John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
We're nearing the halfway point of the year, which seems like a good time to review the performance of my Strategy Lab model dividend portfolio.
First, let me quickly recap the original mission.
When I launched the 12-stock portfolio in September, 2012, using an imaginary $50,000, my goal was to identify blue-chip stocks whose dividends would grow for years to come. I vowed to do very little trading, apart from reinvesting dividends, and I deliberately chose well-established companies that would require minimal monitoring.
I use a similar strategy in my personal portfolio, except that I have more than twice as many stocks and also hold guaranteed investment certificates for fixed-income exposure. (Strategy Lab imposes a 12-stock limit, which in my opinion doesn't provide adequate diversification.)
So, how is the model portfolio faring? Pretty much as I had expected.
Since my last update in February, four stocks have announced additional dividend increases – Royal Bank of Canada, Procter & Gamble Inc., Telus Corp. and Bank of Montreal. All 11 companies (I also have one exchange-traded fund) have now increased their dividends at least twice since the portfolio was launched 21 months ago, and a few have hiked their payments three or four times.
Unless something very bad happens – a nuclear war or an alien invasion, for example – I expect the dividend increases to keep coming.
This is the beauty of dividend growth investing. By assembling a group of conservative stocks that raise their dividends regularly, I benefit from a growing income stream that is taxed favourably (thanks to the dividend tax credit for Canadian stocks) and provides protection from inflation. As long as the company's earnings and dividends are climbing, the share prices should eventually rise as well.
Most of the stocks in my model portfolio are higher than when I bought them. The exceptions are the gas and electric utility Fortis Inc. (FTS) and the iShares S&P/TSX REIT Index ETF (XRE), both of which are down slightly. I have no plans to sell either security, because I believe they are attractive long-term investments that provide a dependable income stream.
Overall, my model portfolio has gained about 27 per cent from inception through June 20, including reinvested dividends. While I'm pleased with that performance, my portfolio used to lead the S&P/TSX composite but now slightly trails the index, which is up about 27.5 per cent over the same period, also including dividends. I attribute the index's strength lately to its significant weighting of oil and gas stocks.
Investing is a long-term exercise, and I'm not about to rejig my model portfolio just because one sector happens to be hot at the moment. Besides, the portfolio is accomplishing its first mission – income growth – quite nicely.
At inception, the portfolio's projected annual income was $1,875.84, for a yield of 3.75 per cent based on the initial value of $50,000. The annual income has since grown to $2,308.16 – up 23 per cent – thanks to dividend increases, dividend reinvestments and a weaker loonie, which raises the value of U.S. dividends in Canadian dollars. The yield has slipped to 3.6 per cent, because the portfolio's value – it's now worth about $63,500 – has grown even faster than the income it generates.
Some dividend investors also like to look at the "yield on cost," which is the portfolio's current annual income of $2,308.16 divided by its initial value of $50,000. This works out to 4.6 per cent, and it's what I'm getting "paid" as a percentage of my original investment. As I've written before, yield on cost has its limitations, but it does demonstrate the power of dividend growth.
I have no idea what share prices will do in the short run, but I'm confident that the next time I do one of these updates the income will be higher still.
John Heinzl