John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
This Saturday will mark the two-year anniversary of Strategy Lab. Today, I'll recap how my model dividend portfolio has performed and discuss what I'll be doing with the cash that's been accumulating since my last reinvestment.
Over all, I'm pleased with how the portfolio has performed. My main goal was to choose blue-chip stocks that would raise their dividends regularly, and my picks have not disappointed.
Of the 11 stocks in the virtual portfolio, eight have raised their dividends twice (BCE, CU, ENB, FTS, KO, MCD, PG, TRP), one has raised its payment three times (BMO) and two have hiked their dividends four times (RY, T). The sole exchange-traded fund (XRE) has raised and lowered its distribution several times, but is now paying significantly more than it did at the outset.
I only wish my employer doled out pay raises so liberally.
In percentage terms, the growth in the portfolio's income has been substantial.
At inception, the portfolio was worth $50,000 (in virtual dollars) and generated $1,875.84 in projected annual income, based on dividend rates at the time. The annual income has since grown to $2,340.06 – up 24.7 per cent. The increase reflects a combination of dividend hikes, a falling loonie (which makes dividends from the U.S. stocks more valuable in Canadian dollars) and reinvestment of dividends.
The portfolio's yield, meanwhile, started at 3.75 per cent but has since slipped to 3.5 per cent. Why the drop? Simple: The portfolio's total value has increased even faster than the income it produces. As of Sept. 8, the portfolio was worth $66,774, for a total return of 33.5 per cent since inception. Over the same time period, the S&P/TSX composite index produced a total return of about 32.2 per cent.
Although I've slightly outperformed the index, I'm not crowing about it: My portfolio still lags Strategy Lab's growth and value portfolios by a wide margin. That said, my stocks have performed pretty much as I expected when Strategy Lab was launched nearly two years ago.
To briefly recap my original mission, I set out to buy large, well-established companies with a track record of rising revenue, earnings and dividends. I wasn't trying to identify potential 10-baggers; rather, my goal was to assemble a group of companies that would continue to grow for many years to come and require minimal monitoring. In keeping with that philosophy, I vowed to do very little trading.
I've kept that promise. The 12 securities in my portfolio are the same ones I started with, and all but one – XRE – are trading at higher prices than when I bought them. (Including distributions, XRE's total return has also been positive.) I haven't just been twiddling my thumbs, mind you: One of the secrets to creating wealth is to reinvest dividends, which I have done on several occasions by adding to my positions in certain stocks.
Now, it's time to reinvest another chunk of cash.
Pipeline operator Enbridge Inc. has been one of the steadiest dividend growers around. Over the past five years, its dividend has increased at an impressive annualized rate of 13.6 per cent. The company typically announces dividend hikes in December, and I fully expect it to come through with another double-digit increase toward the end of 2014.
It's possible that Enbridge's coming increase could be bigger than usual.
In a recent report, Scotia Capital analyst Matthew Akman argued that Enbridge should consider increasing its dividend payout ratio, which is currently targeted at 60 to 70 per cent of earnings – lower than many of its peers. An increase in Enbridge's payout ratio wouldn't just put more cash in investors' pockets; it would also likely give the stock a boost, Mr. Akman said.
Whether Enbridge raises its payout ratio or not, I'm still a big fan of the company. That's why I'm using a portion of my $844.84 cash balance to purchase an additional 10 shares of the company, bringing my Enbridge position to 120 shares.
Remember that the Strategy Lab model dividend portfolio is not intended to be copied exactly. Rather, it's a tool to illustrate how dividend growth investing works. There are many worthy dividend stocks that didn't make it into the model portfolio, which is limited to 12 securities. I've discussed many such companies in past Yield Hog columns and will continue to do so in the future.
John Heinzl