High Yield Portfolio Averages 14%

There’s risk here but so far this portfolio is performing well above expectations

In March 2012 I started a High Yield Portfolio for readers of my Income Investor newsletter who wanted above-average cash flow and were willing to live with a higher level of risk. This is a 100% equity portfolio; there are no bonds to cushion losses when stock markets retreat. So it is not suitable for very conservative investors or for RRIFs where capital preservation is important.

There have been some changes to the portfolio since the launch. It now consists mainly of small/mid-cap companies with one exception (Sun Life). All the stocks are Canadian except for FLY Leasing, which is an Irish-based ADR that trades in New York.

This portfolio 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.

Here, a rundown of the securities we own and how they have performed in the six months since my last review in May.

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. I added it to this portfolio in April 2013 when it was trading at $15.25. At the time of the last review in May, it was trading at $15.99. We saw a nice upward move over the summer and the shares closed on Nov. 21 at $17.30. We also received $0.56 per share in distributions during the period for a total return of 11.7% since the last update.

DH Corporation (TSX: DH, OTC: DHIFF). This company used to derive most of its revenue from cheque printing but it has successfully diversified into other areas. The stock has been on a strong run and the shares are up $4.38 since my last review. We also received two quarterly dividends of $0.32 per share each. The total return on this security is now 92%, making it our top performer.

Freehold Royalties (TSX: FRU, OTC: FRHLF). It hasn’t been a good time for energy stocks, with the price of oil plunging. Freehold has held up better than most because it is a royalty company, however the shares are down $1.68 since our review in May. The stock continues to pay monthly dividends of $0.14 a share, which has partially offset the drop in the share price.

Baytex Energy (TSX, NYSE: BTE). This traditional energy stock didn’t escape the bloodletting. I added it to the portfolio last May at $44.52 and it performed well until the beginning of September when the decline in the oil price turned into a rout. The shares are now down to $30.94 and even the nice monthly dividend of $0.24 can’t come close to offsetting that. We’re down 27.3% on this one but Baytex is a sound company and I expect it to recover.

FLY Leasing (NYSE: FLY). This Irish-based airplane-leasing firm was added to the portfolio in October 2013. It was trading at US$14.39 at the time but has been gradually losing ground and closed on Nov. 21 at US$13.25. However, the quarterly dividend of US$0.25 per share has allowed us to just about break even on this one.

Premium Brands Holding Corp. (TSX: PBH, OTC: PRBZF). This specialty food manufacturer and distributor was also added to the portfolio in October 2013 and it has done very well so far. The shares are up more than $5 since that time plus we are receiving quarterly dividends of $0.3125. Total return since Premium Brands was added is 32.6%.

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 have been flat since my last review in May but we continue to receive good cash flow from the monthly dividend of $0.065 ($0.78 a year).

Pembina Pipeline Corp. (TSX: PPL, OTC: PBNPF). After a big move last winter, Pembina has been marking time, with the shares actually losing a few cents since the May update. However, the monthly dividend of $0.145 a share ($1.74 a year) gave us a small overall gain for the latest period.

Sun Life Financial (TSX, NYSE: SLF). This insurance company is the only blue-chip stock in the portfolio and it has been a strong performer. The shares moved up by $4.56 in the latest period and combined with the $0.32 quarterly dividend (we received three over the period) we now have a total return of just over 80%.

Chemtrade Logistics Income Fund (TSX: CHE.UN, OTC: CGIFF).

Chemtrade is one of the world’s largest suppliers of sulphuric acid, liquid sulphur dioxide, and sodium chlorate. It’s one of the few income trusts still remaining. The share price moved higher by $1.29 since the last update. Distributions are $0.10 per unit monthly ($1.20 a year).

Here’s what the portfolio looked like as of the close of trading on Nov. 21. 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 $3.61 during the latest period.

