John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
I didn't design my Strategy Lab model portfolio to win an investing contest.
If that had been my goal, I would have loaded up on risky tech and mining stocks with the potential for a big payoff. The problem with high-beta stocks, of course, is that they can also suffer outsized losses, which is fine if you're playing with imaginary money, but not so great if the cash you're investing is real.
Instead, I built a portfolio of companies that, while they may not win any sprints, should do well in a longer race – one lasting, say, five, 10 or 20 years. I don't know if Strategy Lab will be around that long, but I intend to be, and these companies – all of which I also own in my personal portfolio – should be, too.
In fact, a decade or two from now I would expect that most, if not all, of them will be trading at higher prices, earning more money and paying substantially bigger dividends than they are today. That, after all, is the core of the dividend growth strategy. It's a get-rich-slowly scheme that rewards patience and commitment. By focusing on the long term, I'm also much better able to deal with the short-term volatility that inevitably rears its head.
Being a conservative fellow, I selected companies that would provide – fingers crossed – very few nasty surprises. I also wanted a portfolio that required little in the way of maintenance; I don't intend to do much trading, apart from re-investing my dividends every few months.
That said, if a company's outlook takes a dramatic turn for the worse, I will consider giving it the boot and buying something more promising. I hope it won't come to that.
As for the companies themselves, I don't have any insider knowledge about pending deals or other news that will drive their share prices higher. Rather, they are all well-established businesses with good prospects for growth. And, of course, they pay attractive dividends that will almost certainly rise.
For me, a token dividend won't do. I'm not interested in stocks with a yield of 1 or 2 per cent because, even if the dividend is growing, it would take too long for the income to rise to a meaningful level. The yields in my model portfolio range from a low of about 2.6 per cent (Canadian Utilities and Coca-Cola) to a high of 5.3 per cent (BCE). The average yield is about 3.75 per cent. All of my companies have raised their dividend at least once in the past year.
The sole exchange-traded fund in my model portfolio – the S&P/TSX Capped REIT Index Fund – is a special case. Its dividend tends to bounce around depending on the timing of cash flows from the real estate investment trusts it holds. I bought this ETF for the attractive yield of 4.3 per cent and the broad exposure it provides to the REIT sector.
In future Yield Hog columns, I'll be taking a closer look at some of the holdings in my model portfolio. I'll also be discussing other dividend stocks, both good and bad, and exploring other aspects of dividend investing.
Finally, to avoid any potential confusion, I want to point out a few differences between my model portfolio and my personal portfolio.
Twelve stocks is a good start for diversification purposes, but in real life I own about twice as many companies, plus a handful of exchange-traded funds (which I contribute to when I can't decide which stock to buy). Another key difference is that, in my personal portfolio, I invest in guaranteed investment certificates, with maturities laddered from one to five years to minimize interest rate risk.
The returns from GICs aren't great, but the buffer they provide against market volatility is a big plus. Keeping one's emotions in check is a big part of investing, and GICs help in that regard.
Dividend investing suits my personality. The frequent cash payments satisfy my desire for instant gratification, and the gradual dividend increases and stock price gains reinforce the principle that investing is a long-term game, not a contest to see who can make the most amount of money in the shortest period of time.
That said, if any of my stocks would like to deliver a 20- or 30-per-cent gain over the next couple of months, I'll take it.
Watch and participate as our value, growth, dividend and indexing strategists look for promising investments in Strategy Lab.
John Heinzl