John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
It's been 15 months since I started my Strategy Lab model dividend portfolio, and I'm pleased to report that everything is unfolding as I had expected.
Today, I want to lift the hood on my portfolio and show you exactly what's been happening.
If you're a dividend investor, this column will probably confirm what you already know: that the strategy works. If you're new to dividend investing, I'm hoping you'll come away with a better understanding of why it works.
First, let's back up to Sept. 13, 2012, when I established my model dividend portfolio with $50,000 of virtual money. I spread the "cash" roughly evenly across 12 securities – eight Canadian companies (BCE, BMO, CU, ENB, FTS, RY, T, TRP), one Canadian exchange-traded fund (XRE), and three U.S.stocks (KO, MCD, PG).
As I said at the time, I wasn't looking for stocks that had the potential to deliver massive short-term gains. That would have entailed too much risk. Rather, I selected conservative blue-chip companies that had a history of raising their dividends and – barring a catastrophe – would continue raising their dividends for years to come. (You can see my model portfolio here and read more my about my stock-selection strategy here)
By focusing on dividends, which will grow over the long run only if the company's earnings are also growing, I don't have to worry about the stock market's daily gyrations. It's not that I don't care about capital gains; I do. But I have faith that, if earnings and dividends are climbing, the share price will eventually rise as well, which means I don't get stressed out by short-term price moves.
So how has the portfolio performed? Well, through Nov. 30 it was up 17.2 per cent, including dividends. That compares with a gain of 12.5 per cent for the S&P/TSX Composite Index over the same period, also including dividends.
I'm happy with that performance, but it doesn't tell the whole story. Let's dig a little deeper.
In the past 15 months, every one of my companies has raised its dividend. Five (BCE, CU, KO, PG, TRP) have raised it once, another five (BMO, ENB, FTS, MCD, RY) have raised it twice, and one (T) has raised it three times. The sole ETF on the list (XRE) has a distribution that fluctuates from month to month, but its current payout is 4.5 per cent higher than it was when the portfolio was started.
Reinvesting dividends is also a core part of my strategy. On several occasions I used the cash in my portfolio to purchase additional shares of companies (namely FTS, KO, T and XRE). Also, two of my stocks (CU and T) split two-for-one. Splits don't create any value, but they can be a positive sign, as I discussed online.
Now let's look at how all those dividend increases and re-investments have affected my portfolio's total income. At inception, the portfolio generated a projected $1,875.84 in dividends annually, for a yield of 3.75 per cent based on the initial value of $50,000. (This assumes all U.S. dividends were converted to Canadian dollars based on the exchange rate at the time.)
As of Nov. 30, the portfolio's annual income had grown to $2,157.70 – up 15 per cent. Granted, the falling Canadian dollar has been a nice tailwind because my U.S. dividends are worth more when converted into loonies. But dividend increases and reinvestments account for the bulk of the portfolio's income gains.
And let's not forget: Dividends are the gift that keep on giving. I expect that all of my companies will raise their dividends again in the coming year, and the year after that, and so on. And I'll continue to reinvest my dividends to purchase more shares. That, plus the prospect of long-term capital gains, is what makes dividend growth investing such a powerful formula.
Here are John Heinzl's 12 Strategy Lab portfolio stocks:
- BCE (BCE)
- Bank of Montreal (BMO)
- Canadian Utilities (CU)
- Enbridge (ENB)
- Fortis (FTS)
- Coca-Cola (KO)
- McDonald’s (MCD)
- Procter & Gamble (PG)
- Royal Bank of Canada (RY)
- S&P/TSX REIT ETF (XRE)
- Telus (T)
- TransCanada (TRP)
The author also personally owns the shares mentioned.
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John Heinzl