Income Investor High Yield Portfolio – as of Nov. 21/14

Security Weight% TotalShares AveragePrice BookValue CurrentPrice MarketValue RetainedDividends Gain/Loss%
KEG.UN 8.2 160 $15.29 $2,446.80 $17.30 $2,768.00 $89.60 +16.8
DH 15.5 145 $19.39 $2,811.15 $36.42 $5,280.90 $115.30 +92.0
FRU 9.3 140 $20.68 $2,895.20 $22.62 $3,166.80 $208.10 +47.1
BTE 4.5 50 $44.52 $2,226.00 $30.94 $1,547.00 $72.00 -27.3
FLY 5.8 150 $14.39 $2,158.50 $13.25 $1,987.50 $183.00 + 0.6
PBH 9.0 125 $19.30 $2,412.50 $24.35 $3,043.75 $156.25 +32.6
MSI 11.3 230 $12.23 $2,813.60 $16.74 $3,850.20 $86.25 +39.9
PPL 12.2 95 $29.09 $2,763.60 $43.69 $4,150.55 $193.48 +57.2
SLF 13.4 110 $24.06 $2,646.10 $41.54 $4,569.40 $236.30 +81.6
CHE.UN 10.7 170 $17.06 $2,899.40 $21.31 $3,622.70 $102.00 +28.5
Cash 0.1 $21.81      $25.42
Total 100.0 $26,094.66 $34,012.22 $1,442.28 +35.9
Inception $24,947.30 +42.1


Comments: The sharp drop in the price of Baytex shares dragged down the overall results of the High Yield Portfolio. Despite that, we recorded a respectable total return of 5.5% during the period since the May review thanks to steady cash flow and good results from DH Corporation and Sun Life.

Since the launch of the portfolio in March 2012, we have recorded a total return of 42.1%, based on the book value at inception. That works out to an average annual compound rate of return of 14.07%. That’s down from 14.72% in May but still well above our target range of 7% to 8% annually.

Changes: We’ll stick with the securities we currently own – the energy stocks will come back. However, we will do some rebalancing and reinvest some of the dividends in additional shares as follows.

KEG.UN – We will buy five additional shares at $17.30 for a cost of $86.50.

DH – The success of this stock has resulted in an overweighting (I try not to exceed 15% for any security). Therefore, we will sell 10 shares for proceeds of $364.20. This will reduce our position to 135 shares.

FRU – We’ll buy 10 more shares for a total cost of $226.20. That will wipe out our retained dividends and leave a deficit of $18.10, which we will draw from cash.

BTE – The best time to buy a good company is when the share price is down. So we will take advantage of this situation by adding 10 shares of BTE at $30.94 for a cash outlay of $309.40. To pay for this we’ll use the $72 in retained dividends plus $237.40 from the sale of DH shares.

FLY – We’ll add 10 shares at $13.25 for a cost of $132.50. We’ll be left with retained dividends totaling $50.50. We now own 160 shares.

PBH – We have enough money to buy five more shares for a cost of $121.75. That leaves cash of $34.50.

SLF – Another five shares will cost $207.70, leaving cash of $28.60.

A reminder that I do not recommend doing small trades because of the sales commissions involved. The best way to add small lots of shares is through dividend reinvestment plans (DRIPs).

Here’s the updated portfolio. I will revisit it again on the third anniversary in March.

Income Investor High Yield Portfolio – revised Nov. 21/14

Security Weight% TotalShares AveragePrice BookValue CurrentPrice MarketValue RetainedDividends
KEG.UN 8.2 165 $15.35 $2,533.30 $17.30 $2,854.50 $3.10
DH 14.1 135 $19.39 $2,617.65 $36.42 $4,916.70 $115.30
FRU 9.7 150 $20.81 $3,121.40 $22.62 $3,393.00 0
BTE 5.3 60 $42.25 $2,535.40 $30.94 $1,856.40 0
FLY 6.1 160 $14.32 $2,291.00 $13.25 $2,120.00 $50.50
PBH 9.1 130 $19.49 $2,534.25 $24.35 $3,165.50 $34.50
MSI 11.1 230 $12.23 $2,813.60 $16.74 $3,850.20 $86.25
PPL 11.9 95 $29.09 $2,763.60 $43.69 $4,150.55 $193.48
SLF 13.7 115 $24.82 $2,853.80 $41.54 $4,777.10 $28.60
CHE.UN 10.4 170 $17.06 $2,899.40 $21.31 $3,622.70 $102.00
Cash 0.4 $134.12 $134.12
Total 100.0 $27,097.52 $34,840.77 $613.73
Inception $24,947.30



For information on a three-month trial subscription to Gordon Pape’s Income Investor newsletter go here