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Update: Pape’s TFSA Income Portfolio
9/22/2018 10:39:51 PM
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Wealth Builder
Gordon Pape writes on common-sense wealth-building strategies.



By Gordon Pape  | Monday, August 27, 2018


 

BUILDING WEALTH WITH GORDON PAPE
 

In May 2015 I created an income portfolio designed for TFSAs for readers of my Income Investor newsletter. The goal was to generate cash flow in the 5% range. This makes it especially useful for older people who want to receive tax-free income. You can withdraw the dividends/distributions earned each year without paying any tax, while leaving the principle intact.

However, this type of portfolio comes with some risk. For starters, it is entirely invested in stocks, which makes it more vulnerable than a balanced portfolio that includes bond holdings. For another, dividend-paying stocks tend to come under pressure as rates rise, as we’ll see when we review the numbers from the latest six-month period.

At the time I launched this portfolio, the maximum cumulative lifetime contribution was $41,000, so that was the initial starting value.

I selected 10 securities from the Income Investor Recommended List. All are traded on the TSX, so currency exchange is not a factor, except for the distributions from the limited partnerships, which are in U.S. dollars. I gave each security an initial weighting of approximately 10% for diversification and balance. Here are the components of the portfolio with a brief report on how they have performed since the last update in November. Prices are as of the close of trading on May 25, and returns are for the six-month period to May 25.

BCE Inc. (TSX: BCE). BCE was one of the stocks hit by rising rates. The shares have dropped by $7.12 since November, a decline of about 15% to mid-May. This was despite an increase in the dividend of 5.2% earlier this year, bringing the quarterly payout to $0.755 ($3.02 per year). As a result of the price decline and the dividend increase, the stock now yields a very attractive 5.5%.

Bank of Nova Scotia (TSX: BNS). Banks are supposed to prosper as rates increase, but we have not seen that in BNS shares, which are down $4.56 since November. As with BCE, we had a dividend increase at the start of the year with the quarterly payout rising 3.8%, to $0.82 per share ($3.28 a year). As a result, the yield jumped to 4.1% from 3.8% at the time of the last review.

Brookfield Infrastructure Limited Partnership (TSX: BIP.UN). This Bermuda-based limited partnership is a spinoff company from Brookfield Asset Management, which owns a majority stake. It invests in infrastructure projects in North and South America, Europe, and Australia. Like other interest-sensitive stocks, this one is down from our November review. The partnership increased its distribution by 8% in February, to US$0.47 per quarter (US$1.88 per year). That and the price drop pushed the yield to 4.9%.

Brookfield Renewable Partners (TSX: BEP.UN). This is another Brookfield spinoff, but with a focus on renewable energy, mainly hydro but also some wind projects. The units are down $2.02 from the time of our last review. We received two distributions totaling US$0.9575, as the partnership implemented a 4.8% increase in February. The units yield 6.2% at the current price.

Inter Pipeline (TSX: IPL). This stock has been a disappointment. It was off another $2.51 in the latest period ending May 25 and is down 13.5% overall since the portfolio’s inception. We will replace it with a similar but more dynamic company (see below).

North West Company Inc. (TSX: NWC). The shares declined by $3.51 in the latest period. The quarterly dividend is $0.32 per share, and we received two payments. The current yield is 4.5%.

Sienna Senior Living Inc. (TSX: SIA). Sienna’s share price was down $1.33 during the latest review period. However, the monthly dividends of $0.075 per share continued to roll in. The current yield is 5.3%.

TransAlta Renewables Inc. (TSX: RNW). This stock took another hit in during the past six months to May 25, dropping $0.87 in value. The monthly payment is $0.0783 per share ($0.9396 per year). The price retreat pushed the yield to 7.6%.

Firm Capital MIC (TSX: FC) . Despite rising rates, the share price of this mortgage investment corporation increased by $0.51 in the latest period. The monthly payment remains at $0.078 ($0.936 per year) to yield 7%.

Dream Global REIT (TSX: DRG.UN). This international REIT invests in office, industrial, and mixed-use properties in Europe. We added it to the portfolio a year ago, and so far, it has paid off well. The share price was up $3.27 (28%) in the latest period, and the units pay $0.0666 per month, or about $0.80 per year. The yield is 5.4% at the current price. This is the best-performing security in the portfolio at this time.

We received interest of $25.15 during the latest period from our EQ Bank savings account.

Here is how the portfolio looked at the close of trading on May 25.

Comments: The value of the portfolio (market price plus retained earnings) declined by $455.54, or 0.8%, during the six-month review period to May 25. It could have been much worse, considering the overall downtrend in interest-sensitive stocks, but gains in Firm Capital, and especially Dream Global REIT, plus strong distributions helped to stem the loss.

Despite that loss, since the portfolio was launched three years ago, it has posted a gain of 31.5%. On an annualized basis, that works out to 9.63%, which is still very respectable for a portfolio of this type.

Cash flow during the latest period was $1,401.80, for a six-month yield of 2.57% based on the portfolio value last November. In terms of the original $41,000 investment, the six-month yield was 3.42%, so we are well ahead of our 5% annual cash flow target.

Changes: We will replace Inter Pipeline with shares of Pembina Pipeline (TSX: PPL). Yes, we’re still in the pipeline business, which means the stock is interest-sensitive, but it has held up much better in the current climate than Inter Pipeline.

The total value of our Inter Pipeline position, including retained dividends, is $3,889.13. Pembina traded at $43.24 on May 25 and had a yield of 5.2%. We bought 90 shares for $3,891.60, and took the difference of $2.47 from cash.

We also made make some additional small purchases as follows:

SIA – We added 10 shares at a cost of $169.60. That brought our position to 310 shares and reduce our retained earnings to $115.05.

RNW – We bought another 20 shares for $246.60, leaving cash of $79. We now own 400 shares with a cash balance of $10.92.

FC – We added 10 shares at a cost of $133.20 to a new total of 400. Our cash balance was reduced to $110.96.

DRG.UN – We bought another 10 shares for $149.20, bringing our total to 490. We had $112.19 left in cash.

Readers are reminded not to do small trades unless you have a fee-based account. Use a dividend reinvestment plans when available.

We will keep our cash of $2,467.74 in the EQ Bank savings account, which still pays 2.3%.

Here is the revised portfolio. I will look at it again in my Income Investor newsletter 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 Investor newsletters, which are available through the Building Wealth website.

For more information on subscriptions to Gordon Pape’s newsletters, check the Building Wealth website.

Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.

Notes and Disclaimer

© 2018 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
 

 
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