Stock Smarts: Buy and Hold Working Well

Gordon Pape | February 17th, 2014

Portfolio averaging almost 15% a year to date.

In mid-June of 2012, I launched a model portfolio for readers of my Internet Wealth Builder newsletter who don’t want to spend a lot of time reviewing their positions and who are not interested in active trading. It’s called the Buy and Hold Portfolio and it focuses on individual stocks rather than mutual funds or ETFs.

The goal is to concentrate on blue chip stocks that offer long-term growth potential plus regular dividend payments. I included both Canadian and U.S. issues and each stock was given a 10% weighting. I also added a 20% weighting in a bond ETF to provide some downside protection in the event of a stock market plunge.

At the time, I stated that the objective was to generate decent cash flow and slow but steady growth. Given the nature of the portfolio, the intention was to make changes only when absolutely necessary.

These are the securities I selected with some comments on how they have performed so far. Prices are as of mid-day on Jan. 22.

iShares DEX Universe Bond Index Fund (TSX: XBB). This is the only bond position in the portfolio. I chose a universe bond ETF because it is easier to provide a stable bond component by using a fund rather than purchasing individual bonds. The ETF took a hit last May over concerns about interest rates rising but has rallied recently. In fact, and this comes as something of a surprise, the DEX Universe Bond Index is ahead 2.19% so far this year (as of Jan. 23). The market price of the units is up $0.16 since my last review in June plus we have received distributions of about $0.59 per unit, including the January payment which will have been received by the time you read this. That combination has brought us back into the black on this one – not by a lot but we shouldn’t be expecting much from the bond market at this time.

BCE Inc. (TSX, NYSE: BCE). When we looked at this portfolio in June, all the telecoms including BCE were having a rough go because of concerns that U.S. giant Verizon was going to invade our wireless sector. That didn’t happen and the telecoms have rallied with BCE up more than 12% in the past six months. Add to that two dividend payments of $0.5825 each and we have a nice go-ahead on this one.

Brookfield Asset Management (TSX: BAM.A, NYSE: BAM). This conglomerate continues to perform well for us. The shares are up about 10% since the June review and we have received dividends of about C$0.32 per share. The company has increased its dividend to US$0.20 a quarter beginning with the Jan. 29 payment, which is not included in this review calculation.

CN Rail (TSX: CNR, NYSE: CNI). A two for one stock split last year helped to propel this high-efficiency railroad to a 16% advance since last June. The dividend is minimal with a yield of just 1.5% but the big move in the share price has made this one of our top performers.

Enbridge (TSX, NYSE: ENB). We shouldn’t expect big price gains from pipeline stocks these days so the 7% advance since last June is a welcome bonus. The dividend was boosted to $0.35 a quarter effective with the December payment.

Toronto Dominion Bank (TSX, NYSE: TD). The banks have been on a roll recently and TD has gone along for the ride with a gain of about 18% since the time of the last review. The stock is splitting two for one on Jan. 31.

AT&T (NYSE: T). This U.S. telecom has been in the doldrums ever since I added it to this portfolio and has actually lost ground since our last review (although it would be about the same in Canadian dollars because of the decline of the loonie). Only the juicy dividend, which has just been increased to US$0.46 per quarter has kept us in the black (barely) on this one.

McDonalds (NYSE: MCD). The stock is down about US$5 since my last review, reflecting disappointing financial returns from the company. However, McDonald’s boosted its dividend by US$0.04 a share to US$0.81 effective with the November payment.

Walt Disney Corp. (NYSE: DIS). This was our best performer over the past six months with a gain of more than 18% in the share price. The company only pays dividends once a year and we received US$0.86 a share on Dec. 12. That was up from US$0.75 a share in 2012. This has been the biggest winner in our portfolio since the launch.

Cash. At the time of the last review, our cash reserves were $1,646.58. We invested that money at 1.4%, earning $11.43 in interest

Following are the results of the portfolio to date. The original prices are as of mid-day trading on June 15, 2012. The updated values are as of mid-day trading on Jan. 22. For simplicity, I assume the Canadian and U.S. dollars are at par although the big drop in the loonie means that Canadian investors have received a currency gain on their U.S. stocks as a bonus. Commissions are not factored in. The initial value of the portfolio for tracking purposes was $49,945.32. Share positions have been rounded up or down to the nearest five.

IWB Buy and Hold Portfolio

(a/o Jan. 22/14)

Symbol	Weight %	Shares	Initial Price	Book Value	Current Price	Market Value	Payments	Gain/ Loss %
XBB	16.3	315	$31.52	$9,928.80	$30.43	$9,585.45	$525.17	+ 1.8
BCE	9.5	120	$41.22	$4,946.40	$46.85	$5,622.00	$415.80	+22.1
BAM.A	10.6	150	$32.72	$4,908.00	$41.70	$6,255.00	$132.75	+30.1
CNR	12.1	120	$41.79	$5,014.12	$59.24	$7,108.80	$122.40	+44.2
ENB	10.4	130

$39.16

$5,090.80

$47.15

$6,129.50

$282.75

+26.0

10.9

$79.00

$5,135.00

$98.91

$6,429.15

$281.45

+30.7

7.9

140

$35.78

$5,009.20

$33.37

$4,671.80

$439.60

+ 2.0

MCD

8.9

$90.28

$4,965.40

$94.98

$5,223.90

$252.45

+10.3

DIS

13.4

105

$47.12

$4,947.60

$75.21

$7,897.05

$169.05

+63.0

Cash

$11.43

Total

100.0

$49,945.32

$58,929.08

$2,621.42

+23.2

Comments: The Buy and Hold Portfolio is doing very well, with an c$overall return of 23.2% and a gain of 12.6% in the past six months. The average annual compound rate of return to this point is 14.9%. That’s more than we should normally expect from a blue chip, buy-and-hold portfolio – an average of 7% to 8% over time would be very good. But let’s enjoy this bonus – it means we’re off to a very good start.

Although our position in Disney is the top performer, overall our Canadian shares have done better than our U.S. holdings. That’s something of a surprise considering the recent strength of the U.S. market. The bond ETF has done about as expected given the current interest rate environment.

We began with a total investment of $49,945.32. The portfolio value is now up to $58,929.08 plus we have received dividends/distributions of $2,621.42.

Changes: Because of the nature and the objectives of this portfolio, we are not recommending any changes to the securities we are holding. AT&T is the laggard in the group but we’ll wait another six months to see if it turns around.

However, we should do some rebalancing to bring the portfolio closer to its original allocation. To do this, we will sell 15 shares of Disney, which will bring us $1,128.15. We will also sell 10 shares of CN Rail for $592.40 for a total of $1,720.55. We will use the money to buy 20 shares of AT&T for $674 and 35 shares of XBB for $1,065.05. That’s a difference of $18.50. We’ll use the $11.43 we have in cash and add another $7.07 in new money.

Normally I would advise reinvesting part or all of our dividends but with a correction likely within the next few months (in fact, it may have already started) we’ll hold off on that. Instead, we will keep the accumulated dividends/distributions of $2,621.42 in a high-interest savings account paying 1.35%.

Here is the revised portfolio.