This RRIF model portfolio was launched in February 2013 with an initial value of $49.910.30. Its goals are to protect capital and to provide higher cash flow than investors could get from conservative securities like bonds and GICs.
At the time the portfolio was created, I commented that during a period of near-zero interest rates, it was impossible to set up a low-risk RRIF that would produce enough income to meet Ottawa's minimum withdrawal requirements. The former Conservative government reduced those minimums last year, dropping the rate for a 71-year-old from 7.38 per cent to 5.28 per cent. That's still on the high side but potentially more attainable with careful management.
This portfolio balances the two objectives of income and safety by putting a significant amount into low-risk assets and the rest into higher-yielding securities. Here are the current positions in the portfolio with a commentary on how they have fared since the time of the last review.
MAXA Financial three-year GIC. GICs offer virtually risk-free stability, which is important in a RRIF. At the time the portfolio was created, MAXA Financial, an on-line subsidiary of Manitoba's Westoba Credit Union, was paying 2.45 per cent for a three-year GIC, maturing this month. We received distributions annually whereas most financial institutions pay at maturity. We invested $12,500 here, so at maturity we have earned a total of $918.75.
Phillips, Hager & North Short Term Bond and Mortgage Fund (RBF1250). This low-risk fund was selected for the stability it brings to the portfolio. However, short-term bond funds, by definition, provide little return, especially during a period of low interest rates. Since the last review in August, the net asset value (NAV) has dropped by $0.10 per unit, although that was offset by two quarterly distributions totaling just under $0.12.
CI Signature Dividend Fund (CIG610). This fund invests primarily in preferred shares and dividend-paying large-cap stocks, such as major U.S. and Canadian banks, Enbridge Inc., etc. The preferreds continue to go through a rough period and as a result they have been a drag on performance. The fund's NAV dropped from $14.22 in August to $12.99 now. We did receive distributions of over 75 cents per unit to help offset that but we still ended with a loss of 10.4 per cent over the six-month period.
PIMCO Monthly Income Fund (PMO005, front-end units). This all-bond fund was added to the portfolio last August to increase the fixed income weighting. The portfolio is composed of investment-grade bonds from developed countries around the world as well as some mortgage-backed securities. It pays monthly distributions, which are currently running at between $0.04 and $0.05 per unit. The units are down by $0.71 since the fund was added and the distributions of $0.50 weren't quite enough to offset that, leaving us with a small loss.
Sentry U.S. Growth and Income Fund (NCE737). This fund was added to the portfolio in August 2013 to obtain more exposure to the U.S. market. It invests in a portfolio of U.S. dividend-paying stocks, both common and preferred, with a large-cap bias. The net asset value declined slightly during the latest period from $18.52 to $18.11, but that was offset to some degree by monthly distributions totaling just under $0.20 per unit.
BCE Inc. (BCE-T, BCE-N). BCE shares have moved up nicely since the August review, gaining $4.41. In addition, we received two quarterly distributions of $0.65 each for a total return over six months of 10.4 per cent.
Inter Pipeline (IPL-T). The weakness in pipeline stocks continued over the latest six months although the loss in this case was not as bad as in the previous period. Still, the shares were down by $2.32, even though the company raised its dividend by 6.1 per cent to 13 cents a month ($1.56 per year).
Brookfield Infrastructure LP (BIP.UN-T, BIP-N). This Bermuda-based limited partnership had been a strong performer but it has slipped over the past year. The shares closed on Feb. 19 at $48.50, down from $52.26 in August. The one bright spot was the news of a distribution increase of 7.57 per cent to 57 cents (U.S.). The new rate applies to the Feb. 25 payment, which is not included in this review as it comes after the Feb. 19 cut-off date.
DH Corporation (DH-T). This company was added to the portfolio in August 2013 and initially did very well for us. However, it took a big hit in the latest six months, dropping $6.98 per share. The quarterly dividend is 32 cents.
Cash. We kept the cash balance in a high-interest savings account paying 0.8 per cent. Interest earned in the latest period was $5.42.
Here's a look at the RRIF Portfolio as it stood at the close of trading on Feb. 19. I have included the accrued interest on the GIC in the retained earnings column for clarity. Note that commissions are not deducted and that U.S. and Canadian currency is treated at par to simplify the calculations. Although this is a RRIF portfolio, withdrawals are not factored in, as this would make it impossible to track performance accurately.
Comments: The RRIF Portfolio suffered a small loss of 1.5 per cent during the latest six-month period. We never want to see losses, of course, but compared to the overall performance of the market the portfolio held up quite well.
This marks the third anniversary of the launch of this portfolio and to date we have an average annual compound rate of return of 6.81 per cent. That's more than the new minimum withdrawal requirement for a 71-year-old and substantially more than you'd get from a GIC. By comparison, the average annual three-year return on a Canadian neutral balance fund to Jan. 31 was 5.33 per cent.
Changes: Our three-year GIC has matured so we have $13,418.75 (principal and accrued interest) to reinvest. MAXA Financial is offering 2.5 per cent on a five-year term and their GIC has two big advantages over most others. First, it's redeemable so if rates rise we can cash in and trade up. Second, it makes annual payments. We will therefore reinvest with them. Maturity will be in February 2021, unless it becomes advantageous to cash in sooner.
I debated selling the Signature Dividend Fund but the preferred share market has started to firm up so we'll hold on for another cycle. We'll use the retained distributions plus $4.54 from cash to buy another 25 units, bringing the total to 440.
Here are some additional new purchases.
PMO005. We'll add 15 units for a cost of $205.50 to increase the total to 420. That will use all of the retained earnings plus another $3.26 from cash.
BCE. We will buy five shares for a cost of $295.30. That will give us 125 shares and reduce the retained earnings to $38.21.
IPL. We are adding 10 shares for a cost of $234.30. That leaves retained earnings of just 78 cents.
BIP.UN. We have enough money to buy five units for a cost of $242.50. We now have 140 units and retained earnings of $43.70.
Remember that with stocks, I do not recommend buying small quantities because of the commissions. Use dividend reinvestment plans if they are available.
The cash of $491.31 will be kept in the laughingly called high interest savings account at 0.8 per cent.
I'll review the portfolio again next August.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. Follow him on twitter @GPUpdates and on Facebook.
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