Answers to your questions about the new Yield Hog dividend portfolio

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After I unveiled my new Yield Hog dividend growth portfolio this week, readers sent in lots of questions. I've selected a few of them to answer here for the benefit of all readers.

If you missed my column introducing the portfolio, you can read it here.

I noticed that you have four banks in the portfolio but not Bank of Nova Scotia, which I own. Can you share your rationale for excluding BNS?

Please don't read anything into that. Bank of Nova Scotia is a great company and, like the other big banks, it has an attractive yield and has raised its dividend regularly. But I needed to keep the number of stocks in the portfolio manageable and did not want to concentrate too much on any one sector, which inevitably meant that some very worthy companies (not just banks) were left out. I also set the bar for dividend yield relatively high at a minimum of 3 per cent, which automatically excluded certain companies with lower yields but excellent dividend growth records.

A few examples that come to mind are Canadian National Railway (CNR), Metro (MRU) and Toromont Industries (TIH). Bottom line: Just because a stock isn't in the portfolio doesn't mean it's a bad investment.

I see you have both A&W Revenue Royalties Income Fund (AW.UN) and Pizza Pizza Royalty Corp. (PZA) in the portfolio. Can you comment on the tax implications for each and whether it's best to hold them in a registered or non-registered account?

Pizza Pizza is a corporation whose dividends are eligible for the enhanced dividend tax credit. As such, the tax treatment is no different from the banks, utilities and other Canadian companies in the portfolio. A&W is different: As a "limited purpose trust," its distributions are taxed as non-eligible dividends. Because non-eligible dividends are subject to a different gross-up and tax-credit system than eligible dividends, the effective tax rate on non-eligible dividends is higher.

How much higher depends on the person's income and province. For example, according to taxtips.ca, an Ontario resident with taxable income of $80,000 would have a marginal tax rate of about 8.9 per cent on eligible dividends and 19.5 per cent on non-eligible dividends. If you only have room in your registered accounts for one of the two stocks, AW.UN would probably be the better choice because you would save more tax. But there's no reason you couldn't also hold PZA in a registered account if you have the room.

You state that you will be tweaking the portfolio from time to time. My question is, will you be letting the readers know when and how much you tweak the portfolio?

The portfolio was designed with a buy-and-hold investor in mind. Unless the outlook for one of the companies changes for the worse, I don't expect to do a lot of selling. My focus will be on reinvesting dividends that accumulate in the portfolio.

However, unlike a dividend reinvestment plan (DRIP) that automatically reinvests dividends in shares of the company that paid them, I will be waiting for sufficient cash to build up and then choosing how to invest the money. I might buy additional shares of a stock already in the portfolio, or I might add a new stock altogether. I will disclose these purchases and discuss the rationale in my Yield Hog columns.

How will you track the portfolio's performance?

The portfolio started with $100,000 in virtual dollars and no new "money" will be added. Calculating the total return will therefore be relatively simple: If the portfolio is worth $112,000 one year from now, for example, the total return (from dividends and share price gains) will be 12 per cent.

All transactions – including dividend payments and any buys or sells – will be tracked on an arm's length basis by a third party.

In other words, I can't fudge any of the numbers. Also, returns will be reported on a pretax basis, just as they are by mutual funds and exchange-traded funds. One small advantage I have over a real-life portfolio is that I don't have to pay transaction fees. Yay!

Are you concerned at all that your portfolio is way overweight in utilities, real estate and telecoms compared to the S&P/TSX composite index? Your utilities weighting, for example, is about 27.7 per cent, compared to about 3.8 per cent for the index.

No, I'm not concerned. I did that deliberately. Because many utilities are regulated, they are among the most stable dividend payers – and dividend growers – around. (Incidentally, if you exclude Brookfield Infrastructure Partners, which is classified as a utility but also owns many other assets, my utility and power weighting drops to about 22.3 per cent).

The telecoms and real estate investment trusts in the portfolio also have above-average yields and a history of raising their payouts. Another respect in which my portfolio differs from the index is that I have no energy producers.

As we saw when the price of oil collapsed, dividends paid by oil and gas companies can shrink or disappear altogether when commodity prices tumble. That said, if the price of oil rebounds, my portfolio will not benefit to the same extent as the index.