Gordon Pape gives us an update on his high-yield portfolio.
Lower prices, higher yields. That pretty well sums up the impact of the past six months on my High-Yield Portfolio. The share prices of dividend stocks remain under pressure as rates rise, pushing yields up in the process.
This portfolio was launched in my Income Investor newsletter in March 2012 for readers who wanted above-average cash flow and could handle a higher level of risk. It invests entirely in stocks, so 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 will receive favourable tax treatment as eligible dividends or return of capital.
The initial value was $24,947.30, and I set a target average annual rate of return of 7 per cent to 8 per cent annually. Here is a review of the securities we own and how they have performed in the six months since my last review in September. Results are to March 23.
The Keg Royalties Income Fund (TSX: KEG.UN, OTC: KRIUF). The units are down $2.01 since the last review, despite the fact the fund raised its monthly payout by 3.2 per cent, to $0.0946 ($1.1352 per year). The yield is 6.3 per cent at the current price.
AltaGas Ltd. (TSX: ALA, OTC: ATGFF). The AltaGas price continues to trend lower even though the company increased its monthly distribution by 4.3 per cent, to $0.1825 ($2.19 per year). The combination of a lower price and a higher dividend means the yield is now up to 9.2 per cent.
Vermilion Energy Inc. (TSX, NYSE: VET). Improving energy prices offset the rising interest rate trend, and this stock held its ground during the period, losing only $0.28 per share. We received dividends of $1.505 per share, which more than offset the slight decline in share value.
Enbridge Inc. (TSX, NYSE: ENB). We bought 70 shares of Enbridge in September at what at the time seemed like a reasonable price of $49.21. But the market disagreed, and the stock has continued to drop, losing $10.73 per share in the six months. This was in spite of a 10 per cent dividend increase, which took the quarterly payment to $0.671, or $2.684 per year, to yield just under 7 per cent.
Premium Brands Holding Corp. (TSX: PBH, OTC: PRBZF). Not all of our stocks went down. Premium Brands continued its great run, adding $15.29 per share. The company also announced a 13.1 per cent dividend increase, to $0.475 per quarter ($1.90 per year). That will only have the effect of increasing the yield to 1.7 per cent; however, the yield based on our original purchase price will rise to 9.7 per cent.
Morneau Shepell Inc. (TSX: MSI, OTC: MSIXF). This stock is also on the rise, with the shares up $4.20 since the last review. That’s a big move for this company, which reported a 33 per cent profit increase in 2017. However, there was no change in the monthly dividend of $0.065 ($0.78 a year), so the yield is down to 3.1 per cent based on the current price. Using the original purchase price, it is 6.1 per cent.
Pembina Pipeline Corp. (TSX, NYSE: PPL). Pembina shares dropped a fraction during the period, losing $0.88. However, we received $1.25 per share in dividends, so we ended up with a small profit. The stock yields 5.4 per cent at the current price.
Sun Life Financial Inc. (TSX, NYSE: SLF). Banks and life insurance companies tend to do well when interest rates rise, and Sun Life showed that with a price jump of $6.58 in the latest period. We received a dividend increase of 4.6 per cent, to $0.455 per share quarterly ($1.82 per year). The current yield is 3.4 per cent.
Chemtrade Logistics Income Fund (TSX: CHE.UN, OTC: CGIFF). Chemtrade shares took a hit, dropping $3.25 since the last review. The units pay a $0.10 monthly distribution ($1.20 a year), to yield 7.8 per cent.
Medical Facilities Corp. (TSX: DR, OTC: MFCSF). This has been a loser since we acquired it, but this time the loss was modest at $0.69 per share. That was almost offset by dividends of $0.56. The monthly dividend is $0.09375 ($1.125 per year), to yield 8 per cent.
Pizza Pizza Royalty Corp. (TSX: PZA, OTC: PZRIF). We will spend another $2,464.50 to purchase 150 shares of Pizza Pizza Royalty Corp. at $16.43. The shares have held up reasonably well in the rising rate environment and yield 5.3 per cent on an annual dividend of $0.82 per share.
We earned $26.72 from the cash we deposited in an account with EQ Bank that paid 2.3 per cent at that time.
The table below shows what the portfolio looked like as of the close of trading on March 23. The weighting is the percentage of the market value of the security in relation to the total market value of the portfolio. The gain/loss shows the performance of the security since inception, or since it was added to the portfolio. Sales commissions are not taken into account, and the U.S. and Canadian dollars are treated as being at par for ease of tracking.
Comments: Despite the heavy pressure on interest-sensitive stocks, this portfolio managed a small gain of 3.3 per cent in the latest six-month period, thanks mainly to strong performances from Premium Brands, Sun Life Financial, and Morneau Shepell. I consider that a very good result in the circumstances.
In the six years since inception, this portfolio has generated a net gain of 84 per cent. That’s an average annual return of 10.7 per cent, which is a very good result.
Changes: The investment climate is changing. Interest rates are moving higher, U.S. protectionism is rattling world markets, and the bull market may be running out of steam. Against this background, I want to add some larger, more stable stocks to this portfolio, even though their yields will be lower than those we are selling.
Accordingly, we will make the following sales:
AltaGas. We’ve waited a long time for this one to turn around, but it keeps on sliding. Therefore, we are selling our position for a total of $2,700.75, including retained dividends.
Medical Facilities Corp. This is another loser, which reported mediocre year-end results for 2017. Total proceeds from this sale are $2,667.20.
We will invest the money in 50 shares of CIBC (TSX, NYSE: CM). The stock is trading at $114.07, for a total cost of $5,703.50. We’re a little short of the amount needed, so we will take $335.55 from cash to make up the difference. The stock currently yields 4.7 per cent.
We will also buy another 10 shares of The Keg Royalties Income Fund, to bring our total position to 200. Retained earnings will be reduced to $33.60.
As well, we will add another 20 units to our position in Chemtrade at what appears to be a very attractive price, bringing the total to 220. The cost is $309.20. We will use all of our retained earnings and take $7.90 from cash.
We are left with a cash balance of $2,220.13, which we will keep in our EQ Bank Account at 2.3 per cent.
Here is a look at the revised portfolio. I will revisit it in six months.
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.