It’s been two years since I started my model Yield Hog Dividend Growth Portfolio, and today I’ll be taking a detailed look at how the portfolio has performed.
I think you’ll agree that the results have been rather divi-licious.
Before we dig into the numbers, I’ll quickly recap the portfolio’s mission.
When I launched the model portfolio at the end of September, 2017, with $100,000 of virtual cash, my goal was to identify companies with a history of raising their dividends and a high probability of continuing to increase their payouts.
The money I use in the model portfolio isn’t real, but I follow the same strategy in my real-life accounts. I focus on dividend growth for a couple of reasons: It puts more money in my pocket, and it’s a sign of a healthy business. If a company’s dividend is rising steadily, supported by growing revenue and earnings, chances are the stock price will eventually follow.
Another reason I like dividends is that they are predictable. Companies pay them every quarter (or every month), and the strongest companies raise their dividends annually – and some more often than that. This predictability makes it easier to live with the daily ups and downs of stock prices. True, companies occasionally reduce their dividends, but if you focus on excellent businesses, your dividends should be going steadily up – not down.
So far, the portfolio is performing exactly as I had hoped.
Since inception, 19 of the 20 companies – and both exchange-traded funds – have raised their dividends. The vast majority have done so multiple times, led by A&W Revenue Royalties Income Fund (AW.UN), with seven increases, and Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CM) and Royal Bank of Canada (RY), with four each. The only company that hasn’t raised its payout is Choice Properties REIT (CHP.UN), which joined the portfolio in 2018 when it acquired Canadian REIT, an original member.
How much has the portfolio’s dividend income grown? Well, at inception it was churning out a projected $4,094 of cash annually, based on dividend rates at the time. The annual income has since grown to $5,131 – an increase of 25.3 per cent.
That’s a big increase in just two years, but it’s not all because of dividend growth. I have also reinvested my dividends regularly, which has turbocharged the portfolio’s income growth. Some people prefer to reinvest their money automatically with a dividend reinvestment plan, which is a fine strategy, but I like to wait for cash to build up and then decide how to reinvest it myself. Whatever method you choose, dividend reinvestment is one of the keys to long-term investing success.
Now, let’s talk about capital growth. As of Sept. 30, 20 of the portfolio’s 22 securities traded at higher prices than when I bought them, led by Canadian Apartment Properties REIT (CAR.UN), up 61.5 per cent, and Algonquin Power & Utilities Corp. (AQN), ahead 38 per cent. The two exceptions, Enbridge Inc. (ENB) and Manulife Financial Corp. (MFC), are down in price but have continued to hike their dividends, so I’m willing to cut them some slack.
Thanks to solid capital gains and a steady flow of growing dividends, the portfolio’s value has increased to $124,630, for a total return of 24.6 per cent over the past two years. That handily beat the total return of 13.4 per cent for the S&P/TSX Composite Index over the same two-year period. (On an annual basis, the model portfolio’s total return was 11.6 per cent, compared with 6.5 per cent for the S&P/TSX.)
After such strong gains, is it time to sell and lock in some profits? Heck, no. As a buy-and-hold investor, I generally don’t consider selling a stock unless the company’s outlook has changed for the worse or a much better opportunity comes along. What’s more, interest rates are expected to remain low, which should continue to provide support for dividend stocks.
That said, I won’t rule out making a few tweaks in the portfolio in the months ahead, but my main focus in the coming weeks will be how to reinvest the more than $1,500 of cash that’s built up over the past few months. Stay tuned.
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John Heinzl