High yield portfolio pays off

Back in March, I launched a portfolio in my Income Investor newsletter designed for investors seeking above-average returns who are willing to live with a higher degree of risk. I called it the High Yield Portfolio.

The objective was to provide investors with a basket of 10 securities with a superior level of income; in fact all but one had yields in excess of 6 per cent. I did not include any bonds or preferred shares in the portfolio. Most of the securities are small- or mid-cap trusts and stocks. There is only one large-cap company in the mix.

This portfolio is best suited for a non-registered account. The reason is three-fold. First, registered plans should carry a higher safety factor than you’ll find here, except for aggressively managed TFSAs. Second, any capital losses in a non-registered account can be deducted from taxable capital gains. Third, a high percentage of the payments from this portfolio will receive favourable tax treatment in a non-registered account.

Here is a quick review of the securities. Each was given a 10 per cent weighting at the outset. The initial book value was $24,947.30 because I rounded the share purchases up or down to the nearest five. Brokerage commissions are not included in the cost price. Original prices, as seen in the table, were as of the close of trading on March 16.

Atlantic Power (TSX: ATP, NYSE: AT). This company owns a portfolio of power generating assets in the United States and Canada. The shares pay a monthly dividend of $0.09583 ($1.15 a year).

Davis + Henderson (TSX: DH, OTC: DHIFF). This company, which used to derive most of its revenue from cheque printing, is in the process of diversifying and appears to be successful thus far. The stock pays a quarterly dividend of $0.31 per share ($1.24 a year).

Freehold Royalties (TSX: FRU, OTC: FRHLF). This oil and gas royalty company pays a monthly dividend of $0.14 per share ($1.68 a year) to yield 8.3 per cent at the current price. The high yield reflects the risk associated with energy stocks.

Just Energy (TSX, NYSE: JE). This is a natural gas and electricity retailer that operates in both Canada and the U.S. It pays a monthly dividend of $0.10333 ($1.24 a year) to yield 11.8 per cent at the current price.

Liquor Stores (TSX: LIQ, OTC: LQSIF). This company operates retail liquor stores in Alberta, British Columbia, Alaska, and Kentucky. It pays monthly dividends of $0.09 a share ($1.08 annually) to yield 5.8 per cent.

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 stock pays a monthly dividend of $0.065 ($0.78 a year) to yield 6.2 per cent.

Pembina Pipeline Corp. (TSX: PPL, OTC: PBNPF). This pipeline company has been an outstanding performer. The share price has almost doubled since it was first recommended in the newsletter as an income trust in June 2009 at $14.78 but the shares still yield 5.8 per cent on a monthly dividend of $0.135 ($1.62 a year).

Sun Life Financial (TSX: NYSE: SLF). This insurance company is the only blue-chip stock in the portfolio. It pays a quarterly dividend of $0.36 ($1.44 a year) to yield 5.8 per cent at the current price.

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. Distributions are $0.10 per unit monthly ($1.20 a year).

Pure Industrial REIT (TSX-V: AAR.UN). This REIT invests in a portfolio of income-producing industrial properties across Canada. The units pay a monthly distribution of $0.025 ($0.30 a year) to yield 6.2 per cent at the current price.

Here’s what the portfolio looks like now, with prices as of the close on Oct. 19. The weighting is the percentage of the market value of the security to the total market value of the portfolio.

Comments: We have a modest capital gain of $401.35 but when the distributions of $1,008.06 are added, the total profit for the first seven months of this portfolio is $1,409.41 or 5.65 per cent. That’s a very respectable performance especially considering the state of the stock markets.

Of the 10 securities in the portfolio, seven gained ground during the period while three lost some market value. The biggest disappointment was Just Energy, which declined by $3.03 a share, costing us $560. The best gain came from Davis + Henderson, which added $2.60 for a profit of $351. In cash flow terms, Atlantic Power did best with dividends of $124.15 or 5 per cent of the initial value.

Changes: I am concerned about the high yield on Just Energy. It’s a signal the market expects a dividend cut. Therefore, I am replacing it with Firm Capital (TSX: FC), which is currently trading at $13.54. It pays an annualized dividend of $0.94 per share to yield 6.9 per cent. The total value of the JE position, including dividends, is $2,061.51. We will use that to buy 150 shares of Firm Capital at a cost of $2,031 leaving us with $30.51 in cash.

I won’t do any rebalancing with the other securities at this time since none are seriously out of line. Here is what the revised portfolio will look like. The total value, including cash and dividends, is $26,356.71.

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