rate of return is now 10.5 per cent, far in excess of the return on even the most generous GIC.

Changes: Don’t mess with success. The portfolio is doing well at present so we’ll keep things as they are. We have a total of $1,242.49 in cash, which we will keep in the EQ account. It is currently paying 2.3 per cent.

I will review the portfolio again in November, on its fifth anniversary.

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