The Fund Library :: Columns :: Pape’s Mini-Portfolio delivers 10% annualized return

BUILDING WEALTH WITH GORDON PAPE

My Mini-Portfolio was launched in November 2012 for readers of my Internet Wealth Builder newsletter. It is designed for investors with a limited amount of money who want a better return than they could get from a guaranteed investment certificate (GIC) without taking on a lot of risk. Here’s a summary and update of performance.

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

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