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, which
guarantee both principal and interest (this portfolio does not) and are
covered by the Canada Deposit Insurance Corp. up to $100,000 per
institution. If absolute safety is what you want, stick with the GICs and
forget about the extra return this portfolio offers.
As of July 14, you can find a five-year GIC that pays 3.25% at Oaken
Financial. But Oaken is a division of the troubled Home Capital Group (TSX:
HCG). 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. It’s had something of a reprieve with a recent investment by
legendary investor Warren Buffett, whose conglomerate holding company
Berkshire Hathaway Inc. (NYSE: BRK.A) took a large position in the company
on very favorable terms (to BRK). But even with that and 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 (for example, 1.6% at
Royal Bank for a 5-year GIC as at May 14).
My Mini-Portfolio includes three securities: the common stock of BCE Inc.
and Bank of Nova Scotia, plus the 5.75% convertible debentures from Firm
Capital Mortgage Investment Corp.
I reviewed the portfolio last November, at which time it was showing an
average annual compounded rate of return of 10.3% since inception. Here’s a
look at the components, based on closing prices on May 31.
BCE Inc. (TSX: 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%, to $0.7174 ($2.87 per
year) at the start of the year.
Bank of Nova Scotia (TSX: BNS). Scotiabank reported good first-quarter earnings, and the shares are up
$3.47 from the time of my 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 Investment Corp. 5.75% Convertible Unsecured
Subordinated 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% 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% in
six months. Since the portfolio was created, the portfolio has gained
56.6%. The average annual compounded rate of return since inception is now
10.5%, 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%.
I will review the portfolio again on its fifth anniversary in my Internet Wealth Builder newsletter in November.
Gordon Pape is one of Canada’s best-known personal finance commentators and
investment experts. He is the publisher of
The Internet Wealth Builder and The Income Investornewsletters, which are available through the Building Wealth website.
For more information on subscriptions to Gordon Pape’s newsletters,
check the Building Wealth website.
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Notes and Disclaimer
© 2017 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned carry risk of loss, and no guarantee of
performance is made or implied. This information is not intended to provide
specific personalized advice including, without limitation, investment,
financial, legal, accounting, or tax advice. Always seek advice from your
own financial advisor before making investment decisions.
BUILDING WEALTH WITH GORDON PAPE