The purpose of Strategy Lab is to simulate what an investor with real money would do.
John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
I receive a lot of questions about my Strategy Lab model dividend portfolio, and today I'll answer some of them. My goal here is to clarify the portfolio's mission and to provide some general guidance to do-it-yourself dividend investors.
The following questions are based on actual reader e-mails and online comments, which I've edited for clarity and space.
Do you recommend that people follow your model portfolio exactly?
No. The purpose of the Strategy Lab model dividend portfolio is to provide an illustration of how dividend investing works; it's not meant as a template to be copied. For one thing, the Strategy Lab rules limit each model portfolio to a maximum of 12 securities, but for proper diversification, an investor would require perhaps twice as many stocks, as well as bonds or guaranteed investment certificates for fixed-income exposure. Another reason not to copy the portfolio is that some of the stocks might be trading at unattractive valuations currently. That said, I do own all of my Strategy Lab stocks personally – plus 17 more, including a handful of exchange-traded funds, mutual funds and GICs.
Why don't you use a dividend reinvestment plan (DRIP) with your stocks?
I prefer to let cash accumulate and then invest it when a particular stock looks attractive. I've used DRIPs personally in the past, but I'd rather have control over when and where to reinvest my dividends. Also, because brokerage commissions have fallen sharply in recent years, the cost savings of DRIPs aren't as substantial as they used to be. This is just my personal preference; if DRIPs work for you, great. The important thing, if you don't need to spend your dividends, is to reinvest them to maximize compounding. There are different ways to do that.
With the Canadian dollar trading at about 79 cents (U.S.), is now a good time to buy U.S. stocks?
I was more comfortable buying U.S. stocks when the Canadian dollar was trading above par a few years ago, because the probability of the loonie rising substantially from its already elevated levels seemed low. That turned out to be the right call, because the loonie subsequently plunged, increasing the value of U.S. assets in Canadian dollars. Now, however, the situation is reversed: The Canadian dollar is trading well below its 10-year average of 91.7 cents (U.S.) and if it were to rise significantly, the value of U.S. assets would fall. Although I'm not eager to go shopping in the U.S. market right now, I continue to hold Johnson & Johnson and Procter & Gamble and would consider adding to my U.S. exposure if the loonie were to climb back toward par.
What is the dividend yield of your Strategy Lab dividend portfolio?
It's about 4.1 per cent. I calculated the yield by adding up the projected annual income of the 12 securities and dividing by the portfolio's market value. (All U.S. dollar share prices and dividends were first converted to Canadian dollars.) I consider the yield to be in the sweet spot for a dividend portfolio; it's not too high (which can sometimes entail higher risk or lower potential for growth), and it's not too low (which would defeat the purpose of a portfolio that's supposed to generate income). With a yield of 4.1 per cent, I feel confident that the dividend income is not only sustainable but has room to grow, which were key considerations when I selected stocks for the portfolio.
Would you consider selling your stocks and starting fresh with a new model portfolio?
Not right now. The purpose of Strategy Lab is to simulate what an investor with real money would do (within the limitations of the Strategy Lab rules). Staying focused on the long run is an essential part of dividend growth investing, and turning over my entire portfolio would be inconsistent with that approach. If you are looking for other dividend stock ideas, in my Yield Hog column I frequently write about companies that aren't included in my Strategy Lab portfolio. You can find an archive of my Yield Hog columns here.
How is the return of your portfolio calculated?
My model dividend portfolio started on Sept. 13, 2012, with $50,000 in virtual cash (as did Strategy Lab's value, growth and index portfolios, which are managed by other Globe and Mail contributors). Because no money has been added or withdrawn since the portfolio's inception, the total return (from dividends and share price gains) is simply the portfolio's current market value divided by its starting value of $50,000, less 1. For example, the March 31 portfolio value of $72,551.10 divided by $50,000 is 1.451. The total return is therefore 0.451 or 45.1 per cent. To calculate the annual return, I plugged the starting and ending dollar values and dates into an online rate of return calculator, which produced an annual return of 11.1 per cent. For more on calculating returns, read my column.
What do you consider your biggest mistake?
Probably selling McDonald's, which is substantially higher than when I punted it from my portfolio. That's one more reason not to copy what I do!
John Heinzl