John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
Now that the first-quarter numbers are in, today I'll provide an update of my Strategy Lab model dividend portfolio's performance. As you'll see, the portfolio is off to a solid start in 2017 after posting strong returns in 2016.
First, a quick recap of my investing strategy.
Back in September, 2012, each of the four Strategy Lab participants started with $50,000 in virtual cash to invest according to their chosen style. As the dividend investor (the other portfolios are based on growth, value and index investing), my goal was to build a portfolio of conservative, blue-chip companies that would raise their payouts regularly. In keeping with my buy-and-hold philosophy, I vowed to do very little trading – I've replaced just two of the 12 original securities – and to let time, compounding and dividend reinvestment work their magic.
The results have been very satisfying.
As of March 31, my Strategy Lab model dividend portfolio was valued at $87,287.82, for a total return – including dividends – of 74.6 per cent since inception on Sept. 13, 2012. This works out to a return of 13 per cent on an annualized basis, which compares favourably with the S&P/TSX composite index's annual total return of about 8.4 per cent over the same period. (All return figures cited here include dividends.) My portfolio has continued to outperform the index in 2017, posting a return of 6 per cent for the first quarter, compared with about 2.4 per cent for the S&P/TSX composite. This follows my portfolio's return last year of 21.5 per cent, which was tops among the four Strategy Lab participants and a fraction of a point ahead of the index.
Lest anyone accuse me of boasting, I should point out that, since inception, I'm still trailing the growth and value portfolios managed by Chris Umiastowski and Norman Rothery, respectively. But I'm nonetheless very happy with the portfolio's performance.
What about dividend increases? I'm glad you asked.
The first quarter featured no fewer than six dividend hikes – one each from BCE, Brookfield Infrastructure Partners, Canadian Utilities, Enbridge, TransCanada and Royal Bank. All 11 of my companies (I also own one exchange-traded fund) raised their dividends at least once last year – several raised their dividends twice – and I expect a similar showing in 2017.
Dividend hikes are at the core of my investing strategy. By choosing companies that raise their dividends regularly, my portfolio income grows steadily. Just as important, a growing dividend is often a sign of a company with an enduring competitive advantage. There are exceptions – companies occasionally run into trouble and cut their dividends – but by selecting only the strongest businesses I've avoided any nasty surprises.
To fully appreciate the power of dividend growth, however, you can't just look at dividend increases in isolation. You have to examine the cumulative effect of multiple dividend increases over many years. My Strategy Lab portfolio provides a nice illustration.
At inception, my model dividend portfolio was generating annual income of $1,875.84 based on dividend rates at the time. Now, the portfolio is churning out $3,379.22 in cash annually – an increase of about 80 per cent in less than five years.
Did your salary increase by that much? Mine sure didn't.
Dividend hikes alone didn't increase my portfolio income by 80 per cent, mind you. I've also regularly reinvested my dividends, which increases the number of shares I own and further boosts my dividend income. Some investors like to use a dividend reinvestment plan, or DRIP, to make the process automatic, but I prefer to let cash accumulate and then buy whatever looks attractive. The falling Canadian dollar, which raises the value of my U.S. dividends when converted to loonies, has also given my portfolio's income a lift.
Now, time for a quick reality check.
The past 15 months have been especially good to my model dividend portfolio – and to stock markets in general. But I would be surprised if such scorching gains continued. A reversion to more-modest returns, or even a pullback in stock prices, are both possible.
But as long as my income continues to rise – as I fully expect it will – I'll stay the course and reap the rewards of the dividend growth strategy.
Yield Hog is part of Globe Unlimited's Strategy Lab series.