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Every time I reviewed my Income Investor High-Yield Portfolio in recent years, I’ve noted the negative impact of rising interest rates. Thankfully, that phase appears to be over. Interest rates have stabilized and are poised to drop later this year. The result has been a strong rebound for most of our high-yield stocks.
This portfolio was created in March 2012 for investors who are looking for above-average dividend income and who can live with somewhat more risk. The portfolio invests entirely in stocks, so it is best suited for non-registered accounts where any capital losses can be deducted from taxable capital gains. Also, Canadian dividends are eligible for the dividend tax credit.
The initial portfolio value was $24,947.30, and I set a target average annual total rate of return of 7% to 8%, with an annual yield of around 5%.
Here is a review of the securities in the portfolio and how they have performed in the time since our last review in September last year. Results are to March 22, and prices may have changed slightly since then.
Enbridge Inc. (TSX: ENB). The stock is up $1.67 from the last review. The quarterly dividend was increased in February to $0.915. The stock yields 7.6% at the new rate.
Pembina Pipeline Corp. (TSX: PPL). Stable interest rates boosted the stock, which gained $6.41 in the latest six-month period. We received two dividend payments that totaled $1.335. At the current price, the dividend yield is 5.6%.
Sun Life Financial Inc. (TSX: SLF). SLF continued its strong recovery and added $6.71 in the latest six-month period. The quarterly dividend was increased by 4%, to $0.78, in November. The current yield is 4.2%.
Capital Power Corp. (TSX: CPX). The stock lost $1.57 in the latest period, but we received two dividends totaling $1.33 a share. The dividend yield is 6.3%.
Canadian Imperial Bank of Commerce (TSX: CM). The bank stocks have recovered strongly as recession fears have eased and interest rates stabilized. CIBC is up $14.25 since September. The bank raised its quarterly payout to $0.90 per share in December. The stock now yields 5.3%, which is still high for a big-five bank, but down from 6.4% at the time of our last review.
Brookfield Renewable Partners LP (TSX: BEP.UN). This Bermuda-based limited partnership invests in an international portfolio of clean energy properties, mainly hydro. Green energy stocks continue to struggle, and the units are down $3.23 from the last review. The quarterly distribution was raised to US$0.355 in February for a yield of 6.2%.
BCE Inc. (TSX: BCE). BCE shares went into freefall after the company announced weak earnings and major layoffs. The stock was down $7.88 in the latest six-month period, after a previous decline of $7.05. This is a huge drop for a normally stable company and may reflect investors’ concern over the safety of the dividend. The dividend was raised in March to $0.9975 per quarter ($3.87 a year). The stock yields 8.4%, which is unusually high for this company and a strong caution signal.
Firm Capital (TSX: FC). Mortgage investment corporations normally see their share prices decline when rates rise, but when they switch direction, these shares move up. That’s where we’re at now – the shares gained $1.41 in the latest period. We should see more of this if interest rates fall as expected later this year. The monthly cash flow is steady at $0.078, with a yield of 8.2%.
Freehold Royalties Ltd. (TSX: FRU). We added Freehold Royalties a year ago at a price of $14.10. The shares are now priced at $14.53, and we are receiving monthly dividends of $0.09, for a yield of 7.4%.
North West Company Inc. (TSX: NWC). This company has a long history, with a prime focus on general stores in Northern Canada and Alaska. The shares are up $3.23 since the last review, and we received two dividends of $0.39 each. The yield is 4%.
Automotive Properties REIT (TSX: APR.UN). Automotive Properties is the only listed REIT focusing on owning and acquiring automotive dealerships in Canada. It was added to the portfolio in September 2022 at $13.20. The price has been retreating since. Monthly distributions are $0.067 per unit, to yield 7.9%.
We put all our cash and retained earnings ($4,975.73) in a six-month GIC with EQ Bank paying 5%. We received $124.39 in interest. We will add that amount to cash and restore the retained earnings to their respective stocks.
The table below shows what the portfolio looked like on March 22. The weighting is the percentage of the market value of the security in relation to the total market value of the portfolio. The gain/loss shows the performance of the security since it was added to the portfolio. Sales commissions and exchange rates are not considered.
The portfolio has a total value of $64,949.84 and is up 9.2% since the last review. We can thank the pause in rate hikes for this result.
We have a total return of 160.3% in the 12 years since inception. That translates into an average annual growth rate of 8.3%, which is above our target range.
In terms of cash flow, the portfolio earned $1,832.41 in the latest six months, for a yield of 3.1% in that time. Over a full year, that would work out to 6.2%. Our cash flow target is 5%, so the portfolio is doing its job.
It’s time to make a couple of changes. The Automotive Properties REIT has been a disappointment, so we will sell our units for $2,958. Add the retained earnings and we have $3,228.45.
We will also sell our position in Brookfield Energy Partners for $3,562.24, including retained earnings. That gives us a total of $6,790.69 to reinvest.
We will invest in Power Corporation of Canada (TSX: POW), a conglomerate with interests in life insurance (Great-West Life), asset management, and banking. The stock is trading at $37.98 and pays a quarterly dividend of $0.525 ($2.10 a year) to yield 5.5%. The company has a long history of raising dividends.
We will buy 180 shares for a cost of $6,836.40. We’ll take $45.71 from cash to make up the difference.
We will also reinvest some of our retained earnings as follows:
ENB – We’ll add 10 shares at a cost of $482.10. That will give us 100 shares total and reduce retained earnings to $164.12.
PPL – We have enough to purchase 10 shares for a cost of $472.80. That gives us 160 shares and retained earnings of $124.95.
SLF – We’ll buy 10 shares for $738. We now own 160 shares and have $144 left.
CPX – We’re adding 10 shares at a cost of $391.50. We now own 130 shares and have $166.40 remaining.
CM – We have enough to buy 10 shares of CIBC for $682.80. That gives us 130 shares, with $188 left.
BCE – I’m concerned about the performance of this stock, but it’s cheap and has a high yield. So, we’ll buy another 10 shares for $458.60. This brings our total to 80 shares and leaves $320.36 in reserve.
FC – We’ll add 30 shares at a cost of $341.70. That brings our total to 480 shares, with $103.80 remaining.
We have cash and retained earnings of $2,484.14. Duca Credit Union has a 6% promotion offer available, so we’ll open an account there.
Here is the revised portfolio. I’ll review it again in my Income Investor newsletter in September.
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.
Follow Gordon Pape on X at X.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2024 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. 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.
Image: iStock.com/alfexe
